Full text of Mimeograph Letters and Statements of the Board : The Amendments to the Federal Reserve Act in the McFadden Bill Referring to Branch Banking, Number X-4027, Volume 20, Page 233

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THE AMENDMENTS TO THE FEDERAL RESERVE ACT IN THE MCFADDEN BILL REFERRING TO
BRANCH BANKINGThe McFadden B i l l (H. R. 6855) has been announced as a b i l l drawn for the
purpose of l i b e r a l i z i n g the National Banking Act, so that National banks may no
longer be prevented by law from performing banking functions regarded as useful
and sound i n principle which State banks have long been performing.

The Comptroller

of the Currency has noted the f a c t that State banks have s t e a d i l y gained in numbers
and in resources while National banks have f a i l e d to maintain the same rate of
growth.

Since January 1 , 1913, he t e l l s us 173 National banks, each with capital

of over $100,000 have given up their National charters and taken out State charters.
These f a c t s are indisputable and in so far as the b i l l confines i t s e l f to i t s
announced purpose I have no c r i t i c i s m to make of i t , further than to s t a t e that
some of the departures from commercial banking need very careful consideration.
One of the l i b e r a l i z i n g provisions of the b i l l has to do with branch banking within
c i t y l i m i t s , and with this provision the Federal Reserve Board i s unanimously in
agreement.

I think I may f a i r l y add that the members of the Board regret that this

l i b e r a l i z i n g feature of the b i l l does not go to the f u l l limit of permitting the
establishment of branches in a l l c i t i e s l a r g e enough to have need for outlyifag
banking f a c i l i t i e s , as a matter of right and without regard to the l i m i t a t i o n s of
State laws.

I t would seem that the National banks might sometimes be permittedto

take the lead in a matter of sound barking vdaich every competent banker and every
economist approvesSo much for the l i b e r a l i z i n g , or modernizing features of the b i l l , designed
to permit banks to transact l e g i t i m a t e business along sound l i n e s by modern methods.
We can a l l get behind and support these f e a t u r e s , these amendments to the National
Banking Act.

But the b i l l doesn't stop there.




I t seeks to amend the Federal Re<*

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serve Act, and here i t becomes r e p r e s s i v e and r e a c t i o n a r y .

Because many bankers a r e

opposed to any f u r t h e r l i b e r a l i z i n g of the National Banking Act t h e b i l l seeks to
deprive s t a t e bank members of the Federal Reserve System of some of t h e i r c h a r t e r
r i g h t s guaranteed them under the Act of June 21, 1917, p a r t i c u l a r l y with r e f e r e n c e
to branch banking.

Certain s t a t e s permit and even encourage banks of s u f f i c i e n t

c a p i t a l to e s t a b l i s h branches beyond c i t y l i m i t s , on the theory t h a t t h e farmer
i s as much e n t i t l e d to the best and s a f e s t banking s e r v i c e a s the c i t y dweller i s .
Instead of advocating the same p r i v i l e g e s f o r National banks t h a t these s t a t e s give
t h e i r S t a t e banks the Comptroller of the Currency has entered i n t o an e l a b o r a t e
argument a g a i n s t branch banking in general, an argument which would, if sound,
u t t e r l y destroy h i s c i t y branch banking recommendation i f i t were not f o r the development of a very ingenious theory of home r u l e .

The s t a t e s may, according t o t h i s

theory, decide f o r themselves whether banks s h a l l or s h a l l not have branches w i t h i n
c i t y l i m i t s , but they must not be allowed t o decide whether any branch banks s h a l l
e x i s t outside of t h e l a r g e c i t i e s - i f t h e i r banks a r e t o remain in the Federal
Reserve System.
There i s n ' t an economist i n the country who would agree with the arguments of
the Comptroller.

Some 322 independent banks have f a i l e d in t h i s country since the

1st of January t h i s y e a r ( t o .April 11th). more than t w o - t h i r d s of them banks with a
capit a l l e s s than $50,000, and more than seven-eighths of them banks with a c a p i t a l l e s s than $100,000.

With f a i l u r e s s t i l l running a t the r a t e of nearly 100 a

month an unprejudiced o u t s i d e r might be pardoned f o r t h i n k i n g t h a t u n i t banking
r a t h e r than branch banking i s a t present in most need of d e f e n s e .
The Comptroller bases h i s arguments on two assumptions, both demonstrably
erroneous.

