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H-NET BOOK REVIEW
Published by [log in to unmask] (January, 1998)
Elmus Wicker. _The Banking Panics of the Great Depression_.
Studies in Monetary and Financial History. New York: Cambridge
University Press, 1996. xviii + 174 pp. Bibliography and index.
$39.95 (cloth), ISBN 0-521-56261-9.
Reviewed for H-USA by Robert Whaples <[log in to unmask]>, Wake Forest
University
Banking and the Great Depression:
New Findings but Still No Consensus
The Great Depression is the enduring puzzle of American economic
history. This event, which ushered in the New Deal, seems to have
permanently altered the role of the government in the economy and
the economic ideology of the electorate. Because the workings of
the economy are so complex and because the Great Depression was such
an extraordinary and unique event, it has defied easy analysis.
There is no consensus among American economic historians about the
causes of the Great Depression.
One leading interpretation is found in Milton Friedman and Anna
Schwartz, _The Great Contraction_ (Princeton, 1965). They conclude
that "monetary forces were the primary cause of the Great
Depression." They argue that a series of banking panics from late
1930 to early 1933 caused the money supply to shrink at a rapid,
unprecedented rate which caused the economy to collapse. They place
considerable blame on the Federal Reserve (the central bank of the
United States) and contend that "throughout the contractionary
period of the Great Depression, the Federal Reserve had ample powers
to cut short the process of monetary deflation and banking collapse.
Proper action would have eased the severity of the contraction and
very likely would have brought it to an end at a much earlier date"
(p. xi). Another leading interpretation rejects much of this line
of reasoning and argues that the banking failures were a symptom,
not a cause, of the depression. The most notable proponent of this
argument, Peter Temin (_Did Monetary Forces Cause the Great
Depression?_, New York, 1976), maintains that "a fall in autonomous
spending, particularly investment, is the primary explanation for
the onset of the Great Depression" (p. 137).
Recent work on the Great Depression has turned away from looking, as
Friedman and Schwartz did, at aggregate national statistics. In
_The Banking Panics of the Great Depression_, Elmus Wicker (Emeritus
Professor of Economics, Indiana University) shows the power of this
more microeconomic approach. After briefly surveying the banking
situation in the United States from 1921 to 1933, Wicker builds a
careful historical narrative of each of the five banking panics of
the Great Depression. He makes a detailed analysis of the
geographical spread of each panic, using the Federal Reserve
District-level data for much of his empirical work, but also turning
to newspapers to identify the cities in which banks failed, the
day-to-day events in each panic, and the names of failing banks.
Unfortunately, neither the Federal Reserve data nor the newspaper
accounts are as informative as one would like. "Because newspaper
editors were conscious of their responsibilities not to exacerbate
banking disturbances," Wicker writes, "their description of what was
happening was held to a not very informative minimum" (p. xvii).
Wicker does all he can to reconstruct events, but concludes that
"some significant details" are still missing and will never be
found.
Wicker presents a substantial amount of information in fifty tables
and figures. His analysis of the data is always careful, and his
interpretations are cautious. The result is a number of important
findings. First, Wicker identifies a new banking panic (June 1932,
centered in Chicago) that earlier scholars had overlooked. Second,
he shows that the first four of the panics were not nationwide in
scope, but concentrated in one or a few areas. Third, he finds that
the banking panics of the Great Depression were unlike those from
the period before the Federal Reserve (the Fed) was established in
1914. Earlier banking panics had started in New York City and
spread to the rest of the country. During the Depression, panics
began in a number of locations but never spread to Wall Street,
where interests rates and the stock market barely reacted. Next,
Wicker shows that most of the banking panics of the Depression do
not fit the common descriptions of indiscriminate runs on banks by
depositors whose confidence in the entire banking system has been
shattered. Runs were generally directed against particular banks
that were known to be weak. Large, secure banks had little to worry
about. In addition, Wicker shows how idiosyncratic the final,
devastating run (February and March, 1933) was. He argues that this
panic was actually a panic among politicians (especially state
governors and legislators who shut down banks, declaring a "bank
holiday") rather than among depositors.
In 1994, I surveyed members of the Economic History Association
asking them to "generally agree," "agree--but with provisos," or
"generally disagree" with forty propositions concerning American
economic history (see Robert Whaples, "Where Is There Consensus
among American Economic Historians? The Results of a Survey on
Forty Propositions," _Journal of Economic History_, Vol. 55, March
1995). The answers showed considerable consensus on a wide variety
of topics, including the costs of the Navigation Acts to colonial
America, the profitability of slavery, and the role of the railroads
in nineteenth century American economic growth. However, the survey
demonstrated widespread disagreement about the causes of the Great
Depression. Among economic historians in economics departments, 48
percent agreed with Friedman and Schwartz's contention that monetary
forces were the primary cause of the Great Depression. The other
half (actually 52 percent) disagreed. Slightly more (61 percent)
agreed with Temin that a fall in spending is the primary explanation
for the onset of the depression. Yet, quite a few (39 percent)
generally disagreed with this theory. Finally, 32 percent generally
agreed that the Fed had ample power to cut short the banking
collapses and terminate the depression at an early date. The
largest group (43 percent), "agreed-but with provisos" with this
proposition, while 25 percent generally disagreed with it. With the
publication of Wicker's book, how will these numbers change? How
will _The Banking Panics of the Great Depression_ alter the
collective wisdom of the profession about the causes and nature of
the Great Depression?
The answer is that Wicker's book won't tip the balance much one way
or another. For example, Wicker concludes that the first bank panic
"generated by the failure of Caldwell and Company was an autonomous
disturbance generated by questionable managerial and financial
shenanigans" rather than being caused by the recession. Yet he
also concludes that, "econometric evidence gives conflicting
interpretations of the causal role of bank failures," so "the jury
is still out" (p. 160). Likewise, Wicker will not change too many
minds about the ability of the Fed to have terminated the downturn
before it became the Great Depression. He thinks the Fed could and
should have done a lot more, but is not as sanguine as many.
However, Wicker may change some minds about the culpability of the
Fed in causing the Depression. Friedman and Schwartz argued that
the Fed was not merely guilty of inaction (i.e. allowing banks to
fail by doing little to stop the bank panics) but that the Fed's
perverse actions helped cause the Great Depression--when it
increased its rate of interest to banks at a critical juncture in
the banking panic of October 1931. Wicker deflates this argument by
showing that this banking panic was well underway and nearing an end
before the Fed's actions. Moreover, Wicker praises the Fed for
keeping the panics from spreading to New York and for providing an
elastic currency supply. He portrays a Fed that was puzzled why the
provision of an elastic supply of currency alone was not sufficient
to halt banking panics and which never understood how to restore
depositor confidence in the banking system and undo the hoarding of
money outside of banks. His Fed is perplexed and timid, rather than
bumbling. Yet, like Friedman and Schwartz, he damns the Fed for
"abdicating" its responsibility for maintaining the stability of
this U.S. banking system. The Fed did not exercise leadership and
did not take seriously its responsibility as a lender of last resort
to banks on the brink of failure; instead it allowed this important
function to fall into (or through) less capable hands.
Wicker's book is the product of decades of rumination on the causes
of the Great Depression and the nature of American banking during
this era. It is a valuable addition.
Copyright (c) 1998 by H-Net, all rights reserved. This work
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