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Liquidity creation without a lender of last resort: clearing house loan certificates in the Banking Panic of 1907

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  • Ellis W. Tallman
  • Jon R. Moen

Abstract

We employ a new data set comprised of disaggregate figures on clearing house loan certificate issues in New York City to document how the dominant national banks were crucial providers of temporary liquidity during the Panic of 1907. Clearing house loan certificates were essentially “bridge loans” arranged between clearing house members. They enabled and were issued in anticipation of gold imports, which took a few weeks to arrive. The large, New York City national banks acted as private liquidity providers by requesting (and the New York Clearing House issuing) a volume of clearing house loan certificates beyond their own immediate liquidity needs, in accord with their role as central reserve city banks in the national banking system.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1010.

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Date of creation: 2010
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Handle: RePEc:fip:fedcwp:1010

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Keywords: Financial crises - United States ; Lenders of last resort;

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  1. James J. McAndrews & Simon M. Potter, 2002. "Liquidity effects of the events of September 11, 2001," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Nov, pages 59-79.
  2. Ellis W. Tallman & Jon R. Moen, 1993. "Liquidity shocks and financial crises during the national banking era," Working Paper, Federal Reserve Bank of Atlanta 93-10, Federal Reserve Bank of Atlanta.
  3. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 29(4), pages 828-64, November.
  4. Wicker,Elmus, 2000. "Banking Panics of the Gilded Age," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521770231.
  5. Gary Gorton & Lixin Huang, 2002. "Bank Panics and the Endogeneity of Central Banking," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 02-29, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. Christina Romer & Jeffrey A. Miron, 1989. "A New Monthly Index of Industrial Production, 1884-1940," NBER Working Papers 3172, National Bureau of Economic Research, Inc.
  7. Jon R. Moen & Ellis W. Tallman, 1999. "Why didn't the United States establish a central bank until after the panic of 1907?," Working Paper, Federal Reserve Bank of Atlanta 99-16, Federal Reserve Bank of Atlanta.
  8. Donaldson, R. Glen, 1992. "Costly liquidation, interbank trade, bank runs and panics," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 2(1), pages 59-82, March.
  9. Ellis W. Tallman, 2012. "The Panic of 1907," Working Paper 1228, Federal Reserve Bank of Cleveland.
  10. John A. James & David F. Weiman, 2010. "From Drafts to Checks: The Evolution of Correspondent Banking Networks and the Formation of the Modern U.S. Payments System, 1850-1914," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 42(2-3), pages 237-265, 03.
  11. Odell, Kerry A. & Weidenmier, Marc D., 2004. "Real Shock, Monetary Aftershock: The 1906 San Francisco Earthquake and the Panic of 1907," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 64(04), pages 1002-1027, December.
  12. Timberlake, Richard H, Jr, 1984. "The Central Banking Role of Clearinghouse Associations," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 16(1), pages 1-15, February.
  13. Clark, Truman A, 1984. "Violations of the Gold Points, 1890-1908," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(5), pages 791-823, October.
  14. Ellis W. Tallman & Jon R. Moen, 1995. "Private sector responses to the Panic of 1907: a comparison of New York and Chicago," Economic Review, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Atlanta, issue Mar, pages 1-9.
  15. Officer, Lawrence H, 1986. "The Efficiency of the Dollar-Sterling Gold Standard, 1890-1908," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(5), pages 1038-73, October.
  16. Moen, Jon & Tallman, Ellis W., 1992. "The Bank Panic of 1907: The Role of Trust Companies," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 52(03), pages 611-630, September.
  17. Gorton, Gary, 1985. "Clearinghouses and the Origin of Central Banking in the United States," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 45(02), pages 277-283, June.
  18. Gorton, Gary & Mullineaux, Donald J, 1987. "The Joint Production of Confidence: Endogenous Regulation and Nineteenth Century Commercial-Bank Clearinghouses," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 19(4), pages 457-68, November.
  19. Frederick R. Macaulay, 1938. "Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856," NBER Books, National Bureau of Economic Research, Inc, number maca38-1, July.
  20. Gary Gorton & Lixin Huang, 2002. "Banking Panics and the Origin of Central Banking," NBER Working Papers 9137, National Bureau of Economic Research, Inc.
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Cited by:
  1. Viral V. Acharya & Denis Gromb & Tanju Yorulmazer, 2012. "Imperfect Competition in the Interbank Market for Liquidity as a Rationale for Central Banking," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 184-217, April.
  2. Gary B. Gorton, 2012. "Some Reflections on the Recent Financial Crisis," NBER Working Papers 18397, National Bureau of Economic Research, Inc.
  3. Tallman, Ellis W & Wicker, Elmus R., 2009. "Banking and Financial Crises in United States History: What Guidance can History Offer Policymakers?," MPRA Paper 21839, University Library of Munich, Germany.
  4. Norman, Ben & Shaw, Rachel & Speight, George, 2011. "The history of interbank settlement arrangements: exploring central banks’ role in the payment system," Bank of England working papers, Bank of England 412, Bank of England.
  5. Mark A. Carlson, 2013. "Lessons from the historical use of reserve requirements in the United States to promote bank liquidity," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2013-11, Board of Governors of the Federal Reserve System (U.S.).
  6. Jon R. Moen & Ellis W. Tallman, 2013. "Close but not a central bank: The New York Clearing House and issues of clearing house loan certificates," Working Paper 1308, Federal Reserve Bank of Cleveland.
  7. Ellis W. Tallman, 2012. "The Panic of 1907," Working Paper 1228, Federal Reserve Bank of Cleveland.

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