This paper develops a model in which panics are caused by the strategic behavior of agents who temporarily monopolize the supply of privately controlled cash reserves. The decision to exercise this "monopoly power" results in localized "corners" on the money market and hence an abrupt alteration...

Four views on the proper role of the lender of last resort are defined. Historical evidence is given on the causes of banking panics in the U.S. and other countries and the roles lenders of last resort played in resolving them.

Henry Thornton (1760-1815) and Walter Bagehot (1826-1877) laid down a set of rules for stopping banking panics and crises. Known collectively as the classical theory of the lender of last resort, those rule stressed (1) protecting the aggregate money stock, not individual institutions, (2)...

During the Panic of 1907, New York City trust companies were not members of the New York Clearinghouse whereas trust companies in Chicago were members of the Chicago Clearinghouse. We argue that the apparent isolation of New York City trust companies from the pool of bank reserves controlled by...

Arguably, eliminating suspensions of payments--periods when banks jointly refuse to convert their liabilities into outside money or other assets--was an important impetus for creating the Federal Reserve. Friedman and Schwartz suggest that a suspension in 1930 would have decreased the severity...