Closed: The History of a Country Bank
I
A BANK in a small Southern city was experiencing a heavy run. Toward the middle of the day, just as an old Negro in the long line of depositors reached the paying teller’s window, word came from the cashier to suspend payments — the cash was all gone and the bank must close. The teller slammed his wicket shut. The longtime, grumbling, gradually broke up and passed out of the building. All but the old Negro, who apparently did n’t intend to give up without a struggle.
Summoning all his courage, he rapped gently on the glass of the cage. No response. He rapped again. Still no answer. Once more he tapped. The teller flung open his wicket. His nerves were ragged with the strain of the past few days.
‘What’s the matter with you?’ he shouted. ‘This bank is closed — busted. Did n’t you ever hear of that before?’
’Yas, suh, boss, ah done heahd ’bout sech things, but dis am de fust time ah evah had one bust in mah face.’
When I first heard that story I thought it was funny. I believe I have even been guilty of telling it at bankers’ dinners when called upon for a speech. Perhaps some bankers can still get a laugh out of it. I can’t. Not any more. I have had a bank ‘ bust in mah face’ — and I was n’t on the side of the counter that the old Negro was on, either. More than that, I waited eighteen months for it to ‘bust,’ never knowing when it was going to happen. Whether the strain of waiting for the explosion was greater than the actual ‘busting’ I have never been able to determine. Nor have I seriously tried. One just does n’t try to remember such things.
I am not going to say the bank should not have been closed. That is probably what every ex-banker who has had his bank closed says — or thinks. Instead, I am going to offer two facts. You may draw your own conclusions.
First: The bank paid an initial depositors’ dividend of 50 per cent. Shortly after the first, it paid a second dividend of 25 per cent. Total to date: 75 per cent. And the end is not yet. At least one more dividend will be paid. Possibly more.
Second: Let me quote from the American Bankers’ Association Journal of June 1929 (page 1269), from an article by Gilbert Thorndyke based on an intensive survey conducted by William McKinley Edens under the fellowship created at the Harvard Graduate School of Business Administration by the American Bankers’ Association: —
Naturally, if these [219] failed banks had rather consistently paid out as much as 80 per cent to their depositors the wisdom of their closing might now be seriously open to question. Such successful liquidation would have indicated a quality of assets rendering them practically solvent, and closure could be presumed to have occurred primarily because of the external factors beyond the bank’s control.
Cold comfort at best.
Let it be understood at the outset that I am not criticizing state supervision of banks as an institution. Some method of regulation is absolutely necessary. The old theory of government that ‘the king can do no wrong,’ however, went out of style about the time of the French Revolution, and there can be no present-day heresy in calling the attention of the bureaucracy to the fact that Fascist methods are no longer in order.
A little power, improperly applied, is dangerous. In the hands of ignorant or arbitrary officials it may be fatal to the institutions under their control. The fact that a politician is close to the Administration does not mean that he is capable of directing the Department of Public Lands, and the fact that a lawyer, a farmer, or a clerk controlled a lot of votes at a gubernatorial election does not necessarily imply that he will be a great success in directing the destinies of banks. It is not necessary to seek far for recent instances of bureaucratic authority misdirected. These instances are most apparent in cases where the governing board or commission seeks to go farther than the lawmakers themselves intended and injects its own ideas into legislative enforcement. In attempting to put into operation the par collection of checks in the Atlanta district, the Federal Reserve officials resorted to all manner of devices to whip into line the non-member banks. In small towns, where there was no national bank, checks were sent through the post office and through the express agencies for collection. Instances are on record that checks were held for days and then presented in imposing totals for the sole purpose of embarrassing banks carrying small cash reserves which refused to remit at par.
A more recent case involves the persecutions and conspiracies of various federal officials against the joint stock land banks, which culminated in the attempt to send two bank officers to prison on charges of using the mails to defraud. Convicted by a trial court two years ago, these officers have just been vindicated by the decision of the United States circuit court of appeals at St. Louis.
A number of years ago, the banking commissioner of one of the states decided that group and chain banking was unsafe. There were no statutes on the books against such systems and the commissioner was not successful in lobbying such a measure through the legislature. But, being a forceful man, he took matters into his own hands and as a result, in one way or another, he closed or banished from the state all interlocking banks. To-day that state has one of the largest group banking systems in the country. But the bankers who had the temerity to disagree with that commissioner in the matter of banking trends were dealt with in no gentle manner.
