FRBSF Economic Letter
2013-13May 6, 2013
resort. Instead, J. Pierpont Morgan, a private investor and founder of J.P. Morgan & Co., orchestratedthe rescue effort in 1907. In 2008, it was federal government agencies, especially the Federal Reserveand the Treasury Department, that responded to the crisis.
Origins of the Federal Reserve
Recessions originating from a financial event were common in the late 19
and early 20
centuries.Many stemmed from banking panics. Figure 1 provides a global historical perspective. We calculate by decade the number of countries that experienced financial crises among a sample of 17 industrializedeconomies representingmore than half of globalGDP during the past 140 years (for details, seeJordà, Schularick, andTaylor 2012).Figure 1 shows a notabledownward global trend inthe incidence of thesehighly disruptive events, with the conspicuousexceptions of the GreatDepression and the GreatRecession of 2007–09. Inthe United States, the rateof banking crises declined markedly after the 1913 creation of the Federal Reserve System. Other thanthe Great Depression and Great Recession, the only significant banking crisis of the past century was thesavings and loan crisis. By contrast, ten significant banking crises occurred in the 19
century.The panic of 1907 and the resulting recession are generally credited with providing the catalyst for thecreation of the Federal Reserve System. When the Federal Reserve was chartered, the United States had been without a central bank for about 70 years. Congress chartered The First Bank of the United Statesin 1791 during the Washington presidency, under the guiding hand of Secretary of Treasury AlexanderHamilton. However, its 20-year charter was allowed to expire in 1811. Then, under President Madison,the Second Bank of the United States was created in 1817 for another 20-year period. Once again, thecharter was allowed to expire amid President Jackson’s strong opposition to the central bank.For the next 70 years, a period known as the Free Banking Era, no national public authority policed the banking system. Banks, which earned their livelihood from the creation of money and credit, wereentrusted to regulate the system’s excesses. This period was punctuated by eight banking crises(Reinhart and Rogoff 2009).(The Federal Reserve Bank of San Francisco exhibits currency privately issued by banks during thisperiod as well as the rare and valuable Grand Watermelon note and an 1886 $1 silver certificate with aportrait of Martha Washington, the only woman ever to appear on American currency, seehttp://www.frbsf.org/currency ).
Figure 1Countries experiencing financial crises by decade
et al. (2012).
1870s 1880s 1890s 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s
# of countriesGreat DepressionGreat Recession