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How the Bank of France Changed U.S. Equity Expectations and Ended the Panic of 1907

Published online by Cambridge University Press:  16 May 2014

Mary Tone Rodgers  and
James E. Payne
Mary Tone Rodgers
Affiliation:
Marcia Belmar Willock Professor of Finance, School of Business, Department of Finance, State University of New York at Oswego, 313 Rich Hall, Oswego, NY 13126. E-mail: Mary.rodgers@oswego.edu.
James E. Payne
Affiliation:
Provost and Vice President for Academic Affairs, Bank One Professor in Business, Department of Economics and Finance, University of New Orleans, 2000 Lakeshore Drive, New Orleans, LA 70148. E-mail: jepayne@uno.edu.
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Abstract

Using an event study approach, we find the announcement by the Bank of France in 1907 to accelerate gold payments directly for U.S. crops is associated with the ultimate upturn in U.S. equity prices. Spillover to the French financial markets accompanied the Regents’ decision to release sterilized reserves, thereby arresting the drainage of coin in French circulation. Counterfactual analysis shows that the facility alone would have been unlikely to end the crisis. Investors may have revised equity expectations upward, recognizing that the acceleration in reliable seasonal gold flows would relieve monetary stringency.

Type
Articles
Information
The Journal of Economic History , Volume 74 , Issue 2 , June 2014 , pp. 420 - 448
Copyright
Copyright © The Economic History Association 2014 

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Footnotes

The authors would like to thank Vincent Bignon, Michael Edelstein, Marc Flandreau, Christopher Hanes, Eric Hilt, John A. James, Iuliana Ismaliescu, Naomi Lamoreaux, Eric Monnet, Larry Neal, Joseph Salerno, George David Smith, Richard Sylla, Ellis Tallman, Eugene White, Berry Wilson, two anonymous referees, and attendees at the 2012 NBER Summer Institute, the 2012 Infiniti Conference at Trinity College, Dublin, Ireland, the Economic History Association Conference 2012, Economics Seminar at SUNY Binghamton 2012, the Midwest Economics Association Conference 2013, presentation at SUNY Oswego 2013, and the Economics History Seminar at Columbia University 2013. All errors and omissions are the authors' alone.

