The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FAILURES AND DEPOSIT INSURANCE B A M FAILURES AM) DEPOSIT INSURANCE Address by Dr. Edison H. Cramer, Chief of the Division of Research and Statistics, Federal Deposit Insurance Corpo ration, before the Charleston Sertoma Club, Charleston, South Carolina, February ll+, 1958. When Ken Foote invited me to visit him in Charleston this spring and lecture to his class at The Citadel, I was glad to accept because I was a college professor for over 20 years. Naturally, I enjoy returning to the classroom to discuss with students some of the important economic problems confronting the country. Moreover, during my 20 years of teaching I had many fine young men and women as students, and Ken Foote was one of the best. Then when he asked me to speak to Sertoma, I accepted the invitation because he asked me to talk about the Federal Deposit In surance Corporation. Naturally I am very proud to be associated with the organization that during the last 25 years has done so much to stabilize 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 a chart showing failures in banking and business during the period to 1952. 1867 The rate of failure in banking is depicted by the red silhou ette, and the black curve furnishes as a point of reference the rate of FAILURES IN BANKING AND BUSINESS FAILURES PER 100 1867 1952 - F A I L U R E S PER 100 Division of Research and Statistics FED ER A L DEPOSIT INSURANCE CORPORATION 2 failure for other types of "business. The statistical problems in volved in analyzing 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. You will note that for long periods of time the record of banking was substantially better than for other types of business. However, during other periods the troublesome problem of banking instability is apparent. Generally ¡speaking, the times when bank failures were relatively more than business failures were times of deep depression and stagnation. Now I should 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 is a dot representing each bank failure for the period 1915-1933- The total suspensions during this 19-year period were over fifteen thousand. was widespread. The distribution, as you can see, Agricultural States appear to have been particularly vulnerable but no area really escaped, bases supporting the economy. depression in the early irrespective of the economic The problem became acute in the great 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 banking was 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 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 - 3 structure of banking in other commercial nations where instead of 111-,000 or 15,000 individual banks (at one time close to 30,000), there were a few huge institutions operating 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 and early 1930 1s . 19201s This record, it was contended, was so bad that nothing could be done to mend the banking system, and very drastic plans for its total reorganization were proposed. Many economists recommended un limited branch banking as the most practical solution, others worked out schemes for requiring banks to keep 100 percent reserves against de posits, and still others suggested nationalization of our banking system. Deposit insurance legislation. Fortunately, a few students of banking and a majority of members of the Congress realized 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. Until about the middle of the 19th century; bank notes were the principal medium of exchange. National Bank Act of medium The 1863 placed a Federal guarantee on this circulating 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 l880'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 - k - “bills providing for the guarantee of deposits. Four hills for this purpose were introduced in the House of Representatives in 1886. Fourteen more were introduced in the Congress prior to 1900. In the 60th Congress, following the panic of 1907> about thirty proposals were made for deposit guarantee legislation. of The Democratic platform 1908 contained this plank, "We pledge ourselves to legislation under which the national hanks shall he required to establish a guaranty fund for the prompt payment of the depositors of any insolvent national hank, under an equitable system which should he available to all State hanking institutions wishing to use it." Federal Reserve Act in The Senate version of the 1913 carried such a provision, hut the hanking and currency committee of the House 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 hills for the guarantee or insurance of deposits are known to have been introduced in the Congress. The foregoing figure does not include hills proposing the establishment and operation of hanks of deposit by the government it self. Numerous proposals 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 t^s^sfer "by check at post offices throughout the nation. The number of such proposals has never been tabulated. The great depression and the hanking debacle in the spring of 1933 convinced the Congress that insurance of hank deposits--our principal - 5 circulating medium--could no longer be delayed. It -was in this atmosphere of desperate emergency that the Federal Deposit Insurance Corporation was created. Many students of banking and most banters 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 power to provide and control the nation’s circulating medium or supply of money, and the responsibility imposed upon the Congress by the Constitution of the United States to regulate the value of money. The monetary responsibility which the Congress has given the Federal De posit insurance Corporation is definite and precise. The Corporation has been given the duty of preventing the destruction of the circulating medium by reducing the number of bank failures, and the restoration to a .. . vhich a failure occurs of a portion of the money supply community in extinguished by the failure. Now I should like to picture the facts regarding bank failures for another 19 -year period, beginning with 193^ "when deposit insurance became effective. the map. You will note that there are not many black spots on The total number of bank failures was only 520, of which *4-20 were insured and 100 noninsured banks. If the chart had been brought up to date, the number of insured bank failures would have been 12 larger, or a total of ^ 32, and a few more^noninsured banks would have been added. Last December the Corporation completed 2b years insuring bank deposits. Something of the success of its operation is suggested when - 6 - the record of hank failure during the prosperous vith this experience. 1920's is compared In each year from 1921 to 1933 more hanks failed than have failed during the past 2k years. Moreover, 39$ of the ^-32 insured hank failures occurred during the first half of the Corporation s life. During the last 12 years the average has heen less than 3 P er year* These facts point to a conclusion which, so far as I can see, is inescapable. The long recognized and troublesome problem of hank failure was faced in the early 1930 ’s . A way to solve the problem was developed and it was a typically American solution. The hanking structure ■was strenS"kkened and stabilized by the adoption of Federal deposit in surance legislation. Deposit insurance has fostered the confidence of depositors in banks, and it seems reasonable to expect that never again will multitudes of sound banks be swept away because depositors are panicky.
@FedFRASER