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.
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."
