Great Depression:Not A Single Canadian Bank Failed
Could it have been different? Could a different regulatory framework have enabled the U.S. banking system to withstand the Great Depression, thereby lessening its impact on the overall economy? Yes. Consider the following:
San Francisco Federal Reserve -- During the Great Depression years—1930 through 1933—5.6% (1,352 banks), 10.5% (2,294 banks), 7.8% (1,500), and 12.9% (4,000) of U.S. banks failed in each year; by the end of that four-year stretch, almost half of U.S. banks had either closed or merged. In all, 9,000 banks failed during the 19300s (see chart above).
Bernanke (American Economic Review, 1983) argues that this banking crisis worsened the magnitude of the downturn because credit supply fell as banks failed. Thus, many firms were unable to finance potential investments. Most of the failed banks were small and operated out of just a single office. In Canada, where not a single bank failed, branching was the rule; in fact, Canada had only ten large banks during the 1930s (see chart above). The Canadian economy fared much better than did the United States economy, in large part because of its better diversified and integrated banking system.
Bottom Line: Strict banking regulations are not always the answer to creating a sound and stable banking system. Exhibit A: The McFadden Act and The Great Depression, and the fact that 0 banks failed in Canada (due to a more sensible regulatory system) vs. 9,000 bank failures in the U.S. largely due to the repressive regulatory framework of the McFadden Act.