Financial Impacts of The Natural Disasters Article Discussion

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“Bank-specific default risk in the pricing of bank not discounts.” by Jaremski Matthew. The Journal of Economic History (2011): 950-975.”Real shock, monetary aftershock: The 1906 San Francisco earthquake and the panic of 1907.” by Odell, Kerry A., and Marc D. Weidenmier. The Journal of Economic History 64.4 (2004): 1002-1027.

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Real Shock, Monetary Aftershock: The 1906 San Francisco Earthquake and the Panic of
1907
Author(s): Kerry A. Odell and Marc D. Weidenmier
Source: The Journal of Economic History , Dec., 2004, Vol. 64, No. 4 (Dec., 2004), pp.
1002-1027
Published by: Cambridge University Press on behalf of the Economic History
Association
Stable URL: http://www.jstor.com/stable/3874987
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Real Shock, Monetary Aftershock: The
1906 San Francisco Earthquake and the
Panic of 1907
KERRY A. ODELL AND MARC D. WEIDENMIER
In April 1906 the San Francisco earthquake and fire caused damage equal to
more than 1 percent of GNP. Although the real effect of this shock was localized, it had an international financial impact: large amounts of gold flowed into
the country in autumn 1906 as foreign insurers paid claims on their San Francisco policies out of home funds. This outflow prompted the Bank of England to
discriminate against American finance bills and, along with other European central banks, to raise interest rates. These policies pushed the United States into
recession and set the stage for the Panic of 1907.
San Francisco’s $200, 000,000 “ash heap” involves complications which will be felt on allfinancial markets for many months
to come [and] the payment of losses sustained … represents a
financial undertaking offar-reaching magnitude ….
The Financial Times [London], 6 July 1906
Canquestion
localized
disasters have international economic effects? This
is attracting more attention from economists as the magnitude and frequency of these events-or simply the media attention paid
to them-has risen noticeably in the past decades. Earthquakes such as
those that hit Northridge, California in 1994 and Kobe, Japan in 1995
may indicate that increases in population and economic activity in areas
like the Pacific Rim will be accompanied by a greater risk of exposure
The Journal of Economic History, Vol. 64, No. 4 (December 2004). C The Economic
History Association. All rights reserved. ISSN 0022-0507.
Kerry A. Odell is Professor of Economics and Johnson Professor in Teaching, Department of
Economics, Scripps College, Claremont, CA 91711. E-mail: Kerry.Odell@ScrippsCollege.edu.
Marc D. Weidenmier is Assistant Professor, Department of Economics, Claremont
McKenna College, Claremont, CA 91711, and Faculty Research Fellow, NBER. E-mail:
marc_weidenmier@mckenna.edu.
The authors would like to thank Michael Bordo, Richard Burdekin, Charles Calomiris,
Forrest Capie, Michael Edelstein, Claudia Goldin, Charles Goodhart, Anne Hanley, Larry Katz,
Charles Kindleberger, Jon Moen, Harold Mulherin, Larry Neal, Ronnie Phillips, Peter Rousseau, Richard Sylla, John Wallis, Tom Weiss, Gavin Wright, two anonymous referees, and
seminar participants at the 2001 Economic History Association, 2001 Business History Conference, the University of Wisconsin at LaCrosse, and the Claremont Colleges for comments. We
would also like to thank the archivists at the Bank of England and Ellis Tallman for supplying
data for the study. A special thanks to Sheree Leeds, the archivist at CGNU, for locating and
transcribing the Business Minutes of Norwich Union for 1906 and 1907. The authors acknowledge financial support from Claremont McKenna College.
1002
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Real Shock, Monetary Aftershock 1003
to natural disaster.1 At the same time, the expansion of global terrorism
-most recently illustrated in the attacks on the World Trade Center in
2001-suggest that man-made disasters may also be becoming more
common and more deadly. The personal and political impact of these
events is clear; what is less clear is their impact on the wider global
economy.
