Country Banking in the Great Depression in the U.S.: Re-examining the work of Fred L. Garlock

Hugh RockoffRutgers University

Friedman and Schwartz 1963

Challenges to F&S

• Temin 1976• Bernanke 1983

• Wicker 1980, 1996.• White 1984.• Calomiris and Mason 1997, 2003

• Richardson and Troost 2009.• Carlson, Mitchener, Richardson

2011.

Garlock’s Data

• country banks in Iowa, Arkansas, Wisconsin

• loan books of the banks• Security holdings by class of

security• Bank Examiner’s reports• Personal meetings with bank

managers, borrowers

Garlock’s papers• ———. 1941. Country banking in Wisconsin during the depression. Technical bulletin /

United States Department of Agriculture. Vol. 777. Washington: U.S. Dept. of Agriculture.

• ———. 1939. Review of Farm Credit in Canada by W. T. Easterbrook. • ———. 1938. “Discussion of ‘Inflation and the Price of Land’ by Louis H. Bean,”

• ———. 1935a. (with Bueford Monroe Gile) Bank failures in Arkansas. agricultural experiment station. Bulletin no. 315. Fayetteville, Ark

• ———. 1935b. “The Money for Spring Planting.” Banking

• ———. 1934. (with Bueford Monroe Gile). “General Indicators of the Condition of Arkansas Banks.” Arkansas Agricultural Experiment Station Bulletin No. 298.

• _____. 1933a. Loan operations and liquidity requirements of an Iowa bank: A preliminary report.

• _____. 1933b. “Waiver Agreements with Depositors.” American Bankers Association Journal 25:8 (Feb.): 21,44,75

.• _____. 1932a. Two Country Banks in Iowa and Virginia.

• _____. 1932b. Effect of the seasonality of agriculture on Iowa banking.. • ———. 1930. Long term loans of Iowa banks

• ———. 1926. Bank failures in Iowa.

• ———. 1925. “Discussion of ‘Did Deflation Ruin the Farmer and Would Inflation Save Him?’

What did country banks do?

• Locus of the banking crisis• Small unit banks• The strength of the system lies in

democracy of control. The capital of the banks, with few exceptions is subscribed by the communities within which they do business; the interests of the officers are localized; and the funds of any community are used for development of its own industries. With such a system it is hoped to escape the monopolistic influences of the great branch systems, to make communities independent, and to protect the public from the foreign magnate (Garlock 1926, 56).

Percentage of Country Bank Loan Portfolios devoted to Real Estate and Working Capital in 1929

Table 1. Loans made by Arkansas Banks, 1929-1931 Type of Loan Loans at

the Beginning of 1929

New loans

1929 1930 1931

Percent of total loans

Percent of total loans

Percent of total loans

Percent of total loans

1. Commercial paper owned 1.17 9.71 7.60 8.46 2. Produce crops 3.61 22.31 27.80 21.87 3. Conduct current Business Operations

6.14 24.85 25.14 16.89

4. Buy or hold cotton 5.51 17.64 8.96 23.16 5. Personal Uses 0.64 1.70 0.65 2.70 SUB TOTAL (Liquid) 17.07 76.21 70.15 73.08 6. Buy stocks or bonds 0.90 4.96 2.86 11.40 7. Buy debts of other banks and pay interest

13.87 5.26 3.15 6.15

8. Buy or improve farm real estate 13.18 1.50 4.08 0.85 9. Buy or improve non-farm real estate

11.18 5.06 2.53 0.00

10. Buy real estate from bank 3.71 1.69 0.15 0.00 11. Furnish permanent capital for business

20.81 0.76 2.51 1.13

SUB TOTAL (Illiquid) 63.65 19.23 15.28 19.53 12. Miscellaneous and unknown 19.28 4.56 14.57 7.39 TOTAL 100.00 100.00 100.00 100.00 Source: Garlock and Gile (1935), table 4, p. 29.

Table 2. the loan portfolios of Wisconsin Banks in June 1929 Type of loan arrange from high to low liquidity, as a percentage of total loans

Four banks that survived without establishing depositors' trusts

Five banks that survived after establishing depositors' trusts

Two banks that closed after establishing depositors' trusts

Five banks that closed without establishing depositors' trusts

Commercial paper and call loans 8 2 2 0

Seasonal operating loans (new) 17 16 11 14

Personal loans 4 4 4 5

Non seasonal working capital loans

22 22 25 25

Seasonal operating loans (carry over)

3 4 3 4

Loans to buy securities 4 3 2 2

Loans to refinance debt 11 9 6 5

Fixed Capital Loans + real estate mortgage purchase

30 34 46 37

Sale of bank's own real estate 0 5 3 2

Loans for unknown purposes 0 0 1 6

Source: Garlock (1941, 29).

Table 3. Security holdings of Arkansas banks in 1929

Surviving banks Closed banks

Percent of total at par value Percent of total at par value

United States Securities 53.3 24.7

Federal land bank bonds 0.6 2.0

Foreign bonds 9.8 0.2

Industrial and utility bonds 7.1 5.7

Railroad bonds 3.8 2.4

State of Arkansas bonds 1.0 19.4

Local bonds and warrants 22.9 42.4

Miscellaneous out-of-state bonds and warrants

1.4 2.2

Stocks 0.1 1.0

Total 100 100

Source: Garlock (1935a, 36).

