Shortfall: Family Secrets, Financial Collapse, and a Hidden History of American Banking by Alice Echols (review)

To some extent, the benign picture of thrift institutions—enabling working classes to fulfil their American dream of homeownership—has endured. Indeed, these cooperative institutions' positive image, first conveyed in the 1946 movie It's a Wonderful Life and then spread in numerous accounts (see for example, David Lawrence Mason, From Buildings and Loans to Bail-outs: A History of the American Savings and Loan Industry, 1831–1995), seems to have survived even the Savings and Loans crisis. Their model of mutual cooperation dating back to the late nineteenth century, whereby shareholders contribute to each other's access to credit and are at the same time somewhat liable for others' repayment errors, remains attractive. This is evident when compared to the more negative image of rapacious bankers lending out innocent depositors' money in order to fill their own pockets with profitable earnings.

In her book, Alice Echols overturns this rosy story and looks at the darker side of the thrift industry. Many scholars of the U.S. Great Depression have told of stockholders' excesses, as well as of bankers' reckless investments and the unresponsiveness of the central banking authorities. However, few have actually studied the ways in which thrift institutions, or Building and Loans (B&Ls) as they were called at the time, far from being immune to such trends, were in fact active contributors to the factors that eventually led to a serious financial crisis, with profound economic consequences for savers and mortgage holders.

To do this, Echols first draws on her own family history. Walter Davis, her grandfather, was the founder of the small City Savings Building and Loan association in 1920s Colorado Springs. At the heart of the Depression, he was attacked on numerous charges of embezzlement and absconded, hid on the East Coast, and ended up taking his own life when finally jailed. In a remarkably skillful and well-researched tale of small-town interwar life, Shortfall manages to paint the thrilling history of small American savers caught in the net of ambitious property investors who often did not start out much richer than they did. While the scope of the book is necessarily geographically restricted, Echols profusely used archival documents such as newspaper articles and court cases to document the historical and geographical context, making it a rich historical account of America's heartland in the run-up to the Depression.

As the 1920s progressed, we learn of the B&L owners' growing tendency to make the best use of their favorable reputation as thrifty institutions in order to attract well-meaning customers and use their lifelong savings to fund personal (often land-related) projects. While embezzlement, sometimes resembling Ponzi schemes, is a recurring theme of the book and had been recognized as a serious issue by some scholars in the field (such as Kenneth A. Snowden, "The Anatomy of a Residential Mortgage Crisis: A Look Back to the 1930s"), less well-known and perhaps more worrying was B&Ls' habit of misleading customers as to the actual nature of their business.

Many B&Ls frequently presented themselves as thrift institutions, but lured customers by pretending they offered, in addition, the same advantages as banks; customers were told their savings could be considered as demand deposits, not as shares, and would not need a long 30- or 60-day notice to be withdrawn. In other words, their money could be considered a liability of the institution, a form of debt, which the shares in reality were not. This was permitted both by very lax regulation and by association owners' cunning way of verbally convincing prospective shareholders of their depositor-like character while at the same time making them sign contracts assuring the contrary.

As evident from numerous court investigations, the result was that B&Ls suffered an enormous credibility crisis when, as the Depression unfolded, customers demanded...