How Did Pre-Fed Banking Panics End?

RePEc Short ID: pta94
ORCID iD: 0000-0001-8387-2768

Gorton, Gary; Tallman, Ellis W.

doi:10.26509/frbc-wp-201603

Working Paper

How Did Pre-Fed Banking Panics End?

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 panics; clearinghouses; bank-specific information; currency premium;

JEL Classification: E44; E58; N21;

https://doi.org/10.26509/frbc-wp-201603