Suspension of Payments, Bank Failures, and the Nonbank Public's Losses

FRB Atlanta Working Paper No. 96-3

Posted: 18 Apr 1998  

Gerald P. Dwyer

Clemson University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Iftekhar Hasan

Gabelli School of Business, Fordham University; Bank of Finland

Date Written: May 2005

Abstract

Arguably, eliminating suspensions of payments periods when banks jointly refuse to convert their liabilities into outside money or other assets was an important impetus for creating the Federal Reserve. Friedman and Schwartz suggest that a suspension in 1930 would have decreased the severity of the Great Depression. More recently, an emerging literature suggests that suspensions of payments may well be optimal in some states of the world. We present evidence about suspensions of payments from an episode that is close to a controlled experiment for examining their effects. In 1861, about 44 percent of the banks in Wisconsin closed, 87 percent of the banks in Illinois closed, and noteholders suffered substantial losses. The historical record suggests a possible explanation: an effective suspension of payments in Wisconsin but not Illinois. Historical and statistical evidence indicate that the suspension of payments decreased the number of banks that closed as well as noteholders' losses. Our statistical evidence indicates a 21 percent increase in the probability that an average bank in the two states remains open with the suspension of payments. The suspension of payments decreases noteholders' losses by about 14 cents per dollar of notes.

Keywords: Suspension of payments, banking panic, free banking

JEL Classification: G21, E58, N11

Suggested Citation

Dwyer, Gerald P. and Hasan, Iftekhar, Suspension of Payments, Bank Failures, and the Nonbank Public's Losses (May 2005). FRB Atlanta Working Paper 96-3. Available at SSRN: https://ssrn.com/abstract=7646 or http://dx.doi.org/10.2139/ssrn.7646

Gerald P. Dwyer (Contact Author)

Clemson University ( email )

Department of Economics
Clemson University
Clemson, SC 29634
United States

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Iftekhar Hasan

Gabelli School of Business, Fordham University ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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