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Liquidity creation without a central bank: Clearing house loan certificates in the banking panic of 1907

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  • Tallman, Ellis W.
  • Moen, Jon R.

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 extensions of credit by the New York Clearing House to its members. These certificates were transferable to other clearing house members as a form of final payment for settlement of interbank payments. The certificate issues allowed borrowing banks to maintain (and increase) loans, fulfill cash payment upon depositor withdrawal demands, and enabled gold imports, which took two to three 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 in excess of their own immediate liquidity needs, in accord with their role as central reserve city banks in the national banking system.

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  • Tallman, Ellis W. & Moen, Jon R., 2012. "Liquidity creation without a central bank: Clearing house loan certificates in the banking panic of 1907," Journal of Financial Stability, Elsevier, vol. 8(4), pages 277-291.
    • Handle: RePEc:eee:finsta:v:8:y:2012:i:4:p:277-291
    DOI: 10.1016/j.jfs.2011.06.001
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    2. Francesco Vercelli, 2022. "The Italian Banking System During the 1907 Financial Crisis and the Role of the Bank of Italy," Quaderni di storia economica (Economic History Working Papers) 49, Bank of Italy, Economic Research and International Relations Area.
    3. Mark Carlson, 2015. "Lessons from the Historical Use of Reserve Requirements in the United States to Promote Bank Liquidity," International Journal of Central Banking, International Journal of Central Banking, vol. 11(1), pages 191-224, January.
    4. Gehrig, Thomas & Fohlin, Caroline & Haas, Marlene, 2015. "Rumors and Runs in Opaque Markets: Evidence from the Panic of 1907," CEPR Discussion Papers 10497, C.E.P.R. Discussion Papers.
    5. Matthew Jaremski & David C. Wheelock, 2022. "Interbank Networks and the Interregional Transmission of Financial Crises: Evidence from the Panic of 1907," Working Papers 2022-020, Federal Reserve Bank of St. Louis, revised Sep 2023.
    6. Robert L. Hetzel, 2014. "The Real Bills Views of the Founders of the Fed," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 159-181.
    7. Gary Gorton & Ellis W. Tallman, 2016. "How Did Pre-Fed Banking Panics End?," NBER Working Papers 22036, National Bureau of Economic Research, Inc.
    8. Chmielewski Tomasz & Sławiński Andrzej, 2019. "Lessons from TARGET2 imbalances: The case for the ECB being a lender of last resort," Economics and Business Review, Sciendo, vol. 5(2), pages 48-63, June.
    9. 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.
    10. Calomiris, Charles W. & Carlson, Mark, 2017. "Interbank networks in the National Banking Era: Their purpose and their role in the Panic of 1893," Journal of Financial Economics, Elsevier, vol. 125(3), pages 434-453.
    11. 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.
    12. Gary B. Gorton, 2012. "Some Reflections on the Recent Financial Crisis," NBER Working Papers 18397, National Bureau of Economic Research, Inc.
    13. Clemens Jobst & Kilian Rieder, 2023. "Supervision without regulation: Discount limits at the Austro–Hungarian Bank, 1909–13," Economic History Review, Economic History Society, vol. 76(4), pages 1074-1109, November.
    14. Christopher Hoag, 2015. "Clearinghouse Loan Certificates as a Lender of Last Resort," Working Papers 1503, Trinity College, Department of Economics, revised Jun 2015.
    15. Christopher Hoag, 2019. "Liquidity and Borrowing from a Lender of Last Resort during the Crisis of 1884," Working Papers 1901, Trinity College, Department of Economics, revised Jul 2019.
    16. Ellis W. Tallman, 2012. "The Panic of 1907," Working Papers (Old Series) 1228, Federal Reserve Bank of Cleveland.
    17. Christopher Hoag, 2019. "Bank Executive Experience with Clearinghouse Loan Certificates," Working Papers 1903, Trinity College, Department of Economics.
    18. Tang, Ying & Li, Zhiyong & Chen, Jing & Deng, Chao, 2021. "Liquidity creation cyclicality, capital regulation and interbank credit: Evidence from Chinese commercial banks," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    19. Hoag, Christopher, 2018. "Clearinghouse loan certificates as a lender of last resort," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 215-229.
    20. Christopher Hoag, 2015. "Clearinghouse Loan Certificates as Interbank Loans," Working Papers 1504, Trinity College, Department of Economics, revised Jun 2015.
    21. Kim Abildgren, 2017. "Determinants of banks’ capital structure in the Pre-Regulation Era," European Review of Economic History, European Historical Economics Society, vol. 21(1), pages 64-82.
    22. 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 Papers (Old Series) 1308, Federal Reserve Bank of Cleveland.
    23. 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 412, Bank of England.

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