Writing Worth Reading
Writing Worth Reading
Sprague was the first chaired Professor at Harvard Business School and his book is a classic narrative of the national banking era. During the Civil War the government passes an act which charters national banks so that 1865-1914 is the national banking era. All the panics in this era are to do with checking accounts.
So, we really haven’t learnt much.
Well, I think the first thing to learn is that these events are not so unique, that you don’t have to have specific policies for each event, that there is a commonality which is to do with how banking is structured. Before the Civil War banks printed their own money – bank notes represented the each bank’s private money. The problem then was that people could run en masse on banks demanding their money back. In 1837 the Free Banking Act was passed in New York State which required banks to back their note issue with state bonds. But, these bonds were risky so it did not prevent panics. During this period checking accounts grow significantly. Then, after the Civil War the government takes over the money supply. The problem is no longer runs on private bank notes, but from 1857 until 1934 there were repeated panics to do with checks: everyone demanding to withdraw all their money from their checking accounts. We finally get deposit insurance in 1934 even though there was a lot of opposition, including economists. Roosevelt was also not a proponent.
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Gary B Gorton is an American economist and Professor of Management and Finance at Yale University. He is a former member of the Moody’s Investors Services Academic Advisory Panel and former director of the research programme on banks and the economy for the Federal Deposit Insurance Corporation. He has taught at the Graduate School of Business, University of Chicago, and previously worked as an economist and senior economist at the Federal Reserve Bank of Philadelphia. During 1994 he was the Houblon-Norman Fellow at the Bank of England. He has been a member of the New York Federal Reserve Bank Financial Advisory Roundtable since January 2009. He is an expert in stock and futures markets, banking and asset pricing. He has been an editor of The Review of Economic Studies.
