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

DISCUSSION

The evidence presented in the previous section corroborates the conjectures of many scholars. As Temin (1976) and White (1984) maintain, a trend of consolidation in the commercial banking industry, as small banks in rural areas left the business, often liquidating involuntarily and after suffering large losses, existed prior to the depression, continued during the contraction, and intensified as the downturn deepened.

As Wicker (1980, 1996) argues, the collapse of the Caldwell conglomerate triggered the initial banking panic in the fall of 1930. Correspondent networks propagated the panic during the initial weeks, when almost all of the banks which suspended operations were financially or geographically connected to the Caldwell conglomerate. Bank runs radiated outward from these focal events. Heavy withdrawals became the principal form of bank distress and forced hundreds of banks to suspend operations. Yet, as Friedman and Schwartz (1963) argue, the failure of the Bank of the United States accentuated depositors' fears and reinvigorated the panic. All three scholars, Friedman, Schwartz, and Wicker, argue that the crisis was a departure from previous trends, a unique event that may have altered the course of the contraction. So, the archival evidence supports a synthesis of their views while revealing additional aspects of the event. Several smaller correspondent chains, with no connection to Caldwell, imploded in Caldwell's wake. The failure of the Guaranty Building and Loan Association added fuel to the fire. Nearly half of the institutions that suspended operations as a consequence of these events rapidly reopened for business.

As Friedman and Schwartz (1963) contend, illiquidity played a role in the surge in bank suspensions in June of 1931. In that month, runs occurred on banks in Illinois. Examiners reported that heavy withdrawals were the primary cause of almost all of these suspensions. Frozen assets and limited cash reserves contributed to many closures, but none of the banks possessed portfolios which had deteriorated near the point of insolvency.

As Calomiris and Mason (1997) maintain, the Chicago banking panic of June 1932 was due to depositors' confusion about bank asset quality. Examiners reported that for the preponderance of the banks which entered receivership, the primary cause of suspensions was problems with doubtful and worthless assets. The banking panic did not produce significant numbers of failures among solvent banks.

For the remainder of the contraction, the causes of bank suspensions fit the descriptions of events offered by Temin (1976) and Calomiris and Mason (1997, 2003). Declining asset values were the principal cause of bank suspensions. Most banks which closed their doors did so permanently. All were insolvent. The few which reopened did so only after receiving outside financial assistance.

The archival evidence concurs completely with no single scholar. It shows that scholars accurately interpreted their own data, but because the nature of the financial crisis varied across time, place, and institutions, no single sample could capture the complexity and dynamism of events. An analogy is to a group of mathematicians trying to describe the slope of a curve. Each estimates a derivative at a particular point. The estimates differ, and they argue about which estimate is more accurate. The archival evidence reveals the shape of the object - say, for the sake of the analogy, y = x3 · cosine(x) - curves wildly in some general direction. All of the estimates lie about the curve. So, everyone is accurate in some region, but you need to see the big picture to understand how their estimates link together.