Banking Failures in the Great Depression and the 1930s

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Executive Summary

The bank failures of the depression were hugely significant events in US banking history.

Introduction

The stock market and banking crisis of 1930’s was not only controlled by private banking interests, but private banking interests fought hard to not engage in debt free spending that could have pulled the US out of the Depression. The US did not exit the depression until the beginning of WW2. The Great Depression allowed for a great concentration of wealth. This fact is left out of most explanations of the period.

This is explained in the following quotation.

Any skepticism about banks before the 1930s turned to outright hostility as the American people faced unprecedented suffering due to bank failures. The public anger and distrust of banks that peaked during the Great Depression led to an even stronger bank-state relationship. It was a high mark of explicit government involvement in banking, drawing from a rise in public anger and Populist fervor. However, the Great Depression banking reforms were a continuation rather than a change in the ongoing bank-state relationship.Although Jeffersonian fears of centralized banking power had never been realized, many now saw the calamity of the Great Depression as Jefferson’s and Jackson’s worst fears coming to pass. It was Louis Brandeis who picked up where they left off, and he would be the most forceful reminder that banks were different than other institutions—that their growth and amassed power posed a threat against which the public and policymakers should constantly be vigilant. Brandeis ably articulated Jefferson’s point and applied it to the modern landscape; he argued that these banks were injuring the very people whose deposits were used to secure the banks’ dominant positions. The control of “other people’s money” allowed financial oligarchies to turn high profits into outsized political influence. “If the banker’s power were commensurate only with their wealth,” Brandeis said, “they would have relatively little influence on American business.” Instead, Brandeis noted that the large investment banks controlled, either directly or indirectly, a staggering $22 billion dollars, more than three times the value of all property, real and personal, in New England. With large investments in American business, including railroads, industrial corporations, and life insurance companies, banks and investment bankers requested directorships on company boards. J. P. Morgan himself held seventy-two directorships in forty-seven of the largest corporations in the country. According to Brandeis, this situation was ripe with conflict and self-dealing. Even though the era preceding the Great Depression saw increased concentrations of wealth in the hands of the few, Brandeis was not concerned about wealth inequality. What worried Brandeis was the increased influence of those who used other people’s wealth. He explained the difference using J. P. Morgan’s bank as an example: “They control the people through the people’s own money.… [Personal wealth] does not endanger political or industrial liberty. It is insignificant in amount as compared with the aggregate wealth of America, or even of New York City.

Source: How the Other Half Banks

https://www.amazon.com/How-Other-Half-Banks-Exploitation/dp/0674286065

The Great Depression Leads Brandeis to Recommend Nationalizing the Banks

The private banks were so disinterested in serving the public interest during the Great Depression that Louis Brandeis recommend nationalizing the banks. This is explained in the following quotation.

In addition to recommending conflict-of-interest legislation that would deter banker directorships, Brandeis suggested a more fundamental solution—turning banks into public utilities. Comparing them to the country’s railways, then an essential utility of commerce, he argued that banks should be treated not as private business but as a public service: “The dependence of commerce and industry upon bank deposits, as the common reservoir of quick capital is so complete, that deposit banking should be recognized as one of the businesses ‘affected with a public interest.’ ” Brandeis was drawing not only from a century of American history that supported his proposition but on like-minded policymakers like Senator Robert Owen, chairman of the Committee on Banking and Currency, who Brandeis quoted in his treatise: “My own judgment is that a bank is a public-utility institution and cannot be treated as a private affair, for the simple reason that the public is invited, under the safeguards of the government, to deposit its money with the bank, and the public has a right to have its interests safeguarded through organized authorities.

Source: How the Other Half Banks

There is little doubt that the Great Depression could have been ended very quickly if the US had nationalized the banking system.