Panics and bailouts of the 19th century / The authors open the book with a deep dive into the National Bank panics
of the Gilded Age.
(11) While the intellectual history of this notion is beyond the scope of my remarks this evening, suffice it to say that what Bagehot and Thornton had in mind is quite clear: the purpose of lender of last resort operations was to expand the supply of bank notes when depositors attempt to make substantial withdrawals, as they did during 19th-century bank panics
. Under a fractional reserve banking system, such wholesale shifts ("runs") from deposits to currency would be disruptive and deflationary without accommodating increases in currency supply.
828) make the theoretical case that bank panics
in the pre-Fed period "occur when there are restrictions on the issue of currency by private banks, but they do not occur if banks are unrestricted." Weber (2012) examines state deposit insurance systems before 1865 and finds that these systems tended to increase bank failures.
In fact, between the Civil War and the Fed's creation, major bank panics
followed by recessions occurred only in 1873, 1893, and 1907, and none of those events approached the severity of the Great Depression.
Contemporary expert opinion knew that the unit-bank system was the reason behind chronic American bank panics
(7) Bank panics
could be devastating to economic activity because they disrupted the ability to make payments conveniently.
For example, Bernanke explains how bank panics
occur and why they are dangerous without dragging his readers through a money and banking lecture.
and Business Cycles." Oxford Economic Papers 40, no.
Nevertheless, even bank panics
that affect the "whole" banking system tend to be isolated to a single country or closely-linked group of countries, and this means that there will still be private lenders in other banking systems able to grant loans on mutually beneficial terms.
<ul> <li>It was created to stabilize the banking system and keep bank panics
A substantial immediate haircut on the sovereign debt of the vulnerable eurozone countries would be so destructive that it would set off a new round of bank panics
. Recognizing this problem, banks can hold their host governments to ransom.
So, what happened during bank panics
? During the nineteenth and early twentieth centuries, the banks themselves developed increasingly sophisticated ways to respond to panics.