The role of information and contagion in banking instability: Banks and mortgage companies in the panic of 1893

This dissertation explores the nature and causes of bank crises using bank-level data on national, state and private banks in the state of Kansas during the bank panic of 1893. In addition to having one of the highest bank closure rates in the financial crisis, Kansas is of particular interest in that its banking laws created a transparent and information-rich environment. The 1891 law regulating state and private banks required that official bank statements be printed in local newspapers on a quarterly basis so depositors therefore had easy access to regular official reports of condition on their local banks. This stipulation of the law was exploited in this dissertation to empirically determine whether the provision of bank-specific information to the banking public, as implied by one of the leading theoretical descriptions of banking crises, is sufficient to stop contagious bank runs from developing. The results show that mitigating the information asymmetry between a bank and its depositors is not sufficient for preventing or stopping bank runs and ensuing closures. Instead, the provision of adequate liquidity is required. This is an important finding not only for properly understanding the bank panic in 1893 but also for creating appropriate policy responses to banking crises around the world today. I also find that bank type matters since the national banks largely avoided contagion effects during the crisis. This suggests that the maturity of the regulatory regime, which was different for national and non-national banks, may be an important factor in banking instability.; Another part of the analysis presented here shows that our understanding of the 1893 crisis cannot stop with the commercial banks alone but should be extended to non-bank financial institutions. Here, that institution is the land mortgage company, which was a relatively new part of the American financial structure of the late 19th century. The analysis explores the strategies used by the J.B. Watkins Land Mortgage Company to deal with the financial crisis and finds that the strategy was similar to that used by commercial banks. Watkins survived the crisis by threatening what amounted to a suspension of payments to investors who were balking at the prospect of renewing their investments. He also relied heavily on his reputation for prompt repayment over the previous two decades. The business correspondence from the company also reveals important insights into the nature of the crisis and its predictability. Along the way, unique insights into the nature of 19th century entrepreneurship in the midst of crisis are uncovered.