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Tuesday, December 3, 192S,
"by Edimind P i a t t

Speaking informally "before the banking classes of the Wharton
School of Finance, under the auspices of Professor Harr, Tuesday
afternoon, December 3rd, on the subject "Banking Legislation Past
and Prospective," with some reference to the causes of tank f a i l ures 1920 to '29 inclusive, Mr. Bchnund P i a t t , Vice Governor of the
Federal Reserve Board, said that the banking l e g i s l a t i o n of this
country, s t a t e and national, might he treated by a s a t i r i s t or
humorist in such a way as to show that we as a nation have manifested rather l e s s financial common sense than the people of other
great commercial nations.

Our largest state once had firmly im-

bedded in i t s constitution, where i t was doubtless regarded as
sacredly fixed for a l l time, a prohibitory amendment forbidding
the organization of banks.

In those days the good people of the

State of Texas regarded banks as rather worse than saloons, and i t
must be admitted that some of the banks of the old days of wildcat
s t a t e banking were p r e t t y bad.

We made a good early s t a r t under

the able leadership of Alexander Hamilton towards a national cent r a l banking system, and i t is interesting to note that the F i r s t
Bank of the United States had to be wound up and liquidated in 1811
largely because of opposition from .the city which i s today the
financial center of the United States and perhaps of the world.


recharter b i l l f a i l e d in the United States Senate in 1811 because of
the opposition and vote of George Clinton of New York, and Clinton


was "backed by soma of the leading "bankers and financiers of New
York City, including John Jacob Astor.

Daring the years that

followed we had a second Bank of the United States 1816 - 1836,
but u n t i l the Civil War brought the National Banking Act business most of the time was under the tremendous handicap of a
fluctuating local state bank note currency, with the notes i s sued in one state or even in one city almost always at a discount
if presented elsewhere.

In New Sngland, New York and Pennsylvania,

the state banks were generally pretty strong and reliable and were
organized under reasonably sound general acts, while in the older
southern states banks continued to be specially chartered by the
l e g i s l a t u r e s and were, therefore, usually large, strong i n s t i t u tions.

In the newly formed western states the " f r e e banking" idea,

which started in New York, ran wild and resulted in every sort of
banking experiment, most of them disastrous.

In Indiana for some

years there was both the best banking system and the worst almost
side by side at the same time.
A good deal of our banking l e g i s l a t i o n has been r e s t r i c t i v e
rather than constructive, and the great constructive measures that
have been passed by the Congress of the United States, such as the
National Banking Act and the Federal Reserve Act, were passed f o r
the purpose of correcting the most glaring defects of an individual,
local, unit banking system without recognition of the f a c t that
much of the trouble was due to the local unit system i t s e l f .


we need now i s to remove some of the r e s t r i c t i o n s i n the present
laws so as to allow some development towards a b e t t e r system.


McFaddon Act of February 1927 went a l i t t l e way toward removing
unnecessary r e s t r i c t i o n s "but the changes were of "benefit mostly
to city banks.

The McFadden Act prevents country tanks even if

located in adjoining towns from pooling their resources.

Of the

4513 bank f a i l u r e s reported to the Federal Re serve Board from
1921 to 1927 inclusive, 63 per cent were banks with a capital of
$25,000 or l e s s and 61 per cent were of banks located in towns
of l e s s thai 1,000 inhabitants, which may be taken, said Mr.
P i a t t , "as conclusive evidence that the American e f f o r t to provide banking f a c i l i t i e s in very small places

by means of very

small u n i t banks i s a f a i l u r e and cannot be made to succeed except when a l l surrounding economic conditions are favorable.
Too often economic conditions have been unfavorable - crop f a i l ures, local industrial f a i l u r e s or merely the f a i l u r e of the
neighborhood i t s e l f to grow."

Mr. P i a t t quoted with approval

from the address of Mr. Clyde Hendrix of the Tennessee Valley
Bank of Decatur, Alabama, at the meeting of the American Bankers'
Association in San Francisco, the following:
"Every banker i s acquainted with the appalling mort a l i t y record of the small unit banks located i n purely
agricultural t e r r i t o r y . Ho doubt, the lack of proper
management and dishonesty account for a small percentage
of such f a i l u r e s , but in the main the wholesale, colossal •
number of small bank f a i l u r e s can properly be charged to
the system i t s e l f . "
This, said Mr. P i a t t , i s substantially the belief of the present
Comptroller of the Currency, "who is recommending as a cure not
more severe r e s t r i c t i o n s , or more elaborate supervision, but a
relaxation of some of the present r e s t r i c t i o n s upon banking so


that a gradual change of the system i t s e l f can take place - a
change "by which some of the small unit "banlcs may "be merged, with
"banks in other places so as to provide larger "banks, with funds
s u f f i c i e n t to provide good management, and covering a t e r r i t o r y
wide enough to insure a diversification of loans and investments."

"Just what form the Comptroller's recommendations to

Congress nay take, j u s t what limits he may propose - for he is
not in favor of unlimited or nation-wide "branch banking - will
not "be made known u n t i l his annual report goes to the Speaker
of the House of Representatives about the middle of the present

He has arrived at his conclusions not only as the re-

sult of long experience as a bank examiner and as the head of
the supervisory forces of the United States
the result of careful study.


but as

In my opinion he i s on the right

track and deserves f u l l support not only from economists and
students of banking, but from business men and bankers."
Mr. P i a t t made no reference during the course of his address
to the recent stock market panic except to remark that while the
year 1929 up to the close of October has recorded 521 bank suspensions as compared with only 375 during the same period of 1928,
no suspensions or f a i l u r e s have been a t t r i b u t e d to the recent
stock market paaic up to date.

Practically a l l suspensions have

been in the West and South, and the banks are mostly so small

as to have l i t t l e or no e f f e c t upon the general f i n a n c i a l condition of the country.

He digressed from his main subject long enough to r e f e r to

-5the development of the M i l market, or market for "bankers1 acceptances during the present year.

"For the f i r s t time since the

Federal Reserve System was established," he said, "the "bill market
has during t h i s year been standing on i t s own f e e t without any
nursing by the Federal reserve banks.

Early in the year the rate

at which Federal reserve banks purchased b i l l s from member banks
or from dealers was placed above the Federal reserve rediscount
r a t e , with the result that investors, including banks, i n s t i t u tions and individuals began to purchase b i l l s because of the a t tractiveness of the r a t e .

More recently, investors have been

outbidding the Federal reserve banks and have been taking the
new b i l l s in spite of very low r a t e s .

This may be due to the

f a c t that some of the corporations and individuals who had been
loaning money on call in the stock market are now buying b i l l s . "