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BANK FAILURES IN THEORY AND HISTORY: THE GREAT DEPRESSION AND OTHER "CONTAGIOUS" EVENTS

To carry out Mr. Law s principles, and to create a borrower which might be able to borrow the notes of the bank to any amount, a trading company had previously been created under the title of the Company of ike West, To this company was conveyed the entire province of Louisi- ana, with the vast tracts claimed by France on both banks of the Missis- sippi, and hence the name of Mississippi System by which the company was commonly known. But that the borrowing might go on to an indefi- nite amount, it was necessary that the business of the borrower should be indefinitely extended, so as. | NBER WORKING PAPER SERIES BANK FAILURES IN THEORY AND HISTORY THE GREAT DEPRESSION AND OTHER CONTAGIOUS EVENTS Charles W. Calomiris Working Paper 13597 http www.nber.org papers w13597 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MA 02138 November 2007 This paper was prepared for the Oxford Handbook of Banking edited by Allen Berger Phil Molyneux and John Wilson. The views expressed herein are those of the author s and do not necessarily reflect the views of the National Bureau of Economic Research. 2007 by Charles W. Calomiris. All rights reserved. Short sections of text not to exceed two paragraphs may be quoted without explicit permission provided that full credit including notice is given to the source. Bank Failures in Theory and History The Great Depression and Other Contagious Events Charles W. Calomiris NBER Working Paper No. 13597 November 2007 JEL No. E5 G2 N2 ABSTRACT Bank failures during banking crises in theory can result either from unwarranted depositor withdrawals during events characterized by contagion or panic or as the result of fundamental bank insolvency. Various views of contagion are described and compared to historical evidence from banking crises with special emphasis on the U.S. experience during and prior to the Great Depression. Panics or contagion played a small role in bank failure during or before the Great Depression-era distress. Ironically the government safety net which was designed to forestall the overestimated risks of contagion seems to have become the primary source of systemic instability in banking in the current era. Charles W. Calomiris Graduate School of Business Columbia University 3022 Broadway Street Uris Hall New York NY 10027 and NBER cc374@columbia.edu Contagion vs. Fundamentals as Causes of Bank Failures Concerns about the susceptibility of banks to unwarranted withdrawals of deposits during panics the possibility of bank failures and contractions of bank credit resulting from .