NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Ellis Tallman

Federal Reserve Bank of Cleveland

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Institutional Affiliation: Federal Reserve of Bank of Cleveland

NBER Working Papers and Publications

March 2016Too-Big-To-Fail Before the Fed
with Gary Gorton: w22064
“Too-big-to-fail” is consistent with policies followed by private bank clearing houses during financial crises in the U.S. National Banking Era prior to the existence of the Federal Reserve System. Private bank clearing houses provided emergency lending to member banks during financial crises. This behavior strongly suggests that “too-big-to-fail” is not the problem causing modern crises. Rather it is a reasonable response to the threat posed to large banks by the vulnerability of short-term debt to runs.

Published: Gary Gorton & Ellis W. Tallman, 2016. "Too Big to Fail before the Fed," American Economic Review, American Economic Association, vol. 106(5), pages 528-32, May. citation courtesy of

February 2016How Did Pre-Fed Banking Panics End?
with Gary Gorton: w22036
How did pre-Fed banking crises end? How did depositors’ beliefs change? During the National Banking Era, 1863-1914, banks responded to the severe panics by suspending convertibility, that is, they refused to exchange cash for their liabilities (checking accounts). At the start of the suspension period, the private clearing houses cut off bank-specific information. Member banks were legally united into a single entity by the issuance of emergency loan certificates, a joint liability. A new market for certified checks opened, pricing the risk of clearing house failure. Certified checks traded at a discount to cash (a currency premium) in a market that opened during the suspension period. Confidence was restored when the currency premium reached zero.
 
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