History tells us that, indeed, events far removed from one’s own
country can have devastating effects. In April 1906 an earthquake and
fire destroyed much of the city of San Francisco. Although the World
Trade Center attacks and recent natural disasters resulted in significant
destruction, the damage from each totaled less than 1 percent of GNP.
On the other hand, the cost of the April 1906 disaster was substantially
higher, at somewhere between $350 and $500 million, or 1.3 to 1.8 percent of nominal U.S. GNP in 1906.2 Large amounts of relief flowed into
the city in the weeks immediately following the disaster and, because
British companies underwrote the majority of the city’s fire insurance
policies-an estimated ?23 million (or $108 million) at the timeenormous insurance claims were soon presented in London.3
After the claims were adjudicated in July 1906, the magnitude of the
resulting gold outflows in late summer and early autumn 1906 forced
the Bank of England to undertake defensive measures to maintain its
desired level of reserves and a fixed sterling-dollar exchange rate. The
Bank’s response was to raise its discount rate 250 basis points between
September and November 1906; central banks in France and Germany
followed suit. In addition, the Bank of England attempted to stem the
gold outflow by pressuring British joint-stock companies to stop discounting American finance bills for the next year.4
The actions of the Bank of England and other European central banks
attracted gold imports and sharply reduced the flow of gold to the
United States. By May 1907 the United States had fallen into one of the
shortest, but most severe recessions in American history. Thus primed
for a financial crisis, already-weakened world markets crashed in October 1907 with the collapse of the Knickerbocker Trust Company in New
1 Other large cities in geologically unstable areas, such as Mexico City and Istanbul, have
also experienced devastating earthquakes in the past 20 years.
2 The GNP data are taken from Balke and Gordon, “Historical Data,” p. 802; and Romer,
“Business Cycle,” p. 22. Early estimates of the damage were reported in The Commercial and
Financial Chronicle on 28 April 1906 (p. 959) and in The Economist on 19 October 1907
(p. 1771). For later damage estimates see Douty, Localized Disasters, p. 194; Thomas and
Witts, San Francisco Earthquake, p.271; and Haas et al., Reconstruction, p. 6.
3 For extensive recent discussion of natural disasters and insurance, see Froot, The Financing
of Catastrophe Risk.
4 The Economist, 20 October 1906, p. 1694.
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1004 Odell and Weidenmier
York. The panic led to one of the most importan
financial architecture: the creation of the Federa
ing information from contemporary sources, ou
links between the disaster localized in San Francisco and the onset of
the nationwide Panic of 1907.
THE GOLD STANDARD AND INTERNATIONAL SPECIE FLOWS
Between 1870 and 1914 many countries adhered to a gold stand
strictly tying national money supplies to gold stocks and standing r
to redeem currency for gold at a fixed exchange rate. The operatio
the gold standard had a number of implications for economic activit
open economies, as summarized in the classical adjustment mechani
Consider the effects of a sudden outflow of gold from a country ca
for example, by the payment of insurance claims. Through the pri
specie-flow mechanism (most famously described by David Hum
1752), the gold outflow amounts to a reduction in the nation’s mon
supply, and so reduces the domestic price level. As the price of dom
tic goods falls relative to the price of foreign goods, exports wi
crease, imports will decline, and the resulting trade surplus will re
gold to the nation. This gold flow will reduce the foreign price leve
raise the domestic price level until trade imbalances and internatio
price differentials are eliminated.5
With integrated financial markets, this trade adjustment mechan
can be augmented by capital flows, whereby the reduction in the m
supply from a gold outflow raises domestic interest rates. This wil
tract loanable funds from abroad, reversing the initial gold outf
Central banks may also use policy tools to affect the speed with wh
equilibrium is reached. Under what came to be known as “the rules
the game,” central banks were supposed to respond to a sudden
outflow by contracting the domestic money supply and raising int
rates.6 These policies would enhance the trade surplus and capita
flow effects of the classical adjustment mechanism, accelerating a
turn to equilibrium.
