'Breaking the Banks' - Federal judge explores Detroit banking crises that unfolded in 1933

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By Tom Kirvan
Legal News

For a jurist who has made his share of legal history during a storied 38-year career on the bench, U.S. District Judge Avern Cohn fittingly enough has been a lifelong student of the subject.

His current interest in "The Detroit Banking Crises of 1933," which serves as the title of a treatise he has written on the Depression-era financial meltdown, stems in part on a vivid childhood memory of his.

"I remember when the banks closed in 1933, I was 9 years old and my mother was in tears, crying that she wouldn't be able to get to her money," recalled Cohn, who grew up in the Russell Woods neighborhood of Detroit. "It was one of the big shocks of the time."

The Detroit banking troubles, which engulfed the First National Bank of Detroit and the Guardian Bank of Commerce, spawned a grand jury investigation to determine if "management misbehavior was behind the insolvencies," according to Cohn. A one-man grand jury was "appointed on petition of the Michigan Attorney General, Patrick H. O'Brien, to examine into the management of the two failed banks," Cohn wrote.

The choice as grand juror was Harry B. Keidan, then-chief judge of the Wayne County Circuit Court. Coincidentally, Keidan and the Cohn family attended the same synagogue.

"As a kid, I sat four rows behind him," said Cohn, whose father, Irwin, was a prominent Detroit attorney and one of the principals in the renowned firm of Honigman, Miller, Schwartz, & Cohn.

Keidan, whose investigation would absolve the management of banks of any legal wrongdoing, died in 1943, a decade after his grand jury service. His presence, however, is still felt in the 3rd Circuit Court of Wayne County today, according to Robert Colombo Jr., the current chief judge of the Detroit-based court.

In a recent e-mail to Cohn, Colombo told of an effort to restore Keidan's legacy in a pictorial sense.

"When I discovered around September 2016 that the Building Authority for the CAYMC (Coleman A. Young Municipal Center) had Judge Keidan's portrait in storage, I went to inspect it," Colombo wrote. "It was in very poor shape. The Building Authority and the court agreed to have it sent out and repaired."

The restoration project cost $5,600 with the Building Authority picking up the bulk of the expense, Colombo indicated. The portrait now hangs in Judge David Groner's courtroom at the Coleman A. Young Municipal Center.

Keidan's role in sorting out the facts surrounding the banking crises is the subject of scholarly debate, as noted in the book "Breaking the Banks in Motor City," a 170-page overview written in 2009 by Darwyn H. Lumley, a past president of the Society of Automotive Historians. Yet, however history judges his work, Keidan was, according to a Detroit News headline of the day, "Fitted by Experience For Job," which only hinted at the difficulty of the task he faced.

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The Detroit Banking Crises of 1933

By Judge Avern Cohn

In looking for cases in the District Court for the Eastern District of Michigan having an historical bent, I came across several books on the closing of the banks in Michigan on Feburary 14, 1933 by the Governor, William A. Comstock, because of their precarious financial state. This momentous event was called a "Bank Holiday." Its effect was to deny depositors access to their accounts. As one scholar (Patricia O'Donnell McKenzie in her Ph.D. thesis, Wayne State University, December 15, 1963) put it:

"The circumstances leading to Detroit's banking crisis in 1933 were not the result of sudden or dramatic events. The financial conditions in Detroit banks had been precarious for a period of some years before they became matters of public concern. The Detroit banks in the early 1930s had been subjected to forces similar to those which had weakened commercial banks throughout the country. Falling prices, output, and employment had decreased the value of bank assets and impaired their marketability. In addition, the contraction of deposits as the result of an unfavorable regional balance of payments had drained the banks of their more liquid assets and thus increased their vulnerability should withdrawals continue.

"Unfortunately, the policies and practices of the Detroit banks prior to the 1930s had reduced their capacity to withstand a prolonged siege of this type."