He assumes, f i r s t , t h a t branch banking In t h i s country i s wholly a Aig




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c i t y proposition - that the banks i n the big c i t i e s w i l l e s t a b l i s h branches throughout each s t a t e i f allowed to do so - and, second, that country branch banking,that
i s branch banking outside of the big c i t i e s , i s "fostered and protected" by the
Federal Reserve System.
The f i r s t of these assumptions the Comptroller partly d i s c r e d i t s himself i n
h i s statement that he has never yet discovered a big banker who wished to extend
h i s i n s t i t u t i o n beyond c i t y l i m i t s .

1 think that i s true of the b i g bankers in

Chicago and in most of the great c i t i e s of the East*

They already do a national

business, r e c e i v i n g deposits from and making loans to large commercial and manufacturing i n s t i t u t i o n s throughout the country, without branches.

Furthermore they

receive deposits from, make loans to, and exercise a c e r t a i n amount of control
over, thousands of small banks a l l over the country.

It i s doubtful i f they would

gain enough more to compensate them f o r the added r e s p o n s i b i l i t y i f they were to
e s t a b l i s h branches outside c i t y l i m i t s .

But the error of the Comptroller's a s -

sumption i s f u l l y demonstrated not by conjectures or by the statements of b i g
bankers but by the f a c t s of the development of branch banking in the s t a t e s which
have permitted i t .

Although the laws of California have provided d i s t i n c t l y f o r

state-wide branch banking since I9O9 only one i n s t i t u t i o n has r e a l l y spread i t s
branches throughout the State, one other has branches covering about oneithird of
the State and two others cover t e r r i t o r y that i s hardly more than suburban or contiguous.

The overwhelming majority of the i n s t i t u t i o n s engaging in branch banking

i n California are country banks not located i n any of the large c i t i e s .

Through-

out the Southern s t a t e s branch banking i s a country bank proposition, with head
o f f i c e s generally not even in towns large enough to be c a l l e d c i t i e s .

The bank

having the l a r g e s t number of branches in Alabama (about 15 branches) i s not a




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-.4t Birmingham bank, but a bank at Decatur.

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The largest branch banking system in

" Mississippi, with about lU branches, has i t s headquarters at Grenada, and the
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v':'largest branch banking system i n Maryland has i t s head o f f i c e not i n Baltimore or
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In Annapolis, or in any town large enough t o be c a l l e d a c i t y , but in Cambridgei

t?" $»•'Alabama, Georgia, Louisiana, Maryland, Virginia, North Carolina and South
^ Carolina there are I3U banks operating 319 branches, l e s s than three branches t o
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, a bank, and l e s s than a dozen of these banks are domiciled i n the larger c i t i e s .
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Further p o s i t i v e proof of the error of the assumption that branch banking i s

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a c i t y monster which most be chained up l e s t i t spread i t s t e n t a c l e s over the
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5 whole country i s found in connection with the f a c t s which disprove the Comptroller 1 s
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fi second assumption, v i z : that branch banking i s "fostered and protected" by the
r Federal Reserve System.

Of the 13^ banks which operate branches i n the Southern

s t a t e s mentioned only 20 are member banks, leaving l l U non-members, and these l l U
; non-members are operating 233 branches, or about 2 branches to each bank.

In Vir-

ginia there are 2 members operating 3 branches and 22 non-members with 29 branches.
The "head o f f i c e s " are located in such towns as Clintwood., Columbia, Gloucester,
Keller, Keysville, Louisa, Staunton, Tappahannock, Wbaana, Wakefield and Williamsburg.

Six banks in Richmond maintain brandies, but not one of them has more than 2

» branches and only one of them, the Richmond Trust Company, of which Mr. John Skelton
); Williams i s president, has a branch outside of the c i t y . On© bank i n Norfolk has 2
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branches both outside the c i t y and one bank in Lynchburg has a branch at Bedford.
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Exactly the same conditions prevail in North Carolina and in Georgia, with the
single exception of the Citizens and Southern of Savannah, which has branches in
Atlanta and Macon.




In the s e c t i o n of Tennessee within the Atlanta Federal Reserve

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D i s t r i c t there are 12 non-member banks operating 33 branches, and no member banks
with branches.

