A New Explanation for Free Bank Failures

Creator Series Issue number
  • 079
Date Created
  • 1982-11
  • In this paper we propose and test a new explanation of bank behavior during the Free Banking Era, 1837–63. Arguing against the view that free bank failures were due to fraud, we claim that they were caused by exposure to term structure risk. Testing this new explanation with a new and extensive body of data, we find strong support for it: periods of falling bond prices correspond to the periods with most of the free bank failures. The new data do not support the view that fraud caused the failures.

Related information Corporate Author
  • Federal Reserve Bank of Minneapolis. Research Department
  • Federal Reserve Bank of Minneapolis
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