Regulation and Bank Failures: New Evidence from the Agricultural Collapse of the 1920s

Abstract

This article examines the contribution of government policies to the high number of bank failures in the United States during the 1920s. In the state of Kansas, which had a system of voluntary deposit insurance and where branch banking was strictly prohibited, bank failure rates were highest in counties suffering the greatest agricultural distress and where deposit insurance system membership was highest. The evidence for Kansas illustrates how prohibitions on branch banking caused unit banks to be especially vulnerable to local economic shocks and suggests that deposit insurance caused more bank failures than would have occurred otherwise.