“Cathedral of finance”

by Joel on March 26, 2009

By Joel Thurtell

In the wee hours of Tuesday, February 14, 1933, Michigan’s new Democratic Governor William Comstock emerged from the posh Detroit Club after a long meeting of Detroit financiers and Lansing and Washington treasury bigshots. He turned right on Cass Street, right again on West Lafayette and right yet again as he walked through the ornate entry of the Albert Kahn-designed Detroit Free Press building.

In the Free Press newsroom, he dictated a proclamation ordering all Michigan banks to take a breather for eight days. The state’s banks were to close while state bank examiners determined which financial institutions were solvent and which ones should never re-open. The governor’s move forestalled further runs on banks that threatened financial chaos in the nation’s automotive manufacturing center.

A few blocks away at 500 Griswold Street stands another ornate monument to the era of the 1920s opulence that led into the Great Depression. It is now known as the Guardian Building, and is the subject of a beautiful book recently published by Wayne State University Press. Researched and written by Detroit Institute of Arts art historian James Tottis, it is titled The Guardian Building: Cathedral of Finance.

Most people I talk to have no idea that this gaudy showpiece of 1920s opulence, known then as the Union Trust Company, symbolizes the profligacy that brought many of the nation’s banks to ruin. The bank whose building was intended to signal stability and strength was actually insolvent by 1933. By then known as the Guardian Detroit Union Group, the bank had as two of its largest investors Henry and Edsel Ford. When Henry Ford, steamed at his former business partner and then U.S. Senator James Couzens and distrusting banks in general, refused to sink more money into the Guardian Union bank and when the Fords also refused to step aside as  preferred creditors, it looked like the impending failure of this big bank would topple Detroit’s other banks, all of which, like the Guardian Union bank, had invested heavily in now hugely devalued real estate and industrial bonds.

The standoff between the Fords and the feds forced Gov. Comstock to order the eight-day “banking holiday” that froze a billion and a half dollars worth of Michigan bank deposits along with 550 banks with 900,000 depositors, according to 28 Days A History of the Banking Crisis, by C.C. Colt and N.S. Keith.

In the twenty five and a half months preceding the Michigan banking holiday, 163 banks had failed in Michigan. One of the prime causes of those failures was incompetence of bank officials, according to a study by then University of Michigan business Professor Robert Rodkey. I will go into more detail about Depression-era bank shenanigans in my book, How To Stop A Bank Run.

Earlier, banking holidays had been declared in Nevada and Louisiana, but those states lacked the heavy capitalization and the overwhelming debt of the country’s car capital. The Michigan banking holiday precipitated runs on banks in other states near and far. By the time the new Democratic president, Franklin Delano Roosevelt, was inaugurated on Saturday, March 4, 1933, the nation’s banking system was in chaos. In Michigan, people were applying to their out-of-state banks for funds to meet payrolls and daily household expenses, thus stressing those banks and forcing other governors to order holidays. Some people were were traipsing over to Windsor in hopes of finding loose cash. There were no bank failures in Canada during the Great Depression.

On Monday, March 6, President Roosevelt ordered all of the nation’s banks to close while auditors could figure out which ones were solvent and which were zombies. In Michigan, dozens more banks closed during the state and federal holidays never re-opened.

And it started right there at 500 Griswold Street in the “Cathedral of Finance.”

James Tottis’ book will be on sale Thursday, March 26 at 5:30 p.m. in the Guardian Building, where Wayne State University Press, Detroit Area Art Deco Society, Michigan Architectural Foundation, Wayne County and Preservation Wayne will celebrate the Guardian Building’s 80th anniversary.

Oh yes, I almost forgot: Wayne State University Press has published a book authored by me and Patricia Beck, Up the Rouge! Paddling Detroit’s Hidden River. Our book can be ordered at uptherouge.com for $34.95 plus $7 shipping.

Drop me a line at joelthurtell@gmail.com

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Bankers: They Just Keep on Screwin’

by Joel on March 6, 2009

By Joel Thurtell

Yes, it’s outragaeous that executives from the failed Countrywide bank whose profiteering in sub-prime mortgages helped bring on our present panic would now be making big bucks buying and flipping properties their own greed forced into foreclosure.

Meanwhile, Fed Chairman Ben Bernanke wants to rein in banks whose officials took risks knowing the government would consider them “too big to fail.”

Size is not the point. Ownership is key. If you decide a bank should be saved, fine, save it, but don’t leave it in the hands of the original proprietors who put it in jeopardy.

We ought to consider whether we don’t have a special banking class of citizens who seem to reap fortune from others’ misery after having created the misery. If they prove themselves incompetent, we need to ban those folk from the banking industry.

I was not trained in banking or finance. I’m a historian through education and a journalist by profession. I’m writing a book called “How To Stop A Bank Run.” In researching my book, I  spent a few quiet days perusing state banking records at the Michigan Office of Financial and Insurance Services in Lansing. I’ve been studying the annual reports of the banking commissioners to the governors in the late 19th and early 20th centuries before and during the Great Depression.

I think I’ve discovered why the crooked capitalists from Countrywide are allowed to make money off the disaster they spawned: It is the way we do things in this country.

Much of my book deals with the Banking Crisis of 1933, because my story involves a small town banker who, we’re told, defied President Roosevelt’s edict that all banks close in March 1933. She claimed she kept her little bank open for business.

