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Banking in Historical Perspective

Paper Session

Saturday, Jan. 4, 2020 10:15 AM - 12:15 PM (PDT)

Marriott Marquis, Malibu City
Hosted By: Cliometric Society
  • Chair: Jonathan Rose, Federal Reserve Bank of Chicago

Interbank Connections, Contagion and Bank Distress in the Great Depression

David C. Wheelock
,
Federal Reserve Bank of St. Louis
Charles W. Calomiris
,
Columbia University
Matthew Jaremski
,
Utah State University

Abstract

Liquidity shocks transmitted through interbank connections contributed to bank distress during the Great Depression. New data on interbank connections reveal that banks were much more likely to close when their correspondents closed. Further, after the Federal Reserve was established, banks’ management of cash and capital buffers was less responsive to network liquidity risk, suggesting that banks expected the Fed to reduce network that risk. Because the Fed’s presence removed the incentives for the most systemically important banks to maintain capital and cash buffers that had protected against liquidity risk, it likely contributed to the banking system’s vulnerability to contagion during the Depression.

Why Was There No Banking Panic in 1920-1921? The Federal Reserve Banks and the Recession

Eugene White
,
Rutgers University
Ellis Tallman
,
Federal Reserve Bank of Cleveland

Abstract

Prior to the formation of the Federal Reserve’s Open Market Investment Committee in 1923, the Federal Reserve banks enjoyed considerable discretion in discounting and open market operations. During the 1920- 1921 recession that followed the Fed’s abrupt increase in discount rates, we show with new data that Federal Reserve banks in hard-hit districts expanded rather than contracted credit to their member banks in the early stage of recession. This group of Federal Reserve banks sought to mitigate the effects of the recession and prevent a banking panic. Although they were individually constrained by gold reserve requirements, as was the System as a whole, the expansionary Reserve banks were able to borrow excess gold reserves from the other Reserve banks and continue lending. While they were ultimately compelled to follow the contractionary policy, these Federal Reserve banks sustained lending for a prolonged period to their member banks who took their increased credit primarily in the form of currency. Buffered by increased liquidity, these banks were able to meet withdrawals by customers, preventing a panic, even though banks suspended operations in record numbers.

Charity Begins At Home - Why Britain Resumed the Gold Standard After the French Wars

Pamfili Antipa
,
Sciences Po
Quoc-Anh Do
,
Sciences Po

Abstract

Will politicians prioritize the public interest over personal financial gain? Analyzing the decision to resume the gold standard after the French Wars (1793-1815), we find that politicians acted to maximize their personal interest. We show the importance of politicians’ personal financial motivations by analyzing the size and timing of their government debt holdings, as recorded in the archives of the Bank of England. A large majority of politicians that publicly pushed for the resumption of the gold standard held large amounts of public debt, an asset that would substantially appreciate in the event of resumption. In addition, the timing of purchases revealed that politicians engaged in insider trading. Our analysis contributes to the literature concerned with politicians’ conflicts of interest. It also informs the current policy choice faced by countries in the South of Europe, consisting in choosing between maintaining a fixed exchange rate and restructuring an outstanding debt overhang.

National Banks and the Liabilities Channel of Local Economic Development

Chenzi Xu
,
Harvard University and Dartmouth College
He Yang
,
Harvard University

Abstract

We use a historical laboratory to show that banks impact real economic activity through the liabilities side of their balance sheet, where safer liabilities provide better monetary services. The United States National Banking Act of 1864 was enacted when the circulating money supply primarily consisted of privately issued bank notes. The Act required “national banks” to fully back their bank note liabilities with federal bonds, thereby creating a new and stable currency, which reduced transactions costs and facilitated trade. National banks also faced regulatory capital requirements defined by town population cutoffs. Using the discontinuity in the capital requirement as an instrument for national bank entry, we find that the composition of agricultural production shifted from non-traded crops to traded crops while total production was unaffected. More- over, trade activity proxied by employment in trade-related professions and businesses engaged in trade grew. National banks also led to significant manufacturing output growth that was primarily driven by sourcing more inputs.
Discussant(s)
Angela Vossmeyer
,
Claremont McKenna College
Kilian Rieder
,
Oesterreichische Nationalbank
Christopher M. Meissner
,
University of California-Davis
Sarah Quincy
,
Vanderbilt University
JEL Classifications
  • N2 - Financial Markets and Institutions
  • G2 - Financial Institutions and Services