Too-Big-To-Fail Before the Fed
“Too-big-to-fail” is consistent with policies followed by private bank clearing houses during financial crises in the U.S. National Banking Era prior to the existence of the Federal Reserve System. Private bank clearing houses provided emergency lending to member banks during financial crises. This behavior strongly suggests that “too-big-to-fail” is not the problem causing modern crises. Rather it is a reasonable response to the threat posed to large banks by the vulnerability of short-term debt to runs.
Neither author has anything to disclose. Thanks to Arun Gupta and Thomas Bonczek for research assistance. Thanks to Bob Chakravorti and Mirjana Orovic for assistance with the New York Clearing House Association Archives. Some of the material here is from Gorton and Tallman (2015). 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.
Gary Gorton & Ellis W. Tallman, 2016. "Too Big to Fail before the Fed," American Economic Review, American Economic Association, vol. 106(5), pages 528-32, May. citation courtesy of