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    When a bank failed, a receiver would calculate the depth of the hole in the equity account. The shortfall computed, he would dun the stockholders for an amount up to the par value of their shares. These proceeds he would distribute to the creditors. Naturally, the stockholders dragged their feet. Many sued, and no fewer than 50 of those cases reached the Supreme Court. Yet the system worked. "Put another way," Jonathan R. Macey and Geoffrey P. Miller, modern scholars of the pre-modern system, relate, "the potential liability of bank shareholders served as supplemental off-balance sheet capital that was not reflected in banks' capital ratios."

    The afore-cited Macey and Miller (whose superb essay we post here on the Grant's Web site), wrote in 1992, following the S&L and commercial real estate debacle. With that experience in view, they concluded that the American regulatory system made a bad trade when it exchanged double liability for the FDIC. How much more emphatic could that conclusion be expressed today? "Empirical evidence," the two write, "substantiates the inference that double liability was an effective regulatory system. Over the life of the system, the recovery rate on national bank assessments was just about 51%--about half the assessed amounts were collected. This rate appears remarkably good when one considers that many bank shareholders were also managers who were forced into personal bankruptcy when their institutions failed. Moreover--remarkably--the recovery rate on assessments was not significantly lower during the difficult years 1930-34 than it was at other times."

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