The High Failure Lower Agricultural Deflation Of The 1920 ' S Essay

The High Failure Lower Agricultural Deflation Of The 1920 ' S Essay

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The high failure rates in agricultural states can be largely attributed to the effect of the change from rapid price inflation during and post the great war to the crippling agricultural deflation of the 1920’s. Between the years 1915-1920 agricultural prices more than double, leading to a speculative bubble as land values soared, this massive influx of rural wealth lead to rapid increase in the number of banks, who often instead of diversifying redistributed their deposits as agricultural loans. From 1900 to 1920 farm mortgages from commercial banks rose 300% as bankers were caught in a ‘speculative frenzy.’ As is the very nature of a bubble, when in 1920 exports to Europe slowed and the US economy fell into a post-war recession, it burst. By 1921 this had lead to the price of agricultural goods falling by 50%, gross farm income fell by 39.4% and by 1923 land values had been reduced by 20%. Rural banks faced massive reduction in deposits, falling earnings and increased suspension in loan payments. Banks were subsequently forced to loan from other banks, liquidate secondary reserves and borrow from the War Finance Corporation in order to meet consumer demands for deposit withdrawals, these actions served to prevent insolvency but left them fundamentally weak. The Federal Reserve Study found that before 1920 the balance sheets of those that failed did not vastly differ from those at survived, but as a result of postwar deflation banks were greatly weakened resulting in hundreds each year suspending operations.

Confronted with falling deposits and unable to liquidate mortgages without losing money banks turned to increasingly high-risk assets, which were often long term in order to boost earning. This only resulted in greater illi...


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...age holdings decrease its survival length increased. Of the five largest banks in Chicago only one failed, the four that survived had extremely low ratios of real estate loans to asset ranging from 0.5% - 2%, the bank that failed had 11%, this was equivalent to the average of other banks that failed at this time. Fire sales held by banks is further evidence that the banks were suffering from illiquidity as opposed to insolvency. Garlock and Gile support this assertion, “narrow margins of liquidity” in suspended banks, meant they were unable to survive deposit withdrawals. To this extent it is possible to trace the causes of illiquidity back to the agricultural crisis, and its role in turning small banks to higher risk long term assets that compromised their liquidity in the long run as they sacrificed their reserve to deposit ratio in order pursue increased earnings.

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