Working Paper: NBER ID: w22036
Authors: Gary Gorton; Ellis W. Tallman
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.
Keywords: banking panics; national banking era; depositors' beliefs; New York Clearing House
JEL Codes: E32; E42; E44; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial crisis (G01) | shift in depositors' beliefs from panic to confidence (E32) |
| clearing house's management of information (D82) | shift in depositors' beliefs from panic to confidence (E32) |
| issuance of loan certificates (H81) | influence on depositors' perceptions of systemic risk (G21) |
| decrease in currency premium (F31) | restoration of confidence in the banking system (G28) |
| clearing house's suppression of bank-specific information (G28) | maintenance of stability and prevention of panic (E63) |
| timing of events (issuance of loan certificates) (G14) | shift in depositors' beliefs about solvency (G21) |
| management of information by clearing house (D82) | mitigation of effects of panic (E71) |