Essay Question 2, Financial History.

Your essays are due Thursday, April 15, at 1:15. If you cannot meet this deadline, please be in touch with me in advance. Please submit your essays as a “pdf” file, and as four clearly labeled answers. For high credit, you should cite the articles indicated below. (It is fine to cite other relevant articles as well.)

1. Explain why a run on the banking system creates the need for a lender of last resort, but not a run on an individual bank. In your answer, define “lender of last resort.” Cite: Dwyer and Gilbert, Turner.

2. Explain why there was a greater threat of runs on the banking system when most of the money supply was made up of deposits, as compared to when most of the money supply was made up of bank notes. Cite: Gorton and Mullineaux, Michener and Jaremski.


3. Explain how the following lender of last resort mechanisms worked:

  1. Commercial bank clearing houses. Cite: Dwyer and Gilbert, Gorton and Mullineaux, Wicker, Tallman and Moen.
  2. Aldrich-Vreeland emergency currency. Cite: White, Silber
  3. Federal Reserve Banks. Cite: Bordo and Wheelock.

4. In which of the following historical cases did the lender of last resort mechanism work best, and why?

  • Panic of 1907. Cite: White, Wicker, Tallman and Moen.
  • Summer of 1914. Cite: Silber
  • Great Depression. Cite: Bordo and Wheelock

List of articles to cite:

  1. Bordo, Michael and David Wheelock, “Promise and Performance of the Federal Reserve as Lender of Last Resort, 1914-1933”
  2. Dwyer, Gerald P. and R. Alton Gilbert, “Bank Runs and Private Remedies.” Federal Reserve Bank of St. Louis Review, May/June 1989,
  3. Gorton, Gary and Donald J. Mullineaux. “The Joint Production of Confidence: Endogenous Regulation and Nineteenth Century Commercial-Bank Clearinghouses”, Journal of Money, Credit and Banking 19: 4 (November 1987), 457-468.
  4. Michener, Kris James and Matthew Jaremski, “The Evolution of Bank Supervision: Evidence from U.S. States”, October 2012 manuscript.
  5. Silber, William. “The Great Financial Crisis of 1914: What Can We Learn from Aldrich-Vreeland Emergency Currency?”
  6. Tallman, Ellis W. and Jon R. Moen, “Liquidity creation without a central bank: Clearing house loan certificates in the banking panic of 1907.” Journal of Financial Stability, published online 8 July 2011.
  7. Turner, Banking in Crisis, Chapter 6.
  8. White, Regulation and Reform, Chapter 2 and 3.
  9. Wicker, Elmus. Banking Panics of the Gilded Age. Cambridge: Cambridge University Press, 2000. Chapter 5, The Trust Company Panic of 1907.


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