Banking panics aren’t pretty. Imagine hundreds of depositors, frightened that their savings are about to be erased, rushing to the sidewalks around the institutions rumored to be failing, pushing toward the tellers' cages and pleading for withdrawals.
Then they learn the money isn't there. The cash is tied up in illiquid investments, inventories and homes. Fear spreads. Soon, perfectly sound institutions are besieged by desperate people who want their money back.
In early 1933, with loan defaults and foreclosures increasing and property values falling, a banking crisis was gradually accelerating in the U.S. The first place where it brought a financial system to its knees was Michigan.
Michigan’s banking misery derived from the "precarious position" of Detroit’s Union Guardian Trust Co., which had invested heavily in real-estate mortgages. A midnight conference ensued on Feb. 14, led by the state’s new governor, William Comstock, and advised by the departing U.S. commerce secretary, Roy Chapin.
Union Guardian had "suffered depreciation of its assets and was seeking to get out of the banking business," Comstock said. Managers needed to return depositors’ money, but even with help from Reconstruction Finance Corporation loans, they were several million dollars short. Worse, when the largest depositors -- General Motors Co., Ford Motor Co. and Chrysler Group LLC -- were asked to "subordinate their deposits to the RFC and smaller depositors," Ford refused.
This forced a shutdown "over the violent protests of the bankers," as Time magazine put it.
To prevent a statewide panic, Comstock ordered Michigan’s banks shuttered for a week. His decree, issued at 1:32 a.m., aimed to safeguard the rights of depositors. The governor worried that big depositors would withdraw their money rapidly, leaving ordinary people "holding the bag."
Wall Street was not yet panicked. Bond and stock prices dropped, but only modestly -- except for Detroit-based GM, whose stock fell more than 20 percent.
About 900,000 Michigan depositors could not access their frozen accounts until Feb. 21. "At first dazed by the suddenness of the action, citizens adopted in the main an apathetic attitude," the New York Times reported. "We’re all in the same boat now, and we’ll have to make the best of it."
People started to improvise. "Motor companies and other large employers agreed to cash checks for their employees with cash brought from New York or Chicago," the Literary Digest wrote. "Grocers worked out coupon systems. Public service companies arranged to extend due dates on bills. Governor Comstock said he thought he’d be fine personally for the week, as he had '$30 in his pocket.'"
Learning that some Michigan banks outside Detroit were opening for essential business, Comstock was unruffled. "The situation is not subject to rules, but to good judgment," he said.
As financial panic spread, and the New Deal got under way, that ethos would soon be guiding government policy throughout the country.
(Philip Scranton is a Board of Governors professor of the history of industry and technology at Rutgers University, Camden, and the editor-in-chief of Enterprise and Society. He writes "This Week in the Great Depression" for the Echoes blog. The opinions expressed are his own.)
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