Abstract: Banking and Financial Crises in United States History: What Guidance Can History Offer Policymakers?
In this paper I assess the validity of comparisons between the recent financial crisis and past crises in the United States. Aspects of two National Banking Era crises (the Panic of 1873 and the Panic of 1907) appear relevant for comparison with the Panic of 2008. In 1873, over-investment in railroad debt and the default of railroad companies on that debt led to the failure of numerous brokerage houses, precursor to the modern investment bank. During the Panic of 1907, panic-related deposit withdrawals centered on the less regulated trust companies, which had only indirect access to the existing lender of last resort, similar to investment banks in 2008. I argue that references to the banking crises of the Great Depression are less relevant comparisons to the recent crisis. The previous banking crises in U.S. history reflected widespread depositor withdrawals, whereas the recent panic arose from counterparty solvency fears and extensive counterparty exposures among large complex financial intermediaries. In historical incidents, monitoring counterparty exposures was standard banking practice and the exposures were smaller. From this perspective, the lessons from the past appear less directly relevant for the current crisis.