In retrospect it would have been a great deal better if Gov. Richard Celeste has not closed those Ohio savings and loan companies last month. In Mr. Celeste's defense it has to be said that events forced him to act quickly, in an area in which governors generally have little expertise. The blame for the panic is widely shared, and the governor hardly bears the chief responsibility. But there are lessons to be learned from the experience. The first is that it's better not to close banking institutions.
The stability of the banking system depends on depositors' unquestioning assumption that they can get their money. Anything that casts doubt on that assumption will contribute to the fragility of the whole system. Once the run began on those privately insured state-chartered S&Ls, the governor felt he had no alternative but to close them all. The failure of one big institution threatened to wipe out the entire fund that insured all of their deposits. But in hindsight a better choice might have been emergency legislation for a state loan to the fund. In other states where nonfederal insurance funds operate, governors will want to assure themselves that in an emergency they will have the authority -- Gov. Celeste did not -- to act quickly and decisively.
You have heard the Ohio affair described as the first run on the American banking system since the 1930s. Unfortunately, that is not correct. It was the second run within the past year. Last spring there was a much bigger one, but it was invisible and silent.
When the Continental Illinois Bank was on the brink of collapse, people managing very large deposits began moving their money out of that bank and other American banks. The government has published figures showing that, in the spring quarter of last year, American banks sent more than $20 billion abroad, primarily to offset deposits being pulled out of their foreign branches. Within a matter of weeks the depositors saw that the banks were safe, and by the end of the summer most of those deposits had returned. At the time it drew little notice outside the banks themselves. Large depositors do not spend the night lined up on the sidewalks waiting for their banks to open. The big deposits move by phone and telex. And they can move very rapidly.
A banking system can hardly be more stable than the economy it serves. Banks and S&Ls now see the staples of their business -- interest rates, the price of oil, the price of farm land, the price of the dollar itself -- swing widely from one month to the next. The American banking system is immensely strong. But as Gov. Celeste has learned, responsible public officials can no longer take that strength for granted.