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COPY To: X-652D March 1, 1930. Governor Young, SU3J3CT: Data re Branch, Group and From: Mr. 7,'ya11, General Counsel. Chain Banking. In accordance with your request, made Tuesday of this week, I have gathered together what I "believe to "be substantially a l l the data in the Board's possession on the above subject, which might be of help to you in connection with your testimony before the Committee on Banking and Currency. I have digested or summarized t h i s material under various headings l i s t e d in the attached analysis and have attached the original material as exhibits numbered according to the corresponding headings of the analysis and digest. This system of numbering the exhibits results in some duplication of exhibits ( i . e . the same material sometimes appears two or three times as different exhibits); but I believe i t is j u s t i f i e d by the resulting convenience of reference. If you decide to f i l e with the Committee a written statement accompanied by exhibits, it may be advisable to eliminate this duplication by designating the exhibits A, B, C, e t c . , and referring back to an earlier exhibit, instead of introducing the sair.e exhibit again under a different number. In accordance with our understanding, I have not' attempted to put the attached summary or digest in the form of a final statement to be f i l e d with the Cormittee but rather in such form as to serve as a rough draft for you to revise and supplement in accordance with your own views. It, therefore, contains some references to confidential material, which should be omitted from any statement or exhibits f i l e d with the Committee. In this connection, I quote the following from a memorandum addressed to me by lir. Horbett with reference to the confidential character of some of the material comp i l e d by Lr. Smead's division: "As I told you over the telephone, a good deal of the material that we have presented to the Board has been of a confidential character, that i s to say, we have not f e l t at liberty to disclose, except to the Board, the names of the individual banks reported to us by the Federal reserve agents. You w i l l note, however, from the copies of the memoranda submitted to the Board on this subject, that they refer to the accompanying detailed reports, and in some cases the memoranda themselves give figures pertaining to individual banks. It may be desirable, therefore, to amend the memoranda somewhat, i f they are to be used at the Congressional hearing, by omitting confidential data and references to accompanying conf i d e n t i a l tabulations," I strongly recommend that you confer with Mr. Smead about this before f i n a l l y deciding what material to f i l e with the Committee. I regret that I have had to do this work so hurriedly that I am not very proud of the result; but I hope that i t w i l l serve for practical purposes. Respectfully, Walter Y«yatt, General Counse" X-6523 FEDERAL RESERVE BOARD DIGEST OF DATA ON BRANCH, GROUP AND CHAIN BANKING. The following i s a digest of a l l the data in the possession of the Federal Reserve Board on the subject of branch, group and chain banking. There i s being submitted to the Committee at the same time as exhibits, copies of a l l the material referred to in this digest. In this connection, attention i s called to the fact that part of the material submitted is confidential in i t s nature and probably ought not to be published in any report of the Committee's hearings. These confidential portions are indicated both on the exhibits and by explanatory statements in the body of the digest, so that the Committee can easily eliminate them if i t should desire to publish this digest or any of the exhibits. FEDERAL X-6523 1 - RESERVE BOARD DA2A ON BEilTCH, G5.0UP A1TO CFADT BASKIITG I. Legal Research 1. September, 2. December, 1922 1924 3. March, 1925 4 . J u n e , 1926 5 . F e b r u a r y , 1929 6. O c t o b e r , 1929 7. December, 8. February, II. Statistical 1. 2. 3. 4. 5. 6. 7. III. 1929 1930 S t a t u s o f B r a n c h B a n k i n g U n d e r t h e Laws c f the Several States. Comprehensive A r t i c l e on Branch B a n k i n g , I n c l u d i n g Legal S t a t u s . D i g e s t o f S t a t e Laws a s o f D e c e m b e r 3 1 , 1 9 2 4 . Supplement t o December, 1924, A r t i c l e . Branch Banking Developments to June 30, 1928. D i g e s t of S t a t e Laws r e O w n e r s h i p o f Bank S t o c k s by Holding Companies. Branch and Chain Banking Developments i n 1929. D i g e s t o f S t a t e Laws r e B r a n c h B a n k i n g . Research re Branch Banking June, 1924. December, 1925. December, 1926. F e b r u a r y 25 a n d June 30, June, 1928. June, 1929. December, 1929. Statistical 1927. R e s e a r c h on Chain Banking 1. December, 1922. 2. 3. 4. 5. 6. 7. June, 1926. June, 1923. June, 1929. December, 1929. Annual Report f o r 1927. Annual Report f o r 1928. IV. Branch Banking i n F o r e i g n C o u n t r i e s 1. Canada. 2. B r i t i s h Isles. 3 . Q-ermany. 4. France. 5 . -Japan. V. H i s t o r y , 1. 2. 3. 4. 5. 6. 7. United States ""Branch B a n k i n g b e f o r e t h e C i v i l War" - A d d r e s s b y H e n . Edmund P i a t t . " B r a n c h B a n k i n g f o r C o u n t r y B a n k s " - A d d r e s s b y E o n . Edmund P i a t t . R e c e n t Growth of Branch Banking Through 1924. B r a n c h B a n k i n g i n t h e U n i t e d S t a t e s f r o m June, 1924, t o December, 1925. Branch Banking Developments i n 1926. Branch Banking Developments to June 30, 1928. Branch and Chain Banking Developments to June 30, 1929. X-S523 V I . F e d e r a l L e g i s l a t i o n on B r a n c h B a n k i n g 1. 3. 3. 4. 5. 6. 7. . , 8. 9. F i r s t Bank of t h e U n i t e d S t a t e s . S e c o n d Bank of t h e U n i t e d S t a t e s . Rational Banks. p o s t a l Savings Banks. Federal Reserve Banks. F e d e r a l Land Banks and J o i n t S t o c k Land Banks. 1;ar F i n a n c e C o r p o r a t i o n . Federal Intermediate Credit Banks. The M c F a d d e n A c t . (a) National Banks. ( o ) S t a t e Member B a n k s o f t h e F e d e r a l R e s e r v e S y s t e m . VII. Policy 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. of F e d e r a l R e s e r v e System on Branch Banking Annual Report f o r 1915. Recommendations Daring 1916, Annual Report f o r 1917. Annual Report f o r 1318. Developments During 1919. Annual Report f o r 1915. Recommendation of F e d e r a l Reserve Agents i n 1921. Annual Report f o r 1922. Annual Report f o r 1923. A d m i n i s t r a t i v e P o l i c y of F e d e r a l R e s e r v e B o a r d P r i o r t o November, 1S23. F e d e r a l R e s e r v e B o a r d ' s R e s o l u t i o n of November 7, 1 9 2 3 . Recommendations on McFadden B i l l . A d m i n i s t r a t i v e P o l i c y During 1924. R e g u l a t i o n s of 1 9 2 4 . A f t e r the McFadden A c t . VIII. P o l i c y of F e d e r a l R e s e r v e System on C h a i n B a n k i n g 1. 2. 3. C o n d i t i o n s of M e m b e r s h i p . Recommendations f o r L e g i s l a t i o n . C o r r e s p o n d e n c e w i t h Hon. L o u i s T. McFadden r e g a r d i n g Administrative Control. 4 . Annual R e p o r t s f o r 1327 and 1928. 5. C o n f e r e n c e s of F e d e r a l R e s e r v e A g e n t s a n d Governors of e r a l Reserve Banks, 1S27-1928. S. Committee t o Study Chain Banking. Fed- IX. Bank F a i l u r e s 1. 2. 3. 4. 5. F e d e r a l R e s e r v e B o a r d ' s Annual Report f o r 1926. R e n o r t on Bank S u s p e n s i o n s , 1921-1927. S t u d y of Bank S u s p e n s i o n s , 1331-1929. F e d e r a l R e s e r v e B o a r d ' s Annual Report f o r 1539. S t u d i e s of Bank F a i l u r e s by P r o f e s s o r S p r a g u e a n d D r . Burgess. X-S523 3 E A F C H , G R O U P A IT D C B A I 17 "B A IT K I IT G- R3S3.4BCS 7 . " 0 3 g During the p a s t done a g r e a t amount of of " b r a n c h b a n k i n g , research It is a n d d u r i n g the p a s t in connection with believed that the d i s c u s s i o n of the results to containing work. the four years s u b j e c t of of this the subject i t h a s made much group and chain banking. r e s e a r c h work w i l l the Committee. There i s t h e v a r i o u s d i f f e r e n t p h a s e s of work and t h e r e a r e a t t a c h e d e x h i b i t s ments the Federal Reserve Board has r e s e a r c h work i n c o n n e c t i o n w i t h enlightening and h e l p f u l brief eight years containing be v e r y g i v e n below a this research the p r i n c i p a l docu- d e t a i l e d information r e s u l t i n g from this research ~ *~ 0 - X-6523 o • I. LB GAL RESEARCH 1. Daring September, 3,922, Mr. Robert F. Leonard, Secretary to Hon. John R. Mitchell, who was at that time a member of the Federal Reserve Board, prepared a preliminary draft of a digest showing the status of branch banking under the laws of the several states. In this digest i t appears that, in September, 1922, branch banking was prohibited by law in 15 States and was expressly permitted by law in 