In Michigan, 163 banks failed between January 1, 1930 and February 11, 1933. By early 1933, major banks in Detroit, including one with Henry Ford as a prime investor, were ready to fail. Disaster was approaching. Officials in Washington, financiers in New York and most of all the bankers in Detroit knew a steamroller was coming. Throughout the roaring twenties, on average 600 banks a year had failed in the U.S., but they were mainly small, rural banks. Michigan was different. It was big. It was home to the auto industry, an economic monoculture in serious distress following the Great Crash of 1929.

On Tuesday, February 14, 1933, Gov. William Comstock of Michigan ordered the state’s banks to take a breather. The Michigan banking holiday had a domino-like effect, prompting banks in other states to scream that they couldn’t meet their Michigan depositors’ and hometown depositors’ demands. Governors in most states ordered holidays and finally FDR on March 6, 1933 ordered all banks in the country to close.

Many, it would turn out, were insolvent and would never re-open.

Here’s the parallel with Countrywide today: As bank examiners looked at the books in Michigan and found many moribund banks whose weaknesses they had somehow overlooked in their annual iinspections, someone had to be appointed to sell off what assets were left and try to repay depositors. Often, the assets were real estate with little value the banks had acquired through foreclosures. Often, too, over-investment in mortgages whose values had plunged had placed the banks in their pickle.

You would think someone independent, with no financial interest in the failed institution, would have been appointed to re-organize or liquify the accounts.

Nope. As a rule, the person appointed as conservator was the bank’s cashier — the very person who drove the bank to ruin. This is not an unfair statement. During the Great Depression, a University of Michigan professor of business administration, Robert Rodkey, concluded that bank officers’ incompetence was a prime reason for the banks’ troubles.

I suppose it could be argued that someone like the bank’s cashier would best know the bank’s situation. But according to Prof. Rodkey (“State Bank Failures in Michigan; A Study of the Causes of Michigan State Bank Failures During the Depression and Prior to the Banking Holiday, With Suggested Remedies”), ignorance of sound banking practices on the part of cashiers was a primary source of the trouble.

Why would you appoint incompetents to fix the problem?

It was no doubt the easiest thing to do. They called  it a “banking crisis” because it literally was an emergency, and appointing someone on site who knew the books may have seemed a smart move. However, it was not uncommon for regulators to come from families heavily involved in banking, so maybe the examiners were a bit too sympathetic to the bankers.

For some reason, anyway, it was those very troublesome cashiers who got to “solve” problems they most likely created.

Such a person would be in a wonderful position to muffle or entirely suppress any information about the bank’s situation. Such a person would be in a great position to help find a new cashier in case the insolvent bank were somehow re-organized. Often if not invariably the new cashier was the same pre-crisis cashier and the same person who served as conservator.

How do I know this? In the banking office in Lansing, I found an amazing document. It’s nothing more than the annual report of the banking commissioner to the governor for 1930. But that year was the critical one. That was when all the state’s banks were figuratively lined up at the side of a cliff where many would step off and never climb back. Someone placed alphabetical thumb tabs in this obviously much-used copy of the report. Over the next few years they marked it up, penning or pencilling in the names of conservators and new cashiers and writing down the ultimate fate of each bank.

The book is a treasure — a snapshot of what happened to Michigan’s banks after the banking holidays. It is a revelation. It showed me  what happened to the two banks in my hometown, Lowell, Michigan, where examiners in 1933 found that both Lowell banks were insolvent. 

In real terms, what did the insolvency of these two small-town banks mean? My grandfather, Martin Houseman, ran a meat market and grocery story on Main Street in Lowell not 100 yards from the City State Bank of Lowell. Half a mile east was the Lowell State Bank. I grew up hearing the family story of how my grandfather had to close Houseman’s Grocery Store in 1936 because his customers simply had no money to pay him.

I discussed this with my mother recently, and with other people from Lowell. Nobody had any idea that the two banks had failed. The Lowell Historical Society notes only that the two banks “merged.” That is true, but it neglects to fill in the facts that one bank over a period of years managed to pay depositors 43 cents on the dollar while the other paid 46.8 cents on the dollar.

No wonder my grandfather’s customers had no money. Thanks to their hometown bankers, they lost most of their savings.

Meanwhile, quietly, the two failed banks were consolidated into a single bank with names of officers from the defunct banks appearing on the new bank’s masthead, and the cashier of one of the dead banks, who also served as conservator after that bank was closed, emerging as cashier of the new Lowell State Savings Bank.

There was no downside for the officers of many of Michigan’s Depression banks that failed. Quietly, they were allowed to maintain control.

Just as now there seems no downside for bankers who pushed us into the abyss.

Drop me a line at joelthurtell(at)gmail.com

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“Stress test” bunkum

by Joel on February 28, 2009

By Joel Thurtell

Why is it so hard to tell if a bank is solvent?

I’m tired of all this blather about so-called “stress tests” for banks.

The test is really very simple: If a hundred percent of a bank’s depositors walked into the lobby today and demanded all of their savings and wrote checks drawing down everything in their accounts, could the bank pay its obligations?

There are only two possible answers, Yes or No.

And the answer will always be No.

That’s because banks make money by lending your savings. From the higher interest rate they charge, in theory, for lending money, the bankers subtract the rate of interest they pay on savings. The difference is the profit they make from holding your savings.

