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Government policy and banking instability: "overbanking" in the 1920s


  • David C. Wheelock


Excess capacity, or “overbanking,” was cited by contemporaries as leading cause of bank failure during the 1920s. Many states that had high numbers of banks per capita in 1920 had high bank failure rates subsequently. This article finds that the number of banks per capita was highest in states that provided deposit insurance, set low minimum capital requirements, and restricted branching. Banks per capita declined the most over the 1920s in states where branching expanded, and in those suffering high failure rates because of falling incomes or instability caused by deposit insurance. Deposit insurance and the relative dominance of agriculture also explain the composition of state banking systems between state and federally chartered institutions.

Suggested Citation

  • David C. Wheelock, 1992. "Government policy and banking instability: "overbanking" in the 1920s," Working Papers 1992-007, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:1992-007

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    References listed on IDEAS

    1. Mark D. Flood, 1992. "The great deposit insurance debate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-77.
    2. Carl M. Gambs, 1977. "Bank failures -- an historical perspective," Economic Review, Federal Reserve Bank of Kansas City, issue Jun, pages 10-20.
    3. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    5. Gary Gorton & Richard J. Rosen, 1991. "Overcapacity and exit from banking," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    6. Alston, Lee J., 1983. "Farm Foreclosures in the United States During the Interwar Period," The Journal of Economic History, Cambridge University Press, vol. 43(04), pages 885-903, December.
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    Bank failures ; Deposit insurance;


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