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Working Paper

How Did Pre-Fed Banking Panics End?

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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.
Topics
Bank policy and regulation
01.14.2016ISSN 2573-7953 WP 16-03DOI 10.26509/frbc-wp-201603
Keywords financial crisis, bank runs, banking panic, clearing house, bank-specific information, currency premium
JEL Classification Codes N21, E44, E58

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

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