A bank can’t make money by holding onto a hundred percent of its savings deposits. Therefore, at no time will any bank be a hundred percent liquid.

By “liquid,” I mean that the bank can at any time lay hands on enough money to fulfill the demands of depositors who want their money back.

The test itself is simple: Add up all the holdings that could quickly be converted into cash, and, of course, that includes “cash on hand” as well as government securities which are considered as good as cash. Compare that total to the total of money in savings and checking deposits, but don’t include certificates of deposit which are not immediately due to depositors.

Look at it another way. Say you’re a banker. If there were to be a run on your bank, would you have enough cash to cover your customers’ demands?

This is what it boils down to, and forget these arcane “stress tests.” They make it sound like you need some expensive computer software to make the calculation.

I’ve been making these calculations with a small electronic calculator as I study Michigan bank behavior before and during the Great Depression.

Nobody called it a “stress test” back then. But thanks to a University of Michigan professor of business administration named Robert Rodkey, I learned how to perform a simple test of liquidity. It’s a formula that can be applied to any bank.

I found the formula in a storage box at the University of Michigan’s Bentley Historical Library in Ann Arbor. It’s called, “State Bank Failures in Michigan; A Study of the Causes of  Michigan State Bank Failures During the Depression and Prior to the Banking Holiday, With Suggested Remedies.” It was published by the UM School of Business Administration Bureau of Business Research in its Michigan Business Studies series. The date: 1935.

The supreme test of a bank’s solvency is how well it could withstand an emergency, otherwise known as a “bank run.” The answer comes in the form of a ”liquidity ratio” which, Prof. Rodkey explained, ”measures the relationship existing between total deposits on the one hand and, on the other, the sum of cash and its equivalent plus United States Government securities less any money borrowed, either in the form of bills payable or bills rediscounted. Thus the liquidity ratio is an index of the proportion of total deposits that could be paid off without attempting to liquidate any earning assets except United States Goverment securities.”

This is not mumbo-jumbo.

In those days of the Great Depression and before, dating back to the Michigan bank law of 1889, state-chartered banks were required to publish a “statement of condition” each quarter in their local newspaper. Anyone with access to a local newspaper and Prof. Rodkey’s formula could figure out very quickly whether or not the local bank was on the brink of disaster. 

But, of course, what is meant by “brink,” and what is meant by “disaster”?

I think bankers would pretty much agree that a lobby full of customers brandishing deposit books could spell disaster if cash in the vault didn’t equate to the amount those nervous depositors wanted to withdraw.

Another word for this situation is “panic.”

Generations of historians have applied that term to describe the supposed psychological state of bank customers, frightened that their bank might fail, as they run to the bank to withdraw their money.

Don’t believe it.

The “panic” concept is nothing but the basest propaganda, political-economic sleight of hand meant to deceive us into looking away from the true panic.

I imagine there were people who know how to do Prof. Rodkey’s calculation and when they found their banks to be in trouble, they grabbed their bank books and headed for the teller’s window. No doubt, they told a neighbor or two along the way. There would be a “run” on the bank.

“Panic”? Heading for the bank seems pretty smart to me.

The true “panic” was in the minds of those bankers sage enough to realize that they were operating banks that were insolvent.

Panic must have been in the mind of Charles Church in 1905 when he realized that his private Charles J. Church & Sons Bank on Main Street in Lowell, Michigan, was, as Prof. Rodkey would have put it, “illiquid.”

I can’t think of any other word to describe what happened when Mr. Church realized he couldn’t pay his depositors back. Panic-stricken, Charles Church committed suicide.

The real panic was in the minds of bankers who could look at their statement and see where they stood. Yet many of them, in tremendous distress, stayed in business. Two years after Charles Church killed himself, a new bank was chartered and would eventually move into the old Church bank on the corner of Main and Riverview. (It’s a dentist’s office now, and was one when I was growing up in Lowell in the 1950s and 1960s. I had four teeth pulled in one day in Dr. Reagan’s office, and never knew I was sitting in what once was the town bank.)

The City State Bank of Lowell, chartered in 1907, had a rival down the street in the  Lowell State Bank, chartered in 1891. In 1933, when all banks were ordered closed in FDR’s Banking Holiday, state bank examiners found that both Lowell banks were insolvent. Over a period of years, depositors were partially repaid at 43 cents and 47 cents on the dollar. The two banks were closed and a new one was chartered — The Lowell State Savings Bank. I had a savings account in that bank in the 1950s and 1960s and used to wonder why the sign out front said “Lowell State Bank,” while a sign painted on the side of the building said “State Savings Bank.”

Now I know.

But I can’t find anyone in Lowell who knows that the two banks failed in 1933. The city’s historical records say it was a “merger.”

No, folks, those banks were insolvent. Depositors came up short and never were repaid all the money they trusted to those two local banks. Stories like this were repeated across the state. In Ann Arbor on one day in 1936, three banks failed. Farmington had two banks fail, Plymouth one.

Yet every year before the Banking Holiday, state bank examiners checked the books of every bank in the state. A few were found to be  insolvent in the 1920s and were closed. Then came the Great Depression. The year 1930 was the precipice year. It was as if the nation’s banks lined up alongside a cliff. Between January 1, 1930 and February 11, 1933, 163 Michigan banks closed. In the Great Depression, 9,000 banks failed nationwide.

