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How Did Pre-Fed Banking Panics End?

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Abstract

How did pre-Fed banking crises end? How did depositors? beliefs change? During the National Banking Era, 1863-1914, banks responded to the severe panics by suspending convertibility; that is, they refused to exchange cash for their liabilities (checking accounts). At the start of the suspension period, the private clearing houses cut off bank-specific information. Member banks were legally united into a single entity by the issuance of emergency loan certificates, a joint liability. A new market for certified checks opened, pricing the risk of clearing house failure. Certified checks traded at a discount to cash (a currency premium) in a market that opened during the suspension period. Confidence was restored when the currency premium reached zero.

Suggested Citation

  • Gary Gorton & Ellis W. Tallman, 2016. "How Did Pre-Fed Banking Panics End?," Working Papers (Old Series) 1603, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1603
    DOI: 10.26509/frbc-wp-201603
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    Cited by:

    1. Michael D. Bordo, 2017. "An Historical Perspective on the Quest for Financial Stability and the Monetary Policy Regime," Economics Working Papers 17108, Hoover Institution, Stanford University.
    2. Matthieu Darracq Paries, 2018. "Financial frictions and monetary policy conduct," Erudite Ph.D Dissertations, Erudite, number ph18-01 edited by Ferhat Mihoubi, December.
    3. Chen, Qian & Koch, Christoffer & Richardson, Gary & Sharma, Padma, 2025. "Suspensions of payments and their consequences," Journal of Financial Stability, Elsevier, vol. 78(C).
    4. Qian Chen & Christoffer Koch & Padma Sharma & Gary Richardson, 2020. "Payments Crises and Consequences," NBER Working Papers 27733, National Bureau of Economic Research, Inc.
    5. Alvarez, Fernando & Barlevy, Gadi, 2021. "Mandatory disclosure and financial contagion," Journal of Economic Theory, Elsevier, vol. 194(C).
    6. Gary Gorton & Ellis W. Tallman, 2016. "Too Big to Fail before the Fed," American Economic Review, American Economic Association, vol. 106(5), pages 528-532, May.
    7. Anderson, Haelim Park & Bluedorn, John C., 2017. "Stopping contagion with bailouts: Micro-evidence from Pennsylvania bank networks during the panic of 1884," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 139-149.
    8. Charles W. Calomiris & Elliot S.M. Oh, 2018. "Who Owned Citibank? Familiarity Bias and Business Network Influences on Stock Purchases, 1925-1929," NBER Working Papers 24431, National Bureau of Economic Research, Inc.
    9. Ellis W. Tallman & Jon R. Moen, 2018. "The transmission of the financial crisis in 1907: an empirical investigation," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 12(2), pages 277-312, May.
    10. Metrick, Andrew, 2022. "Broad-Based Emergency Liquidity Programs," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(2), pages 86-178, April.
    11. Gary Gorton & Guillermo Ordoñez, 2016. "Fighting Crises," NBER Working Papers 22787, National Bureau of Economic Research, Inc.
    12. Anbil, Sriya, 2018. "Managing stigma during a financial crisis," Journal of Financial Economics, Elsevier, vol. 130(1), pages 166-181.
    13. Gary B. Gorton, 2016. "The History and Economics of Safe Assets," NBER Working Papers 22210, National Bureau of Economic Research, Inc.
    14. Schuermann, Til, 2016. "Stress Testing in Wartime and in Peacetime," Working Papers 16-01, University of Pennsylvania, Wharton School, Weiss Center.
    15. Ladley, Daniel & Rousseau, Peter L., 2023. "Panic and propagation in 1873: A network analytic approach," Journal of Banking & Finance, Elsevier, vol. 151(C).

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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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