Hostname: page-component-cd9895bd7-jkksz Total loading time: 0 Render date: 2024-12-25T18:07:28.689Z Has data issue: false hasContentIssue false
  • English
  • Français

Oh, How the Mighty Have Fallen: The Bank Failures and Near Failures That Started America’s Greatest Financial Panics

Published online by Cambridge University Press:  28 May 2021

Hugh Rockoff
Hugh Rockoff*
Affiliation:
Hugh Rockoff is Professor, Department of Economics, Rutgers University, 75 Hamilton Street, New BrunswickNJ08901. E-mail: Rockoff@econ.rutgers.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the failures or in some cases near-failures of financial institutions that started the 12 most severe peacetime financial panics in the United States, beginning with the Panic of 1819 and ending with the Panic of 2008. The following generalizations were true in most cases, although not in all. (1) Panics were triggered by a short series of failures or near-failures; (2) many of the failing institutions were what we would now call shadow banks; (3) typically, the source of trouble was an excessive investment in real estate; and (4) typically, they had outstanding reputations for trustworthiness, prudence, and financial acumen—before they failed. It appears that in these respects the Panic of 2008 was an old-school panic.

[a panic] occurs when a succession of unexpected failures has created in the mercantile, and sometimes also in the non-mercantile public a general distrust in each other’s solvency; disposing every one not only to refuse fresh credit, except on very onerous terms, but to call in, if possible all credit which he has already given.

—John Stuart Mill

All of this has happened before, and it will all happen again.

—Peter Pan

Type
Article
Information
The Journal of Economic History , Volume 81 , Issue 2 , June 2021 , pp. 331 - 358
Copyright
© The Economic History Association 2021

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

This paper had its origin in a conversation with Albrecht Ritschl, who asked a number of searching questions about the history of U.S. banking panics shortly after the 2008 financial crisis, some of which I finally answer here. I presented a paper covering some of these issues at a conference at Indiana University in October 2014, celebrating the scholarship of Elmus Wicker. I thank the participants in that conference, especially my discussant Richard Sylla, for helpful comments. That paper was also presented at a meeting of the Chicago Friends of Economic History in May 2015. On that occasion, questions raised by Lou Cain were especially helpful. Comments received during and after my presentation at the 2020 meeting of the Economic History Association were valuable. Farley Grubb, Eric Hilt, Jeffrey R. Hummel, and my Rutgers colleagues Michael Bordo and Eugene White also provided insightful comments and encouragement. Mriga Bansal, Andrew Garib, and Jessica Schlossberg provided able research assistance. The remaining errors are mine.

