Bank Failures, Financial Restrictions, and Aggregate Fluctuations: Canada and the United States, 1870–1913

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Abstract

During 1870–1913, Canada had a well-diversified branch banking system while banks in the U.S. unit-banking system were less diversified. Canadian banks could issue large-denomination notes with no restrictions on their backing, while all U.S. currency was essentially an obligation of the U.S. government. Also, experience in the two countries with regard to bank failures and panics was quite different. A general equilibrium business cycle model with endogenous financial intermediation is constructed that captures these historical Canadian and American monetary and banking arrangements as special cases. The model's predictions contradict conventional wisdom about the cyclical effects of banking panics. Support for these predictions is found in aggregate annual time series data for Canada and the United States.

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This paper is adapted from an article, "Restrictions on Financial Intermediaries and Implications for Aggregate Fluctuations: Canada and the United States, 1870-1913," in the NBER Macroeconomics Annual 1989. Copyright 1989 by The National Bureau of Economic Research and The Massachusetts Institute of Technology. It is adapted here by permission of MIT press.

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