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The Transmission of the Financial Crisis in 1907: An Empirical Investigation


Using an extensive high-frequency data set, we investigate the transmission of financial crisis specifically focusing on the Panic of 1907, the final severe panic of the National Banking Era (1863-1913). We trace the transmission of the crisis from New York City trust companies to the New York City national banks through direct and indirect interconnections. Trust companies held cash balances at national banks, and these balances were liquidated as trust companies suffered depositor runs. Secondly, trust companies and national banks were notable creditors to the New York Stock Exchange; when trusts were suffering runs, the call loan market on the stock exchange seized. The crisis spread to the interior banks after the New York Clearing House banks restricted the convertibility of deposits into cash. Bond returns were sharply negative in the two weeks following the suspension. We highlight commonalities between the Panic of 1907 and the financial crisis of 2007-2009.

Keywords: Banking panic, asset price, asset volatility, correlation risk, correspondent banking.

JEL Codes: E44, G01, N11, N21.


Suggested citation: Moen, Jon R., and Ellis W. Tallman, 2014. “The Transmission of the Financial Crisis in 1907: An Empirical Investigation,” Federal Reserve Bank of Cleveland, Working Paper no. 14-09.

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