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The Transmission of the Financial Crisis in 1907: An Empirical Investigation

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  • Tallman, Ellis W.

    () (Federal Reserve Bank of Cleveland)

  • Moen, Jon R.

    (University of Mississippi)

Abstract

Using an extensive high-frequency data set, we investigate the transmission of financial crisis specifically focusing on the Panic of 1907, the final severe panic of the National Banking Era (1863-1913). We trace the transmission of the crisis from New York City trust companies to the New York City national banks through direct and indirect interconnections. Trust companies held cash balances at national banks, and these balances were liquidated as trust companies suffered depositor runs. Secondly, trust companies and national banks were notable creditors to the New York Stock Exchange; when trusts were suffering runs, the call loan market on the stock exchange seized. The crisis spread to the interior banks after the New York Clearing House banks restricted the convertibility of deposits into cash. Bond returns were sharply negative in the two weeks following the suspension. We highlight commonalities between the Panic of 1907 and the fi nancial crisis of 2007-2009.

Suggested Citation

  • Tallman, Ellis W. & Moen, Jon R., 2014. "The Transmission of the Financial Crisis in 1907: An Empirical Investigation," Working Papers (Old Series) 1409, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:1409
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    References listed on IDEAS

    as
    1. Moen, Jon R. & Tallman, Ellis W., 2000. "Clearinghouse Membership and Deposit Contraction during the Panic of 1907," The Journal of Economic History, Cambridge University Press, vol. 60(01), pages 145-163, March.
    2. Tallman, Ellis W. & Gorton, Gary, 2016. "How Did Pre-Fed Banking Panics End?," Working Papers (Old Series) 1603, Federal Reserve Bank of Cleveland.
    3. 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, vol. 64(04), pages 1002-1027, December.
    4. 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, September.
    5. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153.
    6. A. Piatt Andrew, 1908. "Hoarding in the Panic of 1907," The Quarterly Journal of Economics, Oxford University Press, vol. 22(2), pages 290-299.
    7. Hoag, Christopher, 2005. "Deposit drains on "interest-paying" banks before financial crises," Explorations in Economic History, Elsevier, vol. 42(4), pages 567-585, October.
    8. William L. Silber, 2007. "Introduction to When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy," Introductory Chapters,in: When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy Princeton University Press.
    9. Fohlin, Caroline & Gehrig, Thomas & 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.
    10. Carlson, Mark, 2005. "Causes of bank suspensions in the panic of 1893," Explorations in Economic History, Elsevier, vol. 42(1), pages 56-80, January.
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    15. Dwyer, Gerald P. & Tkac, Paula, 2009. "The financial crisis of 2008 in fixed-income markets," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1293-1316, December.
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    18. Christopher Hoag, 2015. "Clearinghouse Loan Certificates as Interbank Loans," Working Papers 1504, Trinity College, Department of Economics, revised Jun 2015.
    19. Andrew Coleman, 2007. "The pitfalls of estimating transactions costs from price data: evidence from trans-Atlantic gold-point arbitrage, 1886-1905," Reserve Bank of New Zealand Discussion Paper Series DP2007/07, Reserve Bank of New Zealand.
    20. Ellis W. Tallman & Jon R. Moen, 1990. "Lessons from the panic of 1907," Economic Review, Federal Reserve Bank of Atlanta, issue May, pages 2-13.
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    Cited by:

    1. Rockoff, Hugh, 2015. "O.M.W. Sprague (the man who “wrote the book” on financial crises) and the founding of the Federal Reserve," Journal of Financial Stability, Elsevier, vol. 17(C), pages 35-45.
    2. Matthew S. Jaremski & David C. Wheelock, 2019. "The Founding of the Federal Reserve, the Great Depression and the Evolution of the U.S. Interbank Network," NBER Working Papers 26034, National Bureau of Economic Research, Inc.
    3. Caroline Fohlin & Thomas Gehrig & Marlene Haas, 2015. "Rumors and Runs in Opaque Markets: Evidence from the Panic of 1907," Emory Economics 1503, Department of Economics, Emory University (Atlanta).
    4. Gary Gorton & Ellis W. Tallman, 2016. "How Did Pre-Fed Banking Panics End?," NBER Working Papers 22036, National Bureau of Economic Research, Inc.
    5. 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.
    6. Gehrig, Thomas Paul & Fohlin, Caroline & Haas, Marlene, 2015. "Liquidty Freezes and Market Runs; Evidencefrom the Panic of 1907," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113008, Verein für Socialpolitik / German Economic Association.
    7. Ellis W. Tallman, 2012. "The Panic of 1907," Working Papers (Old Series) 1228, Federal Reserve Bank of Cleveland.

    More about this item

    Keywords

    Banking panic; asset price; asset volatility; correlation risk; correspondent banking;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • N11 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: Pre-1913
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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