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Smith was quite clear on the question of who bore the responsibility: The community depends upon the fraternity of bankers to see to it that the credit of the community is not squandered, that it is sound in character and can be depended upon…No Federal Reserve or other system can be devised to protect the quality of credit if bankers throughout the country do not apply sound judgment in the making of each loan.
In an April 1931 Atlantic piece “Whirlwinds of Speculation,” Samuel Spring blamed the collapse on more structural causes, showing how the promise of fantastical profits—proving to be “more potent than experience or reason”—had driven speculative booms and busts in three distinct sectors of the economy.
Interestingly, Hamilton largely attributed the increasing numbers of the unemployed not to the economic collapse, but to “the dark side of the amazingly rapid increase in labor-saving machinery since the war.” At the end of the essay, however, she alluded to the nation’s dire economic situation to bolster her cause: This year, if ever, it behooves us to think soberly of the need of giving some form of security to those upon whom the fluctuations of business throw the heaviest burdens.
These are men and women who have no control over discount rates, or credit, or the manipulation of bull markets and bear markets, yet they are the first victims of the battles fought in those high and mysterious regions. It is time for us to devise ways of meeting the inevitable disaster of old age and the almost equally inevitable disasters of sickness and unemployment, and these must be ways that will not fail when the stock market breaks or a new machine is invented, that will function in the lean years as in the fat years, and that can be accepted without loss of self-respect.
A series of Atlantic articles published in the aftermath of the 1929 stock market crash captures that era’s collective grappling with the situation—and reflects a broad range of thinking on the future of our economy, politics, and society.
In Chicago in 1923, he explained, the clothing manufacturers had agreed to implement an unemployment reserves system into which workers and their employers each contributed 1.5 percent of their weekly payroll.
Anyone who lost their jobs through no fault of their own would then be able to receive 30 percent of their full-time earnings for up to seven weeks.
Thus, the traditional unit bank began to disappear, replaced by the chain bank, described by Ostrolenk as “a group of banks owned by a holding company, a group of individuals, or by one person—not by a bank, as in branch banking.” Ostrolenk emphasized that this restructuring of the national banking system “has sprung up in accordance with economic need.” The chain bank, he argued, was “an essential substitution for branch banking.” Still, as with any economic evolution, changes in the banking system had dire consequences for those left behind.
“Within eight years,” Ostrolenk reported, “almost one sixth of the United States banks have been suspended with losses to the depositors.” Not surprisingly, the vast majority of these had been small unit banks.
And stockbrokers, in pursuit of commissions and with an eye towards driving prices ever higher, readily extended these unwise loans, which were referred to as “debit balances.” Debit balances thus underwrote a financial system that was unsustainable.