Somehow, the banks in Lowell passed muster. Until their books were re-checked in 1933.

It’s hard for me to fathom how those two banks — and dozens more in Michigan that never re-opened after the Holiday — were not discovered to be in trouble before 1933.

It may go back to the question I raised earlier about what constitutes the “brink” of disaster.

Prof. Rodkey found that the failed banks had an average liquidity ratio of 14.6 percent, meaning that they could pay 14.6 cents on every dollar their books showed on deposit.

All national banks at the time had a liquidity ratio of 34.5 percent while so-called “country” national banks had a liquidity ratio of 26.3 percent.

The professor thought a ratio of 14.6 percent was living dangerously.

Now, I wonder how 34.5 cents on the dollar could be considered safe. Look as those two Lowell banks — 43 cents and 47 cents on the dollar, but only after years of milking money from depressed assets and — get this — federal dollars pumped in from the Reconstruction Finance Corporation. (What was their liquidity ratio on February 11, 1933? I’m working on it.)

But I suspect that as the value of real estate and industrial bonds plummeted following the Stock Market Crash of 1929, some bankers may have been panicked to see that their banks might not withstand a demand for 34.5 percent of their deposits.

That is why I’m writing this book, “How To Stop a bank Run.” I’m trying to figure out what might have been going through the mind of a small-town banker named Donna Schurtz who rebelled against the 1933 Banking Holiday and kept her little G.W. Jones Exchange Bank open. That bank is still open today, and, from reports, doing well. It didn’t get into sub-primes.

I doubt Donna Schurtz knew Prof. Rodkey. Though she was a 1916 graduate of the University of Michigan, her major was Latin.

Still, I suspect she knew better than most bankers how to figure out the liquidity ratio of her bank. Down the street in 1922, a rival bank, the State Savings Bank of Marcellus, had failed following a run by depositors.

Bank runs were common things in those days before federal deposit insurance. I’m sure Donna Schurtz was doing some “stress tests” of her own.

What might the results have been? 

Stay tuned.

Drop me a line at joelthurtell(at)gmail.com

 

 

 

 

———————-, Supplementary Readings in Banking. Ann Arbor: R.G. Rodkey, 1951

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Bank Run Bibliography

by Joel on February 28, 2009

Bank Run Bibliography

 

Antieau, Chester James, “The History of Banking in Michigan,” undated book typescript, Bentley Historical Library, Ann Arbor, Michigan.

 

Bruner, Robert F. and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm, John Wiley & Sons, Hoboken, 2007.

 

Chernow, Ron, The House of Morgan; An American Banking Dynasty and the Rise of Modern Finance. New York: Simon & Schuster, 1990.

 

Colt, C.C. and N.S. Keith, 28 Days A history of the Banking Crisis. New York: Greenberg, 1933.

 

Comptroller of the Currency, National Banks and the Dual Banking System. Washington, D.C.,: Administrator of National Banks, 2003.

 

Dunbar, Willis, Michigan: A History of the Wolverine State. Grand Rapids: William B. Eerdmans, 1965.

 

Dunham, Walter Lee, Banking and Industry in Michigan. Detroit: Madeira Publishing Company, 1929.

 

Dun & Bradstreet, Reference Book with Key to Ratings, State Pocket Edition with a List of Banks and Bankers, State Collection of Laws and Maps. July, 1937.

 

Friedman, Milton and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

 

Galbraith, John Kenneth, The Great Crash 1929. Boston: Houghton Mifflin, Boston and New York, 1954.

 

Hershock, Martin, Paradox of Progress: Economic Change, Individual Enterprise and Political Culture in Michigan, 1837-1878, Ohio University Press, Athens, Ohio, 2003.

 

Hinchman, Theodore H., Banks and Banking in Michigan, W. Graham, Detroit, 1887.

 

Juglar, Clement, A Brief History of Panics and Their Periodical Occurrence in the United States, Hard Press, Sligo, Ireland. Originally published 1915.

 

Kennedy, David M., Freedom from Fear: The American People in Depression and War, 1929-1945, Oxford University Press, Oxford, 1999.

 

Kindleberger, Charles P., Manias, Panics, and Crashes A History of Financial Crises, Fifth Edition, John Wiley & Sons, Inc., Hoboken, New Jersey, 2005.

 

—————-. The World in Depression 1929-1939, Revised and enlarged edition, University of California Press, Berkeley and Los Angeles, 1986.

 

Livingston, James, Origins of the Federal Reserve System Money, Class, and Corporate Capitalism, 1890-1913, Cornell University Press, Ithaca and London, 1986.

 

Marcellus Centennial Executive Committee, The Village of Marcellus Michigan: An affectionate review of its life and times over the past one hundred years, 1978.

 

Mayer, Martin, The Bankers, Ballantine Books, New York, 1974.

Wilentz, Sean, The Rise of American Democracy Jefferson to Lincoln, W.W. Norton & Company, New York, London, 2005.

 

Osthaus, Carl R., Freedom, Philanthropy, and Fraud: A history of the Freedman’s Savings Bank, Univesity of Illinois Press, Urbana, Chicago, London, 1976.

