Banking and Financial Crises in United States History : What Guidance can History Offer Policymakers?

This paper assesses the validity of comparisons between the current financial crisis and past crises in the United States. We highlight aspects of two National Banking Era crises (the Panic of 1873 and the Panic of 1907) that are relevant for comparison with the Panic of 2008. In 1873, overinvestment in railroad debt and the default of railroad companies on that debt led to the failure of numerous brokerage houses, an antecedent to the modern investment bank. For the Panic of 1907, panic-related deposit withdrawals centered on the less regulated trust companies, which were less directly linked to the existing lender of last resort, similar to investment banks in 2008. The popular press has made numerous references to the banking crises (there were three main ones) of the Great Depression as relevant comparisons to the present crisis. This paper argues that such an analogy is inaccurate in general. Banking crises in US history reflected widespread depositor withdrawals whereas the recent panic arose from counterparty solvency fears. The lessons from the past, therefore, appear less directly relevant for the current crisis