Prior to 1913 the United States lacked a central bank to provide l
quidity during periods of monetary stringency and so the economic
fects of abnormal gold flows were often magnified. Fabio Canova,
Ellis Tallman and Jon Moen, building on work by O. M. Sprag
SFor further discussion of this mechanism, see Bloomfield, Monetary Policy; Ba
“Money,” and Bordo, “Gold Standard.”
6 Bloomfield, Monetary Policy.
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Real Shock, Monetary Aftershock 1005
1910, argue that unusual gold flows were the cause of most financial
crises and business cycles in the United States before the founding of
the Federal Reserve.7 Canova shows that external gold shocks were an
important factor in explaining fluctuations in high-powered money and
economic downturns in the pre-Federal Reserve era. Tallman and Moen
find evidence of a monetary transmission mechanism where shocks to
gold high-powered money had non-neutral effects on interest rates and
output in the face of sluggish price adjustment.
There is, however, far less research on the sources of exogenous gold
shocks. Take, for example, the many studies that have examined the
causes of the Panic of 1907. Most of this literature explains the Panic as
the ultimate outcome of a liquidity crisis in London in the wake of an
unusually large amount ($70 million) of gold exports from England to
the United States during 1906. Under the gold standard, such a sudden
gold outflow represented a massive shock to the British money stock. In
response, the Bank of England not only nearly doubled its discount rate
between September and October 1906, but it also instituted a discriminatory policy against capital flows (in the form of finance bills) to the
United States. These actions practically cut off gold exports to the
United States, and England reversed its position from a net gold exporter to a net gold importer. The actions pushed the United States into
a recession and made New York markets susceptible to a financial
panic.
Scholars disagree about what caused the gold outflows that ultimately led the Bank of England to take such drastic measures. Charles
Kindleberger cites various international events ranging from an Italian
banking failure to the Boer War and the Russo-Japanese War as possible sources of the British gold outflow; R. S. Sayers adds the fact of a
bumper crop of cotton produced in Egypt in autumn 1906.8 Although
each of these events may have resulted in some gold outflows from
Britain, it remains the case that during this period, British gold exports
to the United States were nearly 230 percent greater than to any other
country in 1906, as can be seen in Table 1. If we add nearly three million pounds sterling of gold exports returned to Paris (as repayment of
specie lent to London in the spring to cover earthquake payments), then
7 Canova, “Sources”; Tallman and Moen, “Gold Shocks”; Sprague, History of Crises.
8 See Kindleberger, Manias; and Sayers, Bank ofEngland. A search of The Economist uncovered another potentially important event in precipitating the 1907 panic: In late December
1905 concern over the Moscow uprising and the likely impact on Russia’s foreign debt caused a
spike in American call loan rates. This spike, however, was not accompanied by the gold outflows from Britain that we see in the aftermath of the San Francisco earthquake.
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1006 Odell and Weidenmier
TABLE 1
BRITISH GOLD EXPORTS
Gold Exports from England Percentage of British
Country (pounds sterling) Gold Exports
January-October 1906
Argentina 3,405,875 9.1
British India 3,956,286 10.6
Egypt 4,975,046 13.4
France 4,495,042 12.1
United States 14,148,394 38.0
Other 6,228,949 16.7
1906
Argentina 4,285,875 10.0
British India 4,681,186 11.0
Egypt 6,285,046 14.7
France 4,621,451 10.8
United States 14,188,394 33.3
Other 8,555,315 20.0
Source:
The
British
percent
What
such
Economist,
gold
1906.
exports
greater
events
unusual
than
to
to
particula
imports
Anna Schwartz, and Ch
ury L. M. Shaw had, th
discount the impact th
direction of specie mov
flows
on
excessive
sp
1906.10 There is, howev
ing of such flows; ther
of the flows. Excess sp
the United States. To i
summary statistics of
S&P 500 and the U.K. A
quake,
April
1905-Ma
stock return was 0.90
dom during this period
9
Friedman and Schwartz, Mon
10 See, for example, Sprague,
England; Goodhart, Money M
Crises.”
