The Banking Panics of the Great Depression.

The European and American banking panics of the 1930s are one of the most notable features of the Great Depression. Many scholars have argued that the panics are an important cause, if not the most important cause, of the Great Depression.

In this new book Elmus Wicker reexamines the U.S. banking panics during the period 1930 to 1933. Many previous studies of the financial crises focus on the macroeconomic implications of the panics. Wicker extensively reviews the details of each panic, to determine the proximate causes of each. Through this analysis, Wicker offers important new insights into the cause, as well as the macroeconomic implications, of each panic.

Wicker begins by differentiating the panics of the pre-Federal Reserve era from those which occurred after the Fed was established. A particularly important difference is that the pre-Fed panics occurred in the New York money markets, while the post-Fed panics occurred in the interior. This had important implications for the Fed's response to the later panics.

In Chapter two, Wicker reviews the banking crisis of 1930. Much of this chapter is an elaboration of his previous work examining the failure of Caldwell and Company, a major banking chain located in the southeastern United States. Wicker demonstrates that the effects of the panic were largely confined to the Federal Reserve districts in which the Caldwell banks were located, St. Louis, Richmond, and Atlanta. Wicker's unit of analysis is the individual Federal Reserve district, the smallest unit for which data are available. He finds that increases in outstanding currency were largely confined to those districts in which the Caldwell banks were located.

Wicker argues that the failure of the Bank of United States, which occurred toward the end of the Caldwell panic, was not a cause of an aggregate increase in currency demand, nor did it unsettle conditions in the New York money market. Wicker feels that the primary motive for the increased currency holdings was the failure of the Caldwell and Company banks. In addition, he notes that a drought in 1930 reduced the profitability of many banks within the same Federal Reserve districts where the Caldwell banks were located.

Using changes in bank debits as a proxy for expenditure changes, Wicker finds that the expenditure effects of the panic were limited to the St. Louis Federal Reserve district. Wicker concludes that the panic of 1930 was a regional event, and thus casts doubt on the hypothesis that this crisis was the cause of the depression.

Two banking crises occurred in 1931. Wicker dates the first crisis during the months of April through August. He notes that this crisis occurred primarily in the Cleveland and Chicago Federal Reserve districts. The problems in Chicago were largely due to collapse of real estate values. A 1920s real estate boom fueled growth of the Chicago banking industry. The collapse of real estate values reversed the fortunes of many of these banks.

The crisis in the Cleveland Federal Reserve district was a general panic in Toledo, Ohio. The panic began in June when a major trust company failed. Three other large banks announced a 60-day withdrawal requirement for savings deposits. All three of these banks failed 60 days later. Wicker sees this second crisis as region specific, also.

The third crisis began in September of 1931, following Britain's departure from the gold standard. Wicker argues that the crisis really extends only into October, because by November the currency drain had reversed itself. He argues that this third crisis was nationwide. However, Wicker feels that even during the third crisis, the panics were region-specific. There were mini crises in the cities of Philadelphia, Pittsburgh, and Chicago. The targets were banks in these cities which were known to be weak. The panic did not spread to the stronger banks. Wicker argues that it is not clear that these mini panics were associated with Britain's departure from gold, and thus, questions whether there is a relationship between the panic in September and October, and Britain's departure from gold.

Wicker presents an important new argument as well. He argues that Hoover's establishment of the National Credit Corporation on October 7 did much to stabilize the situation. Though the impact was largely psychological, because National Credit Corporation lending activities diminished after October, he feels that inception of the NCC was an important factor restoring public confidence in banks.

The crisis of 1933 is examined in the fourth chapter. Wicker attributes the crisis to two factors. First, the declaration of the bank holiday in Michigan greatly increased the likelihood of banking holidays in surrounding states. As governors in adjacent states in turn declared holidays, the panic spread from state to state. The declaration of a bank holiday was the mechanism by which the panic was spread. In addition, Wicker acknowledges that loss of gold from the New York Federal Reserve Bank, as investigated by Wigmore [5], may have been an additional factor contributing to the declaration of the nationwide bank holiday by the new president. However, Wicker notes that in spite of the loss of gold by the Federal Reserve Bank of New York, by the time Roosevelt was inaugurated, every state in the country had either a declared holiday or imposed restrictions on banking activity. Thus, Roosevelt's actions were inevitable.

Wicker makes several other important points which have not previously been made. He argues that the Chicago crisis in June-July 1932 increased aggregate currency holdings by an amount equal to the increase in currency during the 1930 crisis. On this basis, he argues that the second Chicago panic should be considered a fifth crisis of the great depression.

