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May/June 1989, 
Vol. 71, No. 3
Posted 1989-05-01

Bank Runs and Private Remedies

by Gerald P. Dwyer, Jr. and R. Alton Gilbert

Gerald P. Dwyer Jr. and R. Alton Gilbert examine the history of banking in the United States prior to the formation of the Federal Reserve to determine whether the banking system, in fact, was vulnerable to such runs. While they find some episodes of runs on the banking system, they also find that there were many years with no evidence of runs at all; moreover, some periods without runs included recession years. The authors find only limited evidence that is consistent with the view that the runs had adverse effects on economic activity. The reasons for the limited effects of the runs can be found in the private remedies developed by banks. Through their clearinghouses, banks created clearinghouse loan certificates, which had an impact on the operation of the banking system much like increases in the monetary base. In periods when banks could not meet the demand for currency by depositors through the creation of clearinghouse loan certificates, they acted jointly to restrict currency payments to depositors. Restricting currency payments was also a form of private remedy for runs, since it enabled banks to limit the declines in their assets and deposit liabilities.