 

Poll, Richard D., Howard J. Stoddard: Founder, Michigan National Bank, Michigan State University Press, East Lansing, Michigan, 1980.

 

Rodkey, Robert G., “State Bank Failures in Michigan; A Study of the Causes of Michigan State Bank Failures During the Depression and Prior to the Banking Holiday, With Suggested Remedies,” Michigan Business Studies, Volume ?, No. ?, University of Michigan, School of Business Administration, Bureau of Business Research, Ann Arbor, 1935.

 

———————-, Supplementary Readings in Banking, R.G. Rodkey, Ann Arbor, 1951.

 

Rothbard, Murray N., A History of Money and Banking in the United States, The Colonial Era to World War II, Ludwig von Mises Institute, Auburn, Alabama, 2005.

 

————————-, The Panic of 1819: Reactions and Policies, Ludwig von Mises Institute, Auburn, Alabama, 2007.

 

Safarian, A.E., The Canadian Economy in the Great Depression, University of Toronto Press, Toronto, 1959.

 

Schlesinger, Arthur M.  Jr., The Age of Jackson, Little, Brown and Company, Boston and Toronto, 1945.

 

Shiller, Robert J., Irrational Exuberance, Broadway Books, New York, 2001.

 

Utley, H.M., “The Wildcat Banking System of Michigan,” Bentley Historical Library, Ann Arbor, Michigan.

 

Wendell, Emory, Wendell’s History of Banking & Bankers of Michigan. A Concise History of Banking Operations from the Earliest Time to the Present, with Detailed Accounts of Michigan banking History & Law, & Sketches of Leading banks & Bankers of the State as they are at the Opening of the Twentieth Century, Winn & Hammond, Detroit, 1902.

 

Wicker, Elmus, The Banking Panics of the Great Depression, Cambridge University Press, New York, 1996.

 

——————, Banking Panics of the Gilded Age, Cambridge University Press, Cambridge, New York, Melbourne, 2000.

 

Woodford, Arthur M., Detroit and its Banks: The Story of Detroit bank & Trust, Wayne State University Press, Detroit, 1974.

 

Woodworth, G. Walter, “The Detroit Money Market,” Michigan Business Studies, Volume V, No. 2, University of Michigan, School of Business Administration, Bureau of Business Research, Ann Arbor.

 

 

 

 

 

 

 

 

 

 

 

 

 


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Al and Paul agree — so what?

by Joel on February 24, 2009

By Joel Thurtell

Ain’t it neat?

Al and  Paul agree.

Al is Alan Greenspan, former chairman of the Federal Reserve Board who got it all wrong on the housing bubble and the sub-prime bank disaster.

Paul is Paul Krugman, Nobel Prize-winning Princeton economist and New York Times columnist who called it right on the bubble and the sub-prime scam.

Now the Ayn Rand-worshipping Greenspan and the left-liberal Times columnist both say it’s time to nationalize the nation’s banks.

Some of them.

For awhile.

Nuts.

It would be easier, more intelligent and more efficient to simply abolish the Federal Reserve System.

Not that I’m against the federal government taking over and managing Zombies like Citibank and Bank of America.

But I know that the government could never find the cojones to do what really needs to be done: Take over the ENTIRE BANKING SYSTEM, boot the managers and shareholders and in one fell swoop create a system of national banks with local branches similar to what has existed for generations across the Detroit River in Canada.

What we have in this country is not just a problem with some huge banks that got in over their heads lending money to people who couldn’t afford to pay it back.

We have a system that allows too many banks.

We have a system that lets incompetent bank managers muddle on for years without discovery or corrective action from the so-called “dual system” of federal and state regulatory agencies supposedly entrusted with detecting and correcting insolvency.

Good luck.

I’m writing a book to be called “How to Stop a Bank Run,” based on my joelontheroad.com blog post of October 2, 2008 which brought so much traffic that it swamped my site. In trying to explain for myself what happened when a small town banker rebelled against Roosevelt’s 1933 Banking Holiday, keeping her bank open, I am learning things about the banking industry that I never understood.

Actually, I still don’t understand much of it, but after a retired Michigan bank regulator confessed to me that he too doesn’t understand fractional reserve banking — the basis for the Federal Reserve System — I don’t feel so bad.

In fact, I feel empowered to opine. My discoveries about Depression and pre-Depression era banking are relevant to what’s going on with banks today, it turns out.

For instance, even now, with banks on the ropes, new banks are being formed.

I was astounded while doing research in the Lansing office that oversees banks in Michigan to hear staffers bragging that they’d just weeks earlier chartered Michigan’s newest bank, in Ann Arbor. Take a drive around Ann Arbor. Lots of banks. Did Ann Arbor need another bank? Or did some lucre-crazed folk decide to toss the dice to see if more money — fees and interest and who, knows, dicey home loans and credit cards — could be milked out of the citizens of Ann Arbor? The day has long past when people needed a bank as a place to keep their money safe. Who needs a new bank?

We have way too many banks. Our history as a nation is one of too many banks, most of them turning Zombie at one time or another with little or no oversight from government. When bad things happen in crises oddly termed “panics,”government typically helps the banks and screws depositors by restricting or suspending withdrawals to give the yokel bankers a breather, then letting the good-for-nothing cashiers come back and run their banks straight into the ground — again.

