Economics and The Public Welfare

Chapter 43

The Mortality Among Small Banks

The number of commercial banks in the United States stood at 29,087 on June 30, 1920. The figure stood at 15,353 on June 30, 1934. A great many of these banks had been closed or had failed, however, between June 30, 1920 and July 1, 1929, during which period about 5,000 banks, nearly all of them in agricultural communities, closed their doors and tied up deposits totaling $1,500,000,000. The average deposits per bank thus tied up was very small, being only $300,000. Over 40% of these failed banks were situated in towns and villages having a population of less than 500 persons; over 60% were in towns of 1000 or less; 80% were in towns of 2500 people or less; and 92% were in places having less than 10,000. Of the remaining 8% of the failures, a high percentage was in very small banks in larger places. Sixty-three per cent of the failures were among banks having $25,000 capital or less, and 88% among banks having less than $100,000 capital. There were no failures during this period of banks having a capital of $2,000,000 or more, and there were only four failures of banks having over $1,000,000 capital.

Many of these banks failed as the aftermath of the collapse of the agricultural boom in 1920 and the adverse conditions in agricultural communities which continued for a long time. Another great cause was real estate speculation after 1920 in certain important sections of the country, notably Florida.

During this same period all of New England had only 26 failures, New York had 12, and New Jersey had none at all.

Hard Roads and Automobiles—County Seat vs. Village. But a further factor of major importance, which weakened small banks in many small places, was the coming of hard roads and automobiles, which largely destroyed the usefulness of the small village, doing away with the local merchant, the local mill, and the local church, as well as the local banker, as the people did their business and sought their social life in the county seat and other near-by larger cities. Industrial consolidations, moreover, while leaving local factories in small places, very often took away the banking business which the local factory gave to the local banker. The growth of chain stores had a similar effect. When the troubles of 1930-1933 came, they found a great many very small banks already under such pressure that they could not survive. An illustration would be one county in Missouri where four adequately capitalized banks, with deposits ranging from $750,000 to $3,000,000, in the county seat, stood firm through the troubles of 1933, but where most of the banks in local villages went under—one, for example, failing with deposits of $48,000. In a smaller town in the same county, a railway center, a well-managed National Bank with deposits of $200,000 went safely through the 1933 trouble without assistance.

But many of the local banks away from the county seat showed extraordinary vitality and stood firm. There is one in a village whose population had been 203 people in 1930 and which had 176 people in 1940. The bank is about 30 miles from the railroad in every direction and the automobile roads are not very good. The soil in the country roundabout is thin except for an occasional creek bottom. It is in the foothills of the Ozarks. This bank had, in 1928, capital of $10,000, surplus of $3,000, and undivided profits of $624. It had deposits of $70,000 and loans of $35,000. Its 1933 figures showed a reduction of deposits to $35,000. It had paid out half its deposits. Its loans were down to $20,000. But its capital stood intact at $10,000, its surplus had increased to $5,000, and its undivided profits had risen to over $1,200. In 1938 its figures showed deposits of $85,000, loans of $40,000, capital of $10,000, and surplus and undivided profits of $10,000. It would be hard to find a big bank in the United States which made anything like so good a record in this period.

A very high percentage indeed in the decline of the number of banks between 1920 and 1934 represented the disappearance of the microscopic banks, banks that had once performed a useful service, but which in a changed world were no longer needed. Many of these small banks, indeed, were never needed. Some parts of the country were badly overbanked. This was especially true in rural Iowa.