Table 4. Bonds and securities held by Wisconsin banks in 1929

Type of scurity 17 banks that survived without establishing depositors’ trusts

17 banks that survived after establishing depositors’ trusts

5 banks that closed after establishing depositors’ trusts

18 banks that closed without establishing depositors’ trusts

Percent of total

Percent of total

Percent of total

Percent of total

United States Securities 18 10 49 20

Federal and joint stock land banks

4 0 0 0

Wisconsin county and municipals

5 4 2 6

Other state county and municipals

4 3 3 3

Foreign government bonds 7 10 4 7

Other foreign bonds 2 4 3 3

Steam railroad bonds 5 5 3 4

Utility bonds 27 33 13 21

Industrial bonds 16 23 18 18

Real estate and miscellaneous bonds

10 7 5 15

Other securities 2 1 0 3

Total 100 100 100 100

Source: Garlock (1941, 48). All securities are measured at par value.

Table 5. Percentage by which deposits were lower in 1930, 1932, and 1933 than in 1929, Select Arkansas banks

1930 1932 1933

Category of banks

Percent Percent Percent

1. Three surviving banks known to have had only light withdrawal from lack of confidence

3.4 14.4 26.4

2. Five other surviving banks

9.9 23.1 32.1

3. Seven other closed banks

8.5 All closed All closed

4. Three closed banks known to have had severe "fright withdrawals"

21.4 52.1 All closed

Source: Garlock and Gile (1935, table 16, p.63). Notes. The table shows the average for all the banks in the category. One of the other surviving banks and two of the other closed banks gained deposits in 1930. I entered plus one percent for these banks in computing the average, but Garlock and Gile do not report a numeric value.

Table 6. The number of banks in Wisconsin during the Great Depression 1930-1933 1934-36 1930-1936 (Total)

Active Banks at the beginning of the period

953 445 953

Suspensions -505 -10 -515

Decrease due to consolidations

-90 -43 -133

Liquidations and unclassified

-5 -3 -8

New banks 10 19 29

Suspended reopened 82 197 279

Net change -508 160 -348

Active at the end of the period

445 605 605

Percentage decline in active banks

-53% 36 -37

Source: Garlock (1941, 3).

Table 8. Distribution of Bonds Held by Wisconsin Country Banks, by Quality of Bond, 1929-1935

All Banks Banks that Survived without establishing a Depositor's Trust

All Banks All Banks

Year

1929 1929 1932 1935

Number of banks

57 17 46 31

All U.S. Government Bonds

23% 22% 17% 40%

Grade 1 (Aaa)

7 9 4 2

Grade 2 (Aa)

5 8 6 6

Grade 3 and 4 (A-Baa)

30 34 21 29

Grade 5 and 6 (Ba-B)

15 10 21 13

Grades 7 and other low-rated Bonds (Caa-C)

1 2 10 3

Nonrated, defaulted, and other

19 15 22 8

Total

100 100 100 100

Note: The state banking authority established the grades on the basis of ratings issued by several services. The ratings in parentheses are my guess as to the corresponding Moody's rating based on Garlock's description. Source: Garlock (1941, 49)

Table 9. Average earrings, expenses and profits of Arkansas banks, 1923-1929.

Surviving banks Closed banks

percent percent

Gross earnings 7.78 8.72

- Operating expenses 5.38 6.47

- Losses charged off 0.50 0.91

Net earnings for distribution

1.90 1.34

Dividends 1.23 1.16

Additions to surplus and reserves 0.67 0.18

Source: Garlock and Gile (1935, table 14, p.59). Note. Earnings and costs are

measured as a percentage of deposits.

Table 9. Average earrings, expenses and profits of Arkansas banks, 1923-1929.

Surviving banks Closed banks

percent percent

Gross earnings 7.78 8.72

- Operating expenses 5.38 6.47

- Losses charged off 0.50 0.91

Net earnings for distribution

1.90 1.34

Dividends 1.23 1.16

Additions to surplus and reserves 0.67 0.18

Source: Garlock and Gile (1935, table 14, p.59). Note. Earnings and costs are

measured as a percentage of deposits.

Table 11. Deposit shrinkage and expected losses on loans and securities

Bank Deposit shrinkage 1929-1932

Deposit shrinkage 1929-1933

Ratio of Slow, doubtful or worthless assets to total assets

Leverage (Ratio of Assets to Capital)

Ratio of slow, doubtful, or worthless assets to total capital funds

1929-1932 1929-1933 1929 1929 1929

% % % % %

A 32 39 14 7.6 107 B 47 59 7 9.9 69

C 13 28 1 4.0 4

D 30 35 3 8.3 25 E 14 22 21 8.6 181

F 17 31 7 14.9 104 G 37 50 39 6.3 247

H 28 49 10 7.0 70 I 19 33 4 8.0 32

J 28 38 36 9.9 355

K 23 44 12 13.9 167 L 38 n.a. 40 11.3 450

M 34 42 5 9.2 46 N 38 n.a. 15 12.5 187

O na na 8 9.1 73

P 37 37 26 12.1 314 Q 19 na 13 8.5 111

Nine that survived (A-I) 26.3 38.4 11.8 8.3 93.2 Eight that closed (J-Q) 31.0 40.3 19.4 10.8 212.9 Two- tailed t test (probability) 0.35 0.68 0.23 0.055 0.063 Source: Columns 1 and 2, Garlock (1941, table 41); columns 3 and 4, table 51).

Garlock’s policy recommendations

• Maturity mismatch • Adam Smith’s maligned real bills

doctrine.• Issue deposits with restricted

withdrawals or debentures (waiver agreements saved some banks)

• Commercial banks + savings banks + loan and investment companies

• Never considered inflation as a threat