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Benjamin M. Anderson*
By the fourth quarter of 1930 the
trouble with the Bank of United States gave occasion to grave concern.
The Bank of United States was a bank
which ought never to have existed, and which certainly ought never to have
had the name it had. One leading banker of New York went personally to Albany
to protest against the giving of such a name to that bank or to any other
bank, and was told that there was a political debt to pay.
In the period 1924 to 1929, with excess
reserves and rapid bank expansion, it was easy for plungers and speculators
to grow rapidly. There was a heavy discount on sound banking, and a high
premium on reckless plunging. One watched it with apprehension, afraid not
merely that bankers would lose their judgment but also that in many cases
moral standards would crack. In many cases judgment went bad, and in more
cases traditional practices, sound and tested,
turned out to be bad practices in such an abnormal money markets as then
existed. But the great majority of American bankers kept their integrity and
tried to adhere to established and approved banking practices. However, it
was an era in which the bold speculator and promoter could gain ground
rapidly at the expense of the conservative banker, and it was a period in
which departures from convention and approved banking practices would seem to
be brilliant strokes of genius -- while the new era lasted.
The Bank of United States grew very
rapidly down to 1929. The name itself meant, as it was designed to mean, to
many of the ignorant people of Europe, that this was the national bank, the state
bank, the official bank of the United States. Deposits came to it from a
great many of those people and from a great many of the ignorant poor on the
East Side of New York. And a great deal of business was brought to it, too,
by men engaging in speculative activities who could get the desired
accommodation from this bank which other banks of New York would not give.
Loans against mortgages were generally
looked upon at askance by great New York banks. The first principle of
commercial banking is to know "the difference between a bill of exchange
and a mortgage". Second mortgages and third mortgages were notoriously
improper documents in a bank's portfolio or as a collateral
to its loans. But the Bank of United States went in heavily for these. It had
an affiliate also -- the Bankus Corporation. This
was engaged in many yet more questionable transactions, including
manipulation of the stock of the bank and loans against the stock of the
bank. In addition to the utterly unsound banking practices, there were
definitely criminal acts for which the head of the bank subsequently went to
prison -- not unaccompanied.
When the first mortgages grew shaky,
when the second and third mortgages had no market, and when the bank's stock
was crashing, the Bank of United States and its affiliate, the Bankus Corporation, were in grave peril. Depositors grew
very uneasy and they made heavy withdrawals of funds.
Unsuccessful efforts to save the Bank of
United States. The great
New York clearinghouse banks, the Federal Reserve bank, and the state
superintendent of banking, Joseph A. Broderick (who had no part in giving the
name to the bank and whose job was primarily salvage), made strenuous efforts
to save the situation. The great clearinghouse banks were prepared, in the interest
of preserving the good name of banking in New York, to stand part of the
losses. On Monday, November 24, 1930, it was announced that there would be a
merger of the Bank of United States with the Manufacturers Trust Company, the
Public National Bank & Trust Company, and the Interstate Trust Company,
with J. Herbert Case, Federal Reserve agent and chairman of the Board of
Directors of the Federal Reserve Bank of New York, as the head of the merger.
This looked like an admirable solution
of the problem. The financial community breathed a great sigh of relief when
it appeared that J. Herbert Case thought that the situation could be solved
in this way. It appeared that the aggregate capital funds of all these banks
would suffice to absorb the losses and still leave a strong institution. But
the agreement was a contingent agreement, and the other banks were to have
time to scrutinize the assets of the Bank of United States. As they did, the
merger became impossible. The officials of the other banks and J. Herbert
Case could not assume responsibility for such a mess. The problem remained.
The clearinghouse continued to work hard upon it.
A conference, lasting beyond midnight,
of leading New York bankers sat with superintendent Broderick on the night of
December 10 and the early morning of December 11. A plan was worked out
by which a wholly new management, under the presidency of the head of one of
the small but sound banks of the city, was to take over the Bank of United
States with a guaranty of the great clearinghouse banks against loss.
But after this able young president and
his associates, accustomed to clean, sound banking, looked at the assets of
the Bank of United States, looked at the second and third mortgages, looked
at the tangled and involved transactions they would have to deal with, they
declined. They just did not know how to do that kind of banking. No other New
York bank knew how to do that kind of banking.
And so it came to pass that, on Thursday
morning, December 11, 1930, the Bank of United States was closed for good.
