Only 12 years before the 1918 flu epidemic wreaked medical and economic havoc, the San Francisco earthquake also left many individuals and businesses in dire financial straits, creating an enormous demand for cash to facilitate recovery. In the midst of that disaster, a financial hero—of sorts— emerged, and his story provides an interesting counterpoint to our current situation.
Italian immigrant Amadeo Peter Giannini left school at 15 and built a highly-successful produce business in San Francisco. After arguing with a local banker who was unwilling to make small loans to individuals, Giannini opened his own bank, which he named Bank of Italy. The earthquake struck just two years later, causing fires and devastation in the Bay Area. According to an article by Jason Zweig in The Wall Street Journal, when Giannini realized that his bank was in the fires’ path, he loaded $80,000 ($2.2 million today) of gold and cash into two horse-drawn produce wagons—hidden under crates of oranges—and spirited it away to his outlying home. Although the money smelled like oranges for weeks, it was safe from rampaging looters and the fire that destroyed the bank. By the next day, Giannini had already set up an outdoor desk in the still-smoldering city. He posted a sign reading “Bank of Italy: Open for Business,” and he began lending to nearly anyone who genuinely needed help. His one condition was that borrowers had to raise half the funds they needed elsewhere, which often meant family or friends. This tactic raised their incentive to repay and removed half the bank’s risk. Interestingly, these loans often became Bank of Italy deposits or were invested in its stock.
Giannini’s approach was shrewd and incredibly successful. Borrowers were loyal to his bank, and word spread that this institution would lend to “the little fellows,” a niche most banks had ignored or outright disdained. It expanded across California in the 1920s via branch banking—another move Giannini pioneered—and was renamed Bank of America.
Did kindness and altruism drive his decisions? Probably not. According to a biographer, Giannini was hot tempered, egotistical and ruthless. He had “a titanic head, a face like a rock and a voice like a howitzer.” He hated following others’ rules and flouted them whenever it suited him. Nonetheless, he was the embodiment of Adam Smith’s “invisible hand,” as he made decisions that benefitted his bank while also benefitting his borrowers, depositors and shareholders. The bank continued to grow throughout the Depression and subsequent years, and Giannini remained at the helm until 1945. According to Vanderbilt economics professor Sarah Quincy, between 1929 and 1934 most banks in rural California reduced lending by two-thirds, while Bank of America reduced its by only one-third. Between 1929 and 1940, economic activity in smaller cities where Giannini had a branch grew 25%, while it shrank by 3% in those without one.
According to Zweig, as of early summer 2020, the largest banks today had made only 37% of the Paycheck Protection Program loans, and they have received bipartisan criticism for neglecting small business lending. We’re not passing judgment on this metric, but it is interesting to compare how a banker thrived a century ago with a very different approach during crisis.