Too Big to Fail in 1930: The Failed Bank of United States and The Long Shadow of East European Jewish Immigrant Banking

On December 10, 1930, a Bronx small businessman visited his local branch of Bank of United States on Southern Boulevard. He needed cash. Despite its grandiose name, Bank of United States was in fact a commercial bank whose average deposits approximated $600.¹ With branches scattered throughout the Bronx, Brooklyn, and Harlem, Bank of United States catered to immigrants and other working-class residents of New York City, individuals who found it difficult to gain access to financial services in other New York City banks with only their small savings accounts.² Since 1928, the bank had been selling its shares to depositors to help raise funds, guaranteeing that this stock would retain value as the Bank purchased and merged with smaller commercial banks throughout the city. The Bank promised to buy back shares on demand. Few were concerned about getting their money back, as Bank of United States ostensibly was a very successful enterprise. Their funds were secured by its participation in the Federal Reserve system.³ When the bank manager refused to buy back the stock from the Bronx businessman, he stormed out.⁴ But before he did so he told all the other customers waiting in the branch of the manager's refusal, and warned that Bank of United States could not afford to buy back its stock. This warning, spread rapidly by word of mouth, persuaded 2,500 people to line up outside the bank's branch over the next several hours, all intent on liquidating their savings.⁵

At this time, the Bank of United States was the largest commercial bank in the United States by deposits and by customers, holding over $268 million in savings and serving over 440,000 depositors. Over the course of the 1920s, the bank had expanded from four to fifty-seven branches. The Bank drew most of its clients from New York City's immigrant communities. Few of these working-class depositors appreciated, however, the bold risks the Bank had taken with their assets when it merged with other banks, bought and sold first and second mortgages, and offered loans to anyone with an account. Once rumor of the Bank's insolvency started, it reverberated throughout the city. The crowds swelled; over 20,000 waited outside one Bronx branch. The New York Times marveled at the calm of the crowd.⁶ It seemed many in the "throngs" of depositors confused their bank's creditworthiness with that of the federal government. Neither they, nor any bank regulator knew that the bank's president, Bernard Marcus, the American-born son of its Russian-Jewish immigrant founder, along with his vice president, Russian-born Jewish immigrant Saul Singer, had used strategies to grow the bank—stock inflation and real estate investment—that were questionable according to banking legislation.

By the time the problem of Bank of United States reached the desk of New York's Lieutenant Governor Herbert Lehman—who had been head of the State Banking Commission since 1928—many saw antisemitism, as Milton Friedman would argue, shaping the response of the member banks in the New York Federal Reserve Bank.⁷ Representing Wall Street's most illustrious firms, the New York Federal Reserve system was created to prevent financial panics and bank closings.⁸ Lehman had turned to these firms several times over the previous few years for help in bailing out other failing institutions. Most notably, all had rallied to save Francesco Ferrari's City Trust Company, an Italian immigrant bank that failed in late in 1929 leaving its 20,000 without their $7,000,000 in deposits.⁹ But no banker in December 1930 wanted to risk his own institution's funds on bailing out the Bank of United States Class and ethnic prejudice played a central role in this decision. In responding to the crisis, J. P. Morgan's Thomas Lamont asked pointedly in a private letter which banker in his right mind would risk everything to bail out a bank "patronized largely by foreigners and...