The real issue for the governors was that many of the banks closing their doors—by one estimate close to half—had sustained such large losses on their loans that they were, like the BUS, insolvent. Determined to follow Bagehot’s rule of only lending to “sound” institutions and believing that propping up failing banks would be throwing good money after bad, the regional governors made it a principle to let them go under. They failed to recognize that by doing so they were undermining public confidence in banks as a repository of savings and were causing the U.S. credit system to freeze up.
