CURRENCY ELASTICITY AND BANKING PANICS - THEORY AND EVIDENCE

Existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not. A monetary model is constructed, where seasonal varia tions in the demand for liquidity and credit play a critical role in g enerating banking panics. These panics occur when there are restrictio ns on the issue of currency by private banks, but they do nor occur if banks are unrestricted. Empirical evidence from Canada and the United States for the period 1880-1910 is largely consistent with the predic tions of the model.