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X-6432 ABSTRACT OF ADDRESS AT W A T N SCHOOL OF FINANCE H RO 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. The 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 X-6432 -2- 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 . What 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. The X-6432 ~3*~ 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 X-6432 -4r- 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 month. 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. Government, 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 1-6432 -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 . "
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