Kevin Bae

Non-Social in a Socially Networked World

Government regulation of banks resulted in larger disasters

Since the creation of the modern banking regulatory apparatus the losses, as a percentage of GDP, have grown from 1% in 1913 to 7% in 2009. The safer the government tried to make banking the greater the risks people and businesses took. This resulted in larger failures and losses.

“It is scarcely to be expected…that a national bank can be saved from disaster by the occasional visits of an examiner,” the comptroller of the currency, John Jay Knox, wrote in his report to Congress in 1881.

Regulation relied more on individual responsibility. Back then, if a bank failed, its officers, directors—and shareholders—would not only suffer market losses on the value of their stock. They also faced double liability, a clawback of up to the par value of their shares, contributing to the reimbursement of depositors.

Banks still failed, of course—but not as many as you might think. Of the nation’s roughly 10,000 national banks between 1864 and 1913, 501 failed, with cumulative losses to depositors of only $44 million, somewhat more than $1 billion in today’s money.

That was less than 1% of U.S. gross domestic product, estimates Rutgers University economist Eugene White. 

In later banking crises, when modern regulators were on the case, losses were much greater: Prof. White estimates that the cost of the savings-and-loan and banking failures of the 1980s was at least 3.4% of GDP, and the losses from the 2008-09 crisis may have exceeded 7% of GDP.

What Gets Lost When You Rescue Markets – WSJ