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.
Gorton, Gary, and Ellis W. Tallman. 2016. “How Did Pre-Fed Banking Panics End?” Federal Reserve Bank of Cleveland, Working Paper No. 16-03. https://doi.org/10.26509/frbc-wp-201603