Early Bank Failures

Early-nineteenth-century banks were troubled by a currency shortage and the resulting inability to redeem their notes in specie. States later imposed penalties in those circumstances, but such an inability did not automatically signify failure. The first bank to fail was the Farmers' Exchange Bank of Glocester, R.I., in 1809. The statistics of bank failures between 1789 and 1863 are inadequate, but the losses were unquestionably large. John Jay Knox estimated that the losses to noteholders were 5 percent per annum, and bank notes were the chief money used by the general public. Not until after 1853 did banks' deposit liabilities exceed their note liabilities. Between 1830 and 1860, weekly news sheets called bank note reporters gave the latest discount quoted on the notes of weak and closed banks. All businesses had to allow for worthless bank notes. Although some states—such as New York in 1829 and 1838, Louisiana in 1842, and Indiana in 1834—established sound banking systems, banking as a whole was characterized by frequent failures.

The establishment of the National Banking System in 1863 introduced needed regulations for national (i.e., nationally chartered) banks. These were larger and more numerous than state banks until 1894, but even their record left much to be desired. Between 1864 and 1913—a period that saw the number of banks rise from 1,532 to 26,664—515 national banks were suspended, and only two years passed without at least one suspension. State banks suffered 2,491 collapses during the same period. The worst year was the panic year of 1893, with almost five hundred bank failures. The establishment of the Federal Reserve System in 1913 did little to improve the record of national banks. Although all banks were required to join the new system, 825 banks failed between 1914 and 1929, and an additional 1,947 failed by the end of 1933. During the same twenty years there were 12,714 state bank failures. By 1933 there were 14,771 banks in the United States, half as many as in 1920, and most of that half had disappeared by the failure route. During the 1920s, Canada, employing a branch banking system, had only one failure. Half a dozen states had experimented with deposit insurance plans without success. Apparently the situation needed the attention of the federal government.