How Did Pre-Fed Banking Panics End?
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.
The authors thank Jeremy Atack, Howard Bodenhorn, Michael Bordo, Charles Calomiris, Andrew Coleman, Ben Craig, Stanley Engerman, Kinda Hachem, Eric Hilt, Gary Kornblith, Arvind Krishnamurthy, Jon Moen, Hugh Rockoff, George Selgin, Larry Wall, Warren Weber, David Weiman, Eugene White as well as the participants at the Conferences in Honor of Elmus Wicker and in Honor of Hugh Rockoff, the 2015 Atlanta Fed Monetary and Financial History Conference and the Monetary Economics Workshop at 2015 NBER Summer Institute for helpful comments. They thank Bob Chakravorti and Mirjana Orovic for assistance with the New York Clearing House Association Archives. They also thank George Berry, Thomas Bonczek, Jialu Chen, Paulo Costa, Arun Gupta, Yiming Ma, Markus Shak, and Arwin Zeissler for research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research, the Federal Reserve Bank of Cleveland or the Federal Reserve System.