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Real Shock, Monetary Aftershock 1007
TABLE 2
U.S. AND U.K. STOCK RETURNS APRIL 1905-MARCH 1906
Monthly Stock Return Statistics, April 1905-March 1906 (in percentages)
Average Standard
Return Error Minimum Maximum
U.S.
U.K.
Index
0.90
Index
0.12
2.55
-5.12
3.71
1.27
-1.86
2.41
Abnormal
Stock
Return
Dependent PREQUAKE PREQUAKE
Variable Constant UKIDXRET (1-year) (6-month) R 2
USIDXRET”
0.491
(0.396) (0.240)*
USIDXREi
0.450
0.458
0.454
0.027
0.397
0.027
0.619
0.027
(0.433) (0.239)* (0.791)
USIDXREf
0.460
0.457
(0.416) (0.241)* (0.740)
a Estimated with robust standard errors.
* Significant at the 10-percent level.
Source: See the text.
when returns on British equities outpaced American equities, as shown
by the range and standard deviation of returns.
As an additional check, we test whether U.S. equity returns were significantly greater than U.K. returns in the year and six months before
the earthquake. We first regress American stock returns on a constant
and on the return on the U.K. All Shares Index for the period 19001909. The return on the U.K. index is significant at the 10-percent level.
We then estimate two more regressions that incorporate dummy variables to test if there were abnormal returns in U.S. equities prior to the
earthquake. The dummy variable, PREQUAKE, is set equal to one in
the year leading up to the earthquake in the first specification, and set
equal to one in the six months before the natural disaster in the second
model. As Table 2 shows, U.K. stock returns continue to be significant
at the 10-percent level while the PREQUAKE dummy is not significant
at even the 40-percent level in both regressions. The results suggest that
it is difficult to support the claim that British speculation in an American stock boom created the sizeable gold flows that forced the Bank of
England to nearly double its discount rate in September and October
1906.
In contrast, our evidence shows that the magnitude and timing of
earthquake-loss-related funds do fit the pattern of gold flows we see in
autumn 1906. British insurers (and others, including a significant num-
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Re
1008 Odell and Weidenmier
ber of German firms) stalled on paying claims imm
April disaster. It was not until late summer 1906 th
reached among the firms to accept liability for claim
hensive monetary history of the United States, Fri
offer no definitive statement on the basis for the B
saying only that “During September and October 1
York money market was relieved by gold imports
and Germany, the London money market was in
reading of their statement is instructive: the author
was relieved by gold flows from Great Britain and
dence shows that the two largest sources of foreig
writers in San Francisco at the time of the earth
England and Germany.12
Contemporary observers certainly noted this con
the epigraph. But while Sayers and Kindleberger m
to the observation that the San Francisco earthqu
exports from England to the United States (echoing
made by a banker in 1908 and repeated by Sprague
on bank crises), they appear to be referring mainly t
occurred immediately after the earthquake in Spring
our article utilizes data from contemporary newspap
nal documents from British insurance companies to
payments in the aftermath of the San Francisco ea
heart of the unusual gold flows throughout 190
claims by British insurance companies to policyh
cisco (delayed until late summer by the compani
their liability, then further postponed by an extens
which to make claims-and the typical insurance
days to pay claims once they were adjusted) caus
exports that ultimately resulted in defensive act
” Friedman and Schwartz, Monetary History, p. 156.
12 At the request of the San Francisco Chamber of Commerce in
ley mathematics professor (and insurance consultant) Albert W. W
accounting of insurance settlements resulting from the earthquake a
was reissued in 1972 by Caltech’s Disaster Research Center.) Using
that English companies accounted for 62 percent and German comp
cent of total fire insurance premiums collected by foreign insurance
in 1905. In addition, the average size of English and German insura
San Francisco was significantly larger than the average American
Settlements, pp. 12-16). In fact, a list in The New York Times on 20 A
the two largest insurers in San Francisco were London Assuran
Transatlantic of Hamburg was ranked fourth.
