There are two major problems in identifying the output effects of financial panics of the pre-Great Depression era. First, it is not clear when panics occurred because prior panic series--lists of when panics occurred--combine panics with other developments in financial markets, fail to distinguish among different types of financial panics, and employ unreliable strategies to identify panics. Second, even if the timing of when panics occurred is consistent with panics having real output effects, establishing the direction of causality is tricky: are panics causing downturns or are downturns causing panics? The first chapter of my dissertation address these two problems (1) by developing a new panic series for the 1825-1929 period--one that rectifies many of the problems of earlier series--and (2) by studying the output effects of major banking panics that the reports of contemporary observers suggest were the result of idiosyncratic disturbances, as opposed to declining output conditions. My paper derives four major empirical findings: (1) major banking panics have large and strongly negative effects on both output and prices, (2) panics were a substantial source of economic instability prior to the founding of the Federal Reserve, (3) on average, downturns with major banking panics were more severe than downturns without them and output recoveries were longer for downturns with major banking panics than output recoveries for downturns without them and (4) panics can have persistent level and trend effects. Moreover, using my new series, I find that much of the conventional wisdom on the causes, effects and frequency of panics of the pre-Great Depression era was based on unreliable evidence--and in particular, on biased and inconsistent panic series.

The second chapter of my dissertation argues that monetary intervention alleviated banking panics during the early stages of the Great Depression. Throughout the course of the depression, only two Federal Reserve Districts--Atlanta and New York--aggressively intervened to stabilize their banking systems. To assess the effectiveness of these policies, I analyze the performance of banks along counties straddling the borders of the Atlanta and New York Federal Reserve Districts. My results indicate that expansionary initiatives designed to inject liquidity into the banking system reduced the incidence of bank suspensions by 37 to 45% in some regions. Moreover, an analysis of the balance sheets of individual Federal Reserve Districts suggests that liquidity intervention did not expend large resources and that a concerted, system-wide interventionist policy response was feasible during the first half of the depression. Thus, the Federal Reserve System committed a major policy mistake by not acting as a lender of last resort to stabilize the country's banking system in 1929 and 1930.