Liquidity provision during the crisis of 1914: Private and public sources

Abstract

Caught between the end of the National Banking Era and the beginning of the Federal Reserve System, the crisis of 1914 provides an example of a banking panic avoided. We investigate how this outcome was achieved by examining data on the issues of Aldrich-Vreeland emergency currency and clearing house loan certifi cates to New York City institutions that identify the borrower and the quantity requested for each type of temporary liquidity measure. The extensive provision of temporary credit to a wide array of fi nancial intermediaries was, in our opinion, essential to the successful alleviation of fi nancial distress in 1914. Empirical results indicate an important role for clearing house loan certifi cates that is distinct from the infl uence of Aldrich-Vreeland emergency currency issues.

The (dis)advantages of clearinghouses before the Fed

“…As described by Wicker (2005), the establishment of a central bank was not just about emergency relief to illiquid banks during panics. If it was the goal, then the combined funds issued under the Aldrich-Vreeland Act (1908) and the clearinghouse system were likely sufficient (Jacobson and Tallman, 2013). Instead the adoption of a central bank was an attempt to provide stability to the entire banking system over time-something the exclusionary approaches of clearinghouses could not achieve.…”

Clearinghouse loan certificates as a lender of last resort

“…Further, they do not control for the lending of clearinghouse loan certificates. Jacobson and Tallman (2014) compare borrowing of loan certificates and Aldrich-Vreeland Emergency currency in 1914. Following Hoag (2012b), this paper conducts econometric analysis of which banks borrowed loan certificates across panics.…”

How was the quantitative easing program of the 1930s Unwound?

“…If anything, the lead up to WWII should have reduced confidence in financial markets rather than strengthened it. For instance, WWI caused a financial shock that led to the temporary closure of the New York stock market and the issue of emergency currency through the Aldrich-Vreeland Act (Silber 2007, Jacobson andTallman 2015).…”