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1i ftÊk ■ ms HMBHhÎwRmÊÊm M M FAILURES AMD DEPOSIT INSURANCE Address by Dr. Edison H. Cramer, Chief of the Division of Research and Statistics, Federal Deposit Insurance Corpo ration, before the Boulder Lions Club, Boulder, Colorado. August 12, 1953 When John Macy vas in my office in Washington a few weeks ago and suggested that I might be asked to speak to the Boulder Lions Club, I was very quick to tell him I would accept such an invitation, because I knew it would give me an opportunity to meet many of ay old friends. It is always a great pleasure to return here and renew old friendships and meet some of the many new fblks who have recently come to Boulder. The city has had a remarkable growth during the four years I have been gone, and I sometimes wonder if my departure had anything to do with it. Another reason I was glad to accept the invitation is that John suggested I talk about the Federal Deposit insurance Corporation. Naturally I am very proud to be associated with the organisation that during the last 20 years has done so much to stabilise banking and business, and I like to talk about It. I shall begin with a brief review of the historical instability of banking as it existed during a large part of the 19th century and for the first 33 years of this century. Record of Instability» So that we could see graphically the record of bank failures in the United States over the past three quarters of a century, I studied the available statistical data and prepared chart shoving failures in banking and business during the period 195^* a 1367 to ’fhe rate of failure in banking is depicted by the red silhouette, . 1 . . FAILURES IN BANKING AND BUSINESS 1867 1952 FAI LURES PER 100 PER 100 failures 28---------- - -------------28 ~2and the black curve furnishes as a point of reference the rate of failure for other types of business* The statistical problems involved in analyse liig- these data were such that it is impossible to say the presentation is precisely accurate* Nevertheless, the over-all picture for this period as shown on this chart , in my opinion, is a fair representation of the historical facts* Ton will note that for long periods of tine the record of banking was substantially better than for other types of business. However, during other periods the trouble sob» problem of banking instability is apparent. Generally speaking, the tines when bank failures were relative ly more than business failures were tines of deep depression and stagnation* How X ghgni?a like to have you look at the top of the other chart. It pictures the facts regarding bank failures in a somewhat different form. On this map 1© a dot representing each bank failure for the period 1915-1933« The total suspensions during this 19-year period were over fifteen thou sand. The distribution, as you can see, was widespread. Agricultural States appear to have been particularly vulnerable but no area really escaped, irrespective of the economic bases supporting the economy. The problem became acute in the great depression in the early 1930*s. It is apparent from these charts that the problem of bank failure which had plagued the nation for so long was growing worse in the early 1930* s. As a result there were those who contended that Instability in KsmVi sg vas an inherent characteristic of our dual banking system with its multiple chartering authorities and thousands of individual banks. The proponents of that theory pointed to the structure of banking in other coasaercial nations where instead of 1^,000 or 15 #000 individual banks (at a m time close to 30,000), there were a few huge Institutions FAILURES IN BANKING NINETEEN YEAR PERIOD BEFORE FEDERAL DEPOSIT INSURANCE JANUARY 1,1915-DECEMBER 31,1933 NINETEEN YEAR PERIOD AFTER FEDERAL DEPOSIT INSURANCE JANUARY 1,1934-DECEMBER 31,1952 Grand Total 52Q Division of Research and Statistics FEDERAL DEPOSIT INSURANCE CORPORATION CHART NO. 6 1 -3operating elaborate systems of branches. The critics of the dual banking system placed great emphasis on the record of banking instability and particularly the record in the 1920's and early 1930's. This record, it was contended, was so bad that nothing could be done to send the banking system, and very drastic plans for its total reorganisation were proposed. Many economists recommended unlimited branch banking as the most practical solution, others worked out schemes for requiring banks to keep 100 percent reserves against deposits, and still others suggested nationalisation of our banking system. Deposit insurance legislation. Fortunately, a few students of banking and a majority of members of the Congress realised that the dual system of banking was too valuable to scrap in its entirety, and they determined to correct the evil of bank failure In some