This Chicago crisis was important for several reasons. Charles Dawes, president of the RFC, was forced to resign his position to return home to save his bank. The subsequent RFC loan to Dawes's Central Republic and Trust Company increased the already mounting criticism of the RFC, and contributed the subsequent passage of a bill which required the RFC to publicize the identities of all its loan recipients, greatly diminishing the effectiveness of the RFC [1]. Also, Wicker notes that the RFC's actions reflected a "too big to fail" approach to the Chicago crisis. However, the RFC approach in the subsequent Detroit crisis differed. The Detroit banks were allowed to close, regardless of the implication for the financial system.

Wicker demonstrates that the New York money market was largely isolated from all of the panics. Panics in the pre-Federal Reserve period were located in the New York money market, even if they began within the interior of the country. Panics in New York affected security prices and interest rates. During the 1930 to 1933 period, interest rates and security prices in the New York money markets were stable during the panics. Wicker argues that the Fed felt that its responsibility was to stabilize the New York money market, and was unprepared to cope with panics in interior regions of the country. Wicker praises the response of Governor Harrison of the Federal Reserve Bank of New York to the various crises. Frequently, however, his actions were constrained by the Federal Reserve Board in Washington.

Wicker notes that the role of the currency ratio in the money supply process was not understood at that time. The important theoretical developments in this area occurred during the years immediately following the banking panic of 1933. Thus, Wicker feels that the Fed cannot be blamed for failing to respond to increased currency demand as there was no framework for understanding the monetary effects of increased currency holdings.

While both Temin [4], and Friedman and Schwartz [3] argue that the banking problems may be associated with the collapse of bond prices, Wicker argues that there is very little evidence to support this view. Very few bank failures can be associated with falling bond prices.

Another of Wicker's major points is that gold flows were a secondary factor throughout this period, except perhaps for the September-October 1931 panic. Even then, Wicker suggests that the timing of the panic with Britains departure from the gold may have been more coincidental than causal.

One of the most important points made by this review of the banking crises is that these panics were largely local or regional phenomena. Rarely were there indiscriminate runs on banks throughout the nation following these panics. In most cases, the panics seem to have targeted specific banks with known weaknesses. This interpretation of the panics challenges the Friedman-Schwartz analysis of the depression, which view the panics as a major causal factor.

While Wicker's evidence is carefully constructed, and supports his general thesis, one can still question his conclusions. In particular, while the leaders of the Federal Reserve System may not have had a theoretical framework with which to understand the effects of an increase of currency demand, they clearly should have understood that bank deposits were contracting, and that this had a contractionary effect on the U.S. economy. In commenting on the U.S. banking situation, an article the February 25, 1933-edition of the Economist estimates the decline in bank deposits, and the decline in turnover of deposits outside of New York, amounted to a substantial reduction in aggregate demand. Their exact estimate is, "the stream of purchasing power coming onto the market has been reduced to about two-fifths of its previous dimensions, an unparallel degree of monetary deflation," [p. 402]. Thus, whether or not the Federal Reserve fully understood that the increase in the currency ratio was causing a multiple contraction in the money stock, they clearly should have observed the contraction in the bank deposits, and reacted appropriately.

Also, Wicker admits that in one sense the panics never ended. That is, during each panic there was an increase in currency outstanding. In none of the cases prior to the bank holiday in 1933 was there a current inflow to banks following the panic. Each panic permanently increased the level of currency outstanding, reflecting widespread loss of depositor confidence. This loss of confidence had important implications for monetary conditions. This, of course, is one of the Friedman and Schwartz's main arguments.

Professor Wicker's book has cast important new light on the banking crises of the 1930s. He has painstakingly examined the details of these crises, using data at the micro rather than at the macro level. In doing so, he has challenged some conventional notions about the causes of the panics, and the resulting macroeconomic effects. Professor Wicker's book is an important, provocative contribution to our understanding of the banking crises, and their role in the great depression. This book will stimulate numerous studies attempting to either confirm or confound Wicker's important points. It is certainly a book which must be read by all scholars interested in the events of the 1930s.

James L. Butkiewicz The University of Delaware 

References

1. Butkiewicz, James L., "The Impact of a Lender of Last Resort During the Great Depression: The Case of the Reconstruction Finance Corporation." Explorations in Economic History, 1995, 197-216.

2. Economist, Volume CXVI, Saturday, February 25, 1933, Number 4,670, p. 402.

3. Friedman, Milton, and Schwartz, Anna J. A Monetary History of the United States, 1867-1960. New York: National Bureau of Economic Research, 1963.

4. Temin, Peter. Did Monetary Forces Cause the Great Depression? New York: W.W. Norton, 1976.

5. Wigmore, Barry A. The Crash and Its Aftermath. Westport, Connecticut: Greenwood Press, 1985.