Depression diary: When the banks went dark
'I have some money and checks to deposit but do not know where to go'
Aug. 5, 1931: Depositors gathered outside after American Union Bank in New York City failed and was closed by state regulators.
(Associated Press)
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Eighty years ago this week, the United States experienced the worst meltdown of the stock market in the nation's history. As the effects of the crash rippled through the broader economy, banks began closing their doors in record numbers.
Benjamin Roth, a lawyer in Youngstown, Ohio, recorded the effects as the banks closed in his town. His diary, excerpted on The Big Money, has just been published as a book -- "The Great Depression: A Diary" (Public Affairs).
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Oct. 8, 1931. Everybody is excited about President Hoover's plan to end the Depression, and stocks go up as high as 10 and 15 points. Under this plan, a huge national banking corporation is to be formed backed by government money, which will discount frozen mortgages and other illiquid assets of the banks in order to give them cash to pay depositors. It will be something like the Federal Reserve Bank, except that it can discount mortgages and other paper not now eligible. The plan also contemplates making the Federal Reserve more flexible so that in time of depression it can widen its discount basis.
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Oct. 10, 1931. When I visited my safety box in the vault of the Dollar Bank today, Mr. Owen told me that "in the last two days -- since President Hoover announced his plan to help the banks -- [it] has been the quietest we have had for several months. Before that we had a number of new applicants for safety boxes every day but since then we have had none." He felt that Hoover's [announcement] had strengthened faith in the banks and had put a stop to hoarding.
Again and again I am forced to the conclusion that in prosperous times a man must be cautious and preserve his capital and be careful not to overexpand his business or to go too deeply in debt relying on a continuation of good business to pay the debt. In time of depression, a man can be brave and if the depression is nearing an end he can invest his money or expand his business or open a new business with confidence that he is facing five or 10 years of prosperity. He can feel sure that the road ahead will be up -- not down. Many great, prosperous businesses were founded on the ruins of depression. This may be why so many Federal Street merchants are now beginning to put in a new storefront, etc.
A great many losses and failures in business and in investment are due to the reversal of this policy. At the height of prosperity, they rush in to buy stocks or real estate or businesses at boom prices and assume enormous indebtedness that can be liquidated only if the boom spiral mounts higher and higher. Then comes an abrupt end to prosperity -- a crash -- and down go these businesses and investments purchased at top prices. If the purchase was made mostly with borrowed capital, as so often happens -- then you can write finis to the chapter.
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Oct. 12, 1931. Bank failures continue in spite of President Hoover's plan. Yesterday saw the closing of the National Bank of Uniontown -- one of the largest in western Pennsylvania.
