If you've got money in the bank, chances are you've never seriously worried about not being able to withdraw it. But there was a time in the United States, an era that ended just over a hundred years ago, when bank customers had to pay close attention to the solvency of the banking system, knowing they might have to rush to retrieve their savings before the bank collapsed. During the National Banking Era (1863-1913), before the establishment of the Federal Reserve, widespread banking panics were indeed rather common.
Yet these pre-Fed banking panics, as Gary B. Gorton and Ellis W. Tallman show, bear striking similarities to our recent financial crisis. Fighting Financial Crises thus turns to the past to better understand our uncertain present, investigating how panics during the National Banking Era played out and how they were eventually quelled and prevented. The authors then consider the Fed's and the SEC's reactions to the recent crisis, building an informative new perspective on how the modern economy works.
If you've got money in the bank, chances are you've never seriously worried about not being able to withdraw it. But there was a time in the United States, an era that ended just over a hundred years ago, when bank customers had to pay close attention to the solvency of the banking system, knowing they might have to rush to retrieve their savings before the bank collapsed. During the National Banking Era (1863-1913), before the establishment of the Federal Reserve, widespread banking panics were indeed rather common.
Yet these pre-Fed banking panics, as Gary B. Gorton and Ellis W. Tallman show, bear striking similarities to our recent financial crisis. Fighting Financial Crises thus turns to the past to better understand our uncertain present, investigating how panics during the National Banking Era played out and how they were eventually quelled and prevented. The authors then consider the Fed's and the SEC's reactions to the recent crisis, building an informative new perspective on how the modern economy works.
Preface
1 Fighting Financial Crises: Learning from the Past
2 The New York Clearing House Association
3 The Start of a Panic
4 What the New York Clearing House Did during National Banking Era
Panics
5 Information Production and Suppression and Emergency
Liquidity
6 “Too Big to Fail” before the Fed
7 Certified Checks and the Currency Premium
8 The Change in Depositors’ Beliefs during Suspension
9 Aftermath
10 What Ends a Financial Crisis? Historical Reminders
11 Modern Crises: Perspectives from History
12 Guiding Principles for Fighting Crises
Appendixes
Notes
References
Index
Gary B. Gorton is the Frederick Frank Class of 1954 Professor of Management and professor of finance at Yale University School of Management and a research associate of the NBER. He is the author of many books, including, most recently, The Maze of Banking: History, Theory, Crisis. Ellis W. Tallman is executive vice president and director of research at the Federal Reserve Bank of Cleveland. He has published extensively on macroeconomics, economic forecasting, and historical episodes of financial crisis in several top journals.
"Gorton and Tallman’s historical details of the panics of the 1800s
for the New York banks at the epicenter of the financial system are
unequaled, based on my research. The authors have taken stories
from the contemporary New York press and employed available
financial data from bank reports to develop a narrative and
accompanying tables that bring to life the panics of that era.
These details alone make the book worthy of a place on any
financial historian’s bookshelf."
*Regulation: The Cato Review of Business and Government*
“A vital addition to crisis literature because it compares what
happened in 2008 to the ways in which US bankers dealt with panics
on their own in the years before there was a Fed. . . . With
illustration, analysis, and nuance on every page, Fighting
Financial Crises is one hundred and fifty years better than Lombard
Street."
*Economic Principals*
"Because crises are inevitable, it is important to understand why
they occur and how to respond to them. The authors are leading
authorities on the history and economics of financial crises, and
thus well worth listening to. . . . Gorton and Tallman provide
a clear and succinct description of the crisis, and show how
fundamentally it was like the banking panics of the nineteenth and
early twentieth centuries. Many books and papers have been written
about financial crises, but comparatively few focus on how to fight
crises. . . . Their book provides many insights and lessons
about the nature of financial crises and how authorities should
respond to them. Economists and financial market participants will
find the book informative, and it should be mandatory reading for
regulators and policymakers charged with oversight of the financial
system."
*Business Economics*
"A copy of this book should at least be on the shelves of all
economists at all central banks."
*Economic History Association*
“Financial crises are complex economic and political events, and a
historical perspective is essential. In this book, two of our best
financial historians distill the key lessons for policy makers and
practitioners from the US banking crises of the nineteenth and
early twentieth centuries. Their accounts of the crises are
engaging and their analyses are insightful and persuasive.”
*Ben S. Bernanke, former chairman of the Federal Reserve*
“Those who do not study history are more likely to repeat earlier
errors, particularly so in the case of financial crises. Gorton and
Tallman have painstakingly recorded how US financial crises
unfolded and then dissipated between 1873 and 1914, and then
distilled general lessons for handling current and future crises.
Besides conforming to Bagehot’s rule, they emphasize the importance
of managing information in order to avoid contagion from the bank
perceived as weakest, to the next weakest, and on until the whole
edifice systematically collapses. Excellent history and shrewd
analysis.”
*Charles A. E. Goodhart, London School of Economics*
“History matters, including financial history. During the recent
crisis, those of us then running the Bank of England introduced a
course on the history of crises for our core staff. Although I
don’t agree with every one of its conclusions and prescriptions, I
dearly wish we had had this book to hand then! Policy makers need
more books like it, and to follow the example of Gordon and Tallman
in taking insights from the past seriously.”
*Paul Tucker, former deputy governor of the Bank of England*
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