U.S. bank failures

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1936 1937 1938 1939 1940 1941 1942 1943 1944 Ti Number of failed banks Total assets 20 40 60 1934 $2.7 million 1935 $17.2 million $32.0 million $40 4 million S695 million $181.5 million $161.9 million $34.8 million $22.3 million $14.0 million militon hill One of the most traumatic experiences of the Great Depression was the collapse of the banking system. Depositors saw their life savings vanish as banks closed their doors in the face of mass withdrawals by panic-stricken people.

In the '20s bankers had been folk heroes in America, pointing the road to riches in the great Wall Street bull market. The long boom following the end of World War I convinced many that capitalists had found the way to end the cycle of boom and bust.

The October 1929 stock-market crash produced a rude awakening. Its effect on the bankers and their reputations was devastating. They had been lending money to speculators to gamble on Wall Street. Bank officials had used their depositors' savings to speculate on the market for their own profit. The stocks that they accepted as collateral dropped in value from $10 to 10 cents or less.

President Herbert Hoover counted on the bankers to reverse the slide to financial collapse, but everything the bankers did only prolonged the crisis. They called in loans when beleaguered businessmen and farmers needed more credit, not demands for immediate repayment. Foreclosures left banks with deadbusinesses and unsaleable homes on their hands.

Many banks were hard pressed to meet even the normal demands of their depositors for cash. Then they were faced with the dreaded run on the bankpanicky depositors lining up to get their money out before the bank folded. Even a sound bank cannot pay off all of its depositors in a day without outside help.

As one bank closed, depositors at other banks rushed to take their money out. Even sound banks could not withstand this sort of run and closed their doors. By the end of 1933, 6000 banks across the country had failed.

Roosevelt to the rescue in 1933 To stop the bank runs and save the rest of the banks, state governors declared bank holidays, closing every remaining bank in the state. By the end of 1932, 34 states had taken this drastic action. When Roosevelt took office in March 1933, the country was almost without a functioning banking system.

Roosevelt was not a banker, but he was a superb politician. In his inaugural speech he excoriated the bankers for their incompetence and lack of vision. He declared, "The money changers have fled from their high seats in the temple of our civilization."

Now the government would take charge.

This was what the people wanted to hear. The spirit of doom and despair that enveloped the nation was lifted and replaced by hope. Even when Data for 1984 assets are not yet available.

Number of failed banks 20 40 60 80 1974 1975 1976 1977 ÜL 1978 1979 1980 1981 1982 1983, 1984 Source: Federal Deposit Insuri Roosevelt temporarily closed every bank in the country, depositors did not panic. With appropriate measures of reform, Roosevelt assured the nation, the banking system would be restored to health. The disastrous bank runs would never eccur again.

Gradually most of the banks reopened. However, thousands of people lost millions of dollars that they never recovered from the wreckage. Moreover, nothing basic was changed in the system. The reforms did not eliminate the basic laws of capitalist economics.

It has been 52 years since the banking system was saved and reformed by Roosevelt. Now the financial institutions have to be saved all over again. Small country banks are closing their doors. One of the biggest banks in Chicago is teetering on the brink of bankruptcy. The governor of Ohio has called a bank holiday, closing all 71savings-and-loan banks in the state. Is this 1929 all over again?

The debt bomb is ticking We are not in a deep depression, but there are enough destabilizing factors to undermine any bank. First there is the huge debt that is owed by the countries of the Third World. It is often referred to as the debt bomb because it could blow up the entire banking system of the Western World.

Loans of billions of dollars were pressed upon these countries in the '60s and '70s by banks loaded with OPEC oil money. They now owe $360 billion. There is no way the underdeveloped countries can pay back these billions. The banks close their eyes to this fact and keep postponing the day of payment. So long as interest is being paid the banks pretend that the loans are sound and will be repaid eventually.

No bank has failed as a direct result of the debt bomb because too many banks around the world are involved and governments are using their power to try to prevent the debtor countries from defaulting. Contemplating this problem gives the bankers sleepless nights.

Here at home the farm crisis is undermining banks around the country. In the booming '60s farmers had been encouraged to expand. They borrowed money to buy more equipment and highpriced land. Then the bottom dropped out of the farm market. The value of farmland fell, leaving the farmers with huge debts they could not pay.

