Ongoing research on Fed policies during 1920-23, with Eugene White.
Book released September 21, 2018
Fighting Financial Crises: Learning from the Past
(coauthored with Gary B. Gorton)
Fighting Financial Crises examines the past for a fuller understanding of how historical episodes of crises were addressed. We investigate how panics during the National Banking Era played out and how they were eventually quelled and prevented. We survey of the period’s “information environment,” trace the development of national bank notes, checks, and clearing houses and show how the key to keeping order was to disseminate information very carefully. We isolate effective responses based on the framework of the National Banking Era and then consider government and related agency reactions to the recent crisis to emphasize actions that work.
(coauthored with Gary B. Gorton)
Fighting Financial Crises examines the past for a fuller understanding of how historical episodes of crises were addressed. We investigate how panics during the National Banking Era played out and how they were eventually quelled and prevented. We survey of the period’s “information environment,” trace the development of national bank notes, checks, and clearing houses and show how the key to keeping order was to disseminate information very carefully. We isolate effective responses based on the framework of the National Banking Era and then consider government and related agency reactions to the recent crisis to emphasize actions that work.
How Did Pre-Fed Banking Panics End?
with Gary B. Gorton
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.
with Gary B. Gorton
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.
Too Big to Fail Before the Fed
with Gary B. Gorton
“Too-big-to-fail” is consistent with policies followed by private bank clearing houses during financial crises in the U.S. National Banking Era prior to the existence of the Federal Reserve System. Private bank clearing houses provided emergency lending to member banks during financial crises. This behavior strongly suggests that “too-big-to-fail” is not the problem causing modern crises. Rather it is a reasonable response to the threat posed to large banks by the vulnerability of short-term debt to runs.
with Gary B. Gorton
“Too-big-to-fail” is consistent with policies followed by private bank clearing houses during financial crises in the U.S. National Banking Era prior to the existence of the Federal Reserve System. Private bank clearing houses provided emergency lending to member banks during financial crises. This behavior strongly suggests that “too-big-to-fail” is not the problem causing modern crises. Rather it is a reasonable response to the threat posed to large banks by the vulnerability of short-term debt to runs.
"Banking and Financial Crises in United States History:
What Guidance Can History Offer Policymakers?" [Version November 28, 2010]
Joint with Elmus R. Wicker, Indiana University.
This paper assesses the validity of comparisons between the current financial crisis and past crises in the United States. We highlight aspects of two National Banking Era crises (the Panic of 1873 and the Panic of 1907) that are relevant for comparison with the Panic of 2008. In 1873, overinvestment in railroad debt and the default of railroad companies on that debt led to the failure of numerous brokerage houses, an antecedent to the modern investment bank. For the Panic of 1907, panic-related deposit withdrawals centered on the less regulated trust companies, which were less directly linked to the existing lender of last resort, similar to investment banks in 2008. The popular press has made numerous references to the banking crises (there were three main ones) of the Great Depression as relevant comparisons to the present crisis. This paper argues that such an analogy is inaccurate in general. Banking crises in US history reflected widespread depositor withdrawals whereas the recent panic arose from counterparty solvency fears. The lessons from the past, therefore, appear less directly relevant for the current crisis.
This paper assesses the validity of comparisons between the current financial crisis and past crises in the United States. We highlight aspects of two National Banking Era crises (the Panic of 1873 and the Panic of 1907) that are relevant for comparison with the Panic of 2008. In 1873, overinvestment in railroad debt and the default of railroad companies on that debt led to the failure of numerous brokerage houses, an antecedent to the modern investment bank. For the Panic of 1907, panic-related deposit withdrawals centered on the less regulated trust companies, which were less directly linked to the existing lender of last resort, similar to investment banks in 2008. The popular press has made numerous references to the banking crises (there were three main ones) of the Great Depression as relevant comparisons to the present crisis. This paper argues that such an analogy is inaccurate in general. Banking crises in US history reflected widespread depositor withdrawals whereas the recent panic arose from counterparty solvency fears. The lessons from the past, therefore, appear less directly relevant for the current crisis.
| tallmanwicker_bfcush_11_28_2010.pdf |