‘3 Frank Vanderlip, “Panic,” p. 303.
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Real Shock, Monetary Aftershock 1009
England, setting off the chain of events that culminated in the Panic of
1907.
THE SETTING AND THE DISASTER
By the time the transcontinental railroad was completed in 1869
Francisco had already established itself as the center for export tr
from the Pacific Coast region. Endowed with an excellent natural h
and easy coastal and river access to the agricultural and natural reso
riches of the west, San Francisco had developed strong economic t
other countries, particularly to Britain. Most of the wheat exported
the west coast and bound for England was financed through San F
cisco, and a sizeable number of London banks had offices in that city
At the same time, other British financial institutions sought to ex
their business in the area.14 Prominent among these were the Briti
surance companies. Prior to 1907 California law allowed insurers to
derwrite both marine insurance and fire insurance. Firms insuring
extensive ocean trade between San Francisco and England, then
the opportunity (and perhaps the incentive, from the standpoint
versification) to expand into fire insurance. In 1852 the Liverp
London & Globe fire insurance company placed an agent in San
cisco: this was the first such fire insurance firm (either foreign o
mestic) in the city. Two years later, three more British firms were
ing business in San Francisco and the first American insurance firm
up an office in the city. It was not until 1858, however, that a San
cisco-based company was established.” By 1890 in California t
were 127 Class 1 term American fire insurance firms underwriting
tal of $1.72 billion in risks. On the other hand, there were 52 fore
firms that underwrote a total of $1.22 billion in risks; more than 6
cent of these policies were insured by German firms, and nearly 27
cent of the policies were carried by British companies. In fact, th
insurance company writing the most policies in California was Liv
pool & London & Globe, with total risks of $173 million. In com
son, 28 percent of all fire insurance policy risks in New York wer
derwritten by foreign firms, whereas in Illinois foreign comp
insured less than 20 percent of the value of all risks16
14 One example is the British firm of Balfour, Guthrie, and Co. which started as wh
porters and became the San Francisco-based agents for British fire insurance firms in the
teenth century. See Rothstein, “British Firm.”
15 Kirschner, Fire Insurance, p. 7.
16 Calculated from figures on Class 1 fire insurance companies listed in the U.S. Bur
the Census, Insurance Business.
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1010 Odell and Weidenmier
Twenty-five years later, these patterns persisted.
slightly more than half of insured risks in Californ
by American firms, with almost 40 percent of bus
foreign firms, most of whom were based in Britain
California-based firms were writing only 7 percen
business in the state.17 The city of San Francisco
pendent on foreign fire insurers than the state as a
the century, it was estimated that at least half of a
cies in San Francisco were issued by British compan
tion for the dominance of British firms is the long
tions between the city and Britain; another is si
agents from the London and Lancashire insurance fi
on San Francisco business equaled 30 percent-“t
than that yielded by its business generally.”19 Evide
to consider earthquake risk.20
On Wednesday, 18 April 1906 an earthquake of
8.3 hit San Francisco. Most of the damage was not
itself (which was especially severe in areas of landf
tion occurred) but by the fires that followed. Man
ings had been made of wood; this material was far
inexpensive than brick as a result of the city’s c
coastal lumber trade. The combination of close quar
mable building materials, and earthquake-damage
pered the efforts of firefighters. Ultimately more t
-about half of the city–were destroyed. Although
the city’s 375,000 residents were killed, damage t
mated at between $350 million and $500 million,
mately $235 million in insurance policies were held.2
Word of the disaster in San Francisco spread thro
States within hours and the impact was felt almost
17 Kirschner, Fire Insurance, p. 21.
18 The Economist, 5 May 1906, p. 767. This is nearly double the a
whole; in 1900, British fire houses issued roughly 25 percent of all f
United States (Cockerell and Green, British Insurance, p. 25).
