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

Published by EH.NET (October 2005)

Timothy Messer-Kruse, Banksters, Bosses, and Smart Money: A Social History of the Great Toledo Bank Crash of 1931. Columbus: Ohio State University Press, 2004. xii + 196 pp. $45 (cloth), ISBN: 0-8142-0977-7.

Reviewed for EH.NET by Lynne Pierson Doti, Department of Economics, Chapman University.

Banksters, Bosses, and Smart Money provides great evidence for anyone who wants to prove that business failures are caused by the evil intentions of executives. In this case study of Toledo, Ohio, 1931, Timothy Messer-Kruse (Department of History, University of Toledo) describes a situation where, when the city’s banks faltered, officers and owners greedily hastened the demise of the city’s financial system by grabbing their own assets at the expense of other depositors.

The premise of the book is that banksters, (“the lawlessness of gangsters combined with the power and privilege of bankers,” p. 112), were responsible for the bank failures of 1931. The behavior of the bankers described is certainly inappropriate, but given that bank failure was a nationwide phenomena in that year, are we to assume that all the bank failures had a similar cause? Even in the case of Toledo, did previous years have better people in charge when there were no panics? Or did these banksters suddenly turn greedy? Certainly we cannot look to this book for the causes of the financial problems of 1931, but the author does certainly present a case of bank owners who were no moral firewall against a virus of people who wanted their money back.

Toledo’s bank problems were a significant part of the nation’s problems. The largest bank there, Ohio Bank, with more than $50 million in assets, was the ninth largest bank by assets to fail during the Depression. Toledo was in the Federal Reserve System’s fourth district, which suffered the largest losses of any district. Three quarters of those losses were in Toledo (p. 5). Toledo was also the city where losses per depositor exceeded every other city in the nation, and the next top cities in the ranking were also in Ohio.

The real story in this book starts in June, 1931, when the banks were in eminent danger. A Toledo location hosted the state’s banking convention. Mild rowdiness at the convention masked real fear of problems developing. The week before, the convention host had borrowed $10,000 against his $6000 home. During the festivities, a bank clerk at Security-Home Bank embezzled several thousand dollars, of which he was relieved while in a drunken stupor. Stacey McNary, the bank’s president, kept this out of the newspapers, but rumors circulated (p. 55). A few major corporate depositors began to withdraw funds. McNary could not afford to lose deposits. The bank had almost $1 million, about ten percent of the total loans, in loans to directors which had been renewed while underlying collateral, when there was any, was dropping in value. McNary tried for a merger with Toledo Trust, a more conservatively run institution. Toledo Trust began the process with an examination of Security-Home Bank. A million dollars in deposits conveniently appeared on the day of the examination (p. 66). While they waited for the results of the examination, the Security-Home Board voted for a stock dividend, as they had in March, although there had been no profits in 1931. Of the $37,000 in dividends paid for June, $14,000 would go to the directors. The audit results revealed a deficit, and the state superintendent of banks was present at the special board meeting a week later to inform the directors of this fact. The directors left the meeting and began to empty their accounts. President McNary took about $500 out of his account, leaving just a token amount behind. Bank Vice President Mills walked out the door with $1000, more than was in his account. Others cleaned out their own accounts and those of friends and relatives. Even other companies in which the directors had an interest had their funds skillfully rescued. In the last six weeks of the life of Security-Home Bank, over $1.5 million was withdrawn by the officers of the bank, their relatives, and the other businesses in which they had interests. On June 16, while the general public stood in long lines to withdraw a total of $679,971 from their deposits, insiders removed over a $1 million (p. 70).

Security-Home closed their doors for good, a bank panic developed and all Toledo’s banks were besieged. Ohio Bank, troubled by the fact that sixty percent of their assets were in real estate-backed assets of dubious value, and under sanctions from the state bank superintendent, nonetheless declared dividends (p. 71). Then, on June 18, Ohio Bank froze all deposits for sixty days. The board did allow for “certain exceptions.” This clause was not publicized, and allowed insiders to loot the assets (p. 72).

Commercial Savings Bank’s directors also met in the midst of the crisis. This group included Frank Reams, future county prosecutor who would later lead the prosecution of his fellow bankers, and Harold Fraser, who would far more successfully defend them. Commercial Savings Bank also had well-hidden problems. In spite of holding forged notes, hidden bond losses and loans to fictitious individuals, the directors decided the best way to handle the crisis was to invoke the sixty day moratorium on paying deposits, write a reassuring newspaper ad and, finally, declare a quarterly dividend (p. 73).

What followed these unsavory events was even uglier. In the sixty days after June 17, “… bankers sold off whatever they could and then withdrew the cash themselves as fast as it came in” (p. 77). “Commercial Bank was a sieve of smart money during the summer suspension” (p. 78), paying out over twenty percent of its deposits. Ohio Bank paid out over $10 million. Directors even made loans to themselves during the moratorium.

All of these banks failed when the sixty day suspension ended. The details of their final days were not fully revealed until 1933, when state senator L.L. Marshall launched an investigation. The hearings in November of that year, featuring research by a former economics teacher, were well attended. Public outrage was high and a grand jury was instructed to determine whether any of the findings should lead to criminal charges. Three bankers had already been indicted in 1931, but no convictions ever resulted from the untidy closings of the Toledo banks.

Lynne Pierson Doti is the David and Sandra Stone Professor of Economics in the Argyros School of Business and Economics at Chapman University. She is writing a financial history of California.