Today's Banking Crises is Comparable to the Great Depression of 1930's
Starting late in 2007, the United States has faced one of the harshest recessions since the Great Depression. Like many financial crises of the past, this one has been plagued with high unemployment, increasing poverty, greater numbers of personal and business bankruptcies, endless foreclosures, failing businesses, and lastly an ever increasing number of bank failures. This article will focus on only one byproduct of this recession: number of bank failures. What the author has found is that a real apple to apple comparison between the two events has been obscured by misleading and incomplete information. The official total of today’s bank failures compared to the Great Depression is pegged at 5% when in reality it closer to 74%. This article will provide obscured facts generally not easily and publicly available to see how the reported numbers are so deflated.
Let us start with the official numbers as presented by the Federal Deposit Insurance Corporation, (FDIC). According to their website, www.fdic.gov, the number of bank failures for the full years 2008 & 2009 and the first full eight months of 2010 (When this article was written) are as follows:
Now let us compare these numbers to the Great Depression of the 1930’s. Remember the stock market crash fell on October of 1929 while the sub-prime real estate loan crash began in earnest by late summer of 2007. Both incidents were the precursors for their respective financial meltdown. In both cases, the magnitude of negative effects weren’t fully felt until the following year. Therefore we can compare 2008 to 1930, 2009 to 1931, and 2010 to 1932. Lastly, this article uses the bank failure data for the full year of 1932 when comparing it to the first eight months of 2010! (This fact will become more important near the end of the article.)
In 1933, the Federal Reserve System published its first detailed study of bank suspensions (i.e. failures) entitled, Bank Suspension in the United States, 1892 to 1932. The following data was extracted from this original work:
At this point, most pundits stop and compare how much worse the 1930’s banking crises was versus the one currently facing the nation. It is obvious looking at these numbers that 263 failed banks is merely 5% of the total number which failed during the Great Depression. However, two important factors are never discussed or presented which have a great impact on how to adjust these numbers for a true apple to apple comparison.
The first is population. According the 1930 US Census the official population of this country was 122,775,046 versus the official estimate for 2010 pegged at 309,162,581. In other words, by 2010 the US population increased 152% from 1930.
The second, and most important factor, is that most banks today are multi-branch banks. This is an extremely important factor. In the last 80 years banks have merged, merged and merged some more. In 1929, there were roughly 30,000 banks with 3,000 branches for a total of approximately 33,000 bank-branch combinations. As June 2009, there were 98,913 bank-branch combinations for slightly less than 8,000 banks and savings and loans! (1), (2), (3), (4)
Now, let us re-look at the official FDIC figures for failed banks for 2008, 2009, and the first full eight months of 2010. This time let us consider all the branches each failed bank had at the time they failed and see how they compare to those of 1930, 1931, and (the full year of) 1932.
At this point, one needs to make two adjustments to allow for equal comparisons.
The first: An adjustment needs to made for branch numbers. It is important to note that the branch system didn’t originate in earnest until the 1920’s and by the start of the Great Depression there were only 3,349 total branches (as of 1/1/1930) for the entire United States. (2) This number reflects a small factor of about a 10% increase over the total number of all banks in existence in 1930. Thus, the Depression era totals need to be adjusted to reflect this factor.
The assumption is: had the number of branches been included in the annual totals those totals would have been greater. Without having exact figures the best assumption that can be made is simply assuming that banks with branches failed in the same proportion as banks without branches.
The second: The next factor to consider is population. While the total number of banks today is about a quarter of those in existence in 1930. When compared to the total number of all bank branches there are three times as many today versus those in 1930.
It is at this point the population comparison needs to be taken into consideration between 1930 and 2010. The population is 2.5 times greater today than 1930. The number of bank branches is approximately 3 times greater than those in 1930. To put it simply the number of banks with branches increased approximately in step with the population growth. Since the number of branches increased slightly faster, an adjustment is made to correct for that factor in the table below.
At this point one can see, with all the adjustment made, the difference in the number of failed banks during the Great Depression is comparable to those failing today. No longer are today’s total number of banks failing at a mere 5% compared to those in the 1930’s; they are failing at an alarming rate of approximately 74% with the assumption that no additional banks fail for the rest of the year! (Don’t forget we only used 8 months for 2010! Any additional failures this year would make the 74% go higher!)
We can now see why these numbers are readily obscured. No one wants to tell the public that today’s banking crises is comparable in magnitude to what this country faced during the Great Depression. Until now that is!
Hope this helps and take care!
(1) Banking Panics (1930–1933), ©2004 by Macmillan Reference USA
(2) BRANCH BANKING AS A DEVICE FOR DISCIPLINE: COMPETITION AND BANK SURVIVORSHIP DURING THE GREAT DEPRESSION
Mark Carlson, Kris James Mitchener, Working Paper 12938
NATIONAL BUREAU OF ECONOMIC RESEARCH, 1050 Massachusetts Avenue, Cambridge, MA 02138, February 2007
Article Submitted by: Sean Riskowitz
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