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Published online by Cambridge University Press: 03 February 2011
Economic historians have not provided a satisfactory discussion of the banking collapse of 1933. There are two reasons for their disinterest. First, while state systems contributed 80 percent of the commercial bank failures during the crisis year, banking statistics from state authorities are erratic, difficult to consolidate, and in some cases simply not available. Second, there already exists a set of generalizations based upon contemporary accounts which provides plausible answers to most of the obvious questions. The purpose of the following article is to explore the usefulness of these generalizations by applying them to 1932–1933 failure patterns in Iowa, and to suggest further research activities which need to be undertaken in order to construct a more powerful analysis.
1 The subject is treated most extensively in Bremer, C. D., American Bank Failures (New York: Columbia University Press, 1935)Google Scholar. See also Nadler, Marcus and Bogen, Jules, The Banking Crisis (New York: Dodd, Mead, and Co., 1933)Google Scholar; Upham, Cyril and Lemke, Edward, Closed and Distressed Banks (Washington: The Brookings Institution, 1934)Google Scholar; Rodkey, R. G., “State Bank Failures in Michigan,” Michigan Business Studies, VII, No. 2 (Ann Arbor, 1935)Google Scholar; and the National Industrial Conference Board, The Banking Situation in the United States (New York: National Industrial Conference Board, 1932)Google Scholar.
2 “Bank Suspensions, 1921–1936,” Federal Reserve Bulletin 23 (1937), p. 1204Google Scholar. Though theoretically neat, “failures” and “suspensions” are difficult categories to apply. In this study they are used interchangeably to include both banks which ceased operations entirely and those which remained on a restricted status under the supervision of the State Banking Superintendent after the banking holiday. This usage seems to conform to the definition set forth by the Federal Reserve Board and to the classification given by Bremer.
3 Ibid., p. 1211.
4 This approach is emphasized, for example, in Robertson, Ross M., History of the American Economy (New York: Harcourt, Brace, and Co., 1964), pp. 517 ffGoogle Scholar.
5 This explanation has the favor of historians, presumably because it is dramatic and easy to understand. The following excerpt, originally written for Harper's magazine, is taken from David Shannon's well-known collection, The Great Depression (Englewood Cliffs, N.J.: Prentice-Hall, 1960), pp. 79–80Google Scholar.
… the daily paper … editorially urged the citizens of Beckerstown to stop drawing money out of the banks. “Take your money back to your bank, where it has been kept with safety for over a century,” said the editorial, “and you won't have any regrets.”
… Neither chastening editorial nor encouraging advertisement, however, could stem the rising tide of hysteria, and two days later—on Thursday, October first—the Merchants National Bank was closed. The statement of the directors echoed the words of the directors of the People's Loan, ascribing the troubles of the bank to “unprecedented withdrawals as a result of untrue and absolutely false rumors.”
This fresh catastrophe threw the people of the town into a state of very near panic.
6 From the Report of the Study Commission for Indiana Financial Institutions (Indianapolis, 1932), pp. 75–76, quoted in Thomas, R. G., “Bank Failures—Causes and Remedies,” Journal of Business, VIII (1935), 299–300Google Scholar.
7 There is a disturbing proportion of balance sheets which do not balance, though the error is usually less than one percent. The “loans and discounts” category includes both loans and discounts ana non-federal securities holdings. Thus, for example, all holdings of corporate bonds are included in this asset item. Also, several banks “vanish” between the 1931–32 report and the 1932–33 report, with no record being given of either merger or failure. Of the 704 banks in the 1931–32 report, only 702 were used in this study because two were located in towns which could not be found in the 1930 Iowa atlas.
8 This aggregation is performed so that the dependent variable is continuous, making multivariate regression techniques applicable. The alternative, multivariate probit analysis, is not widely understood among social scientists. For a discussion of the difficulties introduced by dependent variables with a theoretically limited range, see Goldberger, A. S., Econometric Theory (New York: John Wiley & Sons, 1964), pp. 251–55Google Scholar. An alternative failure index, the number of failing banks as a percentage of total banks in each county, was constructed and carried along throughout the research. The simple correlation between these two indices was 0.90, and use of the alternative index does not change the conclusions of this study.
9 In calculating average size, the population of each town was weighted by the number of resident banks.
10 “Bank Suspensions, 1921–1936,” Federal Reserve Bulletin 23 (1939), pp. 886–960, 1204–1224Google Scholar.
11 Ibid., p. 1217.
12 Thomas, “Bank Failures—Causes and Remedies,” p. 305.
13 More exact percentages are not given because they present a distorted impression of accuracy; actually, they are arbitrary results of the intervals chosen.
14 The trend among Iowa banks was toward the substitution of investments for loans. This is established by Mitten, L. G., “A Statistical Analysis of the Financial Structure of Iowa Banks from 1917 to 1937,” Journal of Business, XX (University of Iowa, 1939), 6–10Google Scholar. This was a consequence of the dramatic decline in loan opportunities available to banks during the twenties.
15 To differ significantly from zero at the 5% level, regression coefficients should be roughly twice their standard error.
16 Percentages are based upon data given by the Fourteenth Census of the United States, VI, Part I, 534–43.
17 Both of these items are given in a Report by the Committee on Population and Social Trends of the Iowa State Planning Board entitled The Income of the Counties of Iowa. It is a supplement to Iowa Income, 1909–1934 (State University of Iowa, Bureau of Business Research, 1935)Google Scholar.
18 The limitations of this test should be carefully noted. The “panic” effect may still be useful within counties—for example, within towns. Or the proper region for analysis may be larger than a county.
19 Rodkey, “State Bank Failures in Michigan,” p. 147.
20 These observations would not have been possible without the kindness of Mr. Holmes Foster of the Iowa Banking Commission Office, who allowed me to examine available records of Iowa bank closings.
21 The proclamation of March 11 announced that only banks which complied with federal requirements were to be reopened. But correspondence files reveal no clear interpretation of those requirements among the state's banks. The only item on the brief financial report form which seems to have been singled out for special attention is “real estate.” It was frequently circled (apparently by the examiner) for banks which were judged unsound.