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What Ends a Financial Crisis? Historical Reminders
A central theme in our book is that studying financial history provides insights into how and why financial crises still arise in a modern economy and, in particular, into how to end them. So, what do we learn from the National Banking Era crises under study? For one thing, Bagehot’s (1873) rule for fighting crises is not enough to end a panic; on its own it is insufficient to restore confidence in the financial system. During the crises of the National Banking Era much more was involved to restore confidence than just opening emergency lending facilities. Restoring confidence is a process that takes time and requires delicate information management. And the information management is designed to convey confidence in the banking system. This management process involves suppressing some information and providing other information. This is the essence of fighting crises, and that follows naturally from the concept of a crisis as an information event. Indeed, any concept of a financial crisis should imply how that crisis should be fought and ultimately end. That is the key overarching point shown by studying the panics of the National Banking Era. Key authorities must control the information about financial institutions. From our study of the National Banking Era crises, the suppression of bank-specific information, the production of aggregate information, and occasional bank examinations and “stress test”– like announcements are crucial inputs into restoring confidence. The issuance of clearinghouse loan certificates essentially securitized the banking system by pooling all member bank assets to back the loan certificates. The relevant information then is about the entire clearinghouse (effectively the banking system in the case of the New York Clearing House), rather than information about a single bank, which becomes irrelevant to depositors. Overall, these actions eliminate the incen-
