Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-18T18:37:36.321Z Has data issue: false hasContentIssue false
  • English
  • Français

State-Sponsored Insurance of Bank Deposits in the United States, 1907–1929

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.
Get access Rights & Permissions [Opens in a new window]

Extract

Before the creation of the Federal Deposit Insurance Corporation in 1933, several states established deposit guarantee funds. The key factor influencing the adoption of deposit insurance by a state was the structure of its banking industry. In states where small unit banks were dominant, there was strong support for guarantee funds to protect deposits; in other states there was more interest in branch banking. The failure to design the guarantee funds in accordance with sound principles of insurance brought about their demise and led to increased branch banking.

Type
Articles
Information
The Journal of Economic History , Volume 41 , Issue 3 , September 1981 , pp. 537 - 557
Copyright
Copyright © The Economic History Association 1981

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

An early draft of this paper was presented to the 1980 Cliometrics Conference at the University of Chicago. The author would like to acknowledge the valuable comments received there and from Larry Neal, Jeremy Atack, Tom Ulen. Hugh Rockoff, and two anonymous referees.Google Scholar

1 Golembe, Carter H., “The Deposit Insurance Legislation of 1933: An Examination of its Antecedents and Purposes,” Political Science Quarterly, 75 (06 1960), 183–87.CrossRefGoogle Scholar

2 Andrew, A. Piatt, “Substitutes for Cash in the Panic of 1907,” Quarterly Journal of Economics, 22 (08 1908), 513–14, andCrossRefGoogle ScholarBoard of Governors of the Federal Reserve, Banking and Monetary Statistics (Washington, D.C., 1943), p. 283.Google Scholar

3 Kuhn, W.E., History of Nebraska Banking: A Centennial Retrospect, University of Nebraska Bureau of Business Research, Bull. No. 72 (Lincoln, 1968), p. 13.Google Scholar

4 Rockoff, Hugh, “Regional Interest Rates and Bank Failures, 1870–1914,” Explorations in Economic History, 14 (01 1977), 92.CrossRefGoogle Scholar

5 Sprague, Oliver M. W., “Branch Banking in the United States,” Quarterly Journal of Economics, 27 (02 1903), 243.Google Scholar

6 Ibid., p. 244.

7 Andrew, A. Piatt, “Hoarding in the Panic of 1907,” Quarterly Journal of Economics, 22 (02 1908), 296–99.CrossRefGoogle Scholar

8 Bradford, Frederick A., The Legal Status of Branch Banking in the United States (New York, 1940).Google Scholar

9 Board of Governors of the Federal Reserve, Banking and Monetary Statistics, p. 297;Google ScholarBoard of Governors of the Federal Reserve, All Bank Statistics, 1896–1955 (Washington, D.C., 1963), pp. 34–35.Google Scholar

10 Golembe, “Deposit Insurance Legislation,” 196.Google Scholar

11 West, Robert Craig, Banking Reform and the Federal Reserve 1863–1923 (Ithaca, 1977), pp. 46–50.Google Scholar

12 Wiebe, Robert H., Businessmen and Reform: A Study of the Progressive Movement (Cambridge, MA, 1962), p. 24.Google Scholar

13 Ibid., pp. 24–25.

14 Stigler, George, “The Theory of Economic Regulation,” Bell Journal of Economics and Management Science, 2 (Spring 1971), 3–21.Google ScholarPosner, Richard, “Theories of Economic Regulation,” Bell Journal of Economics and Management Science, 5 (Autumn 1974), 335–58.CrossRefGoogle Scholar

15 Stigler, “The Theory of Economic Regulation,” 10–14.Google Scholar

16 Grant, Joseph and Crum, Lawrence, The Development of State Chartered Banking in Texas (Austin, 1978), pp. 82–83.Google Scholar

17 Robb, Thomas B., The Guaranty of Bank Deposits (New York, 1921), pp. 162–70.Google Scholar

18 Golembe, “Deposit Insurance Legislation,” pp. 181–200.Google Scholar

19 Annual Report of the State Bank Examiner of the State of Washington (Olympia, WA, 1919), p. 8ff.Google Scholar

20 Golembe, “Deposit Insurance Legislation,” p. 197.Google Scholar

21 Ibid., 198.

22 These data were obtained from Welldon, Samuel, Digest of State Banking Statutes (Washington, D.C., 1910), supplemented by the Federal Reserve Bulletin for 1917 and 1924, and the Comptroller of the Currency's Annual Reports for various years.Google Scholar

23 Department of Commerce, Historical Statistics of the United State (Washington, D.C., 1975), pp. 24–37. Rural population is defined as those people living in towns of 2500 inhabitants or less.Google Scholar

24 Annual Report of the Comptroller of the Currency, various years. For states adopting deposit insurance later, the failure rate was for a seven-year period prior to the passage of their laws.Google Scholar

25 The likelihood ratio index, a measure of the goodness of fit suggested by McFadden, was calculated and found to be equal to 0.305 and 0.261 for Model 1 and Model 2. While these may appear to be on the low side, McFadden found that the index tends to produce a number that is smaller than the multiple correlation coefficient. For information on probit and the test statistics, see Judge, George G., et al. , The Theory and Practice of Econometrics (New York, 1980), pp. 590–601;Google ScholarMcFadden, Daniel, “Conditional Logit Analysis of Qualitative Choice Behavior,” in Zarembka, P., ed., Frontiers of Econometrics (New York, 1974), pp. 105–42.Google Scholar

26 Historical Statistics, pp. 24–37, andGoogle ScholarAnnual Report of the Comptroller of the Currency (Washington, D.C., 1920).Google Scholar