I’m not kidding. When I first noticed it, I thought I was misinterpreting the old state banking reports I’ve been studying. But no, it is a fact that when Michigan banks started failing in droves after 1930, the normal procedure was to appoint a conservator to examine the books and salvage what could be saved of the bank’s bad investments, paying depositors and other creditors over a period of years and often a fraction of what they were owed.

Who were these “consevators”? Why, they were, invariably, whoever was the bank’s cashier at the time state bank examiners found it to be insolvent. Now here is an intriguing fact: Every year, according to the reports of the state banking commissioner to the governor, each bank in the state had its books examined by state regulators. It took a national banking respite followed by more minute checking of books to discover that many, many banks were operating with too little reserves. But citizens demanding their money were doing what bank examiners failed to accomplish — forcing banks to face the reality that the deposits they owed people far outweighed their ability to raise cash to repay those liabilities.

Sometimes during the Depression, the banks were outright closed. Other times, they emerged from what amounted to bankruptcy to be managed by the very same officers, directors and cashier who’d earlier run the bank into the ground.

The shareholders won. The losers were the depositors who trusted their “friends,” their local bankers.

This was not happening on a small scale, either. In Michigan between January 1, 1930 and February 11, 1933, we had 163 banks fail.

I’ve seen a calculation of some 9,000 banks that went belly up nationwide during the Great Depression. Few are aware, though, that throughout the Roaring Twenties, on average 600 banks a year failed in this country, according to Elmus Wicker in The Banking Panics of the Great Depression, Cambridge University Press, New York, 1996.

Six hundred banks! Moribund. Dead in the water.

Who created them?

Who thought such a pox was necessary?

What I am learning as I research this book is that historically, the United States has been overbanked. Where there might have been an adequate market in a small town for one bank, instead two, three or more were established. On one day in the Great Depression, three Ann Arbor banks failed. Farmington had two banks fail. In my home town, Lowell, bank examiners found that both banks were insolvent.

Mostly, these banks were started and managed by people with little or no formal education who had no fundamental understanding of how to keep a bank liquid enough to withstand the “panics” that induced people to descend on their banks in masses demanding the deposits they had every right to withdraw when or if they chose.

Bank runs, I’m discovering, were learned behavior in the U.S. They were the natural, even rational, reaction to irresponsible bank management often protected by governments all too willing to restrict or suspend bank operations to prevent citizens from getting their hands on their own funds.

Now here’s a thought: During the Great Depression and in the decade before, when the U.S. was losing thousands of banks, how many banks failed in Canada?

Zero.

I’ll write more about this in future, but let me leave you with this curious thought: In the Great Depression, what did Canada, Great Britain, Sweden, Denmark, The Netherlands, Spain, Portugal, Greece and Czechoslovakia have in common?

No bank runs, no bank failures.

Not one.

Was central bank activity involved, such as our Fed’s printing of scads of dollar bills to induce spending-equals-inflation or tinkering with interest rates to hopefully influence inflation or deflation?

Nope.

Interestingly, none of those countries was on the gold standard.

But the big common factor was this: A system of well-regulated national banks with local branches. No mom-and-pop startups mismanaged by storekeepers, farmers, plumbers and general goof-offs with a hankering to get their hands on their neighbors’ money.

What I say about the startups applies to the biggies, too. Because while it was mainly small banks failing in the 1920s, when the time came for lightning to strike during the Great Depression, the national Banking Crisis of 1933 was ignited in Detroit by a moribund bank controlled by Henry and Edsel Ford. 

One might argue justly that Henry Ford in many ways was a hick, but penny ante he was not. More on this later, too.

The problem with doing entirely away with our dual state-and-federal banking system is that there are some bankers out there with common sense and feelings of responsibility who did not take part in the greed-spawned sub-prime scramble, and they don’t deserve to lose their banks just because the biggies screwed up.

Yet the fact remains that even in these tough times, the Canadian banking system is sound, with zero failures being recorded. It makes me wonder what it would take to re-organize U.S. banks along the Canadian model.

If the Chinese premier is correct in accusing the U.S. financial system of plunging the entire world into a Depression with its sub-prime banker mania, a re-organization into a national system could prevent the next disaster.

Had a national system been in place before now, the current world economic crisis might be a figment of some lunatic’s paranoid fantasy.

Drop me a line at joelthurtell(at)gmail.com

 

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How to stop a bank run

by Joel on February 6, 2009

By Joel Thurtell

This is Chapter One of the book I’m writing about a small-town banker who defied President Roosevelt and kept her bank open during the 1933 Bank Holiday:

“NatCity’s going down,” thundered the financial adviser who happened to phone me in fall 2008. “I’m telling everyone. ‘Get your money out of NatCity — ASAP!’ ”

Big deal, I thought. First, I don’t bank at NatCity, and where we do have accounts, we don’t have anything like a hundred thou to worry about.
Then, I had another thought: Gosh, isn’t she sort of like, well, inflaming the situation? Fanning the flames?

Is she, maybe, promoting a bank run?

Socially, isn’t that a BAD THING? Why, that’s the kind of loose talk than can start a, you know, a PANIC!

From U.S. History classes, I remembered reading about them: The Panic of 1837. The Panic of 1907.

Wasn’t the Great Depression in the 1930s started by a panic?