References

REFERENCES

Abramovitz, Moses. Employment, Growth, and Price Levels. Part 2: Historical and Comparative Rates of Production, Productivity, and Prices: Hearing of the Joint Economic Committee. Testimony of Moses Abramovitz. 86th Cong., 1st sess., 1959.Google Scholar
Allen, Franklin, and Douglas, Gale. “Optimal Financial Crises.” Journal of Finance 53 (1998): 1245–84.CrossRefGoogle Scholar
America’s Most Admired Companies. In Fortune Magazine [database online], various years. Available from http://money.cnn.com/magazines/fortune/mostadmired/2007/full_list/F.html (accessed 23 May 2013).Google Scholar
Bagehot, Walter. Lombard Street: A Description of the Money Market, 14th ed. London: William Clowes and Sons, Limited, 1924 [1873].Google Scholar
Bernanke, Ben S. “Some Reflections on the Crisis and the Policy Response.” Speech, the Century Foundation Conference on “Rethinking Finance.” New York, NY: Russell Sage Foundation, 13 April 2012.Google Scholar
Bogart, Ernest Ludlow. Economic History of the American People. New York and London: Longmans, Green and Co., 1930.Google Scholar
Bordo, Michael, Dueker, Michael J., and Wheelock, David C.. “Aggregate Price Shocks and Financial Instability: A Historical Analysis.” Economic Inquiry 40, no. 4 (2002): 521–38.CrossRefGoogle Scholar
Bordo, Michael, and Harold, James. “The Past Mirror: Notes, Surveys, Debates: The Great Depression Analogy.” Financial History Review 17, no. 2 (2010): 127–40.CrossRefGoogle Scholar
Bordo, Michael, and John, Landon-Lane. “The Banking Panics in the United States in the 1930s: Some Lessons for Today.” Oxford Review of Economic Policy 26, no. 3 (2010): 486–509.CrossRefGoogle Scholar
Bruner, Robert F., and Carr., Sean D. The Panic of 1907: Lessons Learned from the Market’s Perfect Storm. Hoboken, NJ: John Wiley & Sons, 2007.Google Scholar
Cagan, Phillip. Determinants and Effects of Changes in the Stock of Money, 1875–1960. New York: National Bureau of Economic Research, 1965.Google Scholar
Calomiris, Charles W., and Gorton, Gary. “The Origins of Banking Panics: Models, Facts, and Bank Regulation.” In Financial Markets and Financial Crises, edited by R. Glenn Hubbard, 109–73. A National Bureau of Economic Research Project Report. Chicago and London: University of Chicago Press, 1991.Google Scholar
Clews, Henry. Fifty Years in Wall Street. “Twenty-Eight Years in Wall Street,” Revised and Enlarged by a Résumé of the Past Twenty-Two Years, Making a Record of Fifty Years in Wall Street. New York, NY: Irving Publishing Company, 1908.Google Scholar
Coman, Katharine. The Industrial History of the United States. New York: The Macmillan Company, 1910.CrossRefGoogle Scholar
Dewey, Davis Rich. Financial History of the United States. American Citizen Series, 11th ed. New York: Longmans, Green and Co., 1931.Google Scholar
Diamond, Douglas W., and Dybvig, Philip H.. “Bank Runs, Deposit Insurance, and Liquidity.” Journal of Political Economy 91, no. 3 (1983): 401–19.CrossRefGoogle Scholar
Diamond, Douglas W., and Raghuram Rajan. “Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking.” Journal of Political Economy 109, no. 2 (2001): 2431–65.CrossRefGoogle Scholar
Eichengreen, Barry. “Economic History and Economic Policy.” Journal of Economic History 72, no. 2 (2012): 289–307.CrossRefGoogle Scholar
Eichengreen, Barry. Hall of Mirrors: The Great Depression, the Great Recession, and the Uses-and Misuses-of History. Oxford: Oxford University Press, 2015.Google Scholar
Ennis, Huberto M., and Todd Keister. “Bank Runs and Institutions: The Perils of Intervention.” American Economic Review 99, no. 4 (2009): 1588–607.CrossRefGoogle Scholar
Farwell, John V. “George Smith’s Bank.” Journal of Political Economy 13, no. 4 (1905): 590–93.CrossRefGoogle Scholar
Fels, Rendigs. American Business Cycles, 1867–1897. Chapel Hill: University of North Carolina Press, 1959.Google Scholar
