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

According to Wicker (1980, 1996), the collapse of Caldwell and Company triggered the crisis. Caldwell controlled one of the largest banking chains in the South, with assets over $200,000,000, and one of the largest insurance groups in the region, with assets over $230,000.000. Questionable managerial and financial practices caused the firm's demise, which quickly forced the suspension of the Bank of Tennessee and its affiliates.

According to Temin and White, the first banking crisis was caused by worsening fundamental factors, rather than contagion among banks. Temin (1976) argues that the Stock Market Crash, the Dust Bowl, and the ensuing financial, agricultural, and industrial depressions reduced the value of bank's investments and raised suspension rates. White argues that the bank failures during 1930 "did not mark a departure from previous experience (White 1984, p. 135)." Both real and monetary factors played a part. Poorly performing assets and restrictive monetary policy were both contributing factors. The former pushed banks towards insolvency. The latter raised banks' costs by forcing them to seek costly sources of funds such as bills payable, acceptances, and rediscounts. Since banks failed for those reasons throughout the 1920s and since national "bank failures can be predicted a year in advance with some accuracy (White 1984, p. 135)," the banking failures during the fall of 1930 appear to be an accentuation of prior trends, rather than a turning point in the propagation of the Great Depression.5

The data introduced by this article demonstrates that all of these views have merit. Each portrays a portion of a complex, dynamic mosaic. Conclusions which rely solely upon FRB'37 differ because the data are open to interpretation. Conclusions based upon panels of microdata differ because the samples depict certain types of events (such as liquidations) affecting certain banks (such as national banks) in particular times and places. Reconciling these views requires comprehensive, definitive data. The remainder of this article turns to that task.

DATA DEFINITIONS, QUALITY, AND COMPARISONS

During the 1920s, the Federal Reserve Board of Governors developed a lexicon for discussing bank distress and procedures for collecting data on the phenomenon. A series of memorandum delves into details of the definitions and the collection process (Board of Governors 1929, 1930, and 1931). This section concisely characterizes the key concepts before comparing the archival evidence to previously published tabulations. A series of companion papers provides additional details (Richardson 2006a, 2006b, 2006c, and 2006d). The comparison demonstrates two important points. First, the archives retain the original data set in its entirety. Second, the archival evidence contains information previously unavailable to scholars.

In the Federal Reserve's lexicon, a suspension was a bank that closed its doors to depositors and ceased conducting normal banking business for at least one business day. Some, but not all, suspended banks reopened for business. A liquidation was a permanent suspension. A liquidating bank closed its doors to the public, surrendered its charter, and repaid depositors, usually under the auspices of a court appointed officer known as a receiver. A voluntary liquidation was a category of closure in which banks ceased operations and rapidly arranged to repay depositors the full value of their deposits. Voluntary liquidations did not require the services of receivers and were not classified as suspensions. A consolidation (or merger) was the corporate union of two or more banks into one bank which continued operations as a single business entity and under a single charter. The categories of bank distress were typically construed to be temporary suspensions, terminal suspensions (i.e. liquidations), voluntary liquidations, and consolidations due to financial difficulties.