It reminded me of a story I wrote back in 1983 for the South Bend Tribune, where I once worked as a reporter. It was an unforgettable account from an unforgettable woman who did an unforgettable thing: She was president of a small bank, itself highly unusual, in that she may have been the only female bank head in those days. Her family-owned G.W. Jones Exchange Bank, state-chartered and a member of the Federal Reserve System, was, I believed, the only bank in the little town of Marcellus in southwestern Michigan. What was so amazing is that she stood up to the government during President Franklin Roosevelt’s 1933 Bank Holiday. When all other banks closed, she kept on cashing checks and letting customers withdraw deposits.

She told me her story in 1983. I listened, but I had a superior approach, as in: Panics? Thing of the past. Bank runs? Throwbacks to a benighted age.
Then, a few decades later, came those bubbles. There was the dot-com thing, then real estate tanked. Sub-primes? I doubt Donna Schurtz could have dreamed of such a scheme. Countrywide, the biggest mortgage lender in the country, collapsed. Then in the summer of 2008 the unthinkable happened – out in California, there was a run on deposits at a bank called IndyMac.

Wow! Isn’t that what happened in the Depression?

At the time the financial adviser called with her “NatCity’s going bust” news, Wachovia was in deep weeds, Lehman was in its death agony, Merrill Lynch was moribund and in need of a bailout from Bank of America which soon went south. More and worse bad news about banks lay in wait. I kept thinking about that little bank in Marcellus and the story I heard from 90-year-old Donna V. Schurtz, the woman who rebelled against FDR’s Bank Holiday. Was there something in that tale that spoke to me, to us, in the 21st Century? Was there more behind this story than I knew when I wrote it back in ’83?

When I retired from the Detroit Free Press, where I was a reporter for 23 years until 2007, I put seven steel file cabinets in my basement and packed them with the paper residue of a career based on interview notes and documents. Slowly, I’m making an index. In the summer of 2008, after IndyMac was rescued by the Federal Deposit Insurance Corporation, I had an urge to re-read my old story about the Jones bank. But the file on the bank story eluded me.

Truth to tell, I wasn’t all that motivated until the financial adviser called with her panic-inducing speech about NatCity’s death agony. Suddenly, I was more than curious – I wanted to tell that old bank rebellion story on my blog, joelontheroad.com.

Finally, after poking through all 36 drawers and some cardboard boxes, I found my file on Marcellus and the Jones bank. But as I read my notes, including the hand-written transcript of my tape-recorded interview with Donna Schurtz and her daughter, Abigail Schten, I noticed some little problems. Inconsistencies.

For instance, Donna told me the Roosevelt Bank Holiday happened in 1932. I actually used that year in my January 29, 1984 story about her achievement in the South Bend Tribune’s Michiana Magazine. Oops.

In fall 2008, a quick check on Wikipedia showed me that the Roosevelt Bank Holiday actually took place March 6-10. But it was in 1933, not 1932. Oh well, no biggie. I corrected the date for the story I posted on my blog the morning of October 3, 2008.

Back in 1983, Donna Schurtz boasted to me that she’d persuaded officials in the FDIC in Washington, D.C., to permit her bank to stay open. If I’d been a more knowledgeable historian, I might have noticed something amiss in that statement, too.

I was living in Marcellus at the time my Tribune story about Donna and her bank was published. My wife and I had a checking account at the Jones Bank, a dignified stone building in a village so small you could hear cows lowing at one end of town and smell pig manure from the other side. There were 1,134 men, women and children living in Marcellus in 1980.

Marcellus is in the northeast corner of Cass County, a rolling, heavily wooded region with lots of streams and lakes. In 1980 there were slightly less than 50,000 people and a bit shy of 200,000 pigs living in Cass County. Hogs were not the only agriculture in Cass County. There were corn and soybeans, of course, and a few fruit orchards in the northwest corner. But that rolling terrain also was ideal for a cash crop that had to be concealed, sometimes in the middle of a cornfield. Yes, those rugged hills and woods made great cover for some sizable marijuana plantations, which the sheriff would raid, directing cops to the spot from the county helicopter and later phoning reporters like me to come shoot photos of wagonloads of weed.

If you needed a bank, the Jones bank was the only one for miles around, but I knew people from as far off as Three Rivers, where there were other banks, who lived through the Great Depression and still did all their banking at the Jones bank. They remembered how Donna Schurtz let them take money out of their accounts in 1933 when every other bank was locked.

The Jones Bank was founded by Donna’s grandfather, George Washington Jones, a Quaker who went to California during the Gold Rush. Her grandfather was still in California in 1850 when he learned that his father was sick back in Michigan. He strapped gold around his chest in leather moneybags and went home to pay off the family debts. So one story goes. Family members argue over whether he actually had much gold — maybe it was only enough to make a gold wedding ring. The key thing is that he dropped his quest for riches and went home to help.

The Joneses had come from Ohio and along with other Quakers had settled in central Cass County in a township they named after William Penn, the benefactor of Quakers in Pennsylvania. In 1869, G.W. heard a railroad was coming through and somehow got a rough idea where the tracks would be laid. He bought land around what is now Wakelee, and he platted another town, Marcellus. In 1870, the Peninsular Railroad missed Wakelee but came through Marcellus, and G.W. made money selling lots in the fledgling village. Then he made $14,000 on a clover and timothy seed deal.

