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 next week.

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 much.

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 corporations.

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


(END) Dow Jones Newswires

May 29, 2020 11:15 ET (15:15 GMT)

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