Historical Background In the early 1900s, eight states – Kansas, Mississippi, Nebraska, North Dakota, Oklahoma, South Dakota, Texas, and Washington – in the Midwest implemented state deposit insurance systems. Following the Panic of 1907, the states’ leaders found it necessary to establish such systems to protect the states from banking panics and suspensions. This paper is specifically focused on one of the states in the Midwest: Oklahoma. Oklahoma was the first of the eight states to establish such financial system to regulate banking operations after the Civil War. The bill for the state deposit insurance fund was passed in December of 1907, and initially required all state banks to adopt the deposit guaranty fund, while national …show more content…
banks were permitted to join voluntarily based on jurisdiction of the Bank Commissioner. However, in August of 1908, the United States Attorney General Charles Bonaparte ruled that national banks were prohibited from participating in the deposit guaranty fund, stating that under no premises should a national bank be subjected to the state regulations regarding banking operations. Thereafter, a distinction exists, as banks under the state charter were insured and banks under the national charter were not insured. The insurance deposit was funded from first time assessment of 1 % of all state banks’ deposit and annual assessment of 0.25 % of all state banks’ deposits (Table 1). The state deposit insurance system quickly attracted the interest of many banks.
With the prospect of economic development, the number of state banks grew from 495 to 692 from 1908 to 1910, as well as the total deposits from about $21 million to $49 million (Figure 1 and 2). However, the number of national banks declined from 308 to 225, as many national banks re-chartered to state banks (Figure 1). The banks abused this legislation, and the rapid expansion of the policy led to its first major problem when the Columbia Bank and Trust Company, one of the largest banking institutions, failed in 1909. The remaining assets of the Columbia Bank and Trust Company, and the guaranty deposit fund could not cover the disbursements to depositors, leading to its collapse. Initially, the attractive features of the state deposit insurance system, and the misconception of having safer deposits led to many national banks re-chartering to become state banks to attract clients. After the failure of Columbia Bank and Trust Company, and stricter modification of regulations on state, insured banks, many re-chartered into national banks, leaving the remaining state banks to extend risky credit to attract clients. From 1913 to 1923, the number of state banks decreased as the number of national banks increased (Figure 1). Since state banks had mismanaged riskier portfolios, more state banks than national banks failed when the agricultural depression occurred in the …show more content…
1920s. The Oklahoma deposit insurance policy was finally repealed in 1923. During this time, there was a nationwide economic shock as the value of agricultural products decreased due to deflation. Bank failures occurred as borrowers – primarily farmers – could not pay back their loans, and depositors could not recover their assets. In total, there were 408 state bank exits and 48 national bank exits, with most occurring in the early 1920s. Furthermore, the deposit guaranty system was also exhausted, and could no longer properly cover the losses to the extent that was demanded of it. With the rise of bank failures in the early 1920s, the Oklahoma State Legislature passed a bill to repeal the deposit guarantee system, which then after followed litigations regarding the distribution of the remainder of the funds to the collectors that would remained unsettled. In the paper, I examine banking data from the early 1900s to determine if the guaranty deposit system increased the probability of bank exit in Oklahoma.
The deposit insurance fund provides security to the depositors against insolvency risk, however, it also promotes riskier behavior by insured banks – a form of moral hazard. Economic theory suggests that because insured banks have a sense of security provided by the deposit insurance, they will take on more risk by loaning out more of its deposits to try to expand operations and increase profits. This reckless behavior of the insured banks increases probability of bank exit during economic downturns. This research seeks to test whether the theory stands true by looking specifically into the banking operations in Oklahoma in the early
1900s.
Seidman, L. W. (1986) Lessons of the Eighties: What does the evidence show? Retrieved July 25, 2010 from http://www.fdic.gov/bank/historical/history/vol2/panel3.pdf
The 1933 Banking Act, also known as the Glass-Steagall Act in reference to the legislation’s sponsors Carter Glass and Henry B. Steagall, was a statue enacted by the 73rd United States Congress which created the Federal Deposit Insurance Corporation (FDIC) and separated investment banking from commercial banking. The act established clear delimitations between commercial and investment banks, and made it illegal for them to operate in conjunction. Federal Reserve member banks were banned from dealing in non-governmental securities for customers, underwriting or distributing non-governmental securities, investing in non-investment grade securities for themselves, and affiliating with companies involved in such activities. Concurrently, investment banks were prohibited from accepting deposits.
