Banking on History
28 January 2008
Editor, The Wall Street Journal
200 Liberty Street
New York, NY 10281
To the Editor:
Brian Wesbury sensibly calms fears about the state of the economy ("The Economy Is Fine (Really)," January 28). One small correction, though. The Fed's disastrous contraction of the money supply in the early 1930s did not alone cause the many bank failures that haunted the United States during the Depression. Also at work undermining bank solvency at this time were restrictions on branch banking.
Research by my colleague Carlos Ramirez and others finds that such restrictions denied banks opportunities to diversify their portfolios sufficiently.* Further research by Mark Carlson and Kris James Mitchener shows that these restrictions muted competition among banks and, hence, propped up many weak banks.** When the Depression hit, the U.S. was planted thick with inefficient small banks that could not then survive.
Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
* Carlos D. Ramirez, "Did branch banking restrictions increase bank failures? Evidence from Virginia and West Virginia in the late 1920s," Journal of Economics & Business, Vol. 55, July-August 2003.
** Mark A. Carlson and Kris James Mitchener, "Branch Banking, Bank Competition, and Financial Stability," NBER Working Paper No. W11291, May 2005.
Editor, The Wall Street Journal
200 Liberty Street
New York, NY 10281
To the Editor:
Brian Wesbury sensibly calms fears about the state of the economy ("The Economy Is Fine (Really)," January 28). One small correction, though. The Fed's disastrous contraction of the money supply in the early 1930s did not alone cause the many bank failures that haunted the United States during the Depression. Also at work undermining bank solvency at this time were restrictions on branch banking.
Research by my colleague Carlos Ramirez and others finds that such restrictions denied banks opportunities to diversify their portfolios sufficiently.* Further research by Mark Carlson and Kris James Mitchener shows that these restrictions muted competition among banks and, hence, propped up many weak banks.** When the Depression hit, the U.S. was planted thick with inefficient small banks that could not then survive.
Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
* Carlos D. Ramirez, "Did branch banking restrictions increase bank failures? Evidence from Virginia and West Virginia in the late 1920s," Journal of Economics & Business, Vol. 55, July-August 2003.
** Mark A. Carlson and Kris James Mitchener, "Branch Banking, Bank Competition, and Financial Stability," NBER Working Paper No. W11291, May 2005.
Posted by Don Boudreaux on
Friday June 20, 2008 at 8:37am