Banking in Historical Perspective
Saturday, Jan. 4, 2020 10:15 AM - 12:15 PM (PDT)
- Chair: Jonathan Rose, Federal Reserve Bank of Chicago
Why Was There No Banking Panic in 1920-1921? The Federal Reserve Banks and the Recession
AbstractPrior 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
AbstractWill 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
AbstractWe 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.
- N2 - Financial Markets and Institutions
- G2 - Financial Institutions and Services