Suspension of payments, bank failures, and the nonbank public’s losses

We present evidence on the effects of suspensions of payments from an episode that is close to a controlled experiment for examining those effects. In 1861, about 44% of the banks in Wisconsin closed, 81% of the banks in Illinois closed, and noteholders suffered substantial losses. The historical record suggests that an effective suspension of payments in Wisconsin but not in Illinois may explain the difference. Our statistical evidence indicates that the suspension of payments increased the probability of a bank remaining open by about 21 percentage points and decreased noteholders’ losses by about 14 cents per dollar. r 2006 Elsevier B.V. All rights reserved.