In 1877, he started the bank. By 1884, its assets were $86,561.35. By 1893 – the Panic of ’93 – the bank was broke.

In those days, there was no federal deposit insurance. If a bank failed, you were out of luck. My paternal grandparents, Howard C. and Harriet Thurtell, lost all their savings when their bank failed in the Depression. That would have been around the time Donna Schurtz was battling the feds to keep her bank open.

In 1893, the Joneses anted up money and re-started their bank. In the 1880s, the Jones bank didn’t pay interest. People considered themselves lucky to have a safe place to store their cash. It was safe, of course, unless there was one of those hysterical phenomena known as a “run.”

Competition changed things. In Marcellus in 1907, the year of another big panic, a new bank was founded and it offered higher interest than the 3 percent G.W. Jones by then was paying. The Jones bank responded to the rival by handing out pencils stamped “Better sleep on 3 percent than lie awake on higher rates.” It was good advice, it turned out.

By the early 1930s, the Jones bank was still competing against a First State Savings Bank in Marcellus. Vaughn Bartlett, onetime mayor, fire chief, postmaster, village marshal, county treasurer told me how he was warned the First State Bank was about to go under.

“An old-timer fellow said to me one day, ‘Vaughn, the bank’s gonna go broke here in a few days.’ ”

“I says, ‘How do you know?’ ”

“He says, ‘I saw Sam Lowry, the cashier, working there with his derby on — he’s ready to run out of there any minute.’

“My sister-in-law had a lot of money in there (the First State Bank) and she got 50 cents on the dollar,” Bartlett told me.

That gives you some idea of the banking industry in Marcellus, where peppermint farming was big and farmers would store their refined mint — worth big buycks — in the bank vault.

When I lived in Marcellus, running the South Bend Tribune’s Cass County News Bureau from the front porch of our house in the early 1980s, there was a drinking fountain near the teller windows with a sign that said, “A FREE DRINK.”

In 1921, Donna Schurtz took over the bank. She was 28. She’d earned a bachelor’s degree from the University of Michigan in 1916. Her major: Latin. She’d planned on teaching, but when she graduated in 1916, her father’s health was poor and her mother convinced her she was needed at the bank.
When I interviewed Donna, she was 90 and still reading Cicero in Latin. Her daughter, Abigail, was listening.

Donna said her grandfather, G.W. Jones, had walked to California. “Well, he did have some common sense, and he decided he wasn’t going to walk back. So he went south to Panama, rode up the Mississippi home.”

“Well, now, mother,” said Abigail, “How would he get from Panama to the Mississippi River?”

Donna burst into laughter: “You tell me!”

When the order came to shut the bank, she told me, “Well, we phoned down to Washington and said, ‘Now we’re perfectly sound. Our community is unused to what you have requested.’ ”

“Well, you had to allow the public to have some money it its pocket, or they would have gone crazy!

“We had quite a balance in Detroit (in a correspondent bank), and we had asked the teller — the currency department — to send us $40,000.

“They said, ‘Forty thousand dollars!’ ”

“And I said, ‘You send that to us, or we’ll come right up there and look after you.’ Well, we got it. Nothing to be polite about.”

She had the currency stacked on counters and window-sills. Then she invited townspeople to come into the bank and see that it had money.

Spreading a rumor that a man wearing a derby hat means a bank is going bust is one way to start people withdrawing their funds in droves.

But stacking packets of real currency where everybody can see it is a way to stop a bank run from happening.

Now, I can hear people saying, “That’s a quaint story from yesteryear, but stacking hundred dollar bills in the windows of hundreds of Wachovia branches ain’t gonna save that bank.”

They would be right.

But think about it: Wouldn’t the financial bailout plan of Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke accomplish roughly the same thing Donna Schurtz managed to do in tiny Marcellus back in ‘33?

She knew that if her customers could see the money, they would not be so likely to stampede her teller windows and actually demand to have their savings.

She bolstered their confidence that the micro-economy surrounding her little G. W. Jones Exchange Bank was sound.

It’s 2009 now, and we’re talking macro-macro-macro, but the logic is the same.

Isn’t spreading $700 billion of cash through the financial system sort of like stacking currency on a bank’s counters?

It might just be what it takes to keep our economy — and we’re talking the world’s economy — from slapping on its derby hat and hightailing it.

We’re talking faith, but sometimes faith needs a kick-start.

Still, there are differences, it seems to me, between Donna Schurtz’s stunt in 1933 and the plans for a massive bailout of banks today. In 1933, President Roosevelt was imposing discipline and REGULATION on financial institutions with the creation of safeguards like deposit insurance and watchdogs like the Securities and Exchange Commission. But the Clinton and Bush regimes dismantled and defanged those watchdogs, leading us back to a situation more like my grandparents faced under the Republican pro-business Herbert Hoover.

Then too, Donna Schurtz’s $40,000 – worth more than $630,000 in 2007 — was backed by something of substance — gold.

What’s behind the Treasury’s $700 billion today?

Faith — and a mammoth printing press.

There was nothing inflationary about what Donna Schurtz did. Can we say the same about creating hundreds of billions of new money?

The biggest difference of all between 1933 and today, of course, is that back then the nation had someone in charge — someone who cared more about the common good than about the good of corporations.

Keep the faith, for sure, and keep your fingers crossed.

Drop me a line at joelthurtell(at)gmail.com

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