13 states. In 12 States there were no s p e c i f i c provisions of law prohibiting branch banking, but the State supervisory authorities did not permit branches to be established. In four States the laws prohibited branch banking but per- mitted the establishment of branch o f f i c e s or agencies; and in three States the establishment of branches was permitted without any express authorization of law. In one State branch banking was permitted by im- plication, but there were no branches then in operation in that State. Of the 13 States expressly permitting branch banking, eight permitted i t without any geographical limitations, while f i v e permitted the establishment of branches only within certain geographical l i m i t s . A copy of this preliminary digest (X-3530) i s attached hereto as Exhibit A, It appears that i t was never put in final form. 2. In December, 1924, there was published in the Federal Reserve Bulletin (pages 925-940) a comprehensive a r t i c l e with reference to the entire subject of branch banking, which reviewed the administrative p o l i cies of the Federal Reserve Board with reference to this subject, the Board's recommendations to Congress, the extent oi branch banking in the United States, both within and without the Federal reserve system, and the growth of branch banking. In addition to much valuable s t a t i s t i c a l material, this the l e g a l status ing in which article also 3 - X-6523 contained, (pages 930-931) a of b r a n c h "banking i n t h e U n i t e d . S t a t e s s t a t e s b r a n c h "banking was a u t h o r i z e d . , was p r o h i b i t e d , a n d i n w h i c h S t a t e s the laws with reference This to branch banking. equal e x p r e s s l y or number of in 2 other in 2 additional summary showed t h a t a t authorized in 9 States, a n d was p e r m i t t e d w i t h o u t States, m a k i n g 13 S t a t e s b r a n c h b a n k i n g was p e r m i t t e d . the county or that the territory corporate In 3 States limits additional were p e r m i t t e d e i t h e r A c o p y of 3. letin this in an contiguous to was i m p l i e d l y a u t h o r i z e d specific statutory authority in a l l Three S t a t e s In I.arch, the in which State-wide r e s t r i c t e d b r a n c h banking to city branch banking, the city i n which or c o u n t y i n which t h e or agencies, but is attached as Exhibit a complete digest t h e a s s i s t a n c e of the "banks. digest status showed t h e at the close b a n k i n g was p e r m i t t e d e i t h e r bank was l o c a t e d . full-power branches, or u n a e r judicial decisions. B. of S t a t e l a w s p e r t a i n i n g w h i c h was p r e p a r e d i n t h e the various S t a t e s not branches t h e r e was p u b l i s h e d i n t h e T e d e r a l R e s e r v e B u l - Counsel w i t h This the parent by s t a t u t o r y p r o v i s i o n s 1925, (pages 182-187) of offices article time i n 17 S t a t e s a n d was p a r e n t b a n k w a s l o c a t e d and. 2 S t a t e s l i m i t e d t h e e s t a b l i s h m e n t o f to it The f r e e e x t e n s i o n of b r a n c h b a n k i n g on a S t a t e - expressly States, in which S t a t e s i m p l i e d l y p e r m i t t e d by s t a t u t o r y p r o v i s i o n s States. wide b a s i s r a s a n d a map s h o w - c o n t a i n e d no p r o v i s i o n s b r a n c h b a n k i n g was e x p r e s s l y p r o h i b i t e d by s t a t u t e either summary of of o f f i c e of Counsel f o r of the Board's to General the various Federal reserve branch banking l e g i s l a t i o n i n the year 1924. It showed t h a t b r a n c h s p e c i f i c a l l y or by i m p l i c a t i o n i n 20 S t a t e s - 4 and was s p e c i f i c a l l y p r o h i b i t e d i n 17 S t a t e s . X-6523 ( I t a l s o shows t h a t a t t h a t time t h e r e were 11 S t a t e s having no e x p r e s s p r o v i s i o n s of law c o v e r i n g "branch "banking. 4. A copy of t h i s d i g e s t i s a t t a c h e d h e r e t o as E x h i b i t C. I n J u n e . 1926. t h e r e was p u b l i s h e d i n the F e d e r a l Reserve B u l l e t i n (pages 401-408) an a r t i c l e with r e f e r e n c e to branch banking i n the U n i t e d S t a t e s , b r i n g i n g up t o d a t e t h e d a t a c o n t a i n e d i n the a r t i c l e p u b l i s h e d i n the F e d e r a l Reserve B u l l e t i n f o r December, 1924. With r e f e r e n c e to the l e g a l s i t u a t i o n i n the v a r i o u s S t a t e s , t h i s a r t i c l e showed t h a t t h r e e S t a t e s had e n a c t e d l e g i s l a t i o n r e g a r d i n g t h e e s t a b l i s h m e n t and maintenance of b r a n c h e s d u r i n g the y e a r 1925. I t showed t h a t , on December 31, 1925, branch banking was p e r m i t t e d i n 20 S t a t e s e i t h e r e x p r e s s l y or by i m p l i c a t i o n ; i t was p r o h i b i t e d i n 17 S t a t e s ; and t h e r e was no l e g i s l a t i o n on the s u b j e c t i n 10 S t a t e s . I n a d d i t i o n to t h e 20 S t a t e s p e r m i t t i n g b r a n c h banking, ITew J e r s e y had r e c e n t l y e n a c t e d a s t a t u t e a u t h o r i z i n g banks and t r u s t companies to e s t a b l i s h b r a n c h e s w i t h i n t h e l i m i t s of t h e c i t y i n which the head o f f i c e was l o c a t e d , i f n a t i o n a l banking a s s o c i a t i o n s i n ITew J e r s e y s h o u l d a t the time be p e r m i t t e d "by Act of Congress to e s t a b l i s h t r a n c h e s . A copy of t h i s a r t i c l e i s a t t a c h e d as E x h i b i t D. 5 . I n F e b r u a r y . 1929. t h e r e was p u b l i s h e d i n t h e F e d e r a l Reserve B u l l e t i n (pages 97-103) an a r t i c l e e n t i t l e d "Branch Banking Developments t o June 30, 1928", which not only brought up to d a t e much of the s t a t i s t i c a l d a t a on t h i s s u b j e c t b u t a l s o c o n t a i n e d a b r i e f summary of t h e l e g a l s i t u a t i o n e x i s t i n g on June 30, 1928. This showed t h a t , i n the p e r i o d which had. e l a p s e d s i n c e the enactment of t h e McFadden-Pepper Act of February 2 5 , 1927, s e v e r a l S t a t e s had e n a c t e d l e g i s l a t i o n e x p r e s s l y f o r b i d d i n g b r a n c h banking. A t a b l e p u b l i s h e d i n t h i s a r t i c l e i n d i c a t e s t h a t on June 20 - 5 - X-S533 1928, "branch banking was permitted, i n 22 S t a t e s and i n t h e D i s t r i c t ef Columbia, "but was l i m i t e d to the c i t y or county i n which the head o f f i c e of the bank was l o c a t e d i n 10 of t h e s e S t a t e s and. was p e r m i t t e d only i n the home county and a d j o i n i n g c o u n t i e s i n one S t a t e and only i n the home c i t y or t e r r i t o r y contiguous t h e r e t o i n one o t h e r S t a t e , ' s o t h a t 12 of the S t a t e s i n a l l p e r m i t t e d branch banking only w i t h i n l i m i t e d geog r a p h i c a l l i m i t s , while 10 S t a t e s ( n o t c o u n t i n g the D i s t r i c t of Columbia) p e r m i t t e d branch banking w i t h o u t any g e o g r a p h i c a l l i m i t a t i o n . Branch banking was p r o h i b i t e d ( e x c e p t a s to branches a l r e a d y e x i s t i n g ) i n 20 States. I n only 6 S t a t e s was t h e r e no l e g i s l a t i o n on t h e s u b j e c t of branch banking, and no b r a n c h e s i n o p e r a t i o n . a t t a c h e d as Exhibit 6. A copy of t h i s a r t i c l e i s E. In October, 1939, t h e r e was p r e p a r e d i n t h e o f f i c e of t h e B o a r d ' s General Counsel, w i t h a s s i s t a n c e of Counsel to the v a r i o u s F e d e r a l r e s e r v e banks, a d i g e s t of S t a t e laws r e g a r d i n g the ownership of bank s t o c k by holding corporations. as Exhibit F. This was not p u b l i s h e d , but a copy i s a t t a c h e d h e r e t o I t shows t h a t only 19 S t a t e s had any l e g i s l a t i o n a f f e c t - i n g t h i s s u b j e c t e i t h e r e x p r e s s l y or by i m p l i c a t i o n . In most of t h e s e S t a t e s the l e g i s l a t i o n o b v i o u s l y was not i n t e n d e d t o deal d i r e c t l y w i t h the s u b j e c t of c h a i n o r group banking. Most of the l e g i s l a t i o n was v e r y g e n e r a l i n i t s c h a r a c t e r and d e a l t only with the g e n e r a l powers af banks to own s t o c k i n o t h e r c o r p o r a t i o n s or i n o t h e r banks. Only i n the S t a t e s ef Hew J e r s e y , Oregon, West V i r g i n i a and Wisconsin, d i d t h e r e appear to be any l e g i s l a t i o n d e s i g n e d s p e c i f i c a l l y to r e s t r i c t c h a i n b a n k i n g . 