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Working Papers

November 2013, No. 13-18R

The Benefits of Commitment to a Currency Peg: The Gold Standard, National Banks, and the 1896 U.S. Presidential Election (Revised March 2017)

Scott Fulford and Felipe F. Schwartzman

How important is commitment to a currency peg? The U.S. presidential election in 1896 provides a cleanly identified positive shock to commitment to the gold standard. Immediately following the election, national bank leverage in states where gold was more available increased substantially. We use the cross-state impact of the election to identify a latent factor driving fluctuations in commitment throughout the period. Full commitment to gold had the potential to reduce the volatility of real activity overall by a significant amount at the end of the 19th century, as well as substantially mitigate the economic depression starting in 1893.

*Previous versions of this paper were circulated under the titles "The Credibility of Exchange Rate Pegs and Bank Distress in Historical Perspective: Lessons from the National Banking Era" and "The Benefits of Commitment to a Currency Peg: Lessons from the National Banking System."

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