Authors: Benjamin Roth,James Ledbetter,Daniel B. Roth
8/31/36Many bitter enmities were made during these days. Friends of bankers who were loyal to the bank and left their money in later became embittered against the officials who persuaded them to do so. One large law firm was later dissolved because one partner insisted in withdrawing his funds from a bank in which the other partners were deeply interested. Many a feud destined to last many years had its beginnings here.
1. It pays to do business only with the strongest bank in the community.
2. The depositor should learn how to read a bank statement and then follow the progress of the bank. Such a depositor could have long foreseen the bank crash in Youngstown.
3. In the same way money should be invested in the
bonds, stocks, real estate even tho the return is less.
4. Life insurance proved to be a cushion for me in the depression. Money borrowed on life insurance policies should be paid back as quickly as possible. It has so far proven to be the next best investment after government bonds.
5. Money should be invested not locally but on a national scale if possible, including stocks and bonds in companies located in other communities and operating nationally. Many wealthy families in Youngstown grew rich on only local industries and banks but they are pretty well cleaned out now.
EDITOR’S NOTEBy 1931, the economic downturn had gone from bad to worse. Joblessness continued to rise, reaching eleven million by October 1932; by some estimates one in every four eligible Americans was out of work. Many who kept jobs saw their hours or wages reduced. And banks were collapsing at an ever-increasing rate, taking their depositors’ money with them; during Hoover’s presidency more than 20 percent of America’s banks shuttered their doors.Roth chronicled the bank closures in neighboring Warren and in Toledo when he started his diary. Yet bank closures were not unique to the Depression. Even during the booming 1920s, almost five thousand small, independent state-chartered banks and savings and loans had shut their doors, primarily in the South and Midwest. With little extra capital to handle a series of bad loans, defaulted mortgages, failed speculative investments, or even just a run of large withdrawals from depositors, bank failures were a relatively common occurrence. To an important degree this was a deliberate policy. Many economists and the bankers who made up the Federal Reserve (which, founded in 1914, was still a relatively young institution) believed that bank closures were a desirable effect of an economic depression, because they weeded out banks that had weakened themselves through excessive lending. Of course, for local communities the effects could be destabilizing. When a bank was struggling, it would often freeze its assets and limit withdrawals. If it collapsed, it could even lose all of its depositors’ money. As a result, bank customers would try to protect themselves by rushing to withdraw their funds at the slightest indication that their local bank had cash problems. These mass withdrawals would only exacerbate a troubled bank’s financial straits.Opening a postal savings account became one popular alternative to banks. President William Taft established the postal savings system in 1910 as a means to regain the trust of Americans who felt it was unsafe to store their money in uninsured banks after the panic of 1907. In contrast to banks, a postal savings account was a government-protected alternative that took deposits as little as $1 and up to $2,500. It also offered people the opportunity to convert their deposits into certificates or bonds that accrued interest. By 1933 these federally secured accounts grew to more than $1 billion. The number of postal savings depositors would drop after banks received federal insurance protection.But in 1931, as 2,294 banks with $1.7 billion in depositors’ money failed, the massive loss meant a huge disruption to everyday money transactions. People didn’t have the money to pay bills or buy food, businesses couldn’t pay employees, and shops wouldn’t accept checks that they couldn’t cash. In Youngstown people created alternative ways to get funds. Promissory notes called “scrips” were distributed as a substitute for cash. Some companies even used scrips as paychecks to workers. But scrips could be redeemed only once the banks with frozen assets allowed people to take their money out again. A market for buying bank “passbooks” also cropped up in places like Youngstown. If you were desperate enough in 1931 for money to buy the basic necessities, you could get 60 to 70 cents on the dollar for your passbooks’ value. Local newspapers even printed the weekly rates for buying and selling these passbooks as they became a commodity; Roth pasted one such rate chart into his diary.In Washington President Hoover resisted involving the federal government in rescuing the banks. It conflicted with his political philosophy of “self-reliance” in personal as well as business life. Nevertheless, by 1931 he did see a need to save the smaller banks and boost their dismal reserves. He organized a “secret meeting” of major bank leaders to convince them to put their money together and provide a reserve for the weaker banks. At first the bankers resisted. They believed it was the role of the federal government to bail out the smaller institutions. Furthermore, they had their own problems with cash, partly due to foreign investors who were dumping American securities and withdrawing gold in record numbers. They did eventually agree to Hoover’s request and created the National Credit Association, but briefly. Within a few weeks this organization failed, simply because the bankers refused to save their colleagues—including the Bank of Pittsburgh—with their cash. Under pressure from Congress, which had been taken over by Democrats in the 1930 election, President Hoover eventually succumbed to the notion that federal help was necessary. The Reconstruction Finance Corporation was created. By the time the RFC had the power to provide about $2 billion in loans to banks, railroads, and insurance companies in February 1932, even the reserves of the big banks pegged to the Federal Reserve had dropped within $50 million of the lowest amount allowed by law. In August of that year $336,000 would arrive in Youngstown to help the local banks.As he watched banks fail all around him, one of Roth’s particular concerns—and a subject still examined by economists today—concerned the “double liability” of bank shareholders. Beginning in the nineteenth century, many state governments mandated that a shareholder in a bank would be liable not only for the amount of money that he originally invested but also for the value of the shares that he owned; in short, if the institution failed, he could easily lose more money than he had put in. The goal of double liability was to prevent banks from pursuing high-risk activities; if shareholders knew that their own fortunes were at stake, they were presumed to be more cautious. By 1931 federal banking law and all but ten states had some type of multiple-liability provision on their books. But the massive bank failures of the Depression indicated that this was not an effective technique; after federal deposit insurance was introduced, most states did away with multiple-liability rules.
7/10/70Under present law shareholders of banks are no longer subject to double personal liability if the bank fails. Likewise personal liability is limited on real estate foreclosure deficiency judgment.