By Jason Zweig
Back in Business is a new, occasional column that will put the
present day in perspective by looking at business history and those
who shaped it. Mr. Zweig's Intelligent Investor column will return
A century ago, one banker was the lender of first resort when
disasters hit. With coronavirus crippling the economy, we could use
far more financial entrepreneurs like him today.
His story shows that innovation often comes when unlikely people
and unusual events collide. Born in 1870, Amadeo Peter Giannini
quit school at age 15, becoming a wildly successful
fruit-and-vegetable merchant. At the age of 31, three years before
he went into banking, he had a net worth of about $300,000 -- more
than $9 million in today's money.
"I might never have gone into the banking business," he later
recalled, if he hadn't gotten into a shouting match with the head
of a local bank about its reluctance to make small loans to
individual borrowers. In 1904, Giannini founded a bank of his own
in San Francisco, called Bank of Italy, to do just that.
Then, on April 18, 1906, an earthquake struck the Bay Area,
killing more than 3,000 people and setting the city ablaze.
Realizing the fires were heading toward his bank, Giannini
heaved $80,000 of gold and cash into two horse-drawn produce
wagons. He buried the money under crates of oranges to hide it from
looters rampaging through the streets. For weeks afterward, he
recalled later, the bank's money smelled like oranges.
By the next day, the Bank of Italy had burned to the ground. But
Giannini rode in from his home in San Mateo, where he had stashed
the money. With San Francisco still smoldering, he set up a desk on
the wharf and plunked a sack of gold on it, under a cardboard sign
on a stick that read BANK OF ITALY: OPEN FOR BUSINESS.
Giannini lent to almost everyone with a legitimate need, on one
condition: They had to raise half of what they needed elsewhere.
That forced them to enlist their friends and family in the recovery
of their business or the rebuilding of their home.
Then Giannini would lend the other half, often accepting little
more than people's character as their collateral. After all, he'd
just gotten others to assume half the bank's risk. What's more,
much of the hoarded cash the borrowers raised from their friends
and family ended up as Bank of Italy deposits -- or was invested in
shares of its stock.
As his bank expanded across California in the 1920s and
eventually renamed itself Bank of America, "we had money to sell
and we went direct to the people to sell it" -- not "to a favored
few," but "to all the people," Giannini said.
"Be ready to help people when they need it most," he told an
interviewer in 1921. "Get set to yank them out of a hole. The 'glad
hand' is all right in sunshine, but it's the helping hand in a dark
day that folks remember to the end of time."
This wasn't love-based lending. Giannini was maniacally focused
on making his bank the biggest -- first in California, then in the
entire U.S. He shrewdly foresaw that "the little fellows," or small
borrowers and depositors, were the unjustifiably neglected market
that would power him past all his peers. And he rode the booming
economy of the West for all it was worth.
Giannini stood 6'2" and weighed 220 lbs., with "a titanic head,
a face like a rock and a voice like a howitzer," one biographer
noted. Hot-tempered, egotistical, often ruthless, he hated
following other people's rules. He repeatedly bought branches and
made other deals in defiance of orders from regulators.
Giannini was a pioneer in branch banking, then a radical idea.
Having offices in many towns, he believed, would smooth out booms
and busts across agricultural crops and industry sectors.
By 1921, the bank had more than 400,000 depositors, the most in
the U.S. Six years later, it surpassed 1 million depositors and was
the nation's third-biggest bank by assets.
Then came the Great Depression.
Between 1929 and 1932, Bank of America's deposits shrank by
roughly a third.
Working 14 hours a day and traveling 26,000 miles in three
months, Giannini barnstormed through the bank's 410 branches,
talking with hundreds of people a day to coax them into making
deposits. In 41 days after starting the effort in early 1932, he
reversed the drain.
One evening, Giannini drove three hours through a pelting
rainstorm to the home of a depositor who had just transferred to
another bank. Sure enough, she moved the money back. He often
prowled San Francisco's produce market at 5 a.m., urging
agricultural vendors to deposit in and borrow from the bank to
ensure their businesses would survive.
As early as 1921, the bank's "Findex," an early credit-scoring
technology, tracked data on thousands of borrowers. "Any number of
questions selected from a list of about 80 subjects may be asked,"
and the system would automatically pick out potential customers who
met the criteria, boasted an internal publication.
During the depression years of 1929 to 1934, Bank of America
reduced its lending by only 33%. On average, outside the biggest
cities in California, other local banks tightened credit twice as
That kept loans flowing to households and local businesses --
which took off as parts of California bounced back from the
depression. From 1929 to 1940, economic activity in smaller cities
where Giannini had a branch grew 25%, while it shrank by 3% in
those without a Bank of America office, according to Vanderbilt
University economics professor Sarah Quincy.
In 1938, Jesse Jones, chairman of the Reconstruction Finance
Corp., a New Deal agency that supported commercial lending by
banks, wrote to Giannini about Bank of America's small-business
loans: "You are employing more of your deposits, I believe, than
any big bank in the United States."
Until his 70s, Giannini worked in the open on the main floor of
the bank's headquarters, answering his own phone and speaking to
dozens of customers a day.
When he retired in 1945, Giannini told bank employees, "If I
ever hear that any of you are trying to play the big man's game and
forgetting the small man, I'll be back in here fighting."
That year, Bank of America became the world's biggest bank. Yet
even in 1953, four years after Giannini died, the average customer
had under $1,600 in checking accounts. That was roughly 5% of the
typical balance at other large banks, which usually catered to
In its early years, says Prof. Quincy, Giannini's bank was
"figuring out on the fly" how to consolidate financial reporting
across branches, manage a multitude of risks and develop
record-keeping and analytical technology. As it learned, so did its
competitors and regulators.
By pioneering those techniques, Giannini designed much of the
template by which big banks could turn into behemoths.
That legacy means the populist lending he specialized in during
emergencies is only a sideline for most banks today.
Banks with at least $50 billion in assets have made only 37% of
the loans facilitated by the Small Business Administration under
the Paycheck Protection Program, according to the SBA. And
Democrats and Republicans alike have criticized banks for coddling
their favorite clients with emergency loans during the pandemic,
instead of distributing the money to more small businesses.
In times of crisis, those who can most afford to take risks are
often the least willing to take them. Established institutions are
set in their ways, making them averse to taking chances.
In that vacuum is opportunity. Many big banks -- and other
corporate giants -- will be stuck in stasis. Innovation is bound to
bubble up elsewhere in response to the coronavirus crisis, likely
in overlooked and underserved corners of the market.
Periods of prosperity often favor the incumbents, but hard times
can bring forth the upstarts who will help fuel the next boom.
Write to Jason Zweig at email@example.com
(END) Dow Jones Newswires
May 29, 2020 11:15 ET (15:15 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.