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Real Shock, Monetary Aftershock: The 1906 San Francisco Earthquake and the Panic of 1907

  • Kerry Odell

    (Scripps College)

  • Marc D. Weidenmier

    (Claremont McKenna College)

The Panic of 1907 is an important episode in American financial history because it led, in part, to the creation of the Federal Reserve. Although much has been written about the crisis, little has been said about its underlying causes. This study identifies the San Francisco earthquake and its subsequent conflagration as the proximate cause of the panic. London fire-houses insured San Francisco during this period. The payment of claims by British insurance companies following the quake and fire produced a large capital outflow in the fall of 1906, forcing the Bank of England to nearly double interest rates and discriminate against US trade bills. These actions pushed the US into a recession and made markets vulnerable to shocks that otherwise would have been transitory in nature. World financial markets crashed in October 1907 with the collapse of the Knickerbocker Trust Company in New York.

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Paper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 2001-07.

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Handle: RePEc:clm:clmeco:2001-07
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  1. Charles W. Calomiris & Gary Gorton, . "The Origins of Banking Panics: Models, Facts, and Bank Regulation," Rodney L. White Center for Financial Research Working Papers 11-90, Wharton School Rodney L. White Center for Financial Research.
  2. Ellis W. Tallman & Jon R. Moen, 1993. "Liquidity shocks and financial crises during the national banking era," FRB Atlanta Working Paper No. 93-10, Federal Reserve Bank of Atlanta.
  3. Neal, Larry, 2000. "A Shocking View of Economic History," The Journal of Economic History, Cambridge University Press, vol. 60(02), pages 317-334, June.
  4. Canova, Fabio, 1991. "The Sources of Financial Crisis: Pre- and Post-Fed Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 689-713, August.
  5. Peter Temin, 1998. "Causes of American business cycles: an essay in economic historiography," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 42(Jun), pages 37-64.
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