The failure of the Bank of United States aggravated the country’s slide into the Great Depression and strengthened pressures to reform banking and the securities business.
The Bank of United States was closed by order of the New York State banking authorities in December, 1930, at a time when the country was already sliding into severe depression. In terms of the dollar volume of deposits, it was the largest bank to fail in the United States up to that date. It was the twenty-eighth largest bank in the country in 1929, with $238 million in deposits and more than four hundred thousand depositors.
The Bank of United States was established in 1913 by Joseph Marcus, an immigrant from Russia. Some criticized the bank’s choice of name, saying that it implied a nonexistent connection with the government, but in general the bank was honestly if aggressively managed. Catering especially to New York City’s Jewish merchants, it grew rapidly. As its profits increased, the market value of its stock increased rapidly. Part of this increase reflected investors’ high opinion of New York bank stocks in general. Several New York banks had succeeded in boosting their profits and stock values by creating “securities affiliates.” These affiliates were legally separate corporations owned by the same people who owned stock in the bank. The affiliates were free to speculate in securities and to engage in profitable financial services such as underwriting new securities issues and brokering existing shares. In New York, both First National Bank and National City Bank created highly profitable affiliates. Printing stock certificates of banks and their affiliates back-to-back ensured that both would be owned by exactly the same people. Although the parent banks were subject to regular bank examination by state or federal authorities, the affiliates were not until, in 1929, New York State bank superintendent Joseph Broderick extended the inspections to include affiliates.
In 1927, Joseph Marcus died, and the management of the Bank of United States came under the control of his son, Bernard Marcus, working closely with vice president Saul Singer. They observed the rapid rise of most stock prices, which took bank stock prices to especially high multiples of earnings. They apparently were impressed by the operations of Bancitaly, an affiliate organized by California’s Amadeo P. Giannini and closely linked with the Bank of Italy, forerunner of the Bank of America.
In the late months of 1927, Marcus and Singer embarked on a three-pronged strategy designed to raise the market value of stock in the Bank of United States. They invested heavily in the stock, using money borrowed from their own bank. The first part of the strategy involved expansion through mergers and bank purchases. Within a year following May, 1928, they merged with or acquired five other banks. Usually these combinations involved giving stock in the bank or its affiliates in exchange for stock of the acquired bank. In several cases. the bank promised to repurchase its stock if its market value fell below the level at which these exchanges were made. These agreements exposed the bank to heavy losses when its stock did in fact fall.
The second element of the Marcus-Singer strategy involved the creation of securities affiliates. This process began with the creation of City Financial Corporation
The third element of the strategy was a heavy commitment to real estate finance in New York City, even though the nation’s real estate markets were showing signs of trouble and banks were being warned against such involvements. Because banking law severely restricted real estate lending and direct ownership, the bank organized its real estate involvements through a bevy of additional affiliates. A typical affiliate would own and operate an apartment building using funds obtained from City, Bankus, Municipal, or the second-line affiliates, which in turn were obtaining money by borrowing from the Bank of United States. Many of the real estate ventures involved heavy risk exposure, as the bank’s affiliates either were the owners of heavily indebted property or held junior mortgages. In 1929, bank examiners were critical of the real estate involvements.
The Marcus-Singer efforts to raise the value of the bank’s stock and thus enrich themselves were not successful. Even as the general stock market rose in 1929, the bank’s “units” began to decline in value. From $242 in April, 1929, the price fell to $207 in early July. This decline led to a frenzy of effort by the bank’s management to sell shares to depositors. The bank’s employees were instructed to promise depositors that the bank would repurchase its shares if they fell below $198; about $6 million of additional stock was sold under this unwritten promise. The various affiliates were also buying the bank’s stock to try to prop up its price. Despite these efforts, the bank’s stock continued to decline, and it fell even more in the general market collapse in October, 1929. By December, the stock had fallen to $75 a share. Very few investors got the bank to stand behind its promise to buy back shares. The market decline meant a sharp fall in revenues from financial services, and capital losses replaced capital gains in the affiliates’ accounts. The bank’s earnings were disappearing, a process aggravated by neglect of honest and competent administration of mainstream banking operations.
A thorough government examination of the bank began in July, 1930, and lasted until September. The authorities concluded that the bank was in serious trouble and that it could be saved only through merger. Various merger proposals were explored with the aid of federal and state officials, but excessive demands by the bank’s management prevented successful completion of a merger. In late November, a four-bank merger appeared to be firm, but the partners feared heavy deposit withdrawals and insisted that other New York banks stand ready to lend to them. These guarantees from other New York banks could not be secured. As withdrawals of deposits accelerated with news of the merger failure, Superintendent Broderick reluctantly agreed to close the bank, effective December 11, 1930. The bank’s assets were impaired partly because of the decline in the value of its stock, which was extensively pledged as collateral, and of its real estate assets.
