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Federal Reserve Bank of Cleveland
Working Papers (Old Series)
How Did Pre-Fed Banking Panics End?
Ellis W. Tallman
Gary Gorton

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.

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Ellis W. Tallman & Gary Gorton, How Did Pre-Fed Banking Panics End?, Federal Reserve Bank of Cleveland, Working Papers (Old Series) 1603, 14 Jan 2016.
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Keywords: Financial crisis; bank runs; banking panic; clearing house; bank-specific information; currency premium
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