A twin crisis with multiple banks of issue: Spain in the 1860s

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 2 Terms of use: Documents in EconStor may Non-technical summaryDuring the last decades, several emerging market economies have experienced a banking crisis together with a sudden stop. In most of these cases national governments and national central banks adopted several types of interventions to fight the crisis. In this paper we analyze an early example of twin-crisis, which occurred in the 1860s in Spain. The episode is particularly interesting due to the decentralized nature of the Spanish banking system of that time.We document how, at the beginning of the 1860s, Spain experienced a large and relatively quick inflow of foreign capital followed by a sudden stop in the middle of the decade. In the following years the Spanish economy was hit by a severe banking and economic crisis with GDP falling by more than 10% in 1868 and half of the Spanish banks going bankrupt in the years between 1865 and 1870.We argue that the main reason of the stop in capital inflows is the international financial crisis of 1864-66. This was a major crisis that affected most European economies and provoked the fall of one of the largest London banks, Overend, Gurney and Co., which was followed by the 'Black Friday' of May 1866, a massive financial panic in the City of London that quickly spread to other countries in Europe. We collect new empirical evidence supporting our claim: capital inflows were abruptly interrupted from 1864 to 1867, in line with a current account correction during the same period and two recessions, a softer one in 1865 and a more severe one in 1868. We document how the two main financial shocks, those of 1864 and 1866, were coincident with large financial panicsacross Europe.We also analyze the microeconomic behavior of individual banks of issue in facing the crisis. To this end we construct a database with information about the balance sheets of the banks of issue. We regard this as a natural experiment in which all banks operating under a common regulatory and economic environment face a common aggregate financial shock represented by the twin-crisis. We find that three out of twelve banks of issue existing before the crisis were liquidated due to it. In these cases the direct exposure to unprofitable railways projects or the involvement with investment banks that were bankrupted during the crisis are the main causes of the liquidation. In contrast, a number of banks of issue experienced an improvement in their balance sheet position during the crisis...

Reputation and the Palmer Rule in the Origins of Banking in Spain

“…By the end of the 1860s, some of the banks that had been created thanks to the 1856 Law of Banks of Issue had disappeared, as well as several credit societies. The 1866 crisis, a projected law to build a national bank, and the absolutely liberalising regulation that was produced after the 1868 revolution, all characterised the final years of this decade (Sánchez-Albornoz 1963;Sánchez-Albornoz 1967;Sudrià and Navas 2007;Moro et al 2015). The early 1870s were marked by political instability, and the financial system continued operating under the previous laws until a royal decree, passed in 1874, brought the period of multiple banks of issue to an end (although further legal instruments had to be enacted in order to secure its application).…”

“…The bankruptcy of Overend and Gurney was, in a way, providential to the institution which survived despite its performance, which was certainly weak in those years (Moro et al . 2015, pp. 188–192).…”

La Banca De Emisión Andaluza en Perspectiva Nacional (1856-1914)

“…También subrayan su atraso relativo en términos de productividad, especialización económica y distribución sectorial durante los primeros decenios del siglo XX. Un síntoma de dicho rezago sería la alta proporción de la población activa agraria andaluza en 1930, diez puntos por encima de la media española (Rosés 2003;Rosés, Martínez Galarraga y Tirado 2010, 2015.…”

Modern Financial Crises

“…The European countries facing the crisis have experienced what a large number of developing and emerging countries went through over the past decades: a period of strong yet unsustainable output growth fueled by capital inflows comes to a halt at some point, leading to a "sudden stop" or reversal of capital flows (Kaminsky and Reinhart 1999;Moro et al 2015).…”