How Regulation Turned a Winner into a Loser

By Phillips, Ronnie J. | American Banker, October 28, 1992 | Go to article overview

How Regulation Turned a Winner into a Loser


Phillips, Ronnie J., American Banker


During the Great Depression, one Chicago banker foresaw the inherent problems of federal deposit insurance and the extensive government regulation it would entail, and refused to join the FDIC.

He took this stand to protect his depositors and to warn against the financial reforms that were being legislated.

Chicago had the greatest number of bank failures and the largest amount of deposits held in failed banks of all the major U.S. cities in the early years of the depression. Of 225 banks in Chicago in December 1929, two-thirds had failed by the end of 1932. Of the 19 national banks operating in 1914, only four survived the 1930s without having to merge with other banks.

Nichols Versus the FDIC

One was First National Bank of Englewood. Its president, John Milton Nichols, earned the nickname "100%" as a result of his move early in the depression to protect his bank and its depositors by liquidating all non-government securities and loans and replacing them with cash and U.S. government securities.

By 1935, the bank's holdings of cash and government securities equaled 101% of total deposits.

Nichols saw little and for the new deposit insurance system, and began to fight the FDIC.

When temporary deposit insurance was begun in 1934, Nichols' bank was the only one of the 6,000 banks required to subscribe to federal deposit insurance that refused to join the FDIC.

Refuses to Pay

FDIC general manager L.E. Birdzell wrote to Nichols, telling him to send the premium immediately. Nichols refused to pay until he received a written response from comptroller of the currency J.F.T. O'Connor about the penalty for a refusal to join.

In late January, Nichols received a letter from O'Connor stating that he must comply by July 1, 1934.

Nichols continued his battle past the July 1 deadline, calling the FDIC a "damnable piece of political trickery" designed to bring about government ownership of all banks.

In a July 18 letter, Nichols lectured the head of the permanent FDIC, Leo Crowley, on the principles of sound banking. He said, "Within three hours time I could sell our securities and transport to our own vaults far more than enough cash to pay every depositor in full. Where is there a bank that can do any better?

"Tearing into sound banking institutions and supporting the weak ones can have but one ending."

Tripping to Utopia

After the passage of the Banking Act of 1935, O'Connor again warned Nichols that he must join the permanent fund. Nichols held out until September, when he relented and joined the FDIC, though he did not end his protest.

Nichols responded to Crowley, "After having forced the dictators of America to rewrite their law definitely setting forth each bank's contingent liability in connection with the FDIC, I suppose we should let bygones be bygones and link arms with the rest of the boys who are merrily tripping their own way down the path to Utopia, with emphasis on the tripping."

As a result of the costs imposed by the deposit insurance program, Nichols had already asked depositors with less than $3,000 to withdraw their funds and had declined to open new accounts.

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