VoxEU Column Global crisis

Measuring public panic in the Great Financial Crisis

When panic strikes, people tend to withdraw cash. While there were upticks in currency-to-deposit ratios in the autumn of 2008 and early 2009, they were modest and very short-lived compared to the Great Depression. This column argues that leading central banks learnt from the 1930s mistakes and acted decisively to check the panic. Key policies were the existence and upgrading of deposit insurance schemes, massive liquidity injections, and rapid cutting of interest rates. The most important were the guarantees that the biggest banks wouldn’t fail.

Academic economists have typically used the currency-to-deposit (C/D) ratio, or its inverse, to test whether the general public has got into a panic about a banking crisis (Bernanke and James 1991, Friedman and Schwartz 1963). When there is concern about the safety of banks, some depositors will try to protect themselves by withdrawing their funds out of banks and holding them as cash. The result is a rise in the C/D ratio. We use C/D ratios to assess the scale of panic by the general public during the recent Great Financial Crisis and compare it with the Great Depression.

There was quite a large jump in the C/D ratio in a number of developed countries in the autumn of 2008

Data on currency holdings indicate that in most, but not all, developed countries there was a temporary upwards blip in C/D ratios in the autumn of 2008 and early 2009, especially in October 2008. Of the eight developed countries we looked at, the incipient panic response to the failure of Lehman Brothers and the onset of the Crisis appeared most clearly in the UK, the US, the Eurozone and New Zealand, and the impact was at best modest in Australia and Canada. There was little overall impact in Japan and Sweden.

The prior downtrend in the UK C/D ratio came to an end in mid-2007 and it soared in the 4th quarter of 2008. As Figure 1 highlights, the prior downtrend in the UK C/D ratio (probably driven mainly by technological changes in payment technologies) appears to have ended towards mid-2007, although there is little sign of a major jump up in the C/D ratio amid the run on Northern Rock in September/October 2007. This may be because it was seen as a small, regional bank, whose problems were largely idiosyncratic, and with few systematic implications. However, the monthly jump in the C/D ratio in October 2008 was quite large at 1.5% and there were further significant increases in subsequent months. This resulted in a peak of almost 3% in the 3-month on 3-month rate of change in the C/D ratio in December 2008/January 2009 (see Figure 2).1

Figure 1. UK currency-to-deposit ratio

Source: Bank of England, Haver Analytics, Morgan Stanley Research.

Figure 2. Changes in UK currency-to-deposit ratio

Source: Bank of England, Haver Analytics, Morgan Stanley Research.

There were also large rises in the C/D ratio in the US and Eurozone. There is a similar break in the downwards trend in the C/D ratio in the US, although the reversal is not as sharp as in the UK. There is some sign of an earlier increase in the ratio following the rescue of Bear Stearns in March 2008, followed by a fall in September, perhaps in relief after the rescue of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and then large successive monthly increases until about March 2009 (see Figure 3), so that the three-month on three-month change peaks at over 2% in February 2009. In contrast to the UK and US, the C/D ratio in the Eurozone had been trending upwards prior to the Crisis, perhaps due to the rising use of high-denomination euro notes as a store of value internationally. However, this upwards trend was slackening in 2006/07. Then, in October 2008, there was a marked, sharp increase in the C/D ratio of over 5% (see Figure 4). However, this was a one-off, with no subsequent reversal, but no continuation.

Figure 3. US currency-to-deposit ratio

Source: US Federal Reserve Board, Haver Analytics, Morgan Stanley Research.

Figure 4. Eurozone currency-to-deposit ratio

Source: European Central Bank, Haver Analytics, Morgan Stanley Research.

Could other factors have been influencing the C/D ratio?

The Lehman bankruptcy, and the subsequent political and economic turmoil, exacerbated the sharp downturn in the economic cycle that was already under way in most developed economies. In order to mitigate this, central banks in virtually all countries slashed their short-term policy interest rates to the zero lower bound within a few months (see Figure 5).

Figure 5. Policy rates in the US, UK and Eurozone

Source: Bank of England, US Federal Reserve Board, European Central Bank, Morgan Stanley Research.

Currency is non-interest-bearing, whereas deposits mostly provide some yield.  So, a reduction in interest rates will raise the relative attraction of holding currency. Most empirical studies show a statistically significant, if small, interest elasticity of cash holdings. Nevertheless, we do not think that the temporary upwards blip in the C/D ratio in the autumn of 2008 can be ascribed to interest rates, for several reasons:

  • Interest rates generally continued to fall through March 2009, by which time the temporary panic was subsiding. Even if an interest rate effect can explain the initial rise in the C/D ratio, it cannot explain why this effect wore off after the panic subsided. Relative interest rate effects usually start quite small and build up over time. The C/D ratio first jumped in October 2008, at least in the UK and the Eurozone, and then fell back quite quickly to trend thereafter, much more consistent with the onset, and end, of a brief panic than of a response to relative interest rates. 
  • Empirical studies of the interest elasticity of interest rates indicate that it is too small to account for the blip in the C/D ratio. We also ran correlations between interest rate changes and changes in currency holdings for the countries in this sample. While this relationship was typically negative, it was relatively small in size. Moreover, the huge jump in the Eurozone C/D ratio in October 2008 occurred when interest rates of 3.75% were still only 50bp below the cycle peak. Meanwhile, in the UK there appears to have been something of an inverse relationship between the C/D ratio and time deposit rates in recent years. 
  • Some countries, such as Sweden, saw no real change in their C/D ratios, even though they had a sharp decline in interest rates at this time, falling from 4.75% in September 2008 to 0.5% in April 2009 and 0.25% in July 2009. 
  • The shift into currency was primarily driven by a sharp increase in the holdings of the highest-denomination notes, consistent with an incipient panic (see Figure 6).

