American Fractionalized Banking Madness

By: Douglas_French

Some analysts see the outlook for America's banks to be bright for the coming year; just earlier this year the financial sector looked to be toast. Those who follow the industry at Keefe, Bruyette & Woods believe all will be well for at least the banking behemoths. As a sign that things are looking up, Charlotte banking giant Bank of America (BofA) just managed to issue $20 billion in stock to help repay the $45 billion in Troubled Asset Relief Program (TARP) funds the government infused into the bank during the financial meltdown a year ago.

However, banking analyst Meredith Whitney sees the future differently. She told the Squawk Box crew on CNBC that the bounce in the banks has been driven not by improving fundamentals but only by government interventions and now "the government is out of bullets." Whitney contends that economic conditions haven't changed for banks like BofA and the government is only letting them pay the TARP back because Washington needs the money.

Whitney's primary concern is that consumers are 70 percent of the economy and many are "getting kicked out of the financial system," and that that will be the prevailing trend in 2010. After two decades of everyone — including dead people — being able to get mortgages and having a fistful of credit cards, credit is drying up. Banks are hoarding reserves instead of lending them. People are saving instead of spending.

That's what's wrong with America, Union National Bank President Tom Dickson tells his board: there's too much hoarding, too much money sitting idle in coffee cans and socks. That money needs to be lent so that it is circulating in the economy — so that people can be hired and projects completed. That's what made this country great according to Dickson.

This summation of the mythical Dickson's remarks could have come from any current Keynesian commentator: Krugman, Galbraith, or Reich. But Dickson's kinder, gentler capitalism came from the pen of New Deal Democrat Robert Riskin, who wrote the screenplay for American Madness and seven other Frank Capra films.

However, the board of the fictional Union National believes Dickson's lending to be promiscuous. Reading down a list of the loans, borrower names and loan amounts are recited from the bank's books to hoots of derision from various board members.

The unconventional Dickson (played by Walter Huston) takes issue with their criticism, countering that the bank's never had a loan loss in 25 years (requiring considerable suspension of disbelief from the viewer). Dickson refuses to even take collateral for his loans. Why lend against the value of stocks and bonds, things that zig and zag in value? I lend on something more solid, a borrower's character, he tells his board. He's "not interested in profits" and believes that if the bank would just show some faith by loaning to customers, these borrowers would "pull this country out of the doldrums."

We even get to see the bank president turn away a widow who wishes to borrow $10,000 against her house valued at $50,000 or $60,000. Dickson says he wouldn't want to be put in the position of having to foreclose on the mortgage if the widow couldn't pay so he sends her to one of his competitors.

The Dickson character — in contrast to his board members who are all stiff and pretentious — doesn't act, walk, or talk like a bank president, but is as nonassuming as the average Joe. The character was inspired by Riskin's admiration for Amadeo Giannini who founded the Bank of Italy in San Francisco in 1904 to cater to immigrants. Two years later, when the San Francisco earthquake struck, and other banks could only watch as their branches were ruined and their vaults inaccessible, Giannini was able to rescue his funds and begin lending within a few days to anyone who would rebuild. "He took great pride in later years that all of these loans were repaid," according to Wikipedia.

Giannini's Bank of Italy became Bank of America in 1930, and Riskin admired the bank for taking what he considered risks for the greater good. Film critic, historian, and Capra biographer Joseph McBride wrote that Riskin's mission with American Madness was to "propagandize for the liberal lending policies" that were keeping many Hollywood businesses, including his employer, Columbia Pictures, from going under during the Depression's dark early days.

While Dickson is battling his board for control of Union National, his wife (Kay Johnson) feels ignored and thus goes out with the bank's smarmy head cashier (Gavin Gordon), who asked her out only to establish an alibi: he has arranged for local mobsters to rob the bank in the middle of the night in repayment of his gambling debts. This robbery and a murder sets the rumor mill — beginning with the bank's ditzy switchboard operator — to buzzing. Within a few hours, the actual $100,000 loss from the bank's vault has become a rumored $5 million theft by the bank's president! First dozens, then hundreds, and then what looks to be thousands of panicked depositors line up to withdraw their money. All this while the police are questioning the chief teller (Pat O'Brien) for his part in the robbery, when in fact he was innocent, and board members are meeting to take control of the bank.

The president has faith that his chief teller is innocent and that he can stop the run, until he learns that his gambling cashier lothario had been with his wife the night before. At that moment, the despondent Dickson is ready to give up and sign the bank over to the board.

Just when you think all is lost in the madness of a crowd trying to get its money, Capra and Riskin make a quick happy ending to this 1932 film: a handful of Dickson's customers wading through the masses to reach the teller line to deposit money in Union National, all the while telling the crowd what a great guy the president is. Upon seeing this, Dickson rips up the agreement to sign over the bank and persuades the board to deposit their money in Union National.

The next day all is back to normal and the bank president has his secretary (the comely Constance Cummings) book a honeymoon suite for him and his wife. He then tells the secretary that she and the chief teller must take the day off and get hitched or they'll be fired. Capra's Keynesianism has family values!

Despite the rosy ending, American Madness was a horror film for some audiences. In 1931 nearly 2,300 banks failed and the year the film opened saw over 1,400 closures, despite a slew of new government programs that year to stabilize the economy — programs such as the Reconstruction Finance Corporation and the Federal Home Loan Bank Act. Capra's feel-good banking film only played for two days in Baltimore, where citizens had had plenty of real experience with bank runs and didn't wish to watch another one on the big screen — with a bank president emerging as hero.

Frank Capra was America's preeminent filmmaker in the 1930s, giving moviegoers hope with his stories of irrepressible optimism. "Packaging hope for the hopeless," writes the Turner Classic Movies website, "his 'fantasies of goodwill' were as important to national morale as FDR's 'fireside chats' and well-deserving of the three Best Director Oscars they brought him."

Faith and hope, that's what fractionalized banking is all about: faith that not everyone shows up for their money all at once and hope that the bank's loans are always paid back. In the movies, the director and screenwriter can make it all work out. In real life, Keynesianism doesn't work; the government bails out the bankers and then depressions last a long time.

Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his masters degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. See his tribute to Murray Rothbard. Send him mail. See Doug French's article archives. Comment on the blog.

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