In the other end of the d i s t r i c t one member bank in Memphis has

branches, but they are inside the c i t y .
Certainly t h i s Southern development of branch banking i s not "fostered and
protected" by the Federal Reserve System, since i t i s nearly a l l outside the Sys; tem.
true.

Bat even in California, the great branch banking s t a t e , the same thing i s •
There are 88 state banks in that state maintaining branches, but only 19 of

them are members of the System, leaving 69 outside, and the outsiders are almost
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a l l country banks.

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It i s true of course that the member banks maintain the most

branches, but when i t comes to the question of being "fostered and protected" i t
should be said that the large branch banking systems, the Bank of I t a l y , the Pac i f i c Southwest Trust and Savings, and the Security Trust and Savings, have none of
tBem ever been large borrowers from the Federal Reserve System.
has borrowed and the other two only to carry Liberty bonds.

One of them never

During the strenuous

months of 1920 and 1921 i t may f a i r l y be said that these large branch banking ins t i t u t i o n s furnished a large share of the reserve funds which were loaned by the
Federal Reserve Bank of San Francisco to the independent unit banks.
The r e s t r i c t i v e amendments to the Federal Reserve Jct are, i t seems to me,
unfair, as they overthrow the guarantees under which the larger California State
banks, and many State hanks elsewhere were persuaded to j o i n the Reserve System.
We were w i l l i n g enough to invite them in and o f f e r them the guarantee of their charter rights when their funds were sorely needed, but now that the seas are.smooth
we propose to repeal the guarantees so far as branch banking i s concerned.
It $6t only seems to me unfair but from every, point of view unwise.

Every

economist favors branch banking as affording the best and safest means of extending




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X-4027
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banking accommod&tions t o agricultural sections and small communities. Professor
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o . M. W. Sprague begins an a r t i c l e on branch, banking in the Quarterly Journal of
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Economics with these words:

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"Upon few subjacts has the consensus of opinion of

both economists and f i n a n c i a l writers been mbre general than upon the advantages
of branch banking over a system of separate l o c a l banks.

I t s superiority in respect

,/ to safety, econoiry, the equalization of rates f o r loans, and the d i f f u s i o n of
f banking f a c i l i t i e s cannot be questioned."
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The economists generally agree that branch banking i s a matter of most concern
not to the b i g c i t i e s or t h e i r b i g banks, but t o t h i n l y s e t t l e d a g r i c u l t u r a l
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They b e l i e v e that our present scheme of extending banking f a c i l i t i e s

5; to such communities by means of small weak independent banks, banks with a capital
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of $5,000, $10,000, or even $25,000, i s unsafe for depositors and uneconomical,
; Taking i n t e r e s t r a t e s t o the farmers higher than necessary. Professor J . Laurence
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Laughlin of Chicago University, one of the men who had a prominent part i n the preliminary work leading to the establishment of the Federal Reserve Act, declared in
1912 that "the maintenance of such conditions necessarily involves some rather
; serious s u f f e r i n g . "

Hasn't t h i s prediction been rather s t r i k i n g l y and p a i n f u l l y
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v e r i f i e d by the great number of bank f a i l u r e s in the Northwest?
Most of the Comptrollers of the Currency have recommended branch banking in
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some form, and nearly a l l of them have recognized i t s superiority e i t h e r as a
general proposition or under certain conditions to unit banking.
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Comptroller, Hugh McCullough, was himself the President of one of the most notable
branch banking systems i n the country, the Bank of Indiana,

Mr* Hepburn refers

t o t h i s bank as "an exemplary i l l u s t r a t i o n of the e f f i c i e n c y of branch banking as
: a x^stem."

Comptroller Eckles, whose administration f e l t the f u l l force of the




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Panic of 1S93 advocated the establishment by n a t i o n a l banks of branches i n p l a c e s
not having n a t i o n a l banks already e s t a b l i s h e d .

Comptroller Charles G. Dawes

who succeeded him recommended branch banking in p l a c e s with a population l e s s than
2000.

Mr. Dawes in an address t o Pennsylvania bankers in 1903 spoke a g a i n s t

"general domestic branch banking," but in the course of t h e address f r a n k l y admitted t h a t one of the advantages of branch banking would be lower i n t e r e s t r a t e s
to the farmers who grdw crops having a cash Value * Recent Comptrollers have r e commended branch banking w i t h i n c i t y l i m i t s as something a b s o l u t e l y necessary in
most of our great c i t i e s i n order t o save the National banks of t h e c i t i e s from
d e s t r u c t i o n by s t a t e bank competition.

