Collapse of the United States Banking System during the Great Depression, 1929 to 1933, New Archival Evidence, The

Australasian Accounting Business & Finance Journal, Feb 2007 by Richardson, Gary

ABSTRACT

During the Great Depression, one third of all banks in the United States failed. Scholars dispute reason for their demise. This essay analyzes new evidence on the sources of bank distress. The data demonstrates that contagion via correspondent networks and bank runs propagated the initial banking panics in the fall of 1930. As the depression deepened and asset values declined, insolvency loomed as the principal threat to depository institutions. These patterns corroborate some and question other conjectures concerning the causes and consequences of the financial crisis during the Great Contraction.

Key Words: Great Depression; Federal Reserve; banking panics; financial crisis; contagion; suspension.

INTRODUCTION

The causes, consequences, and possibilities of preventing the banking panics of the Great Depression have been debated for seven decades. The debate's factual foundations rest upon data published in the Federal Reserve Bulletin. The September 1937 issue contains the only comprehensive collection of statistics on suspended banks, and is the sole source of aggregate bank failure rates (Board of Governors 1937, hereafter FRB'37). Scholars studying the contraction continuously redefine, reinterpret, and reveal new correlations between data from FRB'37 and measures of industrial, commercial, and financial activity.

The principal reason the debate continues may be the single source of evidence. FRB'37 provides imperfect information about bank distress. It distinguishes neither temporary from terminal suspensions, nor voluntary from involuntary liquidations, nor institutions afflicted by illiquidity from banks suffering insolvency. It contains information neither on the causes of bank suspensions nor the number of bank mergers. The smallest period of aggregation at the national level is the month and at the Federal Reserve district level is the year. Key terms remain undefined, leaving much open to interpretation.

This article introduces new statistical series that provides precise, detailed, aggregate information about categories of bank distress and causes of bank suspensions. The source for the new series is the same as for the old series. From 1929 though 1933, the Board of Governors collected data on changes of status for all banks operating in the United States, both members of the Federal Reserve System and nonmembers, state and national, incorporated and private. The Board also analyzed the cause of each bank suspension. The Division of Bank Operations recorded this information on the St. 6386 series of forms. The series comprehensively covered the commercial banking industry from January 1929 through the national banking holiday in March 1933. Observations existed for every event affecting every bank. These events included the major, such as openings, closings, reopenings, receiverships, and consolidations, and the minor, such as changes in Federal Reserve membership, capital stock, charter type, and even street address. The forms also included financial information for each bank on the date of each transaction. The complete series of St. 6386 forms survives in the National Archives of the United States.

Since the St. 6386 database covers the entire population of banks and events, analysis of it may be conducted in a manner more straightforward than in the current literature, where scholars employ the FRB'37 series, samples of microdata from various sources, economic logic, and statistical techniques to infer patterns of events, and where conclusions depend upon, beliefs arise from, and debate revolves around the assumptions underlying the analysis. Now, there is no need to argue over the nature and timing of events. The St. 6386 database reveals what in fact occurred to every bank in the nation on every day of the contraction.

This article analyzes aggregate series derived from the database using non-parametric methods. The goal is filter the data as little as possible, allowing the evidence - and the hundreds of bank examiners, accountants, receivers, economists, Federal Reserve agents, and others who collaboratively created this data set - to speak for itself. Summary statistics, charts, and graphs demonstrate that some types of bank distress were less prevalent than the conventional wisdom claims; other types of bank distress, such as temporary banks suspensions, contagion through correspondent networks, and suspensions due to illiquid assets, which according to the conventional wisdom seldom (or never) occurred, did in fact occur and played a pivotal role in the collapse of the banking system.

This direct examination of the definitive data for the entire population of banks and events answers two fundamental questions about the contraction: when did banks fail? Why did banks fail? An accurate answer to the latter must be extended, because the nature of the banking crisis changed over time. Before October 1930, the pattern of failures resembled the pattern that prevailed during the 1920s. Small, rural banks with large loan losses failed at a steady rate. In November 1930, the collapse of correspondent networks triggered banking panics. Runs rose in number and severity after prominent financial conglomerates in New York and Los Angeles closed amid scandals covered prominently in the national press. More than a third of the banks which closed their doors to depositors soon resumed normal operations. Following Britain's departure from the gold standard in September 1931, the depression deepened. Asset values declined. Insolvency loomed as the largest threat facing depository institutions. During the financial crisis in the winter of 1933, almost all of the banks that failed were liquidated at a substantial loss.