Banksters, Bosses, and Smart Money: A Social History of the Great Toledo Bank Crash of 1931 (review)

In his book, Timothy Messer-Kruse argues that the financial sector has real effects and examines the causes and effects of the banking collapse in Toledo, Ohio, during the summer of 1931. Messer-Kruse makes an important contribution with his comprehensive microeconomic study of a banking panic and collapse, using a social history approach. Much of the book identifies individuals and details their actions and relationships to Toledo's banks, real estate firms, corporations, and municipal, county, or state governments.

In the introduction, Messer-Kruse briefly reviews economic explanations for banking panics, the impacts of the Great Depression on Toledo, and the special examiner's conclusions regarding Toledo's banking collapse. As a social history, the work does not use concepts such as asymmetric information, adverse selection, moral hazard, or regulatory forbearance to explain insider or regulator behavior. The first chapter details the associations between bank directors and executives with their firms, organizations, corporations, or government offices and provides an overview of Toledo's economy, development, and labor movement. Real estate development and speculation with their corresponding ties to Toledo's banks are emphasized. The next chapter reveals political ambitions of Toledo's bankers and the political economy of banking. The middle chapter details the Toledo banking suspension and collapse, emphasizing the activities of insiders. The following chapters report on actions of insiders, politicians, and regulators during the banking liquidations and prosecutions of several Toledo bankers, as well as an interesting market pricing depositor claim. An epilogue reviews the economic effects of the ongoing depression on Toledo government and summarizes factors Messer-Kruse identifies as causes of Toledo's banking collapse.

Evidently, the origins in June 1931 of the Toledo banking crisis were the embezzlement of a relatively small amount of funds from one Toledo bank, the Chicago banking panic, and the withdrawal of funds by a Toledo bank's insiders that followed an independent audit of its books and inability to merge it with another bank. As these events became known, other banks implemented the 60-day deposit suspension rule. At the end of the suspension period, five banks were closed and liquidated. Messer-Kruse describes the actions of specific banks and bankers during the June–August 1931 deposit–withdrawal suspension and the following liquidations of the closed banks. His research is extensively footnoted from local newspaper reports from the 1930s, as banking records from failed banks and examination records of failed banks are unavailable today in most jurisdictions. Although the depression is raging around Toledo, the effects on Toledo were more severe than average, and Messer-Kruse treats the banking collapse in Toledo as an isolated case.

The book details how some banks managed (or mismanaged) declines in asset values. Attention is given to how funds were raised from illiquid assets and how insiders preferentially withdrew these funds. Particularly valuable, the liquidation activities at some of these failed banks benefited insiders, including the practices of offsets, asset valuations and dispositions, and improper record-management practices. The complex political economy that surrounded the bank prosecutions largely protected Toledo's bank insiders at the expense of Toledo's small savings depositors, and the description of the prosecution of six bankers at one failed bank is a revealing smaller story within the larger work.

While other researchers listed bank runs, too high operating expenses, too many illiquid assets, and declining real estate values as causes for Toledo's banking failures, during 1933, the special examiner documented misappropriation, fraud, insider withdrawals, and director loans in the remaining books and records of one of the failed banks. Messer-Kruse shows that many bank insiders preferentially received their deposits in the failed banks and benefited from their liquidation, politically involved insiders discouraged the investigation of the failures, and regulators protected insiders from the detriment of the failed banks' depositors. Messer-Kruse speculates much...