The immediate effect of the bank’s failure was to aggravate the country’s slide into serious depression. The bank’s stockholders sustained double losses. Not only did the stock in the bank and its affiliates become worthless, but also, under the “double liability” law in force at the time, stockholders were liable for an additional $25 per share to cover depositors’ claims. About $10 million was collected from stockholders.
At the time the bank closed, its deposits totaled about $160 million, and this purchasing power was temporarily unavailable to depositors. As soon as the bank closed, intense efforts were made to collect its loans. Thousands of small businesses that counted on continuation of their lines of credit from the bank found themselves cut off. These developments caused a direct drop in consumer spending in New York, as measured by sales of department stores and chain stores.
Ultimately, depositors received most of their money back. Collecting loans, selling assets, and suing stockholders and directors enabled depositors to regain about three-fourths of their funds. The bank’s affairs were not settled, however, until 1944.
Although there were no other major bank failures in New York City in 1931 and 1932, the intense publicity attending the bank’s failure and liquidation undoubtedly added to public distrust of the banking system. This was reflected in heavy sustained withdrawals of currency from banks in 1931. These withdrawals reduced bank reserves and obliged banks to reduce their lending, adding force to the deflationary process.
The failure of the Bank of United States was an early and dramatic part of the massive wave of bank failures that swept the United States from 1930 to 1933. The lesson was learned that bank failures could be a major source of deflationary damage, aggravating depression and unemployment. From this lesson emerged several important policy measures.
In 1932, Congress created the Reconstruction Finance Corporation,
The bank’s failure, coming so soon after the stock market crash of 1929, added to the public’s anger directed toward financial speculators and manipulators. Bernard Marcus and Saul Singer were indicted, convicted, and sentenced to prison terms for fraudulent actions. Politically, this anger led to the passage of the Securities Act of May, 1933,
Outrage was particularly directed toward the securities affiliates, which were blamed for banking difficulties. The Bankus experience was important evidence leading to the provisions of the Banking Act of 1933, which forbade banks to act as underwriters or dealers in securities or to be affiliated with such activities. Public anger was also directed at regulatory officials who let banking mismanagement go on so long. Superintendent Broderick was indicted for negligence in failing to close or reorganize the bank, but he was acquitted of the charges in 1932. Because of similar experiences throughout the country, bank regulators began to take much more aggressive attitudes toward ousting misbehaving bank managers. The newly created FDIC took on a forceful regulatory role toward banks not already under federal supervision.
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Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960. Princeton, N.J.: Princeton University Press, 1963. Definitive and sometimes quite technical scholarly work makes brief mention of the failure of the Bank of United States, placing it in the context of the monetary crisis and showing how it led to increased withdrawal of currency from other banks. Presents controversial assertions about the causes and consequences of the failure. -
Kindleberger, Charles P. Manias, Panics, and Crashes: A History of Financial Crises. 4th ed. New York: John Wiley & Sons, 2000. General survey of financial speculation and monetary crises from the eighteenth century to the late twentieth century. -
Peach, W. Nelson. The Security Affiliates of National Banks. Baltimore: The Johns Hopkins University Press, 1941. Scholarly work examines the evolution of securities affiliates and describes their role in the stock boom and bust of the 1920’s. Describes the hostility toward affiliates resulting from the stock market crash and assesses the resulting reform legislation. -
Pecora, Ferdinand. Wall Street Under Oath. 1939. Reprint. New York: Augustus M. Kelley, 1973. Pecora was a major participant in the investigation of stock market scandals and recounts many of these in colorful if not entirely objective fashion. The securities affiliates receive much attention. -
Temin, Peter. Did Monetary Forces Cause the Great Depression? New York: W. W. Norton, 1976. Refutes arguments by Friedman and Schwartz (cited above) about the causes of the bank’s failure and asserts that the failure did not have important economic consequences in worsening the Great Depression. -
Trescott, Paul B. “The Failure of the Bank of United States, 1930.” Journal of Money, Credit, and Banking 24 (August, 1992): 384-399. Examines the bank’s relationships with its affiliates, explains the causes of its failure, and shows evidence of the failure’s impact on currency withdrawals and on consumer spending. -
Werner, Morris Robert. Little Napoleons and Dummy Directors: Being the Narrative of the Bank of United States. New York: Harper & Brothers, 1933. Detailed narrative of the bank’s failure is full of valuable details drawn in large part from the numerous civil and criminal court proceedings attending the failure. Colorful and melodramatic but not very analytic. Some of the material also appeared in a Fortune magazine article in March, 1933. -
Wicker, Elmus. The Banking Panics of the Great Depression. New York: Cambridge University Press, 1996. Examines the origins, magnitudes, and effects of five individual banking panics. Includes discussion of the Bank of United States failure. Features figures, tables, references, and index.
Panic of 1907
Federal Reserve Act
McFadden Act Regulates Branch Banking
Banking Act of 1933 Reorganizes the American Banking System
Banking Act of 1935 Centralizes U.S. Monetary Control