Cheap money could not help in a
situation like this. To ease the
shock and to relieve the plight of the depositors of the bank, the other
banks of the city agreed to make loans against deposit accounts in the Bank
of United States up to fifty percent of their face value.
With the announcement of the closing of
the Bank of United States the stock market plunged still lower. Money
remained extraordinarily cheap in this stock market crisis. Call- loan
renewal rates ranged from 2 to 2.3 percent between December 13 and December
27. But cheap money could not help in a situation where it was not liquidity
but confidence that was vanishing. The stock market reached a wide-open
selling climax on Wednesday, December 17. Then, as is usual, it rallied, and
the rally carried over through the early months of 1931. But, in the light of
developments of the next two years, the American banking system was mortally
wounded. By March, 1933, it lay prostrate. One rotten apple can make the
entire pile of apples go bad.
* Benjamin McAlester Anderson,
1886-1949, author of the posthumously published treatise Economics and the
Public Welfare, A Financial and Economic History of the United States,
1914-46 (Princeton: D.Van Nostrand
Co., Inc., 1949; second edition: Indianapolis: Liberty Press, 1979) from
which this excerpt was taken, slightly edited by Antal
E. Fekete of Gold Standard University.
Editor's comment. Professor Anderson was a distinguished
scholar, historian, banker, financier, and economist. As a monetary historian
he wrote about a period in which he was not only an astute observer but also
a frequent participant.
What lends extraordinary timeliness to
his observations about the 1930 banking scene is the now unfolding subprime mortgage
crisis that has already metastasized from the United States to the rest of
the world. Needless to say, in 1930 the American banks were in a far better
shape than they are today when the entire banking system is guilty of unsound
practices with which only isolated banks, such as the Bank of United States
and the Bankus Corporation, indulged themselves
eighty years ago.
Eighty years ago the fancy name of the
bank was the lure to entice ignorant people to their doom. Today it is the
fancy name of the product: "mortgage-backed securities", "collaterized debt obligations", "securitization
of loans" and, most recently, "insuring bonds" that is
supposed to do the same trick.
What makes the above reading so
frightening is the fact that eighty years ago the credit of the United States
was rock-solid. Today it is moth-eaten; the promises of the federal
government are hardly worth the paper on which they are printed, in view of
its repeated defaults and its embracing of the unconstitutional regime of the
irredeemable dollar. Worse still, the credit of other countries is no better,
given the fact that it is not backed by anything more solid than the credit
of the United States.
Eighty years ago American institutes of
higher learning offered the very best available by way of economic and
banking knowledge. Today they are a sorry shadow of their former self. They
are subject to bribe and blackmail. They are stooges of the banks. There is a
gigantic cover-up and distortion of truth, as a consequence of our way of financing
advanced studies through grants from the banks, including the twelve Federal
Reserve banks, with a hidden agenda to perpetuate the regime of the
irredeemable dollar.
If academia is the tamed lion of the
banks, then financial journalism is their lapdog.
Eighty years ago one was afraid that
moral standards may crack in consequence of questionable banking practices.
Today we know that they have. The Bank of United States closed its doors for
good on December 11, 1930. But it did not even have off-balance liabilities!
Nor did it have nina mortgages! (nina = no income, no assets).
It is interesting to watch the Fed
trying to meet the present crisis in the same way as it was in 1930: by
administering liberal doses of cheap money. In 1930 the Fed made the crisis
worse and it prepared the ground for the Great Depression. Cheap money in
1930 certainly did not stop the decline in the stock market.
Ruefully, one can say of the Fed the
same what was once famously said of the Bourbons after the restoration of the
monarchy in France: "they've learned nothing and forgotten
nothing."
Antal E. Fekete
Professor,
Intermountain Institute of Science and Applied Mathematics
Missoula, MT 59806, U.S.A.
DISCLAIMER
AND CONFLICTS
THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY.
THE AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON IT, NOR IS HE SUGGESTING
THAT IT REPRESENTS, UNDER ANY CIRCUMSTANCES, A RECOMMENDATION TO BUY OR SELL
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IT IS COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS
TO BE TAKEN AS THE AUTHORS OPINION AS SHAPED BY HIS EXPERIENCE, RATHER THAN A
STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT,
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Copyright © 2002-2008 by
Antal E. Fekete - All rights reserved
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