PROVIDENCE, R.I — Providence, R.I.--I WASN'T ALIVE 57 years ago when another man with a double-breasted suit and an authoritative voice took his oath of office and then shut down the banks. The image, though, of Franklin Delano Roosevelt's decisive action has become part of the national mythology, and it was chilling to be in Rhode Island's capital to hear its new governor, Bruce Sundlun, declare a similar financial emergency.
Words and events not witnessed for generations were invoked in the first days of the new year, as a forced "holiday" temporarily shut the doors on 45 financial institutions, affecting 1 out of every 3 state residents. While 22 small banks and credit unions reopened early last week, 16 of the largest institutions, representing four-fifths of the deposits, remain closed.
The most troubled institutions, Mr. Sundlun said, may repay depositors in "scrip," referring to the IOUs strapped companies and banks issued decades ago in lieu of cash.
He called upon universities throughout New England to come to the aid of young Rhode Island residents by not denying admission to any of them because of checks drawn on shuttered financial institutions. State colleges and many local markets quickly agreed to honor such checks in an act that may have stemmed as much from charity as faith and prudence.
Local diners likewise granted credit to vocally aggrieved patrons, and even the affluent suddenly faced the daunting prospect of requiring a complimentary meal -- or more substantive assistance. Depression-era pictures of men in suits in relief offices became a real prospect.
As some institutions reopened after examinations, the governor urged calm to stem panic withdrawals by depositors. "Have another cup of coffee," Mr. Sundlun suggested. "Your money is as safe as it can be."
But how safe is that? Even healthy banks are unable to repay all depositors at once because money that comes in is lent out. Besides, "healthy" is a world infrequently connected with many banks these days.
Faith is a tenuous thing. Following the Rhode Island closings, rumors sparked a run at a nearby state-insured bank in Fall River, Mass. The promise of federal insurance didn't block the far more serious run over the next weekend at the Bank of New England that forced a dramatic government takeover that could cost taxpayers more than $2 billion.
The financial disaster in Rhode Island comes at a time when years of ineptitude and malfeasance in the state and throughout the country have undermined a financial structure few people in the United States understand, but upon which everyone relies. The prior debacles in Maryland and Ohio may ultimately be seen as minor preludes for a bigger event, with Rhode Island as the opening scene.
Although the two prior crises were resolved successfully, there are a number of important differences now. Both the Maryland and Ohio problems were far smaller in relation to the size of the states, came at a better time and will likely be far less costly.
When Maryland and Ohio were hit in the mid-1980s, the unprecedented nine-year national economic expansion was just at midpoint. Now the economy is contracting, nowhere more than in New England. Earlier this month, downtown Providence's venerable carriage-trade jeweler went bankrupt, not long after the most elegant men's store did likewise, and several of the most prominent buildings were repossessed by lenders. Rhode Island is hurting.
The easy answer -- relying on fiscal stimulus for relief -- is not feasible. Both the federal and state governments show large deficits, and that the current crises will only make worse. In Rhode Island, the governor estimates the banking loss at $150 million -- 10 percent of the state's $1.5 billion budget. Less optimistic federal officials peg the loss at $475 million to $1 billion.
With the private insurance fund bust, who picks up the tab for these failed financial institutions remains uncertain; it will be either the depositors or the state (and thus all its taxpayers).
In Maryland, a state with four times Rhode Island's population, the state government stepped in when a similar private insurer collapsed in 1985, and the bailout is now reckoned to have cost the state a comparatively mild $180 million. In Ohio, all money has been recovered from bank assets.
Precluded by circumstance from the deficit-spending that Roosevelt embraced as an answer to the Depression, Mr. Sundlun must also consider avoiding the former president's willingness to give government guarantees, most importantly in the area of deposit insurance. Such guarantees provide banks with a critical underlying confidence, but also the potential for unchecked, debilitating malfeasance. Today, confidence is in short supply, but malfeasance is rife. Doing the kind thing may not be the right thing.