In my own state, the department, for reasons sufficient to itself, opposed so-called ‘family banks.’ There was no law against such an institution and no reason why there should have been. Family banks have their roots in the very soil of our independence. They were the pioneer banking institutions which followed the frontier westward. The wealthiest or most prominent man in a new settlement lent money, from force of necessity, to his neighbors. Later, when they had accumulated some money of their own, they left it with him for safe-keeping. Almost before he knew it, and frequently without any desire on his part, he found himself in the banking business. He did not go out into the byways seeking capital; he used his own. He prospered with the community. When he died the business was continued by his sons and grandsons. In good years they made money. In lean years they risked everything to help the community through. Theirs was not a mere job, to be lightly taken or left with the turn of fortune. They were not hired men. The bank was their life, their pride, their whole being. Such was the family bank. And since there was no law against the existence of such an institution, and since there was in existence a board which honestly believed that there should be such a law on the books and had the power to enforce it if there had been one, what more natural than for the department to take matters into its own hands?
II
As I look back on it now I can see the inevitableness of the whole thing so plainly! It was n’t so much the closing itself that hurt — that left only a feeling of numbness, a sense of relief after a rucking pain. What hurt was the standing helplessly aside and watching the blundering and incompetency with which the whole operation was conducted — the false starts, the backing and filling, the terrible uncertainty and insecurity. The watching of one’s child slowly hacked to pieces on the operating table by a group of quack doctors, when a quick and clean incision, no matter how painful, would have saved its life.
Just before Thanksgiving Day, the banking department made its regular examination of the bank. It was customary for two examiners to do the work, coming in at about three in the afternoon, checking the cash and current transactions, sealing up the notes and securities, leaving the checking of the assets and depositors’ ledgers until the following day. It was just a country bank, one of three, in an agricultural community of about twenty-five hundred people. Examinations were a comparatively simple matter.
We prided ourselves on keeping excellent records. All coin was kept wrapped and sacked except the small amount needed for counter use. Currency was kept sorted and strapped according to denominations, and gold certificates were separated from other currency. Note registers, collateral registers, bond records, were of the most approved type and were balanced regularly against the assets themselves and the general ledger controls. Subsidiary ledgers were run for everything for which they could possibly be used. Any assets which were pledged for rediscount purposes were represented in the files by actual receipts signed by the reserve city bank holding them. Customers’ securities held for safekeeping were evidenced by duplicate receipts and were kept in a separate compartment in the vault. Yes, we were rather proud of our records — in our small-country-bank way. The examiners spoke highly of our condition and usually made short work of their examinations. They ’breezed’ in at three o’clock in the afternoon and ‘breezed’ out on the six-fifteen local the next day.
After this particular Thanksgiving examination things went on as usual — for about three weeks. We cashed the creamery and live-stock checks, made some loans, collected a few, extended a lot more. We prevailed upon old Mr. Wallace to leave his $5000 in a certificate of deposit at 3 per cent instead of buying Great Jumbo mining stock which promised 10 per cent a month. We told old Mrs. Hill that if she was dissatisfied with the 3 per cent her savings account was earning she could get more income by buying American Telephone and Telegraph common — and her money would be just as safe. We subscribed for an advertising service that was warranted to bring us all the savings deposits for miles around. We wrote a few advertisements ourselves for the local paper, telling how old and strong we were. We put in the winter’s coal and bought a new snow shovel. We opened the bank every morning at seven o’clock and closed it at six — except Saturdays, when we kept open until ten at night. We were terribly afraid a dollar savings account would get away from us and go to our competitors.
Then, on a gray day in December, back came the examiners, reënforced by a couple of young chaps just out of business college, whose function seemed to be to carry brief cases and say ‘Yes, sir’ to the examiners. They ordered me to telephone to the president, who was at home, and when he came they herded the three of us into the back room the president, the cashier, and me. We were also the board of directors and the entire body of stockholders. This made it all quite simple. We had nothing to do but listen.