69. The Bank proved to be very unpopular among western land speculators and farmers, especially after the Panic of 1819 because it was one of the major contributors to inflation. It held federal tax receipts and regulated the amount of money circulating in the economy. Some people felt that that the Bank, and its particular president, had too much power to restrict the potentially profitable business dealings of smaller banks.
Despite the oncoming bankruptcy of the state banks, prior to Jackson’s administration the government did not show much support in their survival. In fact, the government played a large role in the functioning of the Second Ban...
Banks failed due to unpaid loans and bank runs. Just a few years after the crash, more than 5,000 banks closed.... ... middle of paper ... ... Print.
The issue of whether or not America should have a National Bank is one that is debated throughout the whole beginning stages of the modern United States governmental system. In the 1830-1840’s two major differences in opinion over the National Bank can be seen by the Jacksonian Democrats and the Whig parties. The Jacksonian Democrats did not want a National Bank for many reasons. One main reason was the distrust in banks instilled in Andrew Jackson because his land was taken away. Another reason is that the creation of a National Bank would make it more powerful than...
The US has a sophisticated banking system that does a good job of allocating resources in productive place for their customers. However, in an area such as investment banking companies can use the deposited money for risky investments such as foreign government and corporate bonds. When these banks lose money on their investments or go out of business, all of the customer 's savings would be gone. Also, in this type of system bankers are more likely to commit fraud such as opening fake accounts vis a vis Wells
In the beginning of the 1830s, the United States experienced a short period of expansion and a prosperous economy. Land sales, new taxes, such as the Tariff of 1833, and the newly constructed railroads brought a lot of money into the government’s possession; never before in the history of the country had the government experienced a surplus in its national bank. By 1835, the government was able to accumulate enough money to pay off its national debt. Much of the country was happy with this newly accumulated wealth, but President Jackson, before leaving office in 1836, issued what is called a Specie Circular. Many local and state governments liked to save specie, or gold and silver, and use paper money to take care of transactions. President Jackson, in his Specie Circular, said that the Treasury was no longer allowed to accept paper money as payment for the sales of land and the like. Most, if not all, of the country did not like this, and as a result many banks restricted credit and discontinued the loans. The effects of Jackson’s Specie Circular took effect in 1837, when Martin van Buren became president. All investors became scared, and in 1837, attempted to withdraw all of their money at once. Soon after this, unemployment and riots occurred in many cities, and the continued expansion of the railroad ceased to be.
Sprague, O.M.W. “The Federal Reserve Act of 1913.” The MIT Press 28.2 (1914): 213-254. JSTOR
This bank held government money and controlled the economy by making it easier for local banks to borrow money from it to loan it to manufacturers and factories. As the idea arose the cabinet, Jefferson protested that such a bank was unconstitutional because it favored the north over the south since the bank did not loan money to farmers for land expansions. Being true as it is, the bank drastically boosted our economy and had a great future for our nation. Since it was unconstitutional, a compromise said that the bank would only be funded for 20 years. So as soon as Andrew Jackson was elected, he destroyed the bank. In response to this, our nation suddenly falls into a major depression. No one had jobs and the economy was dying. This showed the brilliance of the national bank and how much it helped our economy. Adding onto this, the bank began the formation of the Federalist and Democratic
In 1913, Wilson and Congress passed the Federal Reserve Act to make a decentralized national bank containing twelve local offices. By and large, all the private banks in every district possessed and worked that separate area's branch. In any case, the new Federal Reserve Board had the last say in choices influencing all branches, including setting financing costs and issuing money. This new managing an account framework settled national funds and credit and helped the monetary framework survive two world wars and the Great
Grant, Peter. "The Giant J.P. Morgan and The Panic of 1907." The New York Daily News 20 Mar. 1998: 49 "J. P. Morgan". Dictionary of American Biography. New York: Charles Scribners and Sons, 1934. Vol. 7 "J. P. Morgan". International Directory of Company Histories. Chicago: St. James's Publishing, 1990. Vol. 2
Banks all around, especially the large ones, sought to support the market before it could crash down. As the stock prices crashed, banks struggled to keep their doors open (“Economic Causes and Impacts”). Unfortunately, some banks were unsuccessful. Customers wanted their money out from their savings account before it was gone and out of reach, leaving banks insolvent (“Stock Market Crash of 1929”).
At the time, there were not adequate facilities available to meet the demand for additional funds. Bank’s reserves of money were stored around the nation at 50 locations. The reserves were not able to be shifted quickly to the areas that were experiencing increases in withdraw demand. The immobility of reserves only added another element to the financial panic (Schlesinger pp. 41). The credit situation would become tense. Since the banks coul...
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.