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The Panic of 1857, the New York Clearing House, and the Concept of Insolvency (B)
Bruner, Robert F. Case F-1793 / Published September 22, 2017 / 5 pages.
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Product Overview

The Panic of 1857 stands out in financial history for its severity, for the coordination of banks through the New York Clearing House (NYCH), for the establishment of a legal doctrine about illiquidity during a panic, and for its aggravation of regional tensions. Profiled in this case are the events of the panic, the range of potential causes, and the civic reaction.


Learning Objectives

(1) Weigh the difference between insolvency and illiquidity—and realize how difficult it is to ascertain that difference in the midst of a financial crisis. (2) Consider the decision among banks regarding the suspension of convertibility of demand deposits into specie in a panic. The instructor can use this case to represent the "coordination game" dilemma that banks face during a run. (3) Illuminate early private-market remedies to prevent or mitigate bank runs and suspensions. The New York "safety fund" intended to provide privately funded deposit insurance. The NYCH was a private-market means of supplying liquidity to the system and of promoting coordination among banks. These private-market innovations aimed to stabilize the financial system. (4) Gauge the impact and legacy of the Livingston decision as a regulatory doctrine for the treatment of illiquid banks in a panic. This decision framed a doctrine that distinguishes between illiquidity and insolvency.

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  • Overview

    The Panic of 1857 stands out in financial history for its severity, for the coordination of banks through the New York Clearing House (NYCH), for the establishment of a legal doctrine about illiquidity during a panic, and for its aggravation of regional tensions. Profiled in this case are the events of the panic, the range of potential causes, and the civic reaction.

  • Learning Objectives

    Learning Objectives

    (1) Weigh the difference between insolvency and illiquidity—and realize how difficult it is to ascertain that difference in the midst of a financial crisis. (2) Consider the decision among banks regarding the suspension of convertibility of demand deposits into specie in a panic. The instructor can use this case to represent the "coordination game" dilemma that banks face during a run. (3) Illuminate early private-market remedies to prevent or mitigate bank runs and suspensions. The New York "safety fund" intended to provide privately funded deposit insurance. The NYCH was a private-market means of supplying liquidity to the system and of promoting coordination among banks. These private-market innovations aimed to stabilize the financial system. (4) Gauge the impact and legacy of the Livingston decision as a regulatory doctrine for the treatment of illiquid banks in a panic. This decision framed a doctrine that distinguishes between illiquidity and insolvency.