A New History of Banking Panics in the United States, 1825–1929: Construction and Implications

Abstract

There are two major problems in identifying the output effects of financial panics of the pre-Great Depression era. First, it is not clear when panics occurred because prior panic series-lists of when panics occurred-combine panics with other developments in financial markets, fail to distinguish among different types of financial panics, and employ unreliable strategies to identify panics. Second, even if the timing of when panics occurred is consistent with panics having real output effects, establishing the direction of causality is tricky: are panics causing downturns or are downturns causing panics? This paper addresses these two problems (1) by developing a new panic series for the 1825-1929 period-one that rectifies many of the problems of earlier seriesand (2) by studying the output effects of major banking panics that the reports of contemporary observers suggest were the result of idiosyncratic disturbances, as opposed to declining output conditions. My paper derives four major empirical findings: (1) major banking panics have large and strongly negative effects on both output and prices, (2) panics were a substantial source of economic instability prior to the founding of the Federal Reserve, (3) on average, downturns with major banking panics were more severe than downturns without them and output recoveries were longer for downturns with major banking panics than output recoveries for downturns without them and (4) panics can have persistent level and trend effects. Moreover, using my new series, I find that much of the conventional wisdom on the causes, effects and frequency of panics of the pre-Great Depression era was based on unreliable evidence-and in particular, on biased and inconsistent panic series.! I am indebted to J.

New Evidence on the Aftermath of Financial Crises in Advanced Countries

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Network Contagion and Interbank Amplification during the Great Depression

“…Economists have clearly defined banking panics in theory and practice (Calomiris and Gorton, 1991;Diamond and Dybvig, 1984;Freixas and Rochet, 1997;Gorton, 2012;Jorda et. al., 2013;Leavan and Valencia, 2013;Reinhart and Rogoff, 2009;Rochet, 2008 (Friedman and Schwartz, 1963;Jalil, 2015;Wicker, 1996 The second method uses micro data from examiners' reports of bank suspensions to identify patterns consistent with the symptoms of banking panics. This approach has been successfully employed (and cross-checked with the narrative method) to identify periods of bank distress during the 1930s (Richardson, 2008), to analyze banking panics on the eve of the Great Depression (Carlson, Mitchener, and Richardson, 2010), and to identify "local" panics during the 1920s (Davison and Ramirez, 2014).…”

New Evidence on the Impact of Financial Crises in Advanced Countries

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