The Credibility of Exchange Rate Pegs and Bank Distress in Historical Perspective: Lessons from the National Banking Era

43 Pages Posted: 16 Nov 2013

See all articles by Scott Fulford

Scott Fulford

Consumer Financial Protection Bureau

Felipe F. Schwartzman

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: October 2013

Abstract

We examine a period during the prevalence of the gold standard in the United States to provide evidence that speculation about a currency peg can have damaging effects on bank balance sheets. In particular, the defeat of the pro-silver candidate in the 1896 presidential election was associated with a large and permanent increase in bank leverage, with the initial impact most pronounced among states where banks held more specie in proportion to their assets and were, therefore, also more committed to paying out deposits in specie. Based on the cross-sectional pattern of changes in leverage observed in 1896, we construct a measure of the credibility of the gold standard spanning the entire sample period. Changes in this measure correlate with changes in aggregate bank leverage, suggesting that uncertainty about the monetary standard played an important role in the 1893 banking panic and its aftermath.

Keywords: Gold Standard, National Banks, Fixed Exchange Rate, Exchange Rate Credibility, Financial Crisis

JEL Classification: E42, E44, F33, G01

Suggested Citation

Fulford, Scott and Schwartzman, Felipe F., The Credibility of Exchange Rate Pegs and Bank Distress in Historical Perspective: Lessons from the National Banking Era (October 2013). FRB Richmond Working Paper No. 13-18, Available at SSRN: https://ssrn.com/abstract=2354567 or http://dx.doi.org/10.2139/ssrn.2354567

Scott Fulford

Consumer Financial Protection Bureau ( email )

United States

Felipe F. Schwartzman (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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