27 Rockoff, “Regional Interest Rates,” p. 92.Google Scholar

28 The dependent variable was the total assets of state banks in thousands of dollars divided by the number of banks of “size.” The regression equation was: Size = 0.530 + 0.025 minimum capital requirement + 0.330 branching dummy − 0.005 total reserve requirement + 0.009 vault cash reserve requirement − 0.84 population density. All estimates were significant at the 5 percent level except for reserve requirements. The f statistic was equal to 13.6, being significant at 5 percent, and the R2 was equal to 0.058.Google Scholar

29 Robb, The Guaranty of Bank Deposits, pp. 170–72.Google Scholar

30 Ibid., pp. 161–62; Popple, Charles S., Development of Two Bank Groups in the Central Northwest (Cambridge, MA, 1944), p. 101.CrossRefGoogle Scholar

31 Johnson, Joseph French, The Canadian Banking System (Washington, D.C., 1910), pp. 18–19.Google Scholar

32 Beckhart, Benjamin Haggot, “The Banking System in Canada,” in Willis, H. Parker and Beckhart, B.H., eds., Foreign Banking Systems (New York, 1929), pp. 327 and 362.Google Scholar

33 Breckenridge, Roeliff Morton, History of Banking in Canada (Washington, D.C., 1910), pp. 131–34.Google Scholar

34 Johnson, The Canadian Banking System, pp. 124–27.Google Scholar

35 Beckhart, The Banking System in Canada, p. 340.Google Scholar

36 Friedman, Milton and Schwartz, Anna J., A Monetary History of the United States, 1867–1960 (Princeton, 1963), pp. 159–63. Interbank cooperation was not unknown in the United States. When three prominent Chicago banks were about to suspend operations in 1905, the city's leading bankers organized by James Forgan, head of the Chicago Clearing House, took over the banks' assets and paid their depositors. The Chicago bankers reasoned that it would be less costly to do this than to risk the possible danger of a panic.Google ScholarSee Redlich, Fritz, The Molding of American Banking (New York, 1968), pp. 285–86.Google Scholar

37 Karekan, John H. and Wallace, Neil, “Deposit Insurance and Bank Regulation: A Partial Equilibrium Exposition,” Journal of Business, 51 (07 1978), 413–38.CrossRefGoogle Scholar

38 The theory is laid out in Ehrlich, Issac and Becker, Gary, “Market Insurance, Self-Protection, and Self-Insurance,” Journal of Political Economy, 80 (07/08 1972), 623–48.CrossRefGoogle ScholarIn his article, “Capital Investment in Commercial Banking and Its Relationship to Portfolio Regulation,” Journal of Political Economy, 78 (01/02 1970), 1–26, Sam Peltzman found that, in spite of capital-to-asset restrictions, Federal Deposit Insurance has led banks to substitute deposit insurance for capital.CrossRefGoogle Scholar

39 Cooke, Thornton, “The Insurance of Bank Deposits in the West,” Quarterly Journal of Economics, 33 (11 1909), reprinted inGoogle ScholarBarnett, George, State Banks and Trust Companies (Washington, D.C., 1911).Google Scholar

40 Robb, The Guaranty of Bank Deposits, pp. 82–87.Google Scholar

41 These were calculated from tables in Historical Statistics, pp. 1025–30.Google Scholar

42 Cooke, “The Insurance of Bank Deposits,” 286–90.Google Scholar

43 Ibid., 283–40.

44 Robb, The Guaranty of Bank Deposits, pp. 105–06.Google Scholar

45 Ibid., p. 87.

46 All Bank Statistics, figures are calculated from the data provided for each state.Google Scholar

47 Robb, The Guaranty of Bank Deposits, p. 123.Google Scholar

48 Ibid., pp. 170–72.

49 Ibid., pp. 165–70.

50 Annual Report of the State Bank Examiner of the State of Washington (Olympia, 1922, 1923).Google Scholar

51 Grant and Crum, The Development of State Chartered Banking, pp. 123–84.Google Scholar

52 Kuhn, History of Nebraska Banking, pp. 15–20.Google Scholar

53 South Dakota Biennial Report of the Superintendent of Banks (Pierre, 1930, 1932,), pp. 306; 345.Google Scholar

54 The data used for this analysis came from Banking and Monetary Statistics, pp. 296–300 and All Bank Statistics.Google Scholar

55 Board of Governors of the Federal Reserve System, Federal Reserve Bulletin (Washington, D.C., 05 1927), p. 317ff.Google Scholar

56 Banking and Monetary Statistics, pp. 284–85, and All Bank Statistics.Google Scholar

57 Calculated from the data in Beckhart, The Banking System, p. 483; All Bank Statistics, pp. 24–25; andGoogle ScholarUrquhart, M.C. and Buckley, K.A.H., Historical Statistics of Canada (Toronto, 1965), pp. 240–41.Google Scholar

58 Beckhart, The Banking System, p. 338.Google Scholar

59 Morrison, George, Liquidity Preferences of Commercial Banks (Chicago, 1966), pp. 63–77.Google Scholar

60 Bradford, The Legal Status, pp. 22–23.Google Scholar

61 Golembe, “Deposit Insurance Legislation,” pp. 195–200.Google Scholar

62 The limitations on branching probably prevented many banks from attaining their optimal size. There appear to have been substantial economies of scale in banking. See James, John A., “Cost Functions of Postbellum National Banks,” Explorations in Economic History, 15 (04 1978), 184–95, andCrossRefGoogle ScholarBenston, George, “Economics of Scale in Financial Institutions,” Journal of Money, Credit and Banking, 4 (05 1972), 312–41.CrossRefGoogle Scholar