Well, it seems we had violated every known rule of banking since books of law had first been written, besides a few rides that the banking department had made up as it went along and had forgotten to tell us about. Then we got down to cases. The examiners brought out their records. We brought out our notes, collateral, and bonds. They had made several lists, carefully classifying the loans into ‘probably good,’ ‘doubtful,’ and ‘worthless.’ Just what method they used I could not understand at the time, since the borrowers were entirely unknown to them. But it all looked very neat on paper. I remember that in a dazed sort of way I was quite impressed. I also recall vividly that the total at the bottom of the column marked ‘worthless’ was $55,000, and that the ‘doubtful’ column, added to it, totaled $177,000. These figures are burned into my mind forever. For months I saw them in the dark as I lay in bed unable to sleep. They came between my eyes and the books I tried to read. Whenever I encounter the combination now it brings the whole thing back.
So we start at the top of the list with Al Adams’s unsecured note for $500 which has been renewed from time to time for years. Al probably expects to pay it, sometime. But he’d be awfully hurt if we asked him. He never heard of‘liquid position,’ ‘frozen assets,’ or ‘call money,’ and he thinks the stock exchange is down by the railroad where he ships his hogs. But he owns eighty acres of the best bottom land you ever saw and has two fine boys who help him farm. — Why, yes; he’ll give us a chattel mortgage if it’s necessary. — All right; get it.
And so on, down the list, through the whole alphabet. Wrangle, wrangle, wrangle. We know our paper is n’t all 100 per cent. Neither is that of any bank, country or city. But the position is far from dangerous. We have a high cash reserve. We have a strong secondary reserve of good listed bonds. We have the confidence of the community. The desperate paper, such as it is, is largely the wreckage from the greatest agricultural slump in history. But we’ll work it out — w’e’ve done it before, after the crop-failure years, the hoof-and-mouth-disease years, the hogcholera years, when things looked pretty desperate.
Now we’ll find out what else is wrong with us. We are carrying our bank building at a greater ratio to our capital than is allowed by law. We point out that the bank had been in operation for years before that particular law was passed and that the law specifically exempted from its provisions institutions established prior to its passage. In other words, that the law was not retroactive. That makes no difference — the chief’s orders are to write it down or take the consequences. That will wipe out our undivided profit account. There’ll be nothing there to charge bad loans to. (In heaven’s name, is this the United States or is it Russia?)
As for the loans themselves, the examiners propose to stay in town and check over every last note in our files till they have determined just how good each one is. They have already taken rooms at the hotel and are prepared to dig in for an all-winter siege. And this in a town where one can’t buy a Ford without every mother’s son knowing all about it in an hour — and just howmuch he got in trade for his old car. Mentally, I throw up the sponge right there, and everything inside me goes dead. I decide that it is just a question of time, and a mighty short time at that.
When they have completed their check they will let us know how much bad paper we have and we shall then be compelled to take up every dollar of it in cash or secure it to their satisfaction. Fair enough, certainly — if they are at all reasonable as to what is ‘ bad paper. But I can’t see how any bank in a small town like ours can last until they get their checking done when the news gets about that a flock of examiners, about as numerous relatively as the proverbial seven-year locusts, has descended upon it.
The inquisition could n’t last forever, and finally the examiners departed, leaving the impression, I recall, that we were fortunate not to have been lined up against the wall and shot. But from our standpoint not so fortunate, at that. There was not one of us, I believe, who would not as soon have been shot as face what we were sure would follow the next morning.
III
After they had gone not a word was said. We were stunned. Our faculties refused to function. We could have been no more surprised or dismayed if the building had suddenly collapsed on us. Years of effort — and to what purpose? Slowly we gathered up our things and went out, one by one. I was the last to leave. I slipped the old-fashioned bank pistol into my pocket. I went up a back street, toward home. I went slowly. I must think things out.
It was very late when I reached home. The children were in bed. My wife had a lunch ready for me, but I could n’t eat. The very thought of food was revolting. Did n’t I feel well ? Oh, yes. Feel all right. Just tired, I guess. (No use to tell her to-night. Spare her as long as I can. Perhaps in the morning . . .) Guess I’ll go to bed. Hard day.
Hours of sleeplessness. Staring up into the dark. Pretending to be asleep. Finally dropping off — to be wide awake again in another moment. Busted! Busted!! Busted!!!
But with morning came new hope. Perhaps things would n’t be so bad — ! Perhaps a miracle —! But did miracles really happen?
We opened at seven. The examiners would be at the bank at nine. No country-bank hours for them. All the better. The run would probably start the next day — possibly to-day, as soon as the news got about. We wired our correspondent for a liberal supply of currency. We’d hold out as long as we could. We’d go down fighting.
