Fighting Financial Crises: Learning from the Past

Economics by Gary B. Gorton (Author), Ellis W. Tallman (Author)

If you’ve got some money in the bank, chances are you’ve never seriously worried about not being able to withdraw it. But there was a time in the United States, an era that ended just over a hundred years ago, in which bank customers had to pay close attention to whether the banking system would remain solvent, knowing they might have to rush to retrieve their savings before the bank collapsed. During the National Banking Era (1863–1913), before the establishment of the Federal Reserve, widespread banking panics were indeed rather common.

Yet these pre-Fed banking panics, as Gary B. Gorton and Ellis W. Tallman show, bear striking similarities to our recent financial crisis. In both cases, something happened to make depositors—whether individual customers or corporate investors—“act differently” and find reason to question the value of their bank debt.

Fighting Financial Crises thus turns to the past for a fuller understanding of our uncertain present, investigating how panics during the National Banking Era played out and how they were eventually quelled and prevented. Gorton and Tallman open with a survey of the period’s “information environment,” tracing the development of national bank notes, checks, and clearing houses to show how the key to keeping order was to disseminate information very carefully. Identifying the most effective responses based on the framework of the National Banking Era, they then consider the Fed’s and the SEC’s reactions to the recent crisis, building an informative new perspective on how the modern economy works

Review
“Financial crises are complex economic and political events, and a historical perspective is essential. In this book, two of our best financial historians distill the key lessons for policy makers and practitioners from the US banking crises of the nineteenth and early twentieth centuries. Their accounts of the crises are engaging and their analyses are insightful and persuasive.”
(Ben S. Bernanke, former chairman of the Federal Reserve)

“Those who do not study history are more likely to repeat earlier errors, particularly so in the case of financial crises. Gorton and Tallman have painstakingly recorded how US financial crises unfolded and then dissipated between 1873 and 1914, and then distilled general lessons for handling current and future crises. Besides conforming to Bagehot’s rule, they emphasize the importance of managing information in order to avoid contagion from the bank perceived as weakest, to the next weakest, and on until the whole edifice systematically collapses. Excellent history and shrewd analysis.”
(Charles A. E. Goodhart, London School of Economics)

“History matters, including financial history. During the recent crisis, those of us then running the Bank of England introduced a course on the history of crises for our core staff. Although I don’t agree with every one of its conclusions and prescriptions, I dearly wish we had had this book to hand then! Policy makers need more books like it, and to follow the example of Gordon and Tallman in taking insights from the past seriously.”
(Paul Tucker, former deputy governor of the Bank of England)

About the Author
Gary B. Gorton is the Frederick Frank Class of 1954 Professor of Management and professor of finance at Yale University School of Management and a research associate of the NBER. He is the author of many books, including, most recently, The Maze of Banking: History, Theory, Crisis. Ellis W. Tallman is executive vice president and director of research at the Federal Reserve Bank of Cleveland. He has published extensively on macroeconomics, economic forecasting, and historical episodes of financial crisis in several top journals



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