The Panic of 1907 and the Savings and Loan Crisis

Abstract

Banking crises go back hundreds of years to the origin of fractional reserve banking. In such a system, banks and other depository institutions maintain only a small fraction of their deposit liabilities in the form of reserves, defined loosely as cash on hand and deposits in other banks. As the story is told in textbooks, fractional reserve banking began with English goldsmiths. Turning the clock back nearly 400 years, the East India Company and other recently chartered British organizations involved in long-distance trade began amassing large amounts of gold around 1650 AD. These companies, along with merchants and other wealthy individuals in seventeenth-century London, needed a place to store their precious metals—mostly gold and silver coins. Goldsmiths were private firms that originated as jewelers. Because they owned impregnable safes in which to store their jewelry, goldsmiths provided the logical place in which to store the increasing stocks of gold and silver.