Working Papers

We develop a method to use the one-time cross-sectional impact of a cleanly identified shock to identify its aggregate impact through the use of a factor model. We apply this methodology to evaluate the importance of fluctuations to the commitment to a currency peg for macroeconomic outcomes during the gold standard period in the U.S. The presidential election in 1896 provides a cleanly identified positive shock to commitment to the gold standard. After the election, bank leverage increased substantially, particularly in states where gold was in greater use. Using the latent factor identified by the election, we find that full commitment to gold had the potential to reduce the volatility of real activity overall by a significant amount in the last two decades 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," "The Benefits of Commitment to a Currency Peg: Lessons from the National Banking System," and "The Benefits of Commitment to a Currency Peg: The Gold Standard, National Banks, and the 1896 U.S. Presidential Election."