7, I n Re a embnr, 1939 , t h e r e was published, i n the F e d e r a l Reserve B u l l e t i n (pages 763-771) an a r t i c l e with r e f e r e n c e to branch and c h a i n "banking developments d u r i n g the year 1922. Shis a r t i c l e p o i n t e d out t h a t " t h e a r e a w i t h i n which "banks were o p e r a t i n g "branch o f f i c e s " on June 30 was composed of 28 S t a t e s and the D i s t r i c t of Columbia. I n 9 of t h e s e S t a t e s , however, any f u r t h e r e x t e n s i o n of "branch "banking h a s been p r o h i b i t e d "by law, l e a v i n g 19 S t a t e s and the D i s t r i c t of Columbia as composing what may be c a l l e d " t h e branch banking a r e a " , t o which may p e r h a p s be added Wyoming, whose banking code would seem t o p e r m i t branch banking, a l t h o u g h no branch o f f i c e s have been r e p o r t e d from t h i s S t a t e . In 8 of t h e s e S t a t e s ( o r 9 i n c l u d i n g Wyoming) S t a t e - w i d e branch banking i s p e r m i t t e d , the e s t a b l i s h m e n t of branches being r e s t r i c t e d i n the o t h e r 11 S t a t e s t o the home c i t y of t h e p a r e n t bank or t e r r i t o r y n e a r l y c o n t i g u o u s t h e r e t o . I n t a b l e s p u b l i s h e d on pages 768 to 770, g i v i n g the d a t a f o r i n d i v i d u a l S t a t e s , t h e S t a t e s a r e grouped wit h r e f e r e n c e to t h e s t a t u s of branch banking as d e f i n e d i n the S t a t e banking codes. A copy of t h i s a r t i c l e i s a t t a c h e d h e r e t o a s E x h i b i t G. 8. I n F e b r u a r y , 1930, t h e o f f i c e of t h e Board 1 s General Counsel, w i t h the a s s i s t a n c e of Counsel t o the v a r i o u s F e d e r a l r e s e r v e banks, completed a p r e l i m i n a r y d r a f t of a new d i g e s t of S t a t e laws r e g a r d i n g branch b a n k i n g . This d i g e s t h a s r e c e n t l y been completed i n f i n a l form, and a copy of the f i n a l d r a f t i s a t t a c h e d h e r e t o a s E x h i b i t H, This d i g e s t shows t h a t the e s t a b l i s h m e n t of branch banks i s p r o h i b i t e d i n 22 S t a t e s ; t h a t the e s t a b l i s h ment of b r a n c h e s i s a u t h o r i z e d i n 19 S t a t e s , and t h a t t h e r e a r e no s p e c i f i c p r o v i s i o n s c o v e r i n g branch banks i n 7 S t a t e s . Of the 19 S t a t e s p e r m i t t i n g branch banking, n i n e p e r m i t S t a t e - w i d e branch banking and t e n permit branch banking only w i t h i n l i m i t e d a r e a s . - 7 - X-65S3 0 I I . STATISTICAL RDS5A3CH OH SR-AI'CH BAMIUG. 1. June, 1924. - The f i r s t survey mede f o r the F e d e r a l Reserve Beard on Branch "banking i n the c o u n t r y a s a whole, i . e . , i n c l u d i n g non- member a s w e l l a s member "banks, was p r e p a r e d as of June, 1924, and the r e s u l t s were p u b l i s h e d i n the 1924 December B u l l e t i n , pages 925-940. That summary showed t h a t 681 member and no member banks, out of a t o t a l of 28,468, were o p e r a t i n g a t o t a l of 2 , 2 3 3 b r a n c h e s . Of t h i s number, 248 were branches of n a t i o n a l banks, 1,137 were branches of S t a t e bank members and 848 were branches of nonrnember b a n k s . The S t a t e s i n which the l a r g e s t number of branches were r e p o r t e d a t t h a t time were C a l i f o r n i a - 538, Hew York - 559, Michigan - 332, and Ohio - 203. A copy of the F e d e r a l Reserve B u l l e t i n f o r December, 1924, i s a t t a c h e d h e r e t o a s E x h i b i t B. 2 . December, 1925. - The next s u r v e r y on branch b a n k i n g made f o r the Board was a s of December, 1925, and the r e s u l t s 408 of t h e June 1926 F e d e r a l Reserve B u l l e t i n . a r e published, on pages 401This survey showed t h a t the number of banks o p e r a t i n g b r a n c h e s k , d i n c r e a s e d from 686 i n June 1924 to 735 i n December 1925, and t h e number of branches i n o p e r a t i o n from 2,243 to 2 , 5 7 2 . Of the t o t a l number o f . b r a n c h e s i n o p e r a t i o n i n December 1925, 332 were b r a n c h e s of n a t i o n a l banks, 1,280 of S t a t e bank members and 960 • f nonrnember b a n k s . A copy of the F e d e r a l Reserve B u l l e t i n f o r June, 1926, i s a t t a i n e d hereto as Exhibit D» 3 . December, 1926. - In 1926 the Board d e c i d e d to m a i n t a i n a complete r e c o r d of a l l b r a n c h e s coming i n t o or going out of e x i s t a n c e of a l l banks i n the c o u n t r y , and the F e d e r a l r e s e r v e a g e n t s were i n s t r u c t e d to p r e p a r e the n e c e s s a r y d a t a f o r t h i s p u r p o s e . On the b a s i s of t h i s new r e c o r d a c o m p i l a t i o n was p r e p a r e d a s of December, 1926, and p r e s e n t e d to the Board X-6523 - 8 - i n Mr. Smea&»s memorandum of A p r i l 27, 1927. B r i e f l y t h i s memorandum summarized the "branch, "banking s i t u a t i o n a t the end of 1926 as f o l l o w s : "She summary shows t h a t out of a t o t a l of 28,000 "banks i n t h e U n i t e d S t a t e s on December 31, 1926, 789 "banks i n 401 c i t i e s were o p e r a t i n g 2,777 "branches. I f mutual s a v i n g s and p r i v a t e "banks a r e excluded, i n o r d e r to o b t a i n f i g u r e s comparable w i t h p r e v i o u s c o m p i l a t i o n s , i t i s f o u n d t h a t 730 "banks were o p e r a t i n g 2,690 "branches a t the end of 1926, a s compared w i t h 735 "banks w i t h 2,572 "branches i n December 1925, and 686 banks w i t h 2,243 b r a n c h e s i n June, 1924. There was during 1326, t h e r e f o r e , an i n c r e a s e of 113 i n the number of branches i n o p e r a t i o n ( e x c l u s i v e of b r a n c h e s of mutual s a v i n g s and p r i v a t e banks) and a nominal d e c r e a s e i n the number of p a r e n t banks o p e r a t i n g the b r a n c h e s , t h i s d e c r e a s e being more t h a n a c c o u n t e d f o r by c o n s o l i d a t i o n s of banks h a v i n g b r a n c h e s . " A copy of t h i s r e p o r t ( S t . 5334) i s a t t a c h e d h e r e t o a s E x h i b i t I . The same s t a t i s t i c s , i . e . , f o r December, 1926 were p u b l i s h e d i n somewhat d i f f e r e n t form i n t h e May, 1927, B u l l e t i n , pages 315-318 and 384-389, a copy of which i s a t t a c h e d h e r o t o a s E x h i b i t J . 4. F e b r u a r y 25 and June 30, 1927. - Under d a t e of February 17, 1528, Mr. Smead s u b m i t t e d a memorandum t o the Board summarizing t h e branch banking s i t u a t i o n a s of t h e d a t e on which the s o - c a l l e d LicFadden B i l l was passed. This memorandum a l s o brought the s t a t i s t i c s up to d a t e as of t h e end of June, 1927. The f o l l o w i n g m a t e r i a l t a k e n from the f i r s t page of t h a t memorandum shows b r i e f l y the s t a t u s of branch banking a t t h e time the McFadden Act was p a s s e d , a s w e l l a s f o u r months l a t e r , i.e., 1927: "On F e b r u a r y 25, 1927, t h e d a t e on which the McFadden amendment to t h e F e d e r a l Reserve and N a t i o n a l Bank Acts became e f f e c t i v e , t h e r e were i n the U n i t e d S t a t e s 777 banks i n 396 c i t i e s which were o p e r a t i n g a t o t a l of 2,902 domestic b r a n c h e s , the f i g u r e s by c l a s s e s of banks being a s f o l l o w s : i n June, X-S523 9 *• Number of banks o p e r a t i n g b ranche s T o t a l ~ a l l "banks National tanks S t a t e "bank members S t a t e "bank nonmembers Mutual s a v i n g s banlcs P r i v a t e "banks Number of b ranche s 777 2,902 144 189 385 50 9 389 1,562 863 76 12 "On June 30, 1927, the l a t e s t d a t e f o r which comp l a t e f i g u r e s f o r "both member and nonmember "banks a r e a v a i l a b l e , the number of banks o p e r a t i n g branches was 788, or about 3 p e r cent of the t # t a l number of banks (about 26,800) i n the U n i t e d S t a t e s , w h i l e the number of b r a n c h e s on t h e same date was 2 , 9 8 9 , about o n e - t e n t h the number of banking o f f i c e s ( p a r e n t banks p l u s b r a n c h e s ) i n the c o u n t r y . Although t h e m a j o r i t y of the banks — 481 cut of 788 — had branches o n l y i n the h e a d - o f f i c e c i t y , t h e r e were 978 b r a n c h e s , or one t h i r d of the t o t a l number, t h a t were- l o c a t e d o u t s i d e %he h e a d - o f f i c e c i t y . " I n most c a s e s the s i z e of the i n d i v i d u a l branch system was s m a l l , 442 of t h e 788 banks h a v i n g only 1 branch and 136 b u t 2 b r a n c h e s . Of the 210 banks t h a t had more t h a n 2 b r a n c h e s , 58 were l o c a t e d i n c i t i e s of l e s s t h a n 100,000 p o p u l a t i o n (where n a t i o n a l banks may not h e r e a f t e r e s t a b l i s h more t h a n 2 b r a n c h e s ) , i n c l u d i n g 3 n a t i o n a l banlcs, 13 S t a t e bank members, and 42 nonmembers. There were 51 banks t h a t had more than 10 branches on June 30, 1927, i n c l u d i n g the f o l l o w i n g which had 30 or more b r a n c h e s . " A copy of t h i s r e p o r t ( S t . 