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A Reinterpretation of the Banking Crisis of 1930

Published online by Cambridge University Press:  03 March 2009

Eugene Nelson White
Eugene Nelson White
Affiliation:
Assistant Professor of Economics, Rutgers University, New Brunswick. New Jersey 08903.
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Abstract

The banking crisis of 1930 is one of the central events of the Great Depression. The causes of this wave of bank failures are examined using individual bank balance sheet data. Both real and monetary factors are found to have forced the closure of banks, many of which were already weakened by regulatory constraints and regional economic difficulties. The bank failures in this crisis do not seem to have been different in character from failures in previous years, suggesting that the rise in the number of failures may have marked only the beginning of a recession rather than a depression.

Type
Articles
Information
The Journal of Economic History , Volume 44 , Issue 1 , March 1984 , pp. 119 - 138
Copyright
Copyright © The Economic History Association 1984

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References

1 The effects of the 1930 and subsequent banking crises have been most recently studied by Wicker, Elmus R., “A Reconsideration of the Causes of the Banking Panic of 1930,” this JOURNAL, 40 (09. 1980), pp. 571–83;Google ScholarBernanke, Ben S., “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review, 73 (06 1983), 257–76;Google Scholar and Brunner, Karl, ed., The Great Depression Revisred (Boston, 1981).CrossRefGoogle Scholar

2 There are a number of problems in determining whether this occurred because there was a substantial shift in the composition of banks' loan and investment portfolios. Commercial loans declined relative to loans on securities and real estate. This was the result of several important events, including the increase in the federal government's debt, the large-scale flotation of foreign securities, and the shift by firms from financing with bank loans to the issue of stock and bonds. Friedman, Milton and Schwartz, Anna J., A Monetary History of the United States, 1867–1960 (Princeton, 1963), pp. 244–45.Google Scholar

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5 Ibid., p. 308. Elmus Wicker has revealed that many failures were related to the collapse of CaIdwell and Company of Nashville, Tennessee. This firm had recently created a fragile financial empire including many banks across the South. The failure of Caldwell and Company in November of 1930 caused a run on its banks. Wicker, “A Reconsideration,” p. 572.

6 Temin, Peter, Did Monetary Forces Cause the Great Depression? (New York, 1976), pp. 106–07.Google Scholar Temin's sample is apparently dominated by very low grade bonds, and this led Mayer to criticize Temin's results. Mayer, Thomas, “Money and the Great Depression: A Critique of Professor Temin's Thesis,” Explorations in Economic History, 15 (1978), 136–37. This criticism may be unjust, as many banks appear, as will be shown, to have held such bonds.CrossRefGoogle Scholar

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10 These rates were calculated with data from the Federal Reserve Bulletin (September. 1937), pp. 907–09. The small number of failing private and mutual savings banks were excluded here. Suspending national banks had 19.5 percent, state member banks of the Federal Reserve, 31.8 percent, and nonmember state banks, 48.7 percent of deposits in all suspended banks.Google Scholar

11 See, White, Eugene Nelson, The Regulation and Reform of the American Banking System, 1900–1929 (Princeton, 1983), pp. 138–40.Google Scholar

12 The coefficient of correlation is 0.885. Bank failure rates were measured as the number of failures in the year divided by the number of banks on June 30, 1930. The data were taken from the Comptroller of the Currency's Annual Report (Washington, D.C., 1931), pp. 707–20.Google Scholar

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23 Although information does not exist for individual banks, the increase in defaults and slow payments can be seen in the data for all national banks. For the six-month period ending December 31, 1929. losses on loans and discounts totalled $54 million. Between July I and December 30, 1930, this rose to $85 million, while gross earnings on loans and discounts fell from $475 million to $401 million. Comptroller of the Currency, Annual Report (1930), pp. 695–96, 946–47.Google Scholar

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26 It may be a fairly accurate measure if banks tended to sell only those bonds that would pay close to their book value, minimizing any losses and held depreciated bonds in the hope that they would receive their book value in the future.Google Scholar

27 Friedman and Schwartz, A Monetary History, p. 246. Latin American bonds were all purchased after 1928 and apparently suffered a large decline in value.Google Scholar

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36 Calculated from Urquhart and Buckley, Historical Statistics, p. 246. In addition, seven weak banks were absorbed by stronger firms. This was an orderly process that had evolved in Canada whereby the relatively small number of banks recognized the importance of maintaining public confidence in the banking system and often took over troubled institutions rather than panic the public. The functioning of this informal system of mutual insurance is described in White, Regulation and Reform, Ch. 4.Google Scholar

37 Calculated from U.S. Bureau of Census, Historical Statistics, Vol 1, p. 1035, Series X717.Google Scholar

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42 There were 210 observations for 1931 and 194 observations for 1932, half of each being failures.Google Scholar

43 Temin, Monetary Forces, pp. 91–92.Google Scholar Other urban banks were also brought to grief by heavy investments in real estate. In Chicago, many banks outside the Loop were hurt not only by the financing of many questionable local real estate projects but also by the sale of mortgages and mortgage bonds to the public with repurchase provisions. When the value of these assets declined, banks were obliged to buy them back. This source of weakness would not have been evident from an examination of their balance sheets. James, Cyril F., The Growth of Chicago Banks (New York, 1938), p. 993.Google Scholar

44 Boughton, James M. and Wicker, Elmus R., “The Behavior of the Currency Deposit Ratio During the Great Depression,” Journal of Money, Credit, and Banking, 11 (11. 1979), p. 415.CrossRefGoogle Scholar

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46 See Friedman and Schwartz, A Monetary History, Ch. 7,Google Scholar and Wicker, Elmus R., Federal Reserve Monetary Policy, 1917–1933 (New York, 1966), Chs. 10 and 11.Google Scholar

47 Friedman and Schwartz, A Monetary History, p. 270.Google Scholar

48 Ibid., p. 358.

49 White, Regulation and Reform, pp. 152–65.Google Scholar