References

REFERENCES

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Tallman, E. W. Private Sector Responses to the Panic of 1907, from Meltzer, A History of the Federal Reserve Volume 1, 1913–1951, 1995, accessed Aug 25, 2013 from FRASER, http://fraser.stlouisfed.org/meltzer/record.php?id=4040.Google Scholar
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Wicker, E. The Great Debate on Banking Reform, Nelson Aldrich, and the Origins of the Fed. Columbus: Ohio State University Press, 2005.Google Scholar
Wilkins, M. The History of Foreign Investment in the United States to 1914. Cambridge, MA: Harvard University Press, 1989.Google Scholar
Wilson, J., Sylla, R., and Jones, C.. “Financial Market Panics and Volatility in the Long Run, 1830–1988.” In Crashes and Panics: The Lessons from History, edited by White, Eugene, 85–125. Homewood, IL: Dow Jones-Irwin, 1990.Google Scholar
Zivot, E., and Andrews, D. W. K.. “Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis.” Journal of Business and Economic Statistics 20, no. 1 (2002): 25–44.Google Scholar
Archives of the Bank of France, 1907 File and Minutes from November 21 and 28, 1907, Paris.Google Scholar
August Belmont Family Papers, Columbia University, New York, 1799–1930.Google Scholar
Andrew, A. P. “Substitutes for Cash in the Panic of 1907.” The Quarterly Journal of Economics, August 1908, as reprinted in History of Crises Under the National Banking System.Google Scholar
National Monetary Commission Publications, 61st Congress. Washington DC: GPO 1910.Google Scholar
Palgrave, Sir R. H. I., from the Economist, Statistics of Great Britain, France and Germany, 1910.Google Scholar
Patron, M. The Bank of France in Its Relation to National and International Credit. Washington, DC: GPO, 1910.Google Scholar
Response of the Secretary of the Treasury to Senate Resolution No. 33 of December 12, 1907 Calling for Certain Information in Regard to Treasury Operations, United States Depositories, the condition of National Banks, Etc.” 60th Congress Fist Session, Document No. 208.Google Scholar
Sprague, O. M. W. History of Crises Under the National Banking System. Washington, DC: GPO, 1910.Google Scholar
New York Times, various dates.Google Scholar
Richmond Times Dispatch, various dates.Google Scholar
Commercial and Financial Chronicle, various dates.Google Scholar
French Chamber of Commerce of New York Monthly Bulletin , December 1907.Google Scholar
The Economist , various dates.Google Scholar
Bollerslev, T. “Generalized Autoregressive Conditional Heteroskedasticity.” Journal of Econometrics 31, no. 3 (1986): 307–27.Google Scholar
Bruner, R., and Carr, S.. The Panic of 1907: Lessons Learned from the Market's Perfect Storm. New York: Wiley, 2007.Google Scholar
Calomiris, C., and Gorton, G.. “The Origins of Banking Panics: Models, Facts, and Bank Regulation.” In Financial Markets and Financial Crises, edited by Glenn Hubbard, R, 109–73. Chicago, IL: University of Chicago Press, 1991.Google Scholar
Carosso, V. P. The Morgan's: Private International Bankers, 1854–1913. Cambridge, MA: Harvard University Press, 1970.Google Scholar
Cosimano, T. F., and Jensen, D. W.. “Estimates of the Variance of U.S. Inflation Based upon the ARCH Model: Comment.” Journal of Money, Credit, and Banking 20, no. 3 (1988): 409–21.Google Scholar
Engle, R. F. “Estimates of the Variance of U.S. Inflation Based on the ARCH Model.” Journal of Money, Credit, and Banking 15, no. 3 (1983): 286–301.Google Scholar
Flandreau, M. “The French Crime of 1873: An Essay on the Emergence of the International Gold Standard.” The Journal of Economic History 56, no. 4 (1996): 862–97.Google Scholar
Forrester, R. B. The Cotton Industry in France. Longmans Green & Co. London/New York/ Bombay: Manchester University Press, 1921.Google Scholar
Friedman, M., and Schwartz, A.. A Monetary History of the United States, 1867–1960. Princeton, NJ: Princeton University Press, 1963.Google Scholar
Frydman, C., Hilt, E., and Zhou, L.. “Economic Effects of Runs on Early Shadow Banks: Trust Companies and the Impact of the Panic of 1907.” NBER Working Paper No. 18264, Cambridge, MA, July 2012.Google Scholar
Guyot, Y. “La Crise Americaine, ses effets et ses causes.” La revue du commerce de l'Industrie et de la Banque, 31 December, Felix Alcan Editor, 1907.Google Scholar
Hanes, C., and Rhode, P.. “Harvests and Financial Crises in Gold Standard America.” The Journal of Economic History 73, no. 1 (2013): 201–46.Google Scholar
Hansen, B. “Financial Regulation and the Panic of 1907.” Unpublished Manuscript, University of Mary Washington, 2013.Google Scholar
Hautecoeur, P-C., and White, E. N.. “Bagehot on the Continent? How the Banque de France Managed the Crisis of 1889.” Document de travail, 2011.Google Scholar
Irwin, D. “Did France Cause the Great Depression?” NBER Working Paper No. 16350, Cambridge, MA, September 2010.Google Scholar
James, J., McAndrews, J., and Weiman, D.. “Wall Street and Main Street: The Macroeconomic Consequences of New York Bank Suspensions 1866 to 1914.” Cliometrica 7, no. 2 (2013): 99–130.Google Scholar
Keynes, J. M. “Recent Economic Events in India.” Economic Journal 19, no. 73 (1909): 51–67.CrossRefGoogle Scholar
Mitchell, W. “Review: The Publications of the National Monetary Commission.” Quarterly Journal of Economics 25, no. 3 (1911): 563–93.Google Scholar
Moen, J. R., and Tallman, E. W. “Clearinghouse Membership and Deposit Contraction During the Panic of 1907.” The Journal of Economic History 60, no. 1 (2000): 145–63.Google Scholar
Muhleman, M. “Egypt's Economic Position and Gold Hoarding.” North American Review 186 (December 1907): 594.Google Scholar
Myers, M. G. The New York Money Market. New York: Columbia University Press, 1931.Google Scholar
Noyes, A. “A Year after the Panic of 1907.” Quarterly Journal of Economics 23, no. 2 (1909): 185–212.Google Scholar
Odell, K., and Weidenmier, M.. “Real Shock, Monetary Aftershock: The 1906 San Francisco Earthquake and the Panic of 1907.” The Journal of Economic History 64, no. 4 (2004): 1002–27.Google Scholar
Onyeiwu, S. “Deceived by African Cotton: The British Cotton Growing Association and the Demise of the Lancashire Textile Industry.” African Economic History 28 (2000): 90.Google Scholar
Perron, P. “Further Evidence on Breaking Trend Functions in Macroeconomic Variables.” Journal of Econometrics 80, no. 2 (1997): 355–85.Google Scholar
Pierce, P. The Dow Jones Averages, 1885–1985. Homewood, IL: Dow Jones-Irwin, 1986.Google Scholar
Rodgers, M. T., and Wilson, B.. “Systemic Risk, Missing Gold Flows, and the Panic of 1907.” Quarterly Journal of Austrian Economics 14, no. 2 (2011): 25–54.Google Scholar
Tallman, E. W. Private Sector Responses to the Panic of 1907, from Meltzer, A History of the Federal Reserve Volume 1, 1913–1951, 1995, accessed Aug 25, 2013 from FRASER, http://fraser.stlouisfed.org/meltzer/record.php?id=4040.Google Scholar
Westerfield, R. B. Banking Principles and Practice, Foreign Division, Volume V. New York: Ronald Press Company, 1921.Google Scholar
Wicker, E. Banking Panics of the Gilded Age. New York: Cambridge University Press, 2000.Google Scholar
Wicker, E. The Great Debate on Banking Reform, Nelson Aldrich, and the Origins of the Fed. Columbus: Ohio State University Press, 2005.Google Scholar
Wilkins, M. The History of Foreign Investment in the United States to 1914. Cambridge, MA: Harvard University Press, 1989.Google Scholar
Wilson, J., Sylla, R., and Jones, C.. “Financial Market Panics and Volatility in the Long Run, 1830–1988.” In Crashes and Panics: The Lessons from History, edited by White, Eugene, 85–125. Homewood, IL: Dow Jones-Irwin, 1990.Google Scholar
Zivot, E., and Andrews, D. W. K.. “Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis.” Journal of Business and Economic Statistics 20, no. 1 (2002): 25–44.Google Scholar