8
The Change in Depositors’ Beliefs during Suspension
When panics start, depositors rush to their banks to withdraw their deposits as cash. That sounds like a bank run, but banking panics are different— in panics, depositors effectively run from the banking system, not just from their bank. Taking cash out of the banking system is more serious than a run on one bank because panic withdrawals from the banking system can cause a magnified contraction in credit. In these systemic events, banks have to scramble for cash reserves (or substitutes) to support their loans and investments. We have described the set of actions— clearinghouse loan certificates, certificated check issues, information suppression, special examinations, and public announcements— employed by the New York Clearing House Association banks in order to combat the panic, but no one action was sufficient to settle financial markets. In each panic, several weeks passed after the clearinghouse took its actions before relative stability of the financial market was restored. From the beginning of a panic until the return of deposits to banks, depositors (both individual households and interior banks) must have changed their beliefs about the solvency of the banking system in order for them to choose to redeposit their funds in New York Clearing House banks after having previously removed them or tried to withdraw them. Somehow their beliefs changed from panic to no panic. Having a perspective from the previous chapters, we are now in a position to investigate how the beliefs of depositors changed. Suspension of convertibility of deposits into currency and the subsequent gold imports are both important elements among a number of actions and outcomes that set the conditions for the change in beliefs that was necessary for recovery from the crisis.
