Three Episodes in Nineteenth Century United States Banking and Finance

Citation

Hoag, Christopher S. (2003) Three Episodes in Nineteenth Century United States Banking and Finance. Dissertation (Ph.D.), California Institute of Technology. doi:10.7907/CCT6-VT44. https://resolver.caltech.edu/CaltechETD:etd-05192003-100431

Abstract

This dissertation samples three episodes from nineteenth century United States history that conveniently illustrate economic behavior in the arena of banking and finance.

The first chapter considers improvements in cross-market arbitrage due to technological change. The completion of the undersea Atlantic telegraph cable in July 1866 more closely integrated securities markets on two continents. Chapter 1 conducts an event study on one security with a dual listing on the New York and London Stock Exchanges using daily data. The event study provides some evidence that the information lag between the two markets shortened from ten days to zero days. We can recover transatlantic steamship crossing times from securities prices.

The second chapter investigates bank window dressing. Window dressing is a temporary change in portfolio designed to produce a more appealing report to regulators or to the public. Market observers accused national banks of window dressing after the Civil War. Chapter 2 attempts to determine whether or not postbellum Philadelphia banks window dressed their balance sheets. A test finds some evidence for window dressing.

The third chapter conducts an econometric test of Diamond and Dybvig's (1983) theory of bank runs as interpreted by Calomiris and Gorton (1991). Diamond and Dybvig employ an exogenous liquidity shock to depositors in order to develop a theory of bank runs. Calomiris and Gorton interpret the exogenous liquidity shock as a seasonal withdrawal from the nation's agricultural interior. Chapter 3 reexamines the hypothesis that a seasonal interior reserve drain served as the exogenous liquidity shock before the bank panics of 1873 and 1893 in the United States. Using individual bank level data in New York, this paper tests whether the banks that held most of the deposits from the interior, the "interest-paying" banks, experience reserve drains just before the panic. The evidence reveals that a seasonal interior drain could have triggered the 1873 panic, but that Diamond and Dybvig's model cannot be applied to the bank panic of 1893 without a non-seasonal interpretation of the exogenous liquidity shock.

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