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Real Shock, Monetary Aftershock: The San Francisco Earthquake and the Panic of 1907

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  • Kerry A. Odell
  • Marc D. Weidenmier

Abstract

Economists have long studied the relationship between the real and monetary sectors. We examine the macroeconomic effects of the 1906 San Francisco earthquake, a shock that immediately reduced United States. GNP by 1.5-1.8 percentage points. The quake's impact manifested itself in gold flows, as British insurance companies paid their San Francisco claims out of home funds in the fall of 1906. The capital outflow prompted the Bank of England to raise interest rates and discriminate against American finance bills. British bank policy pushed the US into recession and set the stage for the 1907 financial crisis. The 1907 panic led to the formation of the National Monetary Commission whose proposals recommended the creation of the Federal Reserve. In this study, we identify the San Francisco earthquake as the shock that triggered the chain of events that culminated in the panic of 1907.

Suggested Citation

  • Kerry A. Odell & Marc D. Weidenmier, 2002. "Real Shock, Monetary Aftershock: The San Francisco Earthquake and the Panic of 1907," NBER Working Papers 9176, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9176
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    Cited by:

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    2. Eric Hilt, 2009. "Wall Street's First Corporate Governance Crisis: The Panic of 1826," NBER Working Papers 14892, National Bureau of Economic Research, Inc.
    3. Green, Georgina, 2018. "Monetary policy spillovers in the first age of financial globalisation: a narrative VAR approach 1884–1913," Bank of England working papers 718, Bank of England.
    4. Ivan Faiella & Filippo Natoli, 2018. "Natural catastrophes and bank lending: the case of flood risk in Italy," Questioni di Economia e Finanza (Occasional Papers) 457, Bank of Italy, Economic Research and International Relations Area.
    5. 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.
    6. Charles, Amélie & Darné, Olivier, 2012. "Trends and random walks in macroeconomic time series: A reappraisal," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 167-180.
    7. Yasuhide Okuyama, 2015. "How shaky was the regional economy after the 1995 Kobe earthquake? A multiplicative decomposition analysis of disaster impact," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 55(2), pages 289-312, December.
    8. Michael D. Bordo & John S. Landon-Lane, 2012. "The Global Financial Crisis: Is It Unprecedented?," Chapters, in: Maurice Obstfeld & Dongchul Cho & Andrew Mason (ed.), Global Economic Crisis, chapter 2, Edward Elgar Publishing.
    9. Ellis W. Tallman & Jon R. Moen, 2018. "The transmission of the financial crisis in 1907: an empirical investigation," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 12(2), pages 277-312, May.
    10. Kristian S. Blickle & Sarah Ngo Hamerling & Donald P. Morgan, 2021. "How Bad Are Weather Disasters for Banks?," Staff Reports 990, Federal Reserve Bank of New York.
    11. Frederic S. Mishkin & Eugene White, 2014. "Unprecedented actions: the Federal Reserve’s response to the global financial crisis in historical perspective," Globalization Institute Working Papers 209, Federal Reserve Bank of Dallas.
    12. Mark Carlson, 2015. "Lessons from the Historical Use of Reserve Requirements in the United States to Promote Bank Liquidity," International Journal of Central Banking, International Journal of Central Banking, vol. 11(1), pages 191-224, January.
    13. Bas van Bavel & Daniel Curtis, 2015. "Better understanding disasters by better using history: Systematically using the historical record as one way to advance research into disasters," Working Papers 0068, Utrecht University, Centre for Global Economic History.
    14. 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.
    15. Koetter, Michael & Noth, Felix & Rehbein, Oliver, 2020. "Borrowers under water! Rare disasters, regional banks, and recovery lending," Journal of Financial Intermediation, Elsevier, vol. 43(C).
    16. Olivier Darné & Amélie Charles, 2011. "Large shocks in U.S. macroeconomic time series: 1860-1988," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 5(1), pages 79-100, January.
    17. Carola Frydman & Eric Hilt & Lily Y. Zhou, 2015. "Economic Effects of Runs on Early "Shadow Banks": Trust Companies and the Impact of the Panic of 1907," Journal of Political Economy, University of Chicago Press, vol. 123(4), pages 902-940.
    18. Christopher M. Meissner, 2013. "Capital Flows, Credit Booms, and Financial Crises in the Classical Gold Standard Era," NBER Working Papers 18814, National Bureau of Economic Research, Inc.
    19. Yasuhide Okuyama, 2016. "Long-Run Effect Of A Disaster: Case Study On The Kobe Earthquake," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(01), pages 1-18, March.
    20. Yasuhide Okuyama, 2014. "Disaster And Economic Structural Change: Case Study On The 1995 Kobe Earthquake," Economic Systems Research, Taylor & Francis Journals, vol. 26(1), pages 98-117, March.

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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