5656)is a t t a c h e d h e r e t o a s E x h i b i t K« 5, June, 1928. - The n e x t t a b l u l a t i o n of s t a t i s t i c s on branch banking g i v e s the s i t u a t i o n a t the end of June, 1928, and i s covered by Mr, Smead* s memorandum to t h e Board #f December 1, 1928. The f i r s t p a r a g r a p h of t h a t memorandum c o n t a i n s a condensed statement of the s t a t u s of branch banking and i s quoted below; "Branch banking s i n c e p a s s a g e of McFadden A c t . I n the 16-month p e r i o d between February 25, 1927, the d a t e on which the McFadden Act became e f f e c t i v e , and June 30 of the p r e s e n t y e a r , the number of b r a n c h e s of member and — 10 -> ~ X-55,33 no member "banks i n o p e r a t i o n i n the United. S t a t e s i n c r e a s e d from 2 , 9 0 0 t o 3,230, or by 330, and t h e number of banks o p e r a t i n g branches i n c r e a s e d from 779 to 835, or by 56. while the n e t i n c r e a s e i n the number of b a r k s o p e r a t i n g branches was 55, t h e r e were r e a l l y 109 banks o p e r a t i n g branches on June 30, 1528, t h a t had no b r a n c h e s whatever "'hen the McFadden b i l l became a law. The d i f f e r e n c e between t h i s f i g u r e and t h e n e t i n c r e a s e of 56 i n the number of banks o p e r a t i n g branches i s accounted f o r by the f a c t t h a t 39 banks which on February 25, 1927, were o p e r a t i n g b r a n c h e s went out of e x i s t e n c e through merger w i t h o t h e r banks, 10 banks a b o l i s h e d t h e i r b r a n c h e s , and 4 banks suspended o p e r a t i o n s on account of f i n a n c i a l d i f f i c u l t i e s . Of t h e 2 , 9 0 0 b r a n c h e s t h a t were i n o p e r a t i o n on F e b r u a r y 25, 1937, 72 were no l o n g e r i n o p e r a t i o n on June 30, 1928, 64 h a v i n g been a b o l i s h e d or merged w i t h o t h e r b r a n c h e s or w i t h the h e a d o f f i c e , and 8 going out of e x i s t e n c e a s a r e s u l t of t h e s u s p e n s i o n of t h e p a r e n t bank. There were 402 b r a n c h e s i n o p e r a t i o n on June 30, 1928, t h a t were not i n e x i s t e n c e when the McFadden Act became e f f e c t i v e , i n c l u d i n g 258 e s t a b l i s h e d de novo and 144 t h a t succeeded independent banks. 11 » ^ > •> •' > A copy of t h i s r e p o r t ( S t . 5937) i s a t t a c h e d h e r e t o a s E x h i b i t L. 6. June, 1929. - Under d a t e of October 1, 1929, Mr. Sniead submitted a memorandum to t h e Board g i v i n g s t a t u s of member and norurember banks as of the end of June, 1929, marl zed i n > ^ '.*• , y . the The changes t h a t took p l a c e d u r i n g t h a t year a r e sum- f o l l o w i n g p a r a g r a p h q u o t e d f r o m t h a t memorandum; " B r a n c h B a n k i n g S i n c e J u n e 5 0 , 19ZG. During the 12m o n t h p e r i o d " b e t w e e n J u n e SO, 1 9 2 8 , w h e n t h e l a s t r e p o r t o n b r a n c h e s o f m e m b e r a n d noni_:ember "banks w a s s u b m i t t e d to t h e B o a r d , a n d J u n e 30 of t h e p r e s e n t y e a r t h e number of b a n k s o p e r a t i n g "branches d e c l i n e d f r o m 835 to 818 o r "by 1 7 , w h i l e t h e n u m b e r o f b r a n c h e s i n o p e r a t i o n i n c r e a s e d from 3,230 to 3,440 or by 210, Although as j u s t s t a t e d t h e r e was a d e c r e a s e d u r i n g t h e y e a r of 17 i n t h e number o f " b an k s o p e r a t i n g " b r a n c h e s , t h e r e w e r e 56 "banks o p e r a t i n g " b r a n c h e s o n J u n e 3 0 , 1 9 2 8 , w h i c h h a d no b r a n c h e s i n o p e r a tion a year e a r l i e r . T h i s i s a c c o u n t e d f o r "by t h e f a c t t h a t 51 b a n k s w h i c h were o p e r a t i n g b r a n c h e s i n J u n e 1928 went out of e x i s t e n c e during the y e a r through merger w i t h o t h e r "banks, 5 b a n k s s u s p e n d e d cp 3 r a t i o n on a c c o u n t of X-6523 — 11 — f i n a n c i a l d i i i i c u l t i e s , and 17 abolished, t h e i r "branches* Of t h e 3,230 "branches t h a t were i n ope r a t i o n on June 30, 1928, 95 were d i s c o n t i n u e d d u r i n g the y e a r , 81 were a b o l i s h e d or merged w i t h o t h e r b r a n c h e s , and 15 went out of e x i s t e n c e a s a r e s u l t of s u s p e n s i o n of the p a r e n t bank. There were 305 branches i n o p e r a t i o n on June 30, 1929, t h a t were not i n e x i s t e n c e on June 30, 1928, i n c l u d i n g 171 e s t a b l i s h e d de novo, and 135 t h a t succeeded independent banks •11 A copy of t h i s r e p o r t ( S t . 6335) i s a t t a c h e d h e r e t o a s E x h i b i t M. Che same s t a t i s t i c s , i , e . , f o r June 1929, were p u b l i s h e d i n somewhat di f e r e n t form i n t h e December 1929 F e d e r a l Reserve B u l l e t i n , pages 762-770 a copy of v h i c h i s a t t a c h e d a s E x h i b i t G. 7# December, 1929, - These a r e the l a t e s t s t a t i s t i c s t h a t we have a v a i l a b l e on branch banking, but the Board 1 s D i v i s i o n of Bank O p e r a t i o n s now f i n i s h i n g the p r e p a r a t i o n of a complete s t a t e m e n t showing the branch banking s i t u a t i o n a t the end of the year 1929. A copy of t h i s s t a t e m e n t w i l l be f u r n i s h e d to t h e Committee as soon as i t i s a v a i l a b l e ; and, f o r v e n i e n c e , i t w i l l h e r e be d e s i g n a t e d a s E x h i b i t I T . X-6523 — lid — I I I . STATISTICAL RESEARCH OH CEAIH BAMIHC1. December, 1922. - The F e d e r a l r e s e r v e a g e n t s were r e q u e s t e d (by the D i v i s i o n of Research and S t a t i s t i c s ) to g a t h e r t o g e t h e r what m a t e r i a l was a v a i l a b l e on the s u b j e c t of chain banking, i n c l u d i n g a l i s t of the c h a i n s and the c o n s t i t u e n t banks, and t o send i t to the Board. This m a t e r i a l was reviewed i n the D i v i s i o n of Research and S t a t i s t i c s , b u t a p p a r e n t l y no memorandum on the s u b j e c t was p r e p a r e d f o r the Board. A copy of t h i s m a t e r i a l i s a t t a c h e d as E x h i b i t 0; but apparently i t i s COIIFIDiEHTIAL and s h o u l d not be r e l e a s e d . 2 . June, 1926. - At the B o a r d ' s r e q u e s t , t h e F e d e r a l r e s e r v e a g e n t s made a n o t h e r survey of c h a i n banking a s of June 1926, and a memorandum summarizing the r e s u l t s of t h i s survey was p r e s e n t e d to the S e c r e t a r y of the Board by Mr. Smead under date of J,lay 7, 1927. This memorandum summarized the s i t u a t i o n b r i e f l y a s f o l l o w s : "A review of t h e d a t a s u b m i t t e d i n d i c a t e s t h a t on : the whole t h e r e i s r e l a t i v e l y l i t t l e c h a i n "banking i n the e a s t e r n s e c t i o n of the c o u n t r y , though q u i t e a number of small c h a i n s or a f f i l i a t i o n s a r e r e p o r t e d i n New York and Hew J e r s e y . In the c e n t r a l and w e s t e r n S t a t e s , however, i n most of which t h e r e i s l i t t l e or no branch banking, c h a i n banking a p p e a r s t o be conducted on a c o n s i d e r a b l e s c a l e . The banks i n the c h a i n s a r e i n most c a s e s c o n t r o l l e d by a m a j o r i t y ownership of s t o c k sometimes through a h o l d i n g company, b u t q u i t e o f t e n t h e b a n k s ' p o l i c i e s a r e dominated by i n t e r e s t s owning a s u b s t a n t i a l p a r t but not a m a j o r i t y of t h e s t o c k . Quite a number of t h e c o n s t i t u e n t banks, i t w i l l be n o t e d from t h e s t a t e m e n t a t t a c h e d , a r e n a t i o n a l banks, p a r t i c u l a r l y i n Hew York, Hew J e r s e y , Minnesota, Kansas, and Oklahoma." A copy of t h i s r e p o r t i s a t t a c h e d a s E x h i b i t P« Apparently the p a r t t y p e d on w h i t e p a p e r (which c o n t a i n s t h e names of the banks) i s C0HFID3ITTIAL and should not be r e l e a s e d . 