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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.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1992-007.

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Date of creation: 1992
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Publication status: Published in Journal of Economic History, v. 53, no. 4, pp. pp. 857-879 (December 1993) Title:"Government Policy and Banking Market Structure in the 1920s"
Handle: RePEc:fip:fedlwp:1992-007
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  1. 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.
  2. 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.
  3. Carl M. Gambs, 1977. "Bank failures -- an historical perspective," Economic Review, Federal Reserve Bank of Kansas City, issue Jun, pages 10-20.
  4. Robert T. Clair & Gerald P. O'Driscoll, Jr., 1991. "Learning from one another: the U.S. and European banking experience," Research Paper 9108, Federal Reserve Bank of Dallas.
  5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  6. Mark D. Flood, 1992. "The great deposit insurance debate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-77.
  7. Gary Gorton & Richard Rosen, 1991. "Overcapacity and exit from banking," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
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