Bank fragility, “money under the mattress”, and long-run growth: US evidence from the “perfect” Panic of 1893

This paper examines how the US financial crisis of 1893 affected state output growth between 1900 and 1930. The results indicate that a 1% increase in bank instability reduced output growth by 2–5%. A comparison of Nebraska, which had one of the highest bank failure rates, with West Virginia, which did not experience a single bank failure, reveals that disintermediation affected growth through a portfolio change among savers: people simply stopped trusting banks. Time series evidence from newspapers indicates that articles containing the words “money hidden” significantly increase after banking crises, then slowly die out.