19 The Economist, 28 April 1906, p. 713.
20 In fact, The Economist, ibid., noted that some critics were chidi
(which had underwritten very profitable San Francisco policies) for th
ter big figures without devoting adequate consideration to the risk
Kennedy even suggests that insurers saw little fire risk in San Franc
ter rains and the summer fogs, buildings never really dried out enou
Earthquake, p. 49). On 20 April 1906 (p. 4) The New York Times co
cisco had been so thoroughly free from fire for years that nearly all
unusually extensive amounts of insurance there.”
21 Whitney, Insurance Settlements, p. 11.
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Real Shock, Monetary Aftershock 1011
80-
60 – San Francisco Earthquake and
Insurance Payments
40

Panic
of
1907
S20-
-20-
-40
FIGURE 1
U.S. NET GOLD IMPORTS, 1900-1913.
Source: Monthly Summary of Commerce and Finance of the United States, various issues.
nancial markets. In particular, news of the earthquake led to a sell-off
and a significant drop in the price of shares in the New York and London stock exchanges. On 26 April The New York Times reported that the
San Francisco disaster led directly or indirectly to about a $1 billion (or
nearly 12.5 percent) decline in the market value of NYSE stocks; railway stocks alone fell more than 15 percent.22 In London, share prices
for leading insurance companies plummeted following news of the San
Francisco disaster, with stock prices for most insurance companies in-
volved in the quake suffering losses of 15 to 30 percent in the two
weeks following the disaster. Equity prices for London and Lancashire,
one of the largest British insurers in San Francisco, posted a 30-percent
decline. At the same time, shares of London Assurance fell more than
one-third, from 75 to 51.5.23
Funds for relief and rebuilding flowed into the city quite quickly.
Given the preference of Californians for specie over banknotes, these
funds came largely in the form of gold; in fact, San Francisco’s bankers
formed a clearinghouse to coordinate the distribution of gold money to
their depositors shortly after the earthquake.24 Figure 1 shows that, in
22 The New York Times, 26 April 1906, p. 15. The 12.5 percent figure was computed by dividing $1 billion by the NYSE market capitalization at the end of 1905. The authors thank Peter
Rousseau for providing the data on NYSE market capitalization.
23 The Economist, 12 May 1906, p. 804.
24 Californians had developed this preference during the gold rush of the late 1840s. Parker
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1012 Odell and Weidenmier
late April and May of 1906, nearly $50 million of g
United States from Germany, France, the Nethe
(whose contribution alone amounted to $30 mil
Times and the records of the National Monetary C
that 80 percent of these funds were transferred to
of the rest was used to replenish the gold reserves
depleted by specie shipments to the West Coast.25
parently also aided by the U.S. Treasury’s policy
imports by offering to place government deposits
was in transit.
THE INSURERS
Because San Francisco was a major market for British fire insuran
companies, much of the brunt of financing San Francisco’s recov
was borne abroad.26 As recreated in Table 3, The Economist reported
length on the consequences of the disaster for British insurance fir
pointing out that they had more than $87 million in policies in
Francisco, with $46 million in losses.27
Of course, the amount of policies underwritten could not precisely
predict the size of insurance payments to be made; some properties su
vived the earthquake undamaged. At the same time, the insurers (in
particularly bad public relations move) indicated early on that no pa
ments would be made on damage that resulted from the earthquake
self. This was a sticky point: If the fires that followed the earthqua
produced the damage but the fires themselves were caused by the ear
28
quake, insurers claimed that they were not liable. There were no clear
Willis notes that this preference persisted until World War I and the government’s impounding
of gold. Only then did paper currency replace gold coin as the common medium of exchange
for California. See Willis, Reserve Bank, pp. 34 and 65-67; and Armstrong and Denny, Financial California. On the clearinghouse, see Phillips, “Financial Catastrophe,” p. 98.
25 The New York Times, 7 May 1906, p. 12.
26 This was anticipated by the editor of the Los Angeles Times who wrote, on 1 May that “It is going to tax the ability, not only of the United States, but of the civilized world under existing circum-
stances, to finance the enormous project of rebuilding the city of San Francisco. . .” (p. 4).