3 . June, 1928. - Another survey was made by the F e d e r a l r e s e r v e X-6525 — 13 • a g e n t s a s of the end of J u n e , 1938, and a memorandum summarizing the a g e n t s ' r e p o r t s on t h i s s u b j e c t was p r e s e n t e d t o t h e F e d e r a l Reserve Board "by Mr. Van Fossen of t h e D i v i s i o n of Bank Operations under date of January 17, 1923. The s i t u a t i o n p r e v a i l i n g a t t h a t time was summarized i n the memorandum a s f o l l o w s : " A t t a c h e d h e r e t o i s a summary showing the e x t e n t of c h a i n "banking i n the v a r i o u s S t a t e s , grouped i n accordance w i t h t h e p r o v i s i o n s of S t a t e laws a s r e g a r d s branch "banking. I t w i l l "be noted, a s might be r e a s o n a b l y e x p e c t e d , t h a t c h a i n banking h a s had v e r y l i t t l e development i n t h o s e S t a t e s i n which S t a t e - w i d e b r a n c h b a n k i n g i s p e r m i t t e d by S t a t e law. G e n e r a l l y s p e a k i n g , a l s o , c h a i n banking h a s not developed e x t e n s i v e l y i n those S t a t e s i n which branch banking r e s t r i c t e d as t o l o c a t i o n i s p e r m i t t e d . The g r e a t e s t development of c h a i n banking e x i s t s i n t h o s e S t a t e s which e i t h e r p r o h i b i t branch b a n k i n g or i n which, w h i l e t h e r e i s no p r o h i b i t o r y l e g i s l a t i o n , branch banking i s not p r a c t i c e d . " I n S t a t e s which p e r m i t e i t h e r S t a t e - w i d e o r l o c a l b r a n c h banking t h e r e i s , of c o u r s e , l i t t l e o c c a s i o n f o r the o p e r a t i o n of a number of l o c a l banks i n a c h a i n , and a s a m a t t e r of f a c t e x c e p t , i n the case of Chicago and P i t t s b u r g h , where branch banking i s p r o h i b i t e d , t h e r e a r e no known i n s t a n c e s of a banking c h a i n l o c a t e d e i t h e r e n t i r e l y or c h i e f l y w i t h i n a l a r g e c i t y . The Old Colony Trust Company of Boston and t h e Marine T r u s t Company of B u f f a l o each have b a n k i n g c h a i n s c o n f i n e d t o banks l o c a t e d w i t h i n a c o m p a r a t i v e l y s h o r t d i s t a n c e of Boston and B u f f a l o , r e s p e c t i v e l y , and c o n s t i t u t i n g i n e f f e c t e x t e n s i o n s of t h e i r branch systems r e s t r i c t e d by law t o w i t h i n t h e h e a d o f f i c e c i t y . The only o t h e r n o t a b l e i n s t a n c e s of l a r g e c i t y banks c o n t r o l l i n g a chain of banks c o n s i s t i n g of or i n c l u d i n g banks l o c a t e d o u t s i d e of the head o f f i c e c i t y a r e e n c o u n t e r e d i n C a l i f o r n i a and may be due i n p a r t t o the r e s t r i c t i o n s of the McFadden Act a g a i n s t S t a t e - w i d e branch banking by member banks. The t y p i c a l c h a i n banking system i s , i n f a c t , a p p a r e n t l y a group of c o u n t r y banks, u s u a l l y i n c l u d i n g one or more members of the F e d e r a l Res e r v e System, u n i t e d by common s t o c k ownership, i n most i n s t a n c e s by a n i n d i v i d u a l or group of i n d i v i d u a l s , i n t o a banking combination t h a t under S t a t e law could not e x i s t i n t h e more obvious form of a b ran ch -b an k i n g s y s t e m . " A copy of t h i s r e p o r t i s a t t a c h e d a s E x h i b i t Q. The e n t i r e r e p o r t i s marked COUFISEITTIAL, though t h e summary on t h e f i r s t few pages X-6523 p r o b a b l y c o u l d "be r e l e a s e d i f names of banks a r e d e l e t e d . 4. J u n e , 1929. - A f o u r t h s u r v e y was made by t h e F e d e r a l r e s e r v e a g e n t s a s of J u n e , 1929: and, i n o r d e r t o i n s u r e u n i f o r m i t y i n the r e p o r t s on the s u b j e c t , i n so f a r a s p r a c t i c a b l e , each F e d e r a l r e s e r v e a g e n t was s u p p l i e d w i t h a copy of the r e p o r t s r e n d e r e d t h e y e a r b e f o r e covering the e n t i r e country. The s u r v e y f o r J u n e , 1929, was f e l t , t h e r e - f o r e , t o be much more comprehensive and r e l i a b l e t h a n any t h a t h a d b e e n „ p r e v i o u s l y made. A memorandum summarizing t h e c h a i n b a n k i n g s i t u a t i o n i n J u n e , 1929, was p r e s e n t e d t o the Board by Mr. Smead on September 20, 1929. Following i s an e x t r a c t from t h i s memorandum. " . . . R e p o r t s of t h e a g e n t s i n d i c a t e t h a t on June 30, 1929, t h e r e were 231 c h a i n s c o m p r i s i n g 1 , 5 6 3 banks of which 597 were N a t i o n a l banks and 966 S t a t e b a n k s . I t i s n o t e w o r t h y t h a t a s of t h e same d a t e , June 30, 1929, t h e r e were 818 banks o p e r a t i n g 3 , 4 4 0 b r a n c h e s which t a k e n t o g e t h e r w i t h t h e c h a i n banks makes* a t o t a l of o v e r 5 , 8 0 0 b a n k i n g o f f i c e s b e l o n g i n g t o b r a n c h or c h a i n b a n k i n g g r o u p s . As t h e r e were about 2 8 , 5 5 0 banking o f f i c e s i n t h e U n i t e d S t a t e s on June 30, t h e number conn e c t e d w i t h b r a n c h and c h a i n banking groups c o n s t i t u t e o v e r 20 p e r c e n t of t h e t o t a l . "The S t a t e s i n which c h a i n or group banking h a s h a d i t s p r i n c i p a l growth a r e Minnesota, Hew York, Iowa, I l l i n o i s , M i c h i g a n , A r k a n s a s , Nebraska, North Dakota, Washington, Oklahoma, Kansas, U t a h , a n d New J e r s e y . Branch b a n k i n g i s p r o h i b i t e d by law i n s e v e n of t h e s e S t a t e s , i n t h r e e o t h e r s i t i s l i m i t e d t o t h e c i t y i n which t h e h e a d o f f i c e i s l o c a t e d , and i n the o t h e r t h r e e t h e r e i s no p r o v i s i o n i n t h e S t a t e law r e g a r d i n g branch b a n k i n g a n d t h e r e a r e no b r a n c h e s i n o p e r a t i o n . " There i s a v a i l a b l e a t t h i s time o n l y one c a r b o n copy of t h e r e c o r d f o r J u n e , 1929, b u t t h e memorandum p r e p a r e d f o r the Board and the accomp a n y i n g l i s t of b a n k i n g c h a i n s o r groups i s a t t a c h e d a s E x h i b i t R. X-6523 - 15 A f t e r t h e d a t a on c h a i n "banking a s well as "branch "banking a s of June, 1929, h a d "been p r e s e n t e d to the Board, the m a t e r i a l was w r i t t e n up and p u b l i s h e d i n somewhat d i f f e r e n t form i n the December, 1929, F e d e r a l Reserve B u l l e t i n . That p a r t of t h e a r t i c l e p e r t a i n i n g p a r t i c u l a r l y to c h a i n "banking a p p e a r s on pages 765 and 771, a copy of which i s a t t a c h e d a s E x h i b i t G. 5. December, 1929. - There a r e s t i l l some r e p o r t s o u t s t a n d i n g on the s u b j e c t of c h a i n banking a s of December, 1929, but they p r o b a b l y w i l l not a f f e c t m a t e r i a l l y the p r e l i m i n a r y summary of the s i t u a t i o n a s g i v e n i n a memorandum of F e b r u a r y 15, 1930. The s i t u a t i o n i s p r e t t y w e l l sum- marized on the f i r s t page of the memorandum, the f i r s t two p a r a g r a p h s of which r e a d a s f o l l o w s ; "We have j u s t completed a p r e l i m i n a r y c o m p i l a t i o n on c h a i n banking a s of the end of 1929, s u b j e c t to some r e v i s i o n upon r e c e i p t of a d d i t i o n a l d a t a i n a few i n s t a n c e s . On the b a s i s of the d a t a now a v a i l a b l e i t a p p e a r s t h a t t h e r e were 287 banking c h a i n s or groups i n the U n i t e d S t a t e s a t the end of December embracing 2,069 banks, as compared w i t h 274 groups embracing 1,306 banks a t the end of J u n e . Sfno 2,069 banks r e p o r t e d a s b e l o n g i n g to banking groups or c h a i n s a t the end of the y e a r c o n s t i t u t e d about o n e - t w e l f t h of the 25,000 banks i n the c o u n t r y , while t h e l o a n s and i n v e s t m e n t s of t h e c h a i n banks were about $10,500,000,000 or n e a r l y o n e - s i x t h of t h e a g g r e g a t e l o a n s and i n v e s t m e n t s of a l l banks i n the United S t a t e s . " H a t i o n a l banks r e p o r t e d as members of banking c h a i n s or groups numbered 791 a t the end of December a s compared w i t h 546 i n June, s t a t e bank members 134 compared w i t h 111 i n J u n e , and nonmep.ber banks, 1,144 compared Tilth 1,049 i n J u n e . Loans and i n v e s t m e n t s of the n a t i o n a l banks b e l o n g i n g to t h e banking groups were a p p r o x i m a t e l y $ 5 , 6 0 0 , 000,000 o r about o n e - f o u r t h of the t o t a l f o r a l l n a t i o n a l banks, w h i l e l o a n s and i n v e s t m e n t s of S t a t e bank members b e l o n g i n g t o t h e groups a g g r e g a t e d $ 3 , 0 0 0 , 0 0 0 , 0 0 0 , and of nonmember banks $ 1 , 8 0 0 , 0 0 0 , 0 0 0 . " 36. SMS '• - r 16 - A copy of t h i s p r e l i m i n a r y r e p o r t i s a t t a c h e d a s E x h i b i t S. I t i s parked. CONFIDBM1 IAL; "but p a r t of i t c o u l d "be r e l e a s e d if names a r e deleted. 6. 