Earlier this month, my mother-in-law called from Pasadena, in dire need of consultation with my husband, who serves as the family's unofficial Ben Bernanke. "Denny," she said, "rumors are flying around here. Should I pull my money out of IndyMac?"
"Don't worry about it, Mom," came the answer. "A big bank like that -- it'll never fail."
But the rumors kept coming, until so many IndyMac customers had withdrawn their funds that the Federal Deposit Insurance Corp. took control of the bank's affairs. By dawn Monday, lines of betrayed, angry and tearful depositors snaked around IndyMac branches across Southern California: a central-casting bank run in the heart of film country.
My husband -- like so many others who trusted IndyMac -- was wrong. Banks, even big banks, go under. And now, once again, the popular wisdom that banks cannot fail has been temporarily replaced by the knowledge that banks can fail. Share prices of bank stocks plunged to multiyear lows before staging a comeback last week.
This rapid oscillation between confidence and panic in the banking sector is nearly as old as the United States. Indeed, at the nation's beginning, the financial landscape was far more complex, the hills steeper and the valleys deeper. Until the Civil War, every bank in the United States issued its own paper money, or notes, and the number of banks grew quickly. In 1790, the infant nation had four of them. During the next two decades, state legislatures incorporated more than 100 more, a surge one diarist labeled "bank mania." Soon, he feared, "every company of boys which had a stock in marbles" would seek a banking charter. Whether their capital consisted of marbles or gold or silver, each of these banks printed notes that passed for money. Every bank bill was a promise; every transaction an arbitrage; every shopkeeper a currency broker.
Two centuries ago, worried investors turned to the newspapers, much as they do today. Many papers carried a column called the Banking Thermometer that helped them to reckon the value of the promises in their pockets. In the initial months of 1809, the Banking Thermometer tracked the "falling temperature" of notes issued by banks stretching from Massachusetts to the Michigan Territory. At first, the notes traded at something close to face value. Down the temperature went. Late January: 80 cents on the dollar. Then 70. 40. And finally, zero.
