How Did Pre-Fed Banking Panics End?

93 Pages Posted: 21 Jan 2016

See all articles by Ellis W. Tallman

Ellis W. Tallman

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Multiple version iconThere are 2 versions of this paper

Date Written: 2016-01-14

Abstract

How did pre-Fed banking crises end? How did depositors' beliefs change? During the National Banking Era, 1863-1914, banks responded to the severe panics by suspending convertibility; that is, they refused to exchange cash for their liabilities (checking accounts). At the start of the suspension period, the private clearing houses cut off bank-specific information. Member banks were legally united into a single entity by the issuance of emergency loan certificates, a joint liability. A new market for certified checks opened, pricing the risk of clearing house failure. Certified checks traded at a discount to cash (a currency premium) in a market that opened during the suspension period. Confidence was restored when the currency premium reached zero.

Keywords: Financial crisis, bank runs, banking panic, clearing house, bank-specific information, currency premium

JEL Classification: E44, E58, N21

Suggested Citation

Tallman, Ellis W. and Gorton, Gary B., How Did Pre-Fed Banking Panics End? (2016-01-14). FRB of Cleveland Working Paper No. 1603. Available at SSRN: https://ssrn.com/abstract=2719474

Ellis W. Tallman (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
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United States

Gary B. Gorton

Yale School of Management ( email )

165 Whitney Ave
P.O. Box 208200
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United States

HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Yale University - Yale Program on Financial Stability

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P.O. Box 208200
New Haven, CT 06520-8200
United States

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