My ruminations yesterday on check cashing firms, and banking (and its history), and the day-to-day impact on a lot of the contractors who provide janitorial service to our clients, got me to thinking about a recent conversation.
CBN Building Maintenance's office is a 1914 prairie style house in Phoenix's oldest historic district (the Roosevelt neighborhood). The fellow who built it was the president of an early local bank, and of the building and loan firm that constructed the house for him. Several years ago, we did a quite thorough restoration of the building, taking it close to its original layout and appearance. We spent much effort in researching early ownership, trying to locate descendants who might have photos of the building as it was in its youth. No luck at all; we found a grandson of the original owner (L L Steward), but he had no idea that his grandfather had ever lived here, and certainly no early photos. And he assured us that he was the only surviving descendant.
So I was a bit surprised to have a granddaughter (cousin of the above) call out of the blue, saying that she'd run across our restoration project on our website, and would much enjoy a tour of the home.
I did the tour; she gave me a photo of her grandfather sitting in his bank, with staff and stockholders (at a guess) clustered around. Neat shot; I added it to our site. I'd known, from local history, that grandfather had lost everything during the depression. Granddaughter explained that he'd tapped his personal assets to pay off his bank's depositors, and it wiped him out. Quite the stand-up thing to do.
But there is a bit more to the story. Though we've mostly forgotten it (and I've seen economist,s who study banking, unaware of it), up until the law change during the Depression, America had "double liability for bank stockholders". Stockholders in any corporation could only lose the amount they'd invested in the corporation (that is, paid for the stock); even if the corporation failed, owing more than it had assets, the stockholders were off the hook. Except for banks. Bank shareholders could be tapped again for as much as they had originally invested. The idea was that a bank could be capitalized with less cash in the vault than might seem safe, because it had stockholders' assets as a fallback. It allowed productive use of those assets, while protecting the bank.
So, a bank shareholder - as the president of a local bank surely was - could lose the rest of his fortune.
To me, it's not a bad system. We currently depend on regulators to insure the safety, and conservative behavior, or banks. And those regulators always seem to lag a bit behind their targets (see the recent financial crisis). Stockholders carrying a big chunk of liability would likely focus their minds on the solidity of the bank, and the behavior of its directors and officers. Might work better than regulators.