Learning from History

I am a student of economic history, and love seeing the patterns that a study of history reveals.

Amadeo Peter Gianini was born in 1870 in California, the son of Italian immigrants. His first occupation was as a produce dealer for farms in the Santa Clara Valley of California. He found established banks unwilling to take on his or the farmers business. When his father-in-law died, he was persuaded to take his place on the Board of a small bank. His intention was to influence banking from the inside, but after many rows and ructions, he found it impossible to persuade his fellow bankers to change their practices.

He left, and in 1906, founded a small bank, “The Bank of Italy”. His express intention was to lend money to small businesses and the emerging middle class. Up to that time, they had had no access to banking. On April 18, 1906, San Francisco was devastated by an earthquake and fires. His bank building collapsed, but because of his personal intervention that previous night, he still had all of his bank records. Other banks’ records were destroyed, and their bank vaults to hot to open, and they were not lending.

The next morning, Amadeo went to the harbour, and ran his bank from the side of a wharf. Giving every cent of his $ 87,000 capital in loans to small businesses aiming to rebuild the city. He encouraged ships to go north and buy lumber and bring it back to North Beach, for example. Hundreds of people, who had been hoarding their money, saw his skill and confidence, and invested their money with him. This gave him more capital to continue lending. North Beach was rebuilt faster than any other part of the city. And every single one of these loans was later repaid!

By 1918, he had California’s first state wide banking city. Now, smaller branches could borrow from city branches when they hit tough times. Previously, if a small farming community had been hit by a bad harvest, the small local bank would not have been able to lend enough to keep the farmers going for a season. Amadeo’s ambitions went further. He set out to create a national banking system.

But here is where the story diverges from the ambitions of modern bankers. He was not after bigger bonuses for himself (think of John Thain of Merrill Lynch paying himself an $ 83 million bonus in 2007, and in the midst of last year’s crisis spending $ 1.4 million on redecorating his office!). He was not after growing his personal wealth. Amadeo was never worth more than $ 1 million dollars in personal wealth. In the 1940s, when it became clear to him that his personal wealth was growing exponentially, he formed a charitable trust and poured most of his wealth into that.

Amadeo’s focus was on creating opportunities for middle class people and small business to have access to banking and the capital they required to grow their businesses and improve their lives. In the Great Depression, for example, he set up low interest installment credit plans, and helped thousands avoid unscrupulous loan sharks. He finances great ventures, such as the Golden Gate Bridge and Disney’s “Snow White and the 7 Dwarves”, which brought convenience, joy and employment to thousands. He refused to take increases in pay and bonuses.

Amadeo is unlike almost any banker today. He saw himself and his bank primarily as a vehicle for increasing the wealth of the community. He did have shareholders, and they did receive returns. But he never put them ahead of his customers and the needs of society. The reason governments have bailed banks out is because of their “special position” in society and the economic system. Most banks don’t deserve that special position, given the way they’ve been acting recently.

The would probably not have meant much to him, but he has received many posthumous honours. Plazas, schools and streets in california bear his name. The U.S. Postal Service honored Giannini’s contributions to American banking by issuing a postage stamp bearing his portrait, in 1973. TIME magazine named him as one of their Titans and Builders of the 20th century.

Amadeo Gianini provides a wonderful example of what banking can – and should – be.

The little bank he started now trades under a different name. It is now called “The Bank of America”. If only it still followed it’s founder’s passion.


One thought on “Learning from History”

  1. To prove the point, here is an article from The Economist:

    Wall Street excess: Looting stars
    Jan 29th 2009
    What will it take for bankers to show a little remorse?

    “THE road of excess leads to the palace of wisdom,” wrote William Blake. Not on Wall Street. At a time when its erstwhile titans could do with displaying contrition, signs of hubris abound. The most glaring is the sacking by Bank of America of John Thain (pictured), Merrill Lynch’s former boss, after he rushed through generous bonus payments for his investment bankers despite disastrous losses (see Buttonwood), and the revelation that he spent $1.2m refurbishing his office. Citigroup, meanwhile, has cancelled an order for a $50m executive jet, though only after flying into flak from the media and the Treasury. And, as he fights off lawsuits from angry investors, Dick Fuld, one-time leader of the now defunct Lehman Brothers, has sold his three-acre Florida estate for a princely $100—to his wife.

    The recriminations over Mr Thain’s departure suggest that Wall Street’s finest were busy elsewhere when Barack Obama exhorted Americans to “set aside childish things”. While apologising for his opulent office refit, he defended the bonuses as necessary to retain talent (in this market?) and reward those unconnected to mortgage losses (whatever happened to collective responsibility?). For his part, Bank of America’s head, Ken Lewis, by now consumed with buyer’s remorse, may have known more about the handouts than he let on. His hold on his job looks fragile. Mr Thain’s role is being looked into by New York’s ever-vigilant attorney-general.

    The affair could be “the last nail in the coffin” of public trust in bankers, sighs one investment-bank boss, adding that “We can now add moral bankruptcy to the financial sort.” To some, Citi’s aeroplane fiasco is equally confidence-sapping. How can a bank that owes its survival to the taxpayer think it acceptable to procure a jet that boasts “uncompromising cabin comfort” and to hold on to several others (plus a helicopter)?

    The explanation may be that finance’s most recent golden age created a culture of entitlement so deep that it survives, for a while at least, even when boom turns spectacularly to bust. It is telling that fully 79% of Wall Street workers who responded to a poll by eFinancialCareers.com said they received a bonus for 2008, despite the carnage. Almost half said they were dissatisfied with the amount received.

    This lack of humility could cost moneymen dear as it whips politicians and the press into an increasingly hostile alliance. The new treasury secretary, Tim Geithner, has already promised closer oversight of banks that receive public funds. Meanwhile, unearthing venality is the latest journalistic pursuit.

    The loss of confidence in bankers can now be tracked. According to a financial-trust index launched this week by academics at the Kellogg School of Management and the University of Chicago, only 22% of Americans have faith in the financial system. Intriguingly, however, even fewer approve of the government’s handling of the crisis. As much as Wall Street’s erstwhile masters of the universe have helped to sully their own reputations, they remain less frowned upon than their handlers in Washington, DC.

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