The Leading Edge of a New Financial Regime: Crisis at Franklin National Bank

• In Event: 4110 - Finance and Its Challengers

Abstract

In the largest bankruptcy of a U.S. bank to that date, Franklin National Bank of New York failed in October 1974. Over the previous months, the U.S. state had engaged in a series of unusual actions to shield depositors and other counterparties from losses. The bail-out is today widely seen as preordained, but drawing on previously inaccessible archival data this paper argues that this outcome was far from certain. The American state initially tried to force the major New York banks to bail out Franklin National Bank. Why it did not succeed—a question that could not be asked so far—is the most pressing question of the crisis. I show that maneuvering by the banks about when and how the crisis happened walked the regulators down the path to a bail-out by the state. The banks could pursue this line of action because of the power they had gained from their economic position in the financial system as it had developed in the postwar period. An important part of the power differential consisted of the state’s lack of information about new elements of that system. Deploying a sociology of crisis centered on the role of information, the paper analyzes the crisis as neither determined by economic fundamentals nor fully constructed. It demonstrates that the reaction to the crisis of Franklin National Bank already foreshadowed important elements of crisis management in 2008.

Author

• Pierre-Christian Fink, Columbia University