Soon thereafter, on March 6, 1933, President Franklin D. Roosevelt closed all the banks in the United States. Most of the closed banks soon recovered. The two major banks in Detroit, The First National Bank of Detroit and the Guardian Bank of Commerce, did not; they went into liquidation. Two new banks were organized in their place, the National Bank of Detroit and the Manufacturers National Bank. The closed banks during the course of their receivership eventually paid their depositors 100 cents on the dollar. The closings and liquidations were conducted under state law. Aside from periodic examinations by the Comptroller of the Currency, there was very little federal involvement in the regulation and supervision of state banks. The closings, however, were based on the federal bank examinations, which found the banks insolvent.

While a number of federal and state cases came to court on the closings, none of them dealt with the merits. For the most part, the cases involved issues relating to the assessment of stockholders of amounts related to the value of their stocks before the closings. See Barbour et al. v. Thomas et al., 7 F. Supp. 271 (E.D. Mich. 1933), aff'd Barbour et al. v. Thomas et al., 86 F.2d 510 (6th Cir. 1936) (holding shareholders could not stop receiver from enforcing the assessments). Such assessments are no longer possible these days.

As one of the many political responses to the closings, particularly the suspicion that management misbehavior was behind the insolvencies, a one-man grand jury was appointed on petition of the Michigan Attorney General, Patrick H. O'Brien, to examine into the management of the two failed banks. The grand jury was held in Wayne County Circuit Court. Then-Chief Circuit Judge Harry B. Keidan was appointed the grand juror. Harry S. Toy, Wayne County's prosecuting attorney, was counsel. A June 9, 1933 Detroit News headline said of Keidan, "Judge Keidan Fitted By Experience For Job." The investigation extended over four months, from May to September 1933.

Keidan's inquiry was pushed by Senator James Couzens, a former partner of Henry Ford and a former Mayor of Detroit. Couzens had been appointed a Senator in 1921 to fill the position vacated by Truman H. Newberry, who defeated Henry Ford for the position in 1918. Newberry resigned following his conviction (later reversed) for violation of the Corrupt Practices Act. Couzens accused the management of the two banks as being criminally responsible for their collapse. The bankers in turn accused Couzens of impeding federal assistance to the two banks to make up their shortfalls in capital funds.

The Keidan grand jury proceedings were unlike that of today. Today, a one-man grand jury conducts its proceedings in secret. The Keidan inquiry was open to the public. Also, unlike the truncated media reports of court proceedings today, the testimony of almost every witness called to testify in front of Keidan was published word for word in The Detroit Free Press.

Through the magnificent efforts of Elise Keller, librarian of the Ralph M. Freeman Memorial Library of the Eastern District, I obtained and perused the daily accounts of the Keidan grand jury. (The minutes of the grand jury were not available; they were destroyed in a fire.) Scores of witnesses testified. Each was examined by Toy.

Keidan's findings were reported full text in The Detroit Free Press of Tuesday, September 19, 1933 under the headline "The Conclusion." Notably, Keidan announced his findings on the previous evening shortly after listening to Couzens testify that morning. Keidan's decision found in pertinent part:

- No evidence has been found to support charges of criminality in the National Bank of Detroit.

- No evidence of "smartmoney" withdrawn before the holiday has been presented.

- Testimony in the Grand Jury investigation led to the "constrained" conclusion that the First National Bank and the Guardian National Bank of Commerce were solvent.

Of particular interest in, and admiration of, the grand jury proceedings:

- the speed with which the grand jury was convened

- the speed with which the grand jury inquiry was conducted and concluded

- the openness of the grand jury inquiry

- the completeness in the reporting of the grand jury proceedings

In the end, one scholar's (O'Donnell McKenzie, supra at 215) concluding comments summarize an important lesson from the "Bank Holiday" in Detroit. Her words from over 50 years ago still hold truths for today: "The Detroit banking crisis is an important caveat to practitioners of monetary policy: intangible political and psychological factors may sometimes become critical even when the problem at hand seems to depend almost entirely on well-known economic and financial considerations."

For a full account of the closing of the banks, see Darwin H. Lumley, "Breaking the Banks in Motor City" (2009), and Susan Estabrook Kenney, "The Banking Crisis of 1933" (1973).

Published: Tue, Feb 28, 2017

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