other way. Before discussing the solution that was found by them, I want to turn briefly to another historical factor. Prior to the Civil War, bank notes were the principal medium of exchange. The Rational Bank Act of 1363 placed a Federal guarantee on this circulating medium. But bank deposits gradually replaced bank notes and other forms of currency, and the guaranteed portion of the money supply declined in importance. By the middle of the 1830's, deposits had become over fourfifths of the circulating medium. The problem of protecting them was sufficiently acute to bring about the introduction in the Congress of bills providing for the guarantee of deposits. Four bills for this purpose were introduced In the Bouse of Representatives in 1336. more were introduced in the Congress prior to 1900. Fourteen In the 60th Congress, following the panic of 1907, about thirty proposals were made for deposit -kguarantee legislation* The Democratic platform of 1903 contained tide plank j “’We pledge out selves to legislation under which the national banks shall be required to establish a guaranty fund for the prompt payment of the depositors of any insolvent national bank, under an equitable system which should be available to all State banking institutions wishing to use it," The Senate version of the Federal Reserve Act in 1913 carried such a provision, but the banking and currency cosralttee of the Bouse was instrumental in taking it out of the Act. For the entire period from 1886 to the establishment of the Federal Deposit Insurance Corporation in 1933 > 150 bills for the guarantee or insurance of deposits are known to have been introduced in the Congress. The foregoing figure does not Include bills proposing the estab** lishment and operation of banks of deposit by the government itself, numerous proposal© of this type were introduced. Some called for a Bank of the United States with a system of branches and others for the expansion of the Postal Savings System to provide for receipt of deposits and their transfer by check at Post Offices throughout the nation. The number of such proposals has never been tabulated. The great depression and the banking debacle in the spring of 1933 convinced the Congress that insurance of bank deposits— our principal circulating medium— could no longer be delayed. It was in this atmosphere of desperate emergency that the Federal Deposit Insurance Corporation was created. Hany students of banking and most bankers believed it could not possibly succeed, but were willing to try it as a last resort. Solution to bank failure problem. Adoption by the Congress in 1933 of the principle of deposit insurance was an exercise of its sovereign 5« pover to provide and control the nation*® circulating Medium or supply of Money, and the responsibility Imposed upon the Congress by the Consti tution of the United States to regulate the value of money. The Monetary responsibility vhich the Congress has given the Federal Deposit Insurance Corporation is definite and precise. The Corporation has been given the duty of preventing the destruction of the circulating medium by reducing the masber of bank failures, and the restoration to a community in vhich a failure occurs of a portion of the money supply extinguished by the failure. How I should like to picture the facts regarding bank failures for another 19-year period, beginning vith became effective. the sap, 193b vben deposit insurance You vill note that there are not many black spots on The total number of bank failures was only 520, of which b2Q were insured and 100 noninsured banks. So far this year, two »ore insured banks have failed, asking a total of b22 since inception of the Corporation. Of the failing insured banks, ITT were merged with other sound banks with the financial assistance of the Federal Deposit Insurance Corporation. In these cases no depositor suffered any loss. This method of aiding depositors has been used exclusively since May, 19bb. Next month the Corporation will become 20 years old. If there are no more failures in the meantime, the record will read: 395 banks failed during the first decade of its operation, aad 2T— an average of less than 3 per year during the second decade. These facts point to a conclusion which, so far as I can see, is inescapable. The long recognised and troublesome problem of bank failure was faced in the early 1930* s. A way to solve the problem was -6developed and it was a typically American solution. The hanking structure was strengthened and stabilised by the adoption of Federal deposit insurance legislation. Deposit Insurance has fostered the confidence of depositors in banks, and it seeas reasonable to expect that never again will autlitildes of sound banks be swept away because depositors are panicky*
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