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The Transmission of the Financial Crisis in 1907: An Empirical Investigation

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  • Jon R. Moen
  • Ellis W. Tallman

Abstract

Using an extensive high-frequency data set, we investigate the transmission of financial crisis specifically focusing on the Panic of 1907, the final severe panic of the National Banking Era (1863-1913). We trace the transmission of the crisis from New York City trust companies to the New York City national banks through direct and indirect interconnections. Trust companies held cash balances at national banks, and these balances were liquidated as trust companies suffered depositor runs. Secondly, trust companies and national banks were notable creditors to the New York Stock Exchange; when trusts were suffering runs, the call loan market on the stock exchange seized. The crisis spread to the interior banks after the New York Clearing House banks restricted the convertibility of deposits into cash. Bond returns were sharply negative in the two weeks following the suspension. We highlight commonalities between the Panic of 1907 and the fi nancial crisis of 2007-2009.

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  • Jon R. Moen & Ellis W. Tallman, 2014. "The Transmission of the Financial Crisis in 1907: An Empirical Investigation," Working Papers (Old Series) 1409, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1409
    DOI: 10.26509/frbc-wp-201409
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    Cited by:

    1. Rockoff, Hugh, 2015. "O.M.W. Sprague (the man who “wrote the book” on financial crises) and the founding of the Federal Reserve," Journal of Financial Stability, Elsevier, vol. 17(C), pages 35-45.
    2. Matthew Jaremski & David C. Wheelock, 2022. "Interbank Networks and the Interregional Transmission of Financial Crises: Evidence from the Panic of 1907," Working Papers 2022-020, Federal Reserve Bank of St. Louis, revised Sep 2023.
    3. Jaremski, Matthew & Wheelock, David C., 2020. "The Founding of the Federal Reserve, the Great Depression, and the Evolution of the U.S. Interbank Network," The Journal of Economic History, Cambridge University Press, vol. 80(1), pages 69-99, March.
    4. Andrea Pulcini & Damiano Montani & Daniele Gervasio, 2022. "Trusts in Business Research: A Concise Systematic Literature Review," International Business Research, Canadian Center of Science and Education, vol. 15(8), pages 1-20, August.
    5. Jiang, Dou & Weder, Mark, 2021. "American business cycles 1889–1913: An accounting approach," Journal of Macroeconomics, Elsevier, vol. 67(C).
    6. Gary Gorton & Ellis W. Tallman, 2016. "How Did Pre-Fed Banking Panics End?," Working Papers (Old Series) 1603, Federal Reserve Bank of Cleveland.
    7. Gehrig, Thomas & Fohlin, Caroline & Haas, Marlene, 2015. "Rumors and Runs in Opaque Markets: Evidence from the Panic of 1907," CEPR Discussion Papers 10497, C.E.P.R. Discussion Papers.
    8. Christopher Hoag, 2019. "Liquidity and Borrowing from a Lender of Last Resort during the Crisis of 1884," Working Papers 1901, Trinity College, Department of Economics, revised Jul 2019.
    9. O'Sullivan, Mary, 2019. "Past meets present in policymaking: The Federal Reserve and the U.S. money market, 1913-1929," Working Papers unige:121790, University of Geneva, Paul Bairoch Institute of Economic History.
    10. Gehrig, Thomas Paul & Fohlin, Caroline & Haas, Marlene, 2015. "Liquidty Freezes and Market Runs; Evidencefrom the Panic of 1907," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113008, Verein für Socialpolitik / German Economic Association.
    11. Ellis W. Tallman, 2012. "The Panic of 1907," Working Papers (Old Series) 1228, Federal Reserve Bank of Cleveland.

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    More about this item

    Keywords

    Banking panic; asset prices; asset volatility; correlation risk; correspondent banking;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • N11 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: Pre-1913
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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