Branch banking by counties was recommended

by some of them, and was recommended a l s o by the Federal Reserve Board i n I 9 I 8 .

In

i t s report f o r 1$22 the Board urged t h a t National banks be given the same p r i v i l e g e s
with regard t o branches t h a t s t a t e banks have been given i n t h e branch banking
states.
The l a s t recommendation i s the only one t h a t w i l l f u l l y meet the s i t u a t i o n , so
f a r as the competition of s t a t e banks i s concerned.

If t h i s cannot be c a r r i e d the

Committee might a u t h o r i z e branch banking by n a t i o n a l banks i n c i t i e s where the
s t a t e s l i m i t branch banking t o c i t i e s , and in counties where s t a t e s permit country
banks to e s t a b l i s h branches.

Such an amendment would g r e a t l y s t r e n g t h e n the country

banks i n a g r i c u l t u r a l s e c t i o n s , and would enable the Federal reserve banks t o deal
with well managed i n s t i t u t i o n s , i n s t e a d of small banks which o f t e n h a t e no f a i r
chance t o survive i n times of s t r e s s .
The argument t h a t branch banking i s monopolistic i s unsupported by any a c t u a l
evidence - t h e evidence on t h e other hand i s c l e a r l y t o t h e e f f e c t t h a t branch banking i n c r e a s e s competition.




I t i s t r u e t h a t the number of c h a r t e r e d banks in

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Canada, and the number of j o i n t stock banks in England and Scotland, have greatly decreased, but except in the largest c i t i e s there are more banks competing with each
other than b e f o r e . A recent Parliamentary investigation (19-3) into the question of
banking in i t s r e l a t i o n to agriculture in England contains t h i s statementt
"Finally, from the point of view of the agricultural community, i t
i s important to r e a l i z e that, notwithstanding the absorption of the
small country Banks, there i s , in f a c t , far keener competition for
rural business than ever before; while, in the matter of security to
depositors, the suralgamtion of the Banks has also been of very gxeat
advantage. The old private Banks were always heavily involved in the
fortunes of a r e s t r i c t e d area and this was a source of weakness at
times of l o c a l c r i s i s . The Joint Stock Banks spread t h e i r r i s k s over
a wider area and a greater range of industries, and can b e t t e r carry
periods of depression." (Report of the Committee on Agricultural
Credit, p. 2 2 ) .
Similar findings were made by a Canadian committee, which investigated credit
conditions in the Canadian northwest a year or so ago.

Furthermore Mr, Frank W,

Murphy and Mr. Castleman, a committee representing our own northwestern farmers,
t e s t i f i e d a few weeks ago that one of the advantages Canadian wheat growers had over
the wheat growers on our side of the l i n e was b e t t e r treatment from t h e i r banks and
lower interest r a t e s .
Why ignore t h i s direct testimony?
Califomians?

And why ignore the direct testimony of the

Can any one maintain that there i s l e s s competition among banks in

California today than there was before the development of the branch banking systems
in that state?
e x i s t i n g in the

Can any one deny that agricultural' s i t u a t i o n s as serious as that now
wheat growing s t a t e s of the Ninth Federal Reserve D i s t r i c t have

been handled in California p r a c t i c a l l y without bank f a i l u r e s ?
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I s n ' t i t rather un-American to express fear of monoply in a f i e l d where the

unite are so overwhelmingly numerous?




"In union there i s strength" i s an American

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shibboleth.

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Every week brings increased evidence of the lack of strength of the

small unit banks in agricultural sections of our country.

The s t a t e s c h i e f l y con-

cerned have t r i e d guaranteeing deposits and every other remedy, except the one
remedy of uniting resources 1 a remedy which has been successful wherever tried*
In conclusion I wish to say that the Federal Reserve Board has directed i t s
division of analysis and research to make a complete study and survey of branch
banking in t h i s country, and with some reference also to conditions in other countries.

The Board has a l s o recently adopted regulations dealing with branch bank-

ing, copy of which I present for the record*

I submit that these regulations w i l l

take care of the matter adequately and make unnecessary the amendments to the Federal Reserve Act contained in the b i l l •

April 17, 1924




Edmund P i a t t •