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Why didn't the United States establish a central bank until after the panic of 1907?

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  • Jon R. Moen
  • Ellis W. Tallman

Abstract

Monetary historians conventionally trace the establishment of the Federal Reserve System in 1913 to the turbulence of the Panic of 1907. But why did the successful movement for creating a U.S. central bank follow the Panic of 1907 and not any earlier National Banking Era panic? The 1907 panic displayed a less severe output contraction than other national banking era panics, and national bank deposit and loan data suggest only a limited impairment to intermediation through these institutions. ; We argue that the Panic of 1907 was substantially different from earlier National Banking Era panics. The 1907 financial crisis focused on New York City trust companies, a relatively unregulated intermediary outside the control of the New York Clearinghouse. Yet trusts comprised a large proportion of New York City intermediary assets in 1907. Prior panics struck primarily national banks that were within the influence of the clearinghouses, and the private clearinghouses provided liquidity to member institutions that were perceived as solvent. Absent timely information on trusts, the New York Clearinghouse offered insufficient liquidity to the trust companies to quell the panic quickly. ; In the aftermath of the 1907 panic, New York bankers saw heightened danger to the financial system arising from "riskier" institutions outside of their clearinghouse and beyond their direct influence. The reform proposals from New York banking interests advocated universal membership in a centralized reserve system to overcome the risk of financial panic arising from the observed isolation of some intermediaries. Serious consideration of federal legislation to reform the banking system took place because New York bankers changed in their attitude toward a system of reserves beyond their control.

Suggested Citation

  • Jon R. Moen & Ellis W. Tallman, 1999. "Why didn't the United States establish a central bank until after the panic of 1907?," FRB Atlanta Working Paper 99-16, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:99-16
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    File URL: http://www.frbatlanta.org//filelegacydocs/wp9916.pdf
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    References listed on IDEAS

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    1. McAndrews James J. & Roberds William, 1995. "Banks, Payments, and Coordination," Journal of Financial Intermediation, Elsevier, vol. 4(4), pages 305-327, October.
    2. Donaldson, R. Glen, 1992. "Costly liquidation, interbank trade, bank runs and panics," Journal of Financial Intermediation, Elsevier, vol. 2(1), pages 59-82, March.
    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, vol. 29(4), pages 828-864, November.
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    Cited by:

    1. 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.
    2. 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.
    3. Ellis W. Tallman, 2012. "The Panic of 1907," Working Paper 1228, Federal Reserve Bank of Cleveland.

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    Keywords

    Banks and banking - History ; Banks and banking; Central;

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