What did the Building and Loans do to save themselves?

The Great Depression that began with stock market crash of 1929 certainly set back to achieving the goals of the building and loan movement, and, as the “bank run scene” below demonstrates, it also posed a mortal threat to the survival of many individual building and loan associations.  Nonetheless, many survived. Many historians credit the programs of Franklin Roosevelt’s New Deal, especially the establishment of the Federal Deposit Insurance Corporation, and this is certainly true.

Josephine Hedges Ewalt reports that, by 1931, building and loans owed $300 million to local banks that had been the lender of first resort when the Great Depression hit.  In 1932, building loans in the state of New York had banded together to send flying squadrons” around the state to preserve the liquidity of these local institutions. In the same year, President Hoover added to these private efforts by signing the Federal Home Loan Bank Act of 1932.

How did the Federal Government help the building and loan?

By 1935, these efforts—combined with the work of the Federal Deposit Insurance Corporation—stability returned to the financial system. There is no doubt that, in this case, the intervention of federal money made the difference: $275 million in loans made  between 1933 and 1942, a sum  “well over 5% of the total assets of all the associations at the time”(44). All of these federal dollars represented loans that were repaid to the federal government “long before the ten-year period over which the payments were scheduled to stretch” (45).

The Case of the FDIC

The Federal Deposit Insurance Corporation (FDIC) was one of the most quietly effective and visible symbols of the continuing importance of the New Deal in day-to-day life in the United States. Writing more than fifty years ago, economists Milton Friedman and Anna Jacobson Schwartz (who each opposed the New Deal’s expansion of federal 

The FDIC’ s annual reports to Congress over the years also confirm that the wrenching experience of the Great Depression did not leave the future generation of bank officials with a greater fund of wisdom or integrity, nor had there been a vast increase in regulatory oversight from government; insured banks that got into trouble were generally caught early enough that they could be merged with healthier banks, with a confidence that the FDIC would cover the “depreciated assets” (Friedman and Schwartz 440). It is also must be noted that this program was self-supporting, with fees providing the revenue with which the federal government would step in to reorganize or close a failing bank with a minimum of economic injury to depositors.

The same logic was applied to a new federal housing policy administered by the New Deal’s Federal Housing Administration. By federally insuring mortgages created by that agency, lending institutions were able to offer long term mortgages (twenty to thirty years), which enabled the monthly loan payment to be within the reach of many more people.  

What happens in “It’s a Wonderful Life?

From the vantage point of our present, the most famous single scene in “It’s a Wonderful Life” is the “bank run” scene, set in 1932. At that moment, George faces an angry crowd clamoring for its money to be handed over immediately, before the building and loan succumbs (without realizing that they were hastening that closure by their panic). Bailey then delivers an impassioned explanation of how such an institution works. The power of that scene is such that we almost forget that George Bailey’s version of an FDR fireside chat is not, in the end, what saves the day. Instead, Mary Bailey fortuitously appears and donates the couple’s $2,000 honeymoon nest egg (just under $39,000 in 2019) to keeping the Bailey Building and Loan solvent, or, more precisely, within exactly two dollars of outright failure (“CPI Inflation Calculator”).

But is this movie version of how a building and loan is saved really that far from capturing what happened in “real life?” Mary Bailey’s action is faithful to history to the extent that it expresses some of what we remember about the spirit and the attitude that helped Americans get through the Great Depression.

Bank Run Scene in the movie It’s a Wonderful Life

Today, in the aftermath of the Great Recession, some of those who have been trying to explain how liquidity is restored to a capital-parched financial system—including then–Federal Reserve chairman Ben Bernanke and then–secretary of the treasury Timothy Geithner—have referred to the bank run scene in It’s a Wonderful Life to explain how pump-priming (the injection of capital) can provide the stimulus to reinvigorate a depressed economy (Bernanke, Federal Reserve 5–7; Geithner 8, 390).

For an especially vivid sense of how one branch of the Federal Reserve intervened at the local level to save well-run institutions made vulnerable by economic and social forces beyond their control, we can turn to the Utah banker Marriner Eccles, who was eventually appointed to head the Federal Reserve system by FDR. In his 1951 memoirs, Eccles give us his own version of a bank run scene (without any mention of the scene pictured five years earlier in It’s a Wonderful Life), in which he must calm a panicky mob whose sudden withdrawals might not only sink the Ogden State Bank, but also bring down all the branches of the First Security Corporation:

Mounting the counter, I raised my hand and called for attention: “Just a minute. . . . I want to make an announcement. It appears we are having some difficulty handling our depositors with the speed to which you are accustomed. Many of you have been in line for a considerable time. I notice a lot of pushing and shoving and irritation. I just wanted to tell you that instead of closing at the usual hour of three o’clock, we have decided to stay open just as long as there is anyone who desires to withdraw his deposit or make one. Therefore, you people who have just come in can return later this afternoon or evening, if you wish. There is no justification for the excitement or the apparently panicky attitude on the part of some depositors. As all of you have seen, we have just had brought up from Salt Lake City a large amount of currency that will take care of all requirements. There is plenty more where that came from.” (This was true—but I didn’t say we could get it.) “And, if you don’t believe me . . . I have here Mr. Morgan Craft, one of the officers of the Federal Reserve Bank, who has just come up in an armored car. Mr. Craft, say a few words to the folks.” Morgan Craft, Deputy Manager of the Salt Lake City branch of the Federal Reserve Bank, stepped forward: “I just want to verify what Mr. Eccles has told you. . . . I want to assure you that we have brought up a lot of currency and there is plenty more where that came from.” This, again, was perfectly true. But he didn’t say the currency belonged to us. . . In a split instant the faces before me relaxed in relief. The edge in all voices seemed to vanish. Some people stepped out of line and left the bank

Mariner Eccles 60–61.

Franklin Roosevelt acknowledged the importance in the New Deal of both preserving and extending homeownership when he announced that “the broad interests of the nation require that special safeguards should be thrown around home ownership as a guarantee of social and economic stability.”

However, the bureaucracy that enacted his words into federal policy rather neatly and deliberately excluded African American communities (Roosevelt, Public Papers 135; Plotkin sections 228, 229, 233, 284, and 289). The patterns of segregation confirmed in the guidelines of the Federal Housing Administration endured long enough to create the neighborhoods that became the targets of unscrupulous lenders peddling subprime adjustable rate mortgages in the Great Recession of our own time.

What Do You Think?

  1. What can we learn from the history of the Building and Loan (Savings and Loan industry about the role played by private efforts in saving the financial system?
  2. How would you explain the role of the federal government (in the example of the FDIC) in saving the financial system?
  3. What is the most accurate way of thinking about relationship between the policies of the Hoover Administration and those of the Roosevelt administration in saving the financial system?
  4. In what ways is “It’s a Wonderful Life” helpful in understanding American life during the 1920s and 1930s?
  5. In what ways is it either an inadequate or a misleading guide to understanding the history of these years?

Why Not Housing for All?