Friedman, Milton, and Schwartz, Anna J.. A Monetary History of the United States, 1867–1960. National Bureau of Economic Research. Studies in Business Cycles, vol. 12. Princeton: Princeton University Press, 1963.Google Scholar
Frydman, Carola, Hilt, Eric, and Zhou, Lily Y.. “Economic Effects of Runs on Early ‘Shadow Banks’: Trust Companies and the Impact of the Panic of 1907.” Journal of Political Economy 123, no. 4 (2015): 902–40.CrossRefGoogle Scholar
Glasner, David. Business Cycles and Depressions: An Encyclopedia. New York and London: Garland Publishing, Inc., 1997.Google Scholar
Gorton, Gary. Slapped by the Invisible Hand: The Panic of 2007. Financial Management Association Survey and Synthesis Series. New York: Oxford University Press, 2010.Google Scholar
Gorton, Gary. Misunderstanding Financial Crises: Why We Don’t See Them Coming. Oxford and New York: Oxford University Press, 2012.Google Scholar
Gorton, Gary, and Ellis, Tallman. Fighting Financial Crises: Learning from the Past. Chicago and London: University of Chicago Press, 2018.CrossRefGoogle Scholar
Holmström, Bengt, and Jean, Tirole. “Private and Public Supply of Liquidity.” Journal of Political Economy 106, no. 1 (1998): 1–40.CrossRefGoogle Scholar
Jalil, Andrew J. “A New History of Banking Panics in the United States, 1825–1929: Construction and Implications.” American Economic Journal: Macroeconomics 7, no. 3 (2015): 295–330.Google Scholar
James, Frank Cyril. The Growth of Chicago Banks, 1st ed. New York: Harper & Brothers, 1938.Google Scholar
Kemmerer, Edwin Walter. Seasonal Variations in the Relative Demand for Money and Capital in the United States; A Statistical Study. [United States] 61st Cong., 2d sess. senate. doc. vol. 588. National Monetary Commission. Washington, DC: GPO, 1910.Google Scholar
Kindleberger, Charles Poor. Manias, Panics, and Crashes: A History of Financial Crises, Rev ed. New York: Basic Books, 1989.CrossRefGoogle Scholar
Lebergott, Stanley. Manpower in Economic growth; The American Record since 1800. Economics handbook series. New York: McGraw-Hill, 1964.Google Scholar
McCulloch, Hugh. Men and Measures of Half a Century; Sketches and Comments. New York: C. Scribner’s Sons, 1888.Google Scholar
McFerrin, John Berry. Caldwell and Company; A Southern Financial Empire. Nashville, TN: Vanderbilt University Press, 1969.Google Scholar
Meerman, J. P. “The Climax of the Bank War: Biddle’s Contraction, 1833–34.” Journal of Political Economy 71 (1963): 378–88.CrossRefGoogle Scholar
Minsky, Hyman P. “An Evaluation of Recent Monetary Policy.” Nebraska Journal of Economics and Business 11, no. 4 (1972): 37–56.Google Scholar
Mill, John Stuart. Principles of Political Economy: With Some of Their Applications to Social Philosophy, 8th ed. London: Longmans, Green, Reader, and Dyer, 1878.Google Scholar
Miron, Jeffrey A. “Financial Panics, the Seasonality of the Nominal Interest Rate, and the Founding of the Fed.” American Economic Review 76, no. 1 (1986): 125–40.Google Scholar
Mitchell, Wesley C. Business Cycles and Their Causes. A new edition of Mitchell’s Business Cycles: Part III ed. Berkeley and Los Angeles: University of California Press, 1941.CrossRefGoogle Scholar
Mitchener, Kris James, and Gary, Richardson. “Shadowy Banks and Financial Contagion during the Great Depression: A Retrospective on Friedman and Schwartz.” American Economic Review 103, no. 3 (2013): 73–78.CrossRefGoogle Scholar
Moen, Jon R., and Ellis W. Tallman. “Clearinghouse Membership and Deposit Contraction during the Panic of 1907.” Journal of Economic History 60, no. 1 (2000): 145–63.CrossRefGoogle Scholar
Myers, Margaret G. A Financial History of the United States. New York: Columbia University Press, 1970.Google Scholar
Noyes, Alexander Dana. Forty Years of American Finance: A Short Financial History of the Government and People of the United States Since the Civil War, 1865–1907. New York: G.P. Putnam’s Sons, 1909.Google Scholar
