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Fighting Financial CrisesLearning from the Past$
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Gary B. Gorton and Ellis W. Tallman

Print publication date: 2018

Print ISBN-13: 9780226479514

Published to Chicago Scholarship Online: May 2019

DOI: 10.7208/chicago/9780226479651.001.0001

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PRINTED FROM CHICAGO SCHOLARSHIP ONLINE (www.chicago.universitypressscholarship.com). (c) Copyright University of Chicago Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CHSO for personal use.date: 18 September 2021

The Start of a Panic

The Start of a Panic

(p.26) 3 The Start of a Panic
Fighting Financial Crises

Gary B. Gorton

Ellis W. Tallman

University of Chicago Press

The start of a financial crisis is chaotic and it initially is not clear that the events constitute a crisis. If there are bank runs, banks suspend convertibility, that is they do not honor demands for cash. If a number of large banks suspended convertibility, then it was clearly a crisis. Such crises start when there is an unexpected increase in a leading indicator of recession, bad news. If this unexpected increase exceeded a threshold, then there was a panic in the National Banking Era. There was never a case of the threshold being exceeded without exceeding this threshold and there were no cases where the threshold was exceeded with a crisis. So financial crises occurred as part of the business cycle, usually occurring at or near a business cycle peak.

Keywords:   bank runs, suspension of convertibility, bad news threshold, crises and business cycles

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