Banking Myth
10 October 2007
Editor, Washington Post
1150 15th St., NW
Washington, DC 20071
Dear Editor:
Robert Samuelson mistakenly suggests that bank runs in the U.S. during the Great Depression were caused by the absence of deposit insurance ("Lessons from the '87 Crash," Oct. 10). The real culprit was prohibitions on branch banking and on banks issuing their own notes. The prohibition on branching restricted banks' ability to diversify their depositor bases and portfolios. A result was greater exposure to risk. The prohibition on note issue prevented banks from easily meeting customers' desire to hold more currency relative to the size of deposits.
The claim that these statutory restrictions fueled the hundreds of Depression-era bank failures in the U.S. is supported by the fact that in Canada - which, unlike the U.S., allowed banks to branch and to issue their own notes, and which did not have deposit insurance until the 1960s - not a single bank failed during the Great Depression.
Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
Editor, Washington Post
1150 15th St., NW
Washington, DC 20071
Dear Editor:
Robert Samuelson mistakenly suggests that bank runs in the U.S. during the Great Depression were caused by the absence of deposit insurance ("Lessons from the '87 Crash," Oct. 10). The real culprit was prohibitions on branch banking and on banks issuing their own notes. The prohibition on branching restricted banks' ability to diversify their depositor bases and portfolios. A result was greater exposure to risk. The prohibition on note issue prevented banks from easily meeting customers' desire to hold more currency relative to the size of deposits.
The claim that these statutory restrictions fueled the hundreds of Depression-era bank failures in the U.S. is supported by the fact that in Canada - which, unlike the U.S., allowed banks to branch and to issue their own notes, and which did not have deposit insurance until the 1960s - not a single bank failed during the Great Depression.
Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
Posted by Don Boudreaux on
Friday April 11, 2008 at 10:17am