Postel-Vinay, Natacha. “What Caused Chicago Bank Failures in the Great Depression? A Look at the 1920s.” Journal of Economic History 76, no. 2 (2016): 478–519.CrossRefGoogle Scholar
Riddiough, Timothy J., and Thompson, Howard E.. “Déjà Vu All over Again: Agency, Uncertainty, Leverage and the Panic of 1857.” HKIMR Working Paper No. 10/2012, Hong Kong Institute for Monetary Research, Hong Kong, 2012.CrossRefGoogle Scholar
Rockoff, Hugh. “Upon Daedalian Wings of Paper Money: Adam Smith and the Crisis of 1772.“ In The Adam Smith Review, volume 6, edited by Forman-Barzilai, Fonna, 237–26. England, UK: Routledge, 2011.Google Scholar
Rockoff, Hugh. “It is Always the Shadow Banks: The Regulatory Status of the Banks that Failed and Ignited America’s Greatest Financial Panics.” In Coping with Financial Crises: Some Lessons from Economic History, edited by Rockoff, Hugh and Suto, Isao, 77–106. Singapore: Springer Nature, 2018.CrossRefGoogle Scholar
Rodgers, Mary Tone, and Payne, James E.. “How the Bank of France Changed U.S. Equity Expectations and Ended the Panic of 1907.” Journal of Economic History 74, no. 2 (2014): 420–48.CrossRefGoogle Scholar
Schularick, Moritz, and Taylor, Alan M.. “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008.” American Economic Review 102, no. 2 (2012): 1029–61.CrossRefGoogle Scholar
Sherman, John. John Sherman’s Recollections of Forty Years in the House, Senate and Cabinet: An Autobiography. Chicago: Werner, 1895.Google Scholar
Shiller, Robert. Narrative Economics: How Stories Go Viral & Drive Major Economic Events. Princeton: Princeton University Press, 2019.Google Scholar
Shultz, William J., and Caine, M. R.. Financial Development of the United States. New York, NY: Prentice-Hall Inc., 1937.Google Scholar
Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. The Glasgow edition of the works and correspondence of Adam Smith, vol. 2., edited by R. H. Campbell, Andrew S. Skinner, and William B. Indianapolis: Liberty Fund, 1981[1776].Google Scholar
Smith, Alice E. “Banking without Banks: George Smith and the Wisconsin Marine and Fire Insurance Company.” Wisconsin Magazine of History 48, no. 4 (1965): 268–81.Google Scholar
Sobel, Robert. Panic on Wall Street: A Classic History of America’s Financial Disasters with a New Exploration of the Crash of 1987. New York: Truman Talley Books/ Dutton, 1988.Google Scholar
Sprague, O. M. W. History of Crises under the National Banking System. U. S. 61st Cong., 2nd sess. senate. doc. 538. Washington, DC: GPO, 1910.Google Scholar
Studenski, Paul, and Herman, Edward Krooss. Financial History of the United States: Fiscal, Monetary, Banking, and Tariff, Including Financial Administration and State and Local Finance, 2nd ed. New York: McGraw-Hill, 1963.Google Scholar
Temin, Peter. The Jacksonian Economy. New York: W. W. Norton & Company, 1969.Google Scholar
Thorp, Willard Long, Thorp, Hildegarde E., and Mitchell, Wesley C.. Business Annals. New York: National Bureau of Economic Research, Inc., 1926.Google Scholar
Tooze, J. Adam. Crashed: How a Decade of Financial Crises Changed the World. New York, NY: Viking, an Imprint of Penguin Random House LLC, 2018.Google Scholar
Werner, Morris Robert. Little Napoleons and Dummy Directors: Being the Narrative of the Bank of United States. Yardley, PA: Westholme Publishing, LLC, 2009 [1933].Google Scholar
White, Eugene. “How to Prevent a Banking Panic: The Barings Crisis of 1890 Revisited.” Presented at the Federal Reserve System Conference on Economic and Financial History, Federal Reserve Bank of Richmond, May 2016.Google Scholar
Wicker, Elmus. The Banking Panics of the Great Depression. New York: Cambridge University Press, 1996.CrossRefGoogle Scholar
Wicker, Elmus. Banking Panics of the Gilded Age. Studies in macroeconomic history. Cambridge, UK; New York: Cambridge University Press, 2000.Google Scholar