Bank Fragility, "Money Under the Mattress," And Long-Run Growth U.S. Evidence From The "Perfect" Panic Of 1893
Source: George Mason University
An issue that has received an increasing amount of attention has been the effect of financial sector conditions (and of banking in particular) on long-run economic growth. In this paper, the author examine how the remnants of the U.S. financial crisis of 1893 (the "Perfect" Panic), manifested through the incidence of bank failures, affected state output growth between 1900 and 1930. Using standard growth convergence regressions he found that the "Elasticity" of bank instability with respect to output growth is approximately 5 percent. This result survives the inclusion of the usual factors known to influence long-term growth, including initial measures of financial depth, and regulatory measures such as branch banking.