27 The Economist, 11 August 1906, p. 1342. This figure excludes reinsurance. What little reinsurance existed (and one author [Kennedy, Great Earthquake, p. 249] suggests that the reinsurance market was not very developed in 1906) was often issued by the same companies that
had primary policies in San Francisco.
28 The San Francisco newspapers reacted quickly and vociferously to such a suggestion. In
the 7 May 1906 edition of the San Francisco Examiner, the editor wrote “To say that [insurers]
will not recognize as an obligation the destruction of a building by fire, which fire was the result of an earthquake, is to take a position hardly more reputable than that of an ordinary pickpocket.”
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Real Shock, Monetary Aftershock 1013
TABLE 3
BRITISH FIRE INSURERS IN SAN FRANCISCO, APRIL 1906
Value of San Francisco Actual Losses
Policies in Effect Sustained
Company ($) a ($) b
Alliance
3,526,220
1,758,686
Atlas (and subsidiaries) 6,790,000 2,757,957
Caledonian and Cal.-American 5,457,727 1,521,064
Commercial Union and Palatine 7,802,722 4,116,281
Law Union 2,205,290 1,368,460
Liverpool and London and Globe 4,850,000 3,998,000
London Assurance 7,668,471 4,016,471
London and Lancashire and Orient 9,662,291 4,229,721
North British 4,021,943 3,012,500
Northern 4,238,646 2,063,926
Norwich Union 2,716,097 750,030
Phoenix and Pelican 5,000,948 2,808,313
Royal and Queen 9,044,050 5,787,776
Royal Exchange 5,518,342 2,639,564
Scottish Union and National 2,013,185 1,300,000
Sun 3,122,091 1,651,666
Union 4,238,775 2,345,420
Total
a
b
87,877,678
Gross
After
Source:
insurance
deducting
The
46,125,835
involved.
reinsurance
Economist,
11
and
sal
August
19
means of allocating damage
some insurers proposed a 6
would be denied “on the gro
damaged
in
that
proportion
by
In contrast to relief payme
settle.30 Not only did some
ity, but the adjustment of
the loss of business records in the fires which had been centered in the
city’s financial district. Most firms waited for guidance from a report is-
sued under the auspices of the Insurance Department of New York State
that outlined how firms should settle claims. This four-point plan was
not finalized until the end of July. At that time, almost all insurers af-
fected by the disaster-including the British fire insurance houses29 Los Angeles Times, 8 May 1906, p. 3.
30 Under normal circumstances, most insurance contracts of the time included a clause allow-
ing firms 60 days to pay the adjusted claims. This “grace period” was extended even furtherto the benefit of the policyholders in San Francisco-after the Insurance Commissioner of California requested that firms extend the time period for the insured to file proof of loss until 17
August. Most companies acceded to his request (Whitney, Insurance Settlements, p. 27).
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1014 Odell and Weidenmier
signed on and agreed to settle their claims in accor
York agency.31 By October it was estimated that m
lion in insurance checks had been received in San
mately, British insurers paid out ?10 million (or $4
quake damage.33
What made these British liabilities all the more sig
national financial markets was the fact that most f
cided to pay the claims out of their “home funds” ra
reserves they held in the United States.34 This, in it
the earthquake would result in massive funds flows
Francisco. At the same time, however, the British
tant to liquidate the home securities in which they
the size of losses involved, such sales would undoub
prices, as The Economist noted on 5 May 1906.
number of firms negotiated term loans with their
poned securities sales for a few months.35
The pattern and timing of insurance payments can
perience of one British company, the Norwich U
Society, which had over $15 million in San Fran
36
fect. Two days after the earthquake, British firehouses gathered in
London to discuss their liability in the disaster. The great majority of
British insurance companies ultimately assumed liability for fire damage caused indirectly by the earthquake. Members of the Norwich Un31Whitney, ibid., traces the development of these joint decisions, beginn