1927 Annual R e p o r t . - The s u b j e c t of c h a i n "banking was d i s c u s s e d i n the B o a r d ' s Annual Report f o r the y e a r 1927 (page 3 1 ) , a s f o l l o w s : "During the p a s t few y e a r s the expanding o p e r a t i o n s of f i n a n c i a l companies s p e c i a l i z i n g i n the p u r c h a s e of "bank s t o c k have p r e s e n t e d s p e c i a l problems to F e d e r a l and S t a t e o f f i c i a l s charged w i t h the r e s p o n s i b i l i t i e s of "bank s u p e r v i s i o n . Such companies have "been o r g a n i z e d i n i n c r e a s i n g numbers t o o p e r a t e e x t e n s i v e l y i n the f i e l d of "backing, n o t simply a s investment a g e n c i e s "but s p e c i f i c a l l y i n i n d i v i d u a l i n s t a n c e s to a c q u i r e c o n t r o l of c o r p o r a t e l y independent "banking i n s t i t u t i o n s , through s t o c k ownership, and to e x e r c i s e t h i s c e n t r a l i z e d c o n t r o l i n e f f e c t i n g "bank m e r g e r s ; i n e x t e n d i n g i d e n t i c a l or v i r t u a l l y s i n g l e c o r p o r a t e c o n t r o l over companies o p e r a t e d as s u b s i d i a r i e s i n s p e c i a l f i e l d s of banking; i n b u i l d i n g up branch systems i n S t a t u s which p e r m i t branch banking; and i n b u i l d i n g up i n t h o s e and i n o t h e r S t a t e s - but p a r t i c u l a r l y i n S t a t e s vihich do not p e r m i t branch banking - c h a i n systems, embracing i n i n d i v i d u a l i n s t a n c e s banking i n s t i t u t i o n s o p e r a t i n g under n a t i o n a l and S t a t e c h a r t e r s i n s e v e r a l S t a t e s . Since such companies a r e not d i r e c t l y engaged i n the b u s i n e s s of b a n k i n g a s d e f i n e d i n F e d e r a l or S t a t e s t a t u t e s , they have not been s u b j e c t t o s u p e r v i s i o n or r e g u l a r examination by banking a u t h o r i t i e s . In some r e s p e c t s the c o n t r o l e x e r c i s e d through s t o c k ownership over a group of banks o p e r a t e d a s a system i s s i m i l a r to t h a t e x e r c i s e d by a p a r e n t bank ever i t s b r a n c h o f f i c e s . This c h a r a c t e r of the f i n a n c i a l company b r i n g s i t c l e a r l y w i t h i n the f i e l d of banking a c t i v i t i e s , and banking o f f i c i a l s have been u r g e d to s u b j e c t developments of t h i s c h a r a c t e r to c a r e f u l s c r u t i n y . " A copy of t h i s Report i s a t t a c h e d a s E x h i b i t I . 7. 1928 Annual R e n o r t . - In t h i s r e p o r t the s u b j e c t i s d i s c u s s e d i n somewhat g r e a t e r l e n g t h on p a g e s 30-31 and the r e p o r t shows the number of c h a i n s i n o p e r a t i o n i n each S t a t e i n June, 1928. a t t a c h e d a s E x h i b i t U. A copy of the Report i s X-6523 - 17 IV. BRANCH BAMINS AND ITS EFFECT IIT FOREIGN COUNTRIES I n o r d e r to a s c e r t a i n the p o s s i b l e e f f e c t of u n r e s t r i c t e d "branch banking i n t h i s c o u n t r y , t h e Board h a s caused i n v e s t i g a t i o n s to "be made of the h i s t o r y of "branch "banking i n f o r e i g n c o u n t r i e s w i t h s p e c i a l r e f e r e n c e t o i t s e f f e c t on u n i t or s i n g l e o f f i c e "banks i n t h o s e c o u n t r i e s . The i n f o r m a t i o n o b t a i n e d i s v e r y e n l i g h t e n i n g and w i l l be summarized belowj 1 . Canada. - Among banks doing a g e n e r a l banking b u s i n e s s , the u n i t bank h a s d i s a p p e a r e d . As of December 31, 1928 t e n c h a r t e r e d banks c o n t r o l l e d g e n e r a l b a n k i n g i n t h e Dominion. Each of t h e s e i s a b r a n c h b a n k i n g system w i t h none h a v i n g l e s s t h a n 30 b r a n c h e s . The t h r e e l a r g e s t banks, the Royal Bank of Canada, the Bank of Montreal, and the Canadian Bank of Commerce, have $ 2 . 5 b i l l i o n i n a s s e t s out of $ 3 . 5 b i l l i o n , the a g g r e g a t e of a l l ten. Of t h e 3 , 9 6 6 domestic branches and a g e n c i e s of the c h a r t e r e d banks, t h e s e t h r e e l a r g e s t banks have 2 , 2 1 9 . The p r o g r e s s of c o n c e n t r a t i o n from 1868 to 1928, which r e s u l t e d i n the d e c r e a s e of the t o t a l number bf banks from 21 to 10, i s shown by a t a b l e c o n t a i n e d i n a r e p o r t a t t a c h e d h e r e t o a s E x h i b i t V. 2 . B r i t i s h I s l e s . - Among banks doing & g e n e r a l d e p o s i t b u s i n e s s , the u n i t bank h a s p r a c t i c a l l y d i s a p p e a r e d i n the B r i t i s h I s l e s . Only seven small i n s t i t u t i o n s doing a l l t h e i r b u s i n e s s a t one o f f i c e e x i s t . Indeed, most of t h e s e a r e d o u b t f u l l y c l a s s i f i e d a s d e p o s i t banks, some c l a s s i f i c a t i o n s p l a c i n g them among a c c e p t a n c e or d i s c o u n t h o u s e s . F o r t y - t w o concerns a r e i n the g e n e r a l d e p o s i t banking b u s i n e s s i n t h e B r i t i s h I s l e s , w i t h 12,837 offices in a l l . The f i v e b i g banks have 8,050 of t h e s e o f f i c e s and have 67 p e r cent of t h e b a n k i n g a s s e t s . f i v e , each w i t h more t h a n Twenty-six concerns, i n c l u d i n g t h e b i g 100 o f f i c e s , have 93 p e r cent of the a s s e t s . A c e n t u r y ago banking i n the B r i t i s h I s l e s was done by p r i v a t e b a n k i n g By 1862 j o i n t s t o c k banks were not uncommon b u t r e a l impetus t o • - X-6523 18 - ^ ; t h e i r o r g a n i z a t i o n was given i n t h a t y e a r "by an a c t which p e r m i t t e d t h e r e g i s t r a t i o n of such 'banks w i t h l i m i t e d , s h a r e h o l d e r l i a b i l i t y . B e f o r e 1880 Lloyds Banking Company h a d p a r t i c i p a t e d i n a number of amalgamations, and c o n c e n t r a t i o n moved r a p i d l y a f t e r t h a t d a t e . However, i t was not u n t i l 1896, t h a t 20 p r i v a t e "banking concerns u n i t e d i n B a r c l a y s Banking Company, and the f i f t h of the p r e s e n t "big f i v e "began i t s c a r e e r . During t h e p e r i o d "between 1895 and 1928, the t o t a l number of "banks i n the B r i t i s h I s l e s was d e c r e a s e d from 154 to 42. More d e t a i l e d i n f o r m a t i o n on t h i s s u b j e c t i s c o n t a i n e d i n a r e p o r t a t t a c h e d h e r e t o a s E x h i b i t W. 3 . Germany. - In Germany, tue movement from t h e u n i t bank to a branch banking system among banks doing a g e n e r a l banking b u s i n e s s advanced con- s i d e r a b l y i n the twenty y e a r s from 1888 through 1907. I n 1888, 164 c r e d i t o r j o i n t s t o c k banks w i t h 173 b r a n c h e s were i n existence. By 1907, t h e r e were 421 such banks w i t h 1 , 0 6 4 b r a n c h e s . Of the t o t a l number e x i s t e n t i n t h a t y e a r a l m o s t 200 were small u n i t banks w i t h p a i d - i n c a p i t a l of l e s s t h a n 1 , 0 0 0 , 0 0 0 marks. These small banks con- t r o l l e d l e s s t h a n 2 p e r c e n t of the a g g r e g a t e p a i d - i n c a p i t a l of the 481 c r e d i t banks. By the end of 1926, mut of a t o t a l of 488 c r e d i t banks, a s many a s 354 were c l a s s i f i e d a s h a v i n g l e s s than 1 , 0 0 0 , 0 0 0 marks c a p i t a l . U n f o r t u n a t e l y no f i g u r e s f o r a l l c r e d i t banks a r e a v a i l a b l e t o u s s i n c e that date. However, t h e a b s o r p t i o n of the s m a l l e r banks by t h e l a r g e r ones ba.8 p r o g r e s s e d r a p i d l y s i n c e t h a t time, i t i s s a i d . T o r a Imng p e r i o d of y e a r s , f o u r g r e a t B e r l i n banks have been i n t h e f o r e f r o n t of German b a n k i n g — Deutsche, D i s c o n t o — G e s e l l s c h a f t , B r e s d n e r , and DoXrastaater. credit banks The f i r s t two h a v e r e c e n t l y m e r g e d . i n Germany i n 1907, these f o u r banks Among t h e 100 l a r g e s t c o n t r o l l e d 27 p e r cent X-5523 o -- -1 - 19 of the 'aggregato c a p i t a l and i n Sept ember IS29, 42 p e r c e n t . More d e t a i l e d i n f o r m a t i o n i s c o n t a i n e d i n a r e p o r t a t t a c h e d h e r e t o a s E x h i b i t X. 4 . F r a n c e . - The u n i t bank i n France has s u f f e r e d s e v e r e l y from the c o m p e t i t i o n of e x t e n s i v e branch banking systems and h a s been l o s i n g ground i n r e c e n t y e a r s . Four g r e a t French banks, doing a g e n e r a l 'business, c o n t r o l a p p r o x i m a t e l y o n e - h a l f the commercial banking b u s i n e s s i n F r a n c e , i t h a s been e s t i m a t e d . throughout the c o u n t r y : Three of t h e s e have a l a r g e net-work of b r a n c h e s C r e d i t Lyonnais, 1014 b r a n c h e s ; S o c i e t e Generale, 1350 b r a n c h e s ; Comptoir d'Escompte, over 250 b r a n c h e s . The f o u r t h , the C r e d i t I n d u s t r i e l e t Commercial, h a s many branches i n P a r i s b u t none o u t s i d e the c i t y . I n a d d i t i o n t o t h e s e l a r g e banks t h e r e a r e s e v e r a l s i z e a b l e banks which have many b r a n c h e s i n p a r t i c u l a r r e g i o n s of the c o u n t r y . For example, t h e r e a r e t h e C r e d i t du Mori ( b r a n c h e s i n 75 p l a c e s ) , S o c i e t e Nanceienne (105 branches and a g e n c i e s ) , Banque P r i v e e (more t h a n 200 b r a n c h e s and a g e n c i e s ) and S o c i e t e M a r s e i l l a i s e (107 branches and a g e n c i e s ) . f o r b r a n c h e s a r e a s of 1922. Figures Mo s a t i s f a c t o r y f i g u r e s e x i s t a s to hew many banks of a p u r e l y l o c a l importance survive* I t was e s t i m a t e d f o r the Mational Monetary Commission (1S11) t h a t t h e r e were 2700-2800 banks ( p r o b a b l y a loose c l a s s i f i c a t i o n ) in France. The growth of the f o u r b i g banks and t h e r e g i o n a l banks h a s been a t the expense of the l o c a l bank, which i s s a i d t o p l a y a s.nall r o l e i n French banking t o d a y . More d e t a i l e d i n f o r m a t i o n i s c o n t a i n e d i n a r e p o r t a t t a c h e d h e r e t o a s E x h i b i t Y. 5 . J a p a n . - The u n i t bank i n Japan i s l o s i n g ground r a p i d l y i n t h e X-6523 - face af the a progressive tendency has the b e l i e f that — ' "branch "banking movement. In the p a s t been d e l i b e r a t e l y f o s t e r e d by the larger tween 1913 and 1928 Of t h e 2 0 g o v e r n m e n t b a s e d on o r g a n i z a t i o n s would c o n t r i b u t e the 1163 banks total few y e a r s to stability. Be- number of b a n k s was r e d u c e d f r o m 2156 t o in existence i n 1928, 100 were savings banks, 1163. 