Systemic Risk, Missing Gold Flows and the Panic of 1907

Abstract

This paper investigates the potential systemic risks posed to the U.S. securities markets by the banking crisis during the Panic of 1907. Past studies of 1907 have focused almost exclusively on the banking crisis. Our study examines the mechanisms that minimized the spill over of the banking crisis, and allowed the U.S. capital markets to remain not only open, but also relatively liquid, during the crisis. We show that contractual arrangements in the securities markets helped to minimize spill over effects, and that global arbitrage of U.S. securities allowed the U.S. to draw significant liquidity from European markets in times of crisis.

Keywords: systemic risk, spill over, bearer bonds, gold clauses, securities arbitrage, Panic of 1907, gold flows