The banks found that the farmland used for collateral was worth less than the debt. This means that the bank would be insolvent. From here it is a short step to bankruptcy.

The mounting federal deficit is another source of disaster for the banks. The national debt is now $1.7 trillion. The yearly deficit is $200 billion. The Treasury has to borrow more money just to pay the interest, leading to a never-ending spiral of debt. It has to Total assets $3.8 billion $420.0 million $1.0 billion $2330 million 5934 million $133 million 5236 million S4.9 billion $11.6 billion $7:2 billion unyescdoo vou to keep the system going.

This drains investment funds from the capitalists. It keeps interest rates high. And it creates all sorts of opportunities for fraud and deception-as the state of Ohio discovered.

Even well-run banks must be shaken by this triple threat to the financial system. But the banks are not being well run, despite the reforms of 1933. Many are being run by the same sort of self-serving, double-dealing, and incompetent men who led the banks to disaster in 1929.

Almost every week the papers carry an item concerning irregularities in the affairs of some prominent bank. Florida banks are accused of laundering drug money. A big Boston bank admits to accepting laundry bags full of cash for deposit without reporting it, as required by law. The Bank of America was forced to refund illegal charges on inactive accounts.

Of Florida crooks and an Ohio crisis The saga of the Ohio savings-and-loan crisis is a good illustration of what happens when crooks are allowed a free hand in our financial institutions. In Florida in 1976 three scoundrels by the names of Ewton, Seneca, and Mead joined forces to create the ESM Company to deal in government securities. Buying and selling them, lending and borrowing them, and profiting from their rise and fall in value.

Cities like Beaumont, Texas, often buy government securities with tax money that they will not be spending for a while. That city bought $90 million worth from ESM. They did not take delivery because ESM was supposed to buy them back in a few months. This gave ESM the opportunity to pledge Beaumont's bonds as collateral for loans to finance further profitable schemes that it was engaged in. In fact, ESM pledged the same bonds several times over in a pyramid of unsecured debt.

The climax came when a suspicious customer looked deeper into ESM's tangled finances and forced it into bankruptcy and its operators into court. This was the end of ESM but the beginning of big trouble for the savings-and-loan-business in Ohio.

Home State Savings of Cincinnati had invested heavily in ESM's securities. In fact it had close ties to ESM that are still under investigation. When ESM went bankrupt, Home State took a huge loss.

When its depositors learned of their bank's troubles, they rushed to take their money out. Pictures of long lines outside Home State appeared on TV Depositors of other savings and loans (S and L's) rushed to take their money out too, and a classic bank run was on.

To stop the panic Gov. Richard Celeste did exactly what state governors had done in 1932. He closed all 71 S and L's in Ohio. He called to Washington for help, but help was slow in coming. It is charged that Reagan let Ohio swing slowly in the wind for a while because the state administration is Democratic, and Marvin Warner, head of Home State Savings, is a big wheel in the Democratic party.

Reagan to the rescue in 1984 The Ohio savings and loans are only a small segment of the financial scene. The crisis did not involve any commercial banks. So the administration could play politics with the fate of a few thousand small depositors. But when it comes to bank failures that endanger the whole financial edifice, the ruling class can move rapidly and decisively.

This was the case in the collapse of the Continental Illinois Bank in Chicago last year. This bank had expanded rapidly, investing in farm loans and nuclear-energy loans, as well as highly risky and complicated deals that will take years to unravel. As farm values dropped and nuclear-energy projects closed down, rumors of trouble at Continental Illinois spread. Depositors began to withdraw their These were not small savers, but big international corporations, including many Japanese. This was an international bank run that could have the most serious consequences for the whole banking system. The ruling class was alarmed.

Reagan declared that he would never let Continental Illinois fail. The government moved in with a massive infusion of taxpayers' money. It could be as much as $7.5 billion. The Treasury took over the bad loans and piled the risk on the backs of the public. It guaranteed the safety of every deposit without limit and put all the financial power of the government behind the bank.

Many country bankers, who had been allowed to fail without the administration lifting a finger, wondered why they were treated like second-class citizens? They do not understand that they are expendable in the battle to save the system.

The ruling class has not saved the banking system. They are merely shoring up weak points in a basically bankrupt institution. It will take intervention by the working class to oust the money changers and make the banks institutions serving the people.

SOCIALIST ACTION MAY 1985