32 special banks, and the r e m a i n d e r o r d i n a r y b a n k s w h i c h do a g e n e r a l b a n k i n g "business. The special banks were particular end o f t e n as p u b l i c ar.3 t h e B a n k o f J a p a n , and the a g r i c u l t u r a l include Japanese Fourteen equal cent Chosen, institutions. Bank of banks. f u r t h e r some Taiwan, Moreover, In t h i s group Yokehorna S p e c i e B a n k , these f i g u r e s do n o t companies and cooperative banks. of ordinary banks a t all cent d e t a i l e d inf:) E x h i b i t AA. semi-public and i n d u s t r i a l trust Five alone had 34 p e r More Bank of important to 55 p e r or i n d i v i d u a l l y c h a r t e r e d to tne of raation deposits the the of aggregate »nd of the of 1928 had deposits ordinary banks. The B i g such d e p o s i t s . i-; c o n t a i n e d i n a r e p o r t attached hereto as X-6523 - 21 - • V. HISTORY OF BRANCH BANKING- III THE UNITED STATES. The e a r l y h i s t o r y of "branch banking w i t h i n t h e United. S t a t e s has "been the s u b j e c t of r e s e a r c h work done by Honorable Edmund. P i a t t , Vice Governor of t h e F e d e r a l Reserve Board, i n c o n n e c t i o n w i t h c e r t a i n speeches d e l i v e r e d "by him. The more r e c e n t h i s t o r y of branch banking i n the U n i t e d S t a t e s . i s very w e l l covered by a s e r i e s of a r t i c l e s p u b l i s h e d i n the Fede r a l Reserve B u l l e t i n , commencing w i t h the number f o r December, 1924. This m a t e r i a l w i l l be d i s c u s s e d b r i e f l y and c o p i e s w i l l be a t t a c h e d a s exhibits. 1 . "Branch Banking B e f o r e the C i v i l War." I n an a d d r e s s on t h i s s u b j e c t d e l i v e r e d b e f o r e the N a t i o n a l Bank S e c t i o n of the 17ew York S t a t e Bankers' A s s o c i a t i o n a t I t h a c a , New York, on June 22, 1925, Mr. P i a t t p o i n t s out t h a t branch banking was very much i n evidence i n t h i s c o u n t r y b e f o r e the C i v i l War, e s p e c i a l l y i n the T'ast and i n t h e S o u t h . I n 1848, out of 48 banks i n Ohio; 29 were branched of the Ohio S t a t e Bank'; I n d i a n a had 17 branches of one S t a t e bank and no independent banks; M i s s o u r i h a d 1 bank and 5 b r a n c - e s ; Kentucky 3 banks and 13 b r a n ches; Tennessee 3 banks and 17 b r a n c h e s ; V i r g i n i a 6 banks and 30 b r a n c h e s ; North C a r o l i n a 4 banks and 14 b r a n c h e s ; South C a r o l i n a 12 banks and 2 b r a n c h e s ; Georgia 13 banks and 7 b r a n c h e s ; Delaware 5 banks and 3 b r a n c h e s and Alabama 2 banks and 4 b r a n c h e s . At the sare time no b r a n c h e s were l i s t e d i n t h e E a s t e r n S t a t e s except two each i n the S t a t e s of Hew York, Maryland and New J e r s e y . I n 1860 the s i t u a t i o n was s i m i l a r , though I l l i n o i s appeared w i t h 75 banks, I n d i a n a w i t h 13, a l l of which were branches of the S t a t e Bank of Iowa, and M i s s o u r i had 42 banks of which 33 were c l a s s e d a s b r a n c h e s . X-6523 — 22 — The two b r a n c h e s e x i s t i n g i n Hew York i n 1848 had d i s a p p e a r e d i n 1860, and a p p a r e n t l y "branch banking was f o r b i d d e n i n Hew York, P e n n s y l v a n i a , M a s s a c h u s e t t s and C o n n e c t i c u t . l i t . P i a t t ' s a d d r e s s c o n t a i n s an i n t e r e s t i n g d i s c u s s i o n of t h e motive f o r the e s t a b l i s h m e n t of such branches (which a p p e a r e d to be t h e f a c i l i t a t i o n of the i s s u e of bank n o t e s which would be d i f f i c u l t to redeem) and a l s o the r e a s o n s f o r the o p p o s i t i o n to the e s t a b l i s h m e n t of branches i n E a s t e r n S t a t e s . A copy of Mr. P i a t t ' s a d d r e s s i s a t t a c h e d &s E x h i b i t B B 2 . "Branch Banking f o r Country Banks." On May 20, 1927, Mr. P i a t t made a n a d d r e s s a t Birmingham, Alabama, b e f o r e a m e e t i n g of the American Banke r s ' A s s o c i a t i o n , a t which he d i s c u s s e d the above s u b j e c t . In t h i s ad- d r e s s he p o i n t e d out t h a t , i n the e a r l y days of banking i n t h e U n i t e d S t a t e s , t h e r i g h t of any bank to e s t a b l i s h b r a n c h e s was r a r e l y q u e s t i o n e d ; both the F i r s t and Second Banks of t h e U n i t e d S t a t e s had "branches; many of the e a r l y S t a t e banks e s t a b l i s h e d b r a n c h e s ; and branches were looked upon a s the n a t u r a l means of p r o v i d i n g banking f a c i l i t i e s and convenience to t h e s m a l l e r communities. He d i s c u s s e d the development of banking i n t h e U n i t e d S t a t e s , commencing w i t h t h e f i r s t i n c o r p o r a t e d bank i n P h i l a d e l p h i a i n 1781 and p o i n t e d out t h a t the P h i l a d e l p h i a Bank, c h a r t e r e d i n 1804, e s t a b l i s h e d branches i n many of t h e i n t e r i o r towns of P e n n s y l v a n i a , p u r s u a n t t o an a c t of the l e g i s l a t u r e p a s s e d i n March 1809. I t a l s o appears t h a t the Bank of Manhattan Company h a d a t l e a s t 3 branches o u t s i d e of Hew York i n 1811. I t a p p e a r s t h a t most of these branches i n the E a s t e r n S t a t e s were r e p l a c e d by s m a l l e r independent banks d u r i n g the e a r l y p a r t of X-5523 - 23 - ' the Nineteenth Century. This lation speech also reviews again in the Eastern w h i c h a p p a r e n t l y was States due to restricting the f a c t in remote p l a c e s with branches i n the c i r c u l a t i n g n o t e s were redeemed a t reached the conclusion b a n k i n g was n o t issuance of the In this p o r a t e d i n l.Ir. P i a t t ' s Mr* P i a t t earlier states existence, "banks w e r e f r e q u e n t l y l o c a t e d a discount. into that the national that Mr. the panic at' the Piatt points do so b u t of 1857; data incor- that impetus for o r g a n i z a t i o n of covered again. capital and i t their branches. reorganized as South seems t o It appears, national banks and banks. i n 1860 the c o u n t r y banks contained banks with a in in the Western S t a t e s would independent unit out the a u t h o r i t y the s t a t i s t i c a l the S t a t e bank n o t e s were t a x e d out banks and r e t a i n o r g a n i z a t i o n of but the-branch banking systems in the s u c c e s s f u l banks they did not the Mr. P i a t t b r a n c h b a n k i n g was i n 1848 and 1860 i s S o u t h and "Jest h a d a much l a r g e r a v e r a g e that a t which t h e i r From t h i s , branch banking i t s e l f when the reorganized t h e i r branches as but branches, of speech w i t h r e f e r e n c e to b r a n c h e s that have been e x p e c t e d i n 1866, ent, establishment financial centers c o n n e c t i o n much of a n d West s u c c e s s f u l l y w e a t h e r e d however, the currency." the Southern and Western S t a t e s convert to l e g i s - the South and the West, however, general rule. of cause l e a d i n g up early l e g i s l a t i o n r e s t r i c t i n g branch r e a l l y aimed a t "wild-cat In that that the in the capitalization than at pres- i n t h e Nations,1 Bank Act of for the only $50,000 f u r n i s h e d an small banks and that some o f the Western X-6523 "ran wild in States very smallest the as o r g a n i z a t i o n of then traces traces Southern States that than $50,000. that Mr. Charles of Dawes, s i n c e many of independent banks. wheat sections of of 1893. that, the and c a l l s cent of in his annual report the tana, least experience the U n i t e d S t a t e s where i n o p e r a t i o n a n d i n Canada, w h e r e t h e and a t 50 p e r cent of the six years, Mr. P i a t t banking for the for in small less of of less the year recommended than 2,000 to support farmers in the independent bank system s y s t e m was i n "The C a n a d i a n f a r m e r s h a v e l o s t nothing ?29S,070,000 in d e p o s i t s has been t i e d up it nearly a l l states that a t t e n t i o n to Currency, branch banking lost, in the bordering States North and South Dakota and Minnesota the p a s t to which apparently them h a d a c a p i t a l such c o m m n i t i e s