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The Antebellum Money Market and the Economic Impact of the Bank War: A Reply

Published online by Cambridge University Press:  11 May 2010

Marie Elizabeth Sushka
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Extract

In their comment Curran and Johnston raise two general points. They suggest (1) that my main conclusions are not substantiated by statistical tests of stability, and (2) that the specifications used in my analysis are inappropriate.

Let me summarize my reply. With regard to Curran and Johnston's statistical tests for the structural stability of my money model, there are three major points. First, in using the Chow test for structural stability the authors do not use the relevant statistical information to carry out the test, so the results they derive are not the appropriate test of the economic hypotheses. I on the other hand report and interpret the results of the relevant Chow test that uses the appropriate statistical information and lends support to my hypothesis that the Bank War altered the public's liquidity preference. Second, Curran and Johnston do not correctly analyze and interpret their own results. Actually, the implications of their own evidence support my original hypothesis that the Bank War caused a shift in the liquidity preference of the public. Third, although the Chow test is a statistical test for stability, in this case it is not a direct test of the economic question at hand; that is, it is a weak test. I therefore provide a more direct statistical F test that provides evidence to support my hypothesis that the Bank War caused the Panic of 1837 and that refutes the Temin hypothesis that the Bank War left monetary behavior unaffected.1 Furthermore, the empirical evidence demonstrates that banks were quite interest sensitive during the years prior to the Bank War and that the Bank War altered commercial bank behavior before 1837 in a manner that, coupled with the shift in the public's liquidity preference, culminated in the Panic of 1837.

Type
Notes and Discussion
Information
The Journal of Economic History , Volume 39 , Issue 2 , June 1979 , pp. 467 - 474
Copyright
Copyright © The Economic History Association 1979

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References

The author is Assistant Professor of Economics at the University of Georgia. She would like to thank Myron B. Slovin for his valuable insights and advice.

1 Temin, Peter, The Jacksonian Economy, (New York, 1969).Google Scholar

2 See Modigliani, Franco et al. , “Central Bank Policy, the Money Supply, and the Short Term Rate of Interest,” Journal of Money, Credit, and Banking, 2 (May 1970), 166–218CrossRefGoogle Scholar, for a similar analysis of residual statistics and the explanatory power of economic specifications.

3 Johnston, J., Econometric Methods (New York, 1972), p. 245.Google Scholar

4 The correction of autocorrelation does not explain anything per se and merely serves as a technique for improving the efficiency of the estimates since there are no lagged dependent variables.

5 It should be noted that there is a mathematical error in the Curran and Johnston calculations, namely, there are 4 independent variables in the supply equation (rather than 3) so n-k is 20 rather than 21 for the supply equation. The effect is minimal.

6 The relevant values for the calculated F for the demand for bank liabilities and the demand for the currency are, respectively, 6.09 and 19.63, which exceed the appropriate tabular value for of 2.92 at the 5 percent level, whereas the calculated value for the supply of bank liabilities is 1.03, which does not exceed the relevant tabular value for of 2.70.

7 In this case the relevant values for the calculated F for the demand for bank liabilities and currency are, respectively, 4.52 and 24.09, which exceed the tabular value of F at the 5 percent level, whereas the supply function produces a calculated value of F of 0.51, which does not exceed the tabular value.

8 In my original paper I reported results in which I split the equations in 1835 in order to demonstrate the dramatically altered pattern of the coefficients and suggested that this pattern was logical and presented a scenario consistent with these results, namely that the Bank War increased the demand for currency and excess reserves and decreased the demand for bank liabilities.

9 Sushka, Marie Elizabeth, An Economic Model of the Money Market in the United States, 1823–1859 (New York, 1978).Google Scholar

10 Ibid., pp. 88, 92. The supply equation results reported in Table 3 are slightly different from those reported as Table 5.5 on p. 95, which incorporate a correction for autocorrelation. If-F tests are performed using demand and supply regressions all of which incorporate an autoregressive technique, however, the patterns of the results are identical. It should be noted that due to the length of my original article, “The Antebellum Money Market and the Economic Impact of the Bank War,” this Journal, 36 (Dec. 1976), 809–35Google Scholar, these year-by-year split sample regressions were not incorporated in the text; however, they were explained in footnote 32.

11 The t statistics are reported in parentheses below the coefficients.

12 Johnston, Econometric Methods, p. 207. The number of observations is indicated by n, the number of variables by k, and RSS is the residual sum of squares.

13 Eckstein, Otto and Brinner, Roger, “The Inflation Process in the United States,”in A Study, prepared for the use of the Joint Economic Committee, U.S. Congress, 92nd Congress, 2nd Session(Washington, D.C.,1972), pp. 24–25Google Scholar, and Goldfeld, Stephen, “Money Demand Revisited,” Brookings Papers on Economic Activity, 3 (1973), pp. 539–90.Google Scholar

14 It should be noted that although this pattern of results continues throughout the 1830s, only the results up to 1837 are reported. In order to test the hypothesis that the Panic of 1837 was due to changes in financial behavior, it is important that the change in the F tests occur before 1837, which it does. If it occurred in 1837 or after, it would be difficult to draw any conclusions since a shift in behavior could then be viewed as an effect rather than a cause of the Panic of 1837.

15 See for example, Wonnacott, Paul, Macroeconomics (Homewood, Ill., 1974)Google Scholar or Gordon, Robert J., Macroeconomics (Boston, 1978).Google Scholar

16 For a good summary on this point see Goldfeld, “Money Demand Revisited.”

17 Modigliani et at., “Central Bank Policy.”