The Joint Production of Confidence: Endogenous Regulation and Nineteenth Century Commercial-Bank Clearinghouses

During the nineteenth century, deposits increased relative to bank notes, c ausing increased information-asymmetry problems in banking. This pape r describes how bank clearinghouses lowered these costs by monitoring bank activities and establishing mechanisms of managerial control, i n effect "regulating" bank behavior. Such actions enforced the loca l one-to-one exchange rate between deposits and specie. Clearinghouse s increased regulation during financial panics, creating and enforcin g a risk-sharing device (loan certificates) for addressing panic-rela ted information problems. This paper concludes that "the market's" capacity to control bank managers depends on the banking product mix, and more generally, on information costs.