The usual early-morning customers came in to transact their business. Nothing unusual. Same conversations about the crops and the weather. At nine the examiners came trooping in, all set for a Roman holiday. They fell upon the notes and securities and began their everlasting checking. They stood behind the cashier as he paid checks. They dug into drawers and corners. They watched every transaction — for all the world like a bunch of correspondence-school detectives.
To my surprise, the customers paid very little attention to them. They had seen examiners at work there before and nothing serious had ever come of it. Six o’clock came at last, and there had not been even a semblance of a run. Surely it would start to-morrow. But the extra currency would be here in the morning and we should be prepared.
The second day was much the same as the first — and the third and the fourth. There seemed to be even fewer withdrawals than usual. No suggestion of a run. People did n’t even seem to be worried. I don’t know which were the more surprised, the examiners or ourselves. I am convinced that the banking department expected that a run would develop which would put us out of business within forty-eight hours.
After four days, during which they had rechecked everything on the premises, — even the postage stamps and the supply of stationery on hand, — the examiners left town, instructing us carefully to telephone the banking department immediately when a run started. I can’t get the idea out of my head that they were actually disappointed that their presence had n’t already caused one. They had n’t counted on the confidence which the bank enjoyed in this small community. But apparently the department had set out to ‘clean up’ some of the banks, and they did n’t propose to be deterred. As soon as the examiners had returned to headquarters letters were sent out to our borrowers and depositors, to the people to whom we had sold securities, to the people who had left securities with us for safe-keeping. They did not try to conceal the fact that the banking department thought there was a nigger in the woodpile. Questions were asked in the letters to determine whether the recipient had ever been defrauded by the bank or had any reason to suspect the actions or the motives of those who ran it. It was a perfect system for destroying bank credit. How any bank could have stood out against such a barrage of insidious propaganda is more than I can comprehend. But stand out we did — for months and months, which seemed years and years. Probably the general public had become so used to state and federal interference during and after the war that they thought here was just another new wrinkle, and sighed and answered the letters, or tore them up unanswered.
Immediately after the first of January, two of the examiners returned. It seemed they had completed their check and the original figures would stand. The $55,000 in bad paper must be taken out at once and the balance of doubtful paper must be secured and then collected within a short time or our doors would be closed. We had been warned what to expect and the president was prepared. He turned everything he had into the bank, took up the bad paper and gave security for the doubtful loans. It left him without a dollar, but he did it cheerfully and without complaint, to save (as he thought) the bank which he had built up.
Then began the greatest clean-up movement which that section will ever see. I took the $177,000 of loans and started out in earnest to try to collect them. Only those bankers who piloted their institutions through the great agricultural slump at the beginning of this decade and the years that followed — or those who failed and went down with their banks — will know what a heartbreaking job that was. All through that winter, through the spring, the summer, and the winter that followed, I drove the countryside, getting a few dollars here and there, but mostly hard-luck stories — which I knew too well were genuine. There simply was n’t any money, there wasn’t any credit, there wasn’t any value to anything. Farm lands were n’t worth the amount of the mortgages against them. Many farm owners, who had considered themselves wellto-do a few years before, were actually insolvent. Tenant farmers were in a pitiable condition. Their few belongings, when we sold them out, were not enough, in many instances, to pay their store bills. When we threatened to collect their notes they promptly went into bankruptcy.
The banking department was continually demanding that we collect more and more paper and do it faster. As often as twice a month the examiners would drop in unannounced and hold an inquisition. We never knew when they would make good their continual threats to close our doors. Our nerves were so ragged we would jump whenever a customer entered the door. They would have us believe that never before was a bank in such terrible condition; that we were the only bank in the country that had any bad loans; that only by the grace of God and the commissioner were we not out on the street. Naturally, these statements were not very convincing. We knew our fellow bankers well enough to know that ours was not the only bank which stood behind its customers through the big depression, and that they all had their share of poor loans.
We had practically ceased making any new loans, merely renewing those we had to carry. The proceeds of those notes which we did collect were put into underlying railroad bonds, all listed, which even the banking department could n’t object to. These securities strengthened our liquid position, we felt, against the day when a run must be met.
