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Free Bank Failures: Risky Bonds versus Undiversified Portfolios

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  • MATTHEW JAREMSKI

Abstract

Almost 30% of the 872 banks established under the Free Banking System (1837–62) are considered failures, unable to reimburse noteholders for the full value of their bank notes upon closure. Lacking sufficient data, economists have focused on one of two general failure explanations: poor regulation design or undiversified bank portfolios. I test both explanations within hazard functions using Warren Weber's annual balance sheet data for almost every antebellum bank. My results suggest that free banking's bond‐secured note issue was the underlying problem, but individual banks could have avoided failure by diversifying their assets with loans and controlling their circulation.

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  • Matthew Jaremski, 2010. "Free Bank Failures: Risky Bonds versus Undiversified Portfolios," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(8), pages 1565-1587, December.
    • Handle: RePEc:wly:jmoncb:v:42:y:2010:i:8:p:1565-1587
    DOI: 10.1111/j.1538-4616.2010.00354.x
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    Cited by:

    1. Kris James Mitchener & Matthew Jaremski, 2014. "The Evolution of Bank Supervision: Evidence from U.S. States," NBER Working Papers 20603, National Bureau of Economic Research, Inc.
    2. Benjamin Chabot & Charles C. Moul, 2014. "Bank Panics, Government Guarantees, and the Long‐Run Size of the Financial Sector: Evidence from Free‐Banking America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(5), pages 961-997, August.
    3. Brownlees, Christian & Chabot, Ben & Ghysels, Eric & Kurz, Christopher, 2020. "Back to the future: Backtesting systemic risk measures during historical bank runs and the great depression," Journal of Banking & Finance, Elsevier, vol. 113(C).
    4. Jeremy Atack & Matthew S. Jaremski & Peter L. Rousseau, 2014. "Did Railroads Make Antebellum U.S. Banks More Sound?," NBER Chapters, in: Enterprising America: Businesses, Banks, and Credit Markets in Historical Perspective, pages 149-178, National Bureau of Economic Research, Inc.
    5. Jaremski, Matthew & Rousseau, Peter L., 2018. "The dawn of an ‘age of deposits’ in the United States," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 264-281.
    6. Matthew Jaremski & Peter L. Rousseau, 2013. "Banks, Free Banks, And U.S. Economic Growth," Economic Inquiry, Western Economic Association International, vol. 51(2), pages 1603-1621, April.
    7. Mitchener, Kris James, 2014. "The Evolution of Bank Supervision: Evidence from U.S. States," CAGE Online Working Paper Series 181, Competitive Advantage in the Global Economy (CAGE).
    8. Jaremski, Matthew, 2017. "Privately Issued Money in the US," Working Papers 2017-05, Department of Economics, Colgate University, revised 20 Sep 2017.
    9. Matthew Jaremski, 2013. "State Banks and the National Banking Acts: Measuring the Response to Increased Financial Regulation, 1860–1870," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2‐3), pages 379-399, March.
    10. Tobias Adrian & Adam B. Ashcraft, 2012. "shadow banking: a review of the literature," The New Palgrave Dictionary of Economics,, Palgrave Macmillan.
    11. Benjamin Chabot, 2017. "The Federal Reserve’s Evolving Monetary Policy Implementation Framework: 1914-1923," Working Paper Series WP-2017-1, Federal Reserve Bank of Chicago.
    12. Peter L. Rousseau, 2013. "Politics on the road to the U.S. monetary union," Vanderbilt University Department of Economics Working Papers 13-00006, Vanderbilt University Department of Economics.
    13. Tobias Adrian & Adam B. Ashcraft & Nicola Cetorelli, 2013. "Shadow bank monitoring," Staff Reports 638, Federal Reserve Bank of New York.

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