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Suspension of payments, bank failures, and the nonbank public's losses

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  • Gerald P. Dwyer, Jr.
  • Iftekhar Hasan

Abstract

Arguably, eliminating suspensions of payments--periods when banks jointly refuse to convert their liabilities into outside money or other assets--was an important impetus for creating the Federal Reserve. Friedman and Schwartz suggest that a suspension in 1930 would have decreased the severity of the Great Depression. More recently, an emerging literature suggests that suspensions of payments may well be optimal in some states of the world. We present evidence about suspensions of payments from an episode that is close to a controlled experiment for examining their effects. In 1861, about 44 percent of the banks in Wisconsin closed, 81 percent of the banks in Illinois closed, and noteholders suffered substantial losses. The historical record suggests a possible explanation: an effective suspension of payments in Wisconsin but not Illinois. Historical and statistical evidence indicate that the suspension of payments decreased the number of banks that closed as well as noteholders' losses. Our statistical evidence indicates a 25 percent increase in the probability that an average bank in the two states remains open with the suspension of payments. The suspension of payments decreases noteholders' losses by about 20 cents per dollar of notes.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 96-3.

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Date of creation: 1996
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Handle: RePEc:fip:fedawp:96-3

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Keywords: Bank failures ; Banks and banking - History ; Banks and banking; Central;

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Cited by:
  1. Chen, Yehning & Hasan, Iftekhar, 2006. "Why do bank runs look like panic? A new explanation," Research Discussion Papers 19/2006, Bank of Finland.
  2. Chen, Yehning & Hasan, Iftekhar, 2006. "The transparency of the banking system and the efficiency of information-based bank runs," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 307-331, July.
  3. Gerald P. Dwyer, Jr. & Margarita Samartín, 2006. "Why do banks promise to pay par on demand?," Working Paper 2006-26, Federal Reserve Bank of Atlanta.
  4. Matthew Jaremski & Peter L. Rousseau, 2013. "Banks, Free Banks, And U.S. Economic Growth," Economic Inquiry, Western Economic Association International, vol. 51(2), pages 1603-1621, 04.
  5. Gerald P. Dwyer, Jr. & R.W. Hafer, 2001. "Bank failures in banking panics: Risky banks or road kill?," Working Paper 2001-13, Federal Reserve Bank of Atlanta.
  6. Jeffery W. Gunther & Linda M. Hooks & Kenneth J. Robinson, 1997. "Adverse selection and competing deposit insurance systems in pre-depression Texas," Financial Industry Studies Working Paper 97-4, Federal Reserve Bank of Dallas.
  7. repec:van:wpaper:vuecon-sub-12-00014 is not listed on IDEAS
  8. repec:van:wpaper:1206 is not listed on IDEAS
  9. Eduardo Levy Yeyati & Alain Ize & Miguel A. Kiguel, 2005. "Managing Systemic Liquidity Risk in Financially Dollarized Economies," IMF Working Papers 05/188, International Monetary Fund.
  10. Alain Ize & Miguel Kiguel & Eduardo Levy Yeyati, 2005. "Managing Systemic Liquidity Risk in Financially Dollarized Economy," Business School Working Papers managsystrisk, Universidad Torcuato Di Tella.
  11. Todd Keister & Huberto Ennis, 2012. "Optimal banking contracts and financial fragility," 2012 Meeting Papers 179, Society for Economic Dynamics.

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