, Volume 7, Issue 2, pp 99–130 | Cite as

Wall Street and Main Street: the macroeconomic consequences of New York bank suspensions, 1866–1914

  • John A. James
  • James McAndrews
  • David F. Weiman
Original Paper


Before the formation of the Federal Reserve, banking panics were routine events in the United States. During the most severe episodes, banks in cities across the country would often suspend or restrict the par convertibility of their demand deposit liabilities. In diagnosing the causes of the Great Depression, Friedman and Schwartz famously regard these local initiatives as a second best solution, which in the absence of an effective lender of last resort would have prevented the rash of bank failures during the early 1930s and their dire monetary and real impacts. Recent research in macroeconomics though has raised the possibility that banks’ suspension of payments might also have negative real effects albeit through changes in aggregate supply such as the financing of working capital. We would expect to observe these negative shocks during the pre-Fed era, because the decentralized, private interbank payments network was especially vulnerable to systemic disruptions such as suspensions by New York and other money center banks. Reports in national trade periodicals and local newspapers during suspension periods offer many accounts of factories closing because of the inability to obtain currency for weekly payrolls and “domestic exchange” to finance internal trade. We corroborate these observations with more systematic econometric evidence at the national and regional levels. Our results show that controlling for the overall contraction and bank failures, suspension periods were associated with a statistically significant and quantitatively large decline in real activity, on the order of 10–20 %.


Financial crises National banking system Panics Payments system Suspension of payments 

JEL Classification

E32 G01 N11 N21 



The views expressed in the paper are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of New York or of the Federal Reserve System. Earlier versions of this paper were presented at the Institute for Monetary and Economic Studies, Bank of Japan, London School of Economics, Rutgers University, 7th BETA Workshop in Historical Economics. We thank the participants and Richard Grossman and Christopher Hanes for comments and suggestions but alas must still accept responsibility for any errors. Weiman acknowledges the financial support of Barnard College, and research assistance from Keren Baruch, Olivia Benjamin, and Nancy Greenewalt.


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Copyright information

© Springer-Verlag 2012

Authors and Affiliations

  • John A. James
    • 1
  • James McAndrews
    • 2
  • David F. Weiman
    • 3
  1. 1.Department of EconomicsUniversity of VirginiaCharlottesvilleUSA
  2. 2.Federal Reserve Bank of New YorkNew YorkUSA
  3. 3.Department of EconomicsBarnard CollegeNew YorkUSA

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