All in all, we believe that the blip in the C/D ratio was driven by incipient panic, and not by a relative interest rate effect.

Figure 6. High-denomination notes were the primary drivers of the increase in currency in circulation

Source: US Department of Treasury Bureau of the Fiscal Service, Bank of England, European Central Bank, Morgan Stanley Research

It was a modest and very short-lived panic when compared to the Great Depression

In the US, the average monthly change in the C/D ratio was 0.8% between October 2008 and March 2009 compared to 1.6% in 1930-33. At times in 1931 and 1933, the 3-month on 3-month rate of change in the C/D ratio was above 20% (see Exhibit 7). This massive shift by the public out of deposits into currency was cited by Friedman and Schwartz (1963) as one of the main reasons for the collapse in the broad US money stock in 1929-33, with the shift being ascribed primarily to a run on the banks by the public, given their experience and subsequent expectation of bank failures. In contrast, in the UK there were no significant bank failures at that time, and no general expectation that these might occur, despite the economic depression. So, the gradual downward trend in the UK C/D ratio in the 1920s continued into the 1930s (see Figure 7).

Figure 7. US and UK currency-to-deposit ratios in the inter-war period*

Source: Friedman and Schwartz 1963, Sheppard 1971, Morgan Stanley Research
*The data on the UK C/D ratio for the Inter-War Period are annual

Policymakers had learnt from the mistakes made during the Great Depression and their multitude of interventions sent a credible message that they would “do whatever it takes” to support the banking system

As then Federal Reserve Chairman Ben Bernanke remarked in a 2002 conference speech in honour of Milton Friedman: “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again”. In contrast to the Great Depression, leading central banks and their respective governments acted very decisively and in multiple ways to support the financial system during the Crisis. In particular, they injected massive extra liquidity into the banking system; reduced interest rates to the zero lower bound, followed by more quantitative easing;2 upgraded deposit insurance schemes; widened and eased access to their lender of last resort facilities and, where short-term markets became dysfunctional, they became market-makers of last resort. We think that the G7 commitment, after the collapse of Lehman Brothers, to prevent any further failures of large, systemically important banks, was probably the most important single step. In combination, the multitude of interventions sent a credible message that the authorities would do whatever it takes to support the banking system. 

Disclaimer: Charles Goodhart is a senior adviser to Morgan Stanley. In his personal capacity, Mr Goodhart advises other organisations and firms on economic matters, including, among others, the Financial Markets Group of the London School of Economics.

Authors' note: This article is based on research published for Morgan Stanley Research on 9 March 2015. It is not an offer to buy or sell any security/instruments or to participate in a trading strategy. For important disclosures as of the date of the publication of the research, please refer to the original piece available at The Gilt Edge - UK Interest Rate Strategy and Economics Monthly: Measuring Public Panic in the Great Financial Crisis (9 Mar 2015). For important current disclosures that pertain to Morgan Stanley, please refer to the disclosures regarding the issuer(s) that are the subject of this article on Morgan Stanley’s disclosure website (https://www.morganstanley.com/researchdisclosures).


Ashworth, J (2013), “Quantitative Easing by the major western central banks during the financial crisis”, in S N Durlauf and L E Blume (eds), New Palgrave Dictionary of Economics.

Bernanke, B (2002), “Remarks by Governor Ben S. Bernanke”, at the Conference to Honor Milton Friedman, University of Chicago, Chicago, IL, 8 November.

Bernanke, B and H James (1991), “The Gold Standard, Deflation and Financial Crisis in the Great Depression: An International Comparison”, in R G Hubbard (ed.), Financial Markets and Financial Crises, Chicago: University of Chicago Press.

Friedman, M and A J Schwartz (1963), A Monetary History of the United States, 1867-1960, Princeton, NJ: Princeton University Press.

Goodhart, C A E and J Ashworth (2014), “Trying to glimpse the ‘grey economy’”, VoxEU.org, 8 October.

Sheppard, D K (1971), The Growth and Role of UK Financial Institutions 1880-1962, London: Methuen & Co Ltd Publishers.


1 See Goodhart and Ashworth (2014) for a discussion of some other factors that may have continued to push the C/D rate up once the impact of the financial crisis had abated.

2 See Ashworth (2013) for a summary of the quantitative easing carried out by the major central banks during the financial crisis.

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