During all this time, we were carrying on an economy campaign within the bank which would have made the closest Scotchman look like a spendthrift. We virtually discontinued our advertising, except the usual card in the local weekly paper. We discharged our janitor and for a year and a half the cashier and I did all the cleaning, — getting down on our hands and knees once a week to scrub the tile floor, — tended the fires, and shoveled the walks. We spent just as little as possible for stationery; we even hated to buy postage stamps. At night when I swept out I would carefully pick up all the rubber bands, paper clips, and pins from the floor so we could use them again. We voluntarily reduced our salaries at the start — though heaven knows the usual country-bank salary is small enough — and of course did not even consider paying any dividends.
And yet the examiners, at every visit, would complain because we were not earning enough to justify our existence as a bank. They were right about that, but they forgot to point out that not one country bank in ten earns enough on its invested capital to justify the risks of commercial banking. And they had us so cowed by this time that we did n’t dare argue the point.
IV
At last the banking department had an idea that was a masterpiece: we should double our capital and distribute the shares widely among local people. Now there would have been considerable sense to this plan if it had been conceived at the very start. But to attempt to sell stock with the bank in the position in which it had been placed by the department seemed just, about hopeless. Nevertheless, the ultimatum was issued and we went at it almost cheerfully. Surely the department would not authorize the sale of stock if it contemplated closing the bank. This was the only good news we had had since the first visit of the examiners.
So we went to work. One by one the men whom we wanted as stockholders were called in and told that we planned to increase the capital and to place the additional stock among a group of men such as themselves, and that the banking department had authorized the additional issue. Of course this order of the department specified that control of the bank must pass entirely out of our hands and into those of the new stockholders. We did not demur for an instant; the only thing we cared about was saving the bank.
Within a few weeks the stock was sold and paid for, the proceeds placed in a separate account on the order of the banking department, and permission was asked to issue the shares. Instead of granting this request at once, however, the department countered with another ultimatum. They had decided they ought to have one of their men in the bank permanently, and told us the cashier must resign and they would select one of their own staff to take his place. Whether they thought that the hoped-for run was about to develop, or that we expected to decamp for South America with the bank’s funds, or that we were wasting too many rubber bands, I never learned. They did n’t take the trouble to give us reasons.
The cashier was n’t particularly cut up about this last order. His was no bed of roses, and so far as his income was concerned he could have done better at any time if he had given up his job, bought an old horse and wagon, and begun hauling trunks to the depot. As to the rookie from the banking department, he did n’t trouble us much. He showed up at nine in the morning, left early in the afternoon, and spent most of his time while he was at the bank looking out of the window. Oh, yes, he was on our pay roll and drew his salary regularly every month. But he did n’t offer to help scrub out, so from then on I did that alone.
As the weeks wore on and the department was deaf to our pleas to issue the additional stock, the subscribers began to drop in and ask, in a perfectly nice way, when we expected to issue the shares, and to suggest that if we had changed our minds about it they could find other uses for the money they had paid in. Finally we grew desperate and I made a trip to the capital to demand that they allow us either to issue the stock or to return the money to the subscribers. The only relief that I got was that they would write us about it in a few days. In this instance they kept their word and several days later we received a letter — telling us to return the funds to the subscribers. We sent out checks immediately with a letter stating that the banking department had withdrawn its authorization for the additional stock.
I cannot describe the feeling of absolute hopelessness that took possession of us after that. It did n’t take a soothsayer to predict that our months of agony were about over. After going through such mental torture as I never expect to have to endure again we knew that at last the end was very near. So I was n’t surprised when, one afternoon, the chief examiner and two assistants walked in. I was sitting at my desk looking out of the window into the quiet July street. I continued to look. They did n’t need to tell me why they were there. I don’t remember that they did tell me. I knew. And they knew that I knew. I just sat there, slumped down in my chair. No feeling of relief. No feeling of anger. No feeling of discouragement. No feeling whatever. Just nothingness. Nothingness in a complete vacuum. A body without a spirit. A lump.
I heard the rookie put the cash into the vault, lock it, and depart with the examiners. I saw them cross the street and enter the hotel. I sat there a long time. It began to grow dark. With an effort I roused myself. I reached into my pocket. A key and some bills. I counted the bills. Fifteen dollars. I laid the key on the desk. Mine no longer. I took my hat and crossed the lobby. On the floor lay a large rubber band. I picked it up and, returning, laid it on the desk. I went out and closed the door. A neatly typed sign was pasted on the glass panel: ‘This Bank is in the hands of the State Banking Department.’