N.B.: The article below is a prequel to my previous article on the 1926 banking crash in Georgia at https://longleafjournal.com/the-1926-atlanta-banking-crisis-three-or-more-crooks-sharpers-or-fools-may-apply-to-the-secretary-of-state-and-secure-a-bank-charter/).
The second decade of the twentieth century brought revolutionary changes to the small towns of Georgia. The build up to the First World War bolstered American exports, and cotton production soared. The United States, while maintaining a policy of neutrality when the war began in August 1914, reaped enormous profits from trade with the Allied enemies of Germany. Our military involvement would only become meaningful after we had despatched a substantial ground force to France near the end of hostilities 1918.
Closer to home, the number of banks in Georgia soared in the years before and during the war-especially in rural areas. Georgia cotton farmers bought new lands for cultivation. They borrowed from the banks to do it.
In the 1900s, magazines and city newspapers reached the curious eyes of small town people who were eager to join the twentieth century -and indulge in its bounty. Motion pictures became popular. Automobiles were becoming commonplace among the rising middle class of the small towns that dotted the counties of Georgia’s cotton belt. railroad. Women’s magazines fueled the movement for women’s suffrage. The sticking point for many would-be entrepreneurs was where to get the capital to build a theater, open a car dealership, start a Coca Cola bottling plant or build an electric generating facility -typical small town businesses that would prove profitable. . Of course, banks were the answer.
Banks proliferated in rural Georgia partly because the automobile was not so ubiquitous before the war. It was not convenient (or always possible) to get to the bank in the county seat for farmers still using mules and hand plows to plant. At the same time, aspiring extended families with a a few thousand dollars could pool their resources and get a bank charter-an easily incorporated state bank charter that is. And, the state’s regulations were minimal and lacked adequate enforcement mechanisms.
These banks, often owned by family members and their in-laws, often loaned depositors’ money to other family members to buy land or businesses. Thousands of small corporations for various and often ill-defined purposes were chartered in this era. Business and civic organizations as well as some churches provided the social space and connections for would-be entrepreneurs to inspire and conspire. On the upswing because of the war in Europe, things looked great. Cotton prices rose as did all other commodities required by the Europeans to sustain their war efforts.
For these small town banks, things took a disastrous turn. The war came to an unexpectedly early conclusion with Germany’s abject surrender in November 1918. Predictably, cotton prices collapsed in the Great Recession of 1920, as cotton planters held to the romantic notion that cotton prices would remain high. Overproduction proved disastrous. The lands that had served as collateral for loans fell in value. Hundreds of local newspapers record the story of public auctions of land on the courthouse steps in counties throughout the cotton-growing regions of the state. Individuals went broke. Often, banks did as well.
Overnight, desperate bankers in small towns sought an escape from their predicament. Even the most scrupulous were tempted to rescue family members by loaning them even more of their depositors’ money. These “insider loans” often went to desperate family members who had lost their shirts in the downturn. “Runs” on such banks by depositors to draw out their money became pointless. Their bank had gone into receivership and its assets -in the form of notes from borrowers- had to be sold at public auction to satisfy creditors. It is not difficult to imagine that loans to family members were issued knowing that the collateral was worthless or at least of less value than the amount of the loan.
Rural people in particular had little cash money and were reluctant to deposit it in banks. But the emerging cash economy of the war years gave them little alternative but to risk putting their money in a bank. Advertising by banks helped convince them no doubt.
Throughout the first two decades of the new century, bankers, legislative reformers and banks’ lawyers sought stability by having the state or federal government establish guarantee protection for depositors. This would expand their own opportunities of course, and enable banks to loan out a growing percentage of their deposits. But, federal guaranteed deposit insurance would not become a reality until the creation of the FDIC during the New Deal Years of the 1930s. Interestingly, many New Dealers and President Franklin Roosevelt were hesitant to create the FDIC, fearing the act would encourage bankers to be too too cavalier in loaning money. There was ample evidence to justify such fears.
Meanwhile, some bankers created their own schemes to at least imply that deposits were insured. This inspired creative and sometimes deceptive agreements permitting Manley’s banks to become “fiscal agents” for member banks. Systems or “chain” banking arrangements were created to lower risk by supposedly setting aside a rescue fund to give a failing bank an infusion of cash if local conditions caused a ” “run” by depositors to draw out their money. This approach created a nightmare scenario.
One of the largest such schemes was owned and operated by Wesley Manley, a highly respected and very rich Atlanta banker. When his reserve fund company was found to be virtually devoid of funds in 1926, more than 180 banks went into receivership (bankruptcy in effect). Depositors spent lots of money on lawyers over the next few years in an effort to recover the remnants of their deposits. State banking officials reluctantly placed Manley’s Bankers Trust firm in receivership. Also, reluctantly, and under great public pressure, Manley was arrested. He had been using the firm’s money to invest in the Florida real estate boom. (Manley’s trial and fate were discussed in my previous post.)
While much has been written about the 1926 banking crash as a precursor of the Great Depression of 1929, little attention has been paid to the affect all this had in slowing the emergence of economic development, especially in the agricultural regions of Georgia. The glamor lies in writing about Manley (and others) and his eccentric character, lavish lifestyle and ability to evade punishment for his deeds. There has been a tendency to dismiss the failure of the myriad smaller banks and focus on the larger banks that failed. Bankers and state officials dismissed the 1926 crash as manageable and impacting mostly rural banks. They were misleading the public.
For many small-town families, the 1926 banking collapse was ruinous, forestalling personal and regional progress. For some, it put an end to the accumulation of generational family wealth -just as had the Civil War. Plans for establishing or expanding local educational systems, businesses and even medical services must all have suffered tremendously. But who has spoken or written to acknowledge the set back this caused? Based on the known failure of banks, about 110,000 depositors lost all or most of their money. But the effect was even greater when you consider that each account lost impacted four or five other children and wives -the total affected persons probaby amounted to about half a million people.
Trying to assess the small town impact, I am failing to find complaints in the many newspapers serving he state’s smaller cities and towns. Did editors fear embarrassing the towns’ elites who owned the banks and made poor choices. Were they embarrassed for their communities because their leaders had been so easily taken in? I do not know. The impact simply became conflated into the “Great Depression” narrative and was all but forgotten during and after World War II. Study by historians is made difficult by the fact that most of the banking records from this period were destroyed by the state of Georgia.
Hopefully, readers will share with me their stories about how the the bank failures of 1926 and earlier affected their ancestors. I would love to hear your family memories about these events.