NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How Did Pre-Fed Banking Panics End?

Gary Gorton, Ellis W. Tallman

NBER Working Paper No. 22036
Issued in February 2016
NBER Program(s):Asset Pricing, Corporate Finance, Development of the American Economy, Economic Fluctuations and Growth, Monetary Economics

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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Document Object Identifier (DOI): 10.3386/w22036

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