were not able from the bank f a i l u r e s while the suspended banks had a c a p i t a l t h e n Comptroller of that, of From a b o u t branch banking, inclusive, He t h e n c o m p a r e s t h e operation and concludes $5,000." banks and c a l l s a t t e n t i o n b r a n c h b a n k i n g b e a u t h o r i s e d i n c o m m u n i t i e s of inhabitants, was two-thirds a n d t h a t 72 p e r 0. few S t a t e s the number of bank f a i l u r e s 1926, out -of the i n d e p e n d e n t "ba nks d i f f i c u l t i e s a r i s i n g out 1921 to He p o i n t s of in and i n C a l i f o r n i a , then discusses almost $25,000 or l e s s 1898, the the modern development banks during the years of and even i n a numerous small independent Mr. P i a t t fact organization of f a i l u r e s among them i n t h e p a n i c s t a r t e d in the the the small as $10,000, iir. P i a t t time he to provide banking f a c i l i t i e s t o w n s "by p e r m i t t i n g with a capital t h e number effort n 24 - of i n 1134 bank them i n s m a l l bat believes suspensions in towns and small b a n k s . " t h a t he does not a d v o c a t e United States, of Mon- nation-wide branch t h a t we n e e d a n d m u s t h a v e X-6523 y ( - 25 - " l a r g e r c o u n t r y b a n k s w i t h a l i m i t e d number of b r a n c h e s a l o n g t h e of the development f o r many y e a r s . " that has taken place He c l a i m s t h a t i n many of t h e McFadden Act the Southern S t a t e s discriminates against c o u n t r y b a n k s a n d i n f a v o r of b a n k s i n t h e b i g c i t i e s . statistics w i t h r e f e r e n c e to in the United States the country the inclusive, which of speech i s attached hereto in this summarize c a t e d by l i s t i n g its as Exhibit On p a g e s 9 2 5 the F e d e r a l Reserve B u l l e t i n f o r December, contains a branch banking in be made t o branch banking organizations Growth of Branch B a n k i n g t h r o u g h 1924. is p u b l i s h e d an a r t i c l e States", entitled, "Branch Banking i n c o m p r e h e n s i v e s u r v e y of country the through the year 1924. this a r t i c l e here, various headings, but its Control A d m i n i s t r a t i v e P o l i c y of the Board P r i o r Branch Banking Recommendations to 1924, the United recent g r o w t h of Ho a t t e m p t w i l l s c o p e may be i n d i - which a r e as f o l l o w s : L i m i t a t i o n s upon Federal of Branch B a n k i n g . t o November, 1923. Congress. R e s o l u t i o n on Branch Banking Adopted by t h e Board on November 7 , 1923. F u r t h e r D e f i n i t i o n of t h e B o a r d ' s Branch Banking P o l i c y . ( I n the R e g u l a t i o n s of 1 9 2 4 . ) Extent the districts. 3. Recent there He r e v i e w s and concludes with a plea for branch banking A copy of Mr. P i a t t ' s to 940, number of lines of B r a n c h B a n k i n g i n Legal Status of the United S t a t e s . Branch Banking. Branch Banking w i t h i n and without Resources of the Federal Reserve System. Banks O p e r a t i n g and Not O p e r a t i n g B r a n c h e s . C C. X-6633 — 26 - Banks O p e r a t i n g Hone C i t y and O u t s i d e Branches. S i z e of Branch Systems. Branches i n and Outside of the Hone C i t y of t h e P a r e n t Bank. P a r e n t Banks a n d Branches C l a s s i f i e d by P o p u l a t i o n of Community i n Which Located. Growth of Branch Banking, 1865-1924. C l a s s i f i c a t i o n of P a r e n t Banks and Branches "by F e d e r a l Reserve D i s t r i c t s . State Totals. A copy of1 t h i s a r t i c l e i s a t t a c h e d h e r e t o a s E x h i b i t B. 4 . Branch Banking i n t h e U n i t e d S t a t e s from June, 1924, to December, 1925. On p a g e s 401 to 414, i n c l u s i v e , of t h e F e d e r a l Reserve B u l l e t i n f o r June, 1926, t h e r e i s p u b l i s h e d an a r t i c l e e n t i t l e d , "Branch Banking i n the U n i t e d S t a t e s " , which d e s c r i b e s the development of branch banking from June, 1924, to t h e end of December, 1925, and t h u s supplements t h e a r t i c l e p u b l i s h e d i n the F e d e r a l Reserve B u l l e t i n f o r December, 1924. I t c o n t a i n s not o n l y a d i s c u s s i o n of the development of branch banking d u r i n g t h i s p e r i o d b u t a l s o a c l a s s i f i c a t i o n of t h e S t a t e s w i t h r e f e r e n c e to t h e i r b r a n c h b a n k i n g laws a s of December 31, 1925, and c e r t a i n v a l u a b l e s t a t i s t i c a l m a t e r i a l w i t h r e f e r e n c e to the s t a t u s of branch banki n g i n t h i s c o u n t r y on tho same d a t e . A copy of t h e B u l l e t i n c o n t a i n i n g t h i s a r t i c l e i s a t t a c h e d a s E x h i b i t D. 5 . Branch Banking Developments i n 1926, On pages 315 t o 318, i n c l u s i v e , of t h e F e d e r a l Reserve B u l l e t i n f o r May, 1927, t h e r e i s X-6523 - 2 7 published an a r t i c l e the United States on t h i s articles during the year, subject. of b r a n c h b a n k i n g , fornia, tical 1926. d e s c r i b i n g t h e d e v e l o p m e n t o f "branch "banking i n the It showing the A copy of as Exhibit contains status the Bulletin inclusive, of from the e n d of earlier articles because i t Act. It to June 30, the article on t h i s the during the contains a 1928. valuable end of statis- the year is attached hereto On p a g e s 9 7 t o February, 1928, gether with subject. This a r t i c l e e f f e c t of the McFadden-Pepper Act first table e i g h t e e n months of showing the branch banking to June 30, is the increase is the States permitting, 1928, in tables 762 t o December, 1929, 771, there inclusive, of that restricting, in operation, 1927, A copy of 1929. the Federal Reserve B u l l e t i n for discussing to- to June E. is published an a r t i c l e and s h o w i n g t h e number t h e s e numbers f r o m F e b r u a r y 25, attached as Exhibit the of F e b r u a r y f u n c t i o n i n g of 7 . Branch and Chain Banking Developments t o June 30, On p a g e s there is pub- especially interesting together with other valuable s t a t i s t i c a l material. this article 1929, which supplements o f b a n k s o p e r a t i n g b r a n c h e s a n d t h e number of b r a n c h e s 1928, status branch banking developments in the United States t h e y e a r 1926 t o June 30, describes prohibiting 30, legal and also the Federal Reserve Bulletin for d i s c u s s i o n of 1927, the earlier branch banking in Cali- of b r a n c h b a n k i n g a t containing this the J. lished a 25, d i s c u s s i o n s of establishing branches, 6 . B r a n c h Bank Developments 103, which supplements e::tent of b r a n c h b a n k i n g , a n d t h e m e t h o d of tables 1926, the branch X-6523 — 28 — and c h a i n "banking developments i n the U n i t e d S t a t e s d u r i n g t h e y e a r ending June 30, 1929. This not only supplements the i n f o r m a t i o n w i t h r e f e r e n c e t o b r a n c h banking p u b l i s h e d i n e a r l i e r a r t i c l e s , but cont a i n s much v a l u a b l e m a t e r i a l w i t h r e f e r e n c e to c h a i n b a n k i n g . The scope of t h e a r t i c l e may be i n d i c a t e d by the c a p t i o n s i n t h e t e x t and the h e a d i n g s of t h e t a b l e s , which a r e a s f o l l o w s ; Changes 1927 to 1929. Banks I n i t i a t i n g and D i s c o n t i n u i n g Branch Banking and Branches E s t a b l i s h e d and D i s c o n t i n u e d ; 1927-1929. Branch Banking A r e a . S i z e of Branch Systems. i Size of Branch Systems f o r P a r e n t Banks l o c a t e d i n Large and Small C i t i e s ; June 30, 1$29. Urban and Rural Systems. ; Chain Banking. Summary of B r a n c h B a n k i n g D e v e l o p m e n t s ; 1924 to 1929. Branch Systems w i t h Head O f f i c e s i n S e l e c t e d C i t i e s . Banks O p e r a t i n g Domestic Branches and number of . B r a n c h e s , by S t a t e s ; June 30, 1929. Banks O p e r a t i n g Domestic Branches and Number of Branches, by S t a t e s ; June, 1924-June, 1929. S i z e of Branch Systems and L o c a t i o n of Branches; June, 1929 and 1928. Chains and Banks i n Chain Systems, by S t a t e s ; June 30, 1929. A copy of t h i s a r t i c l e i s a t t a c h e d a s E x h i b i t G-. X-S523 r - 29 - V I . FED-URAL LEGISLATION OH BRAI-TCH BAISI1T&. Congress has the several e s t a b l i s h m e n t of country, First instances enacted legislation authorizing "branch t a n k i n g s y s t e m s . 1791 and 1815, Bank of Both of of in Congress a u t h o r i z e d the the United S t a t e s . the establishment ( S e c t i o n 5155 of establishment of b r a n c h e s ; and definite proportions, regardless assigned to to of convert their this the the United S t a t e s . establish branches i n any p a r t t h e amendment of M a r c h 3 , the Revised Statutes), of of The N a t i o n a l Bank Act d i d n o t e x p r e s s l y with capital branches, early years t h e U n i t e d S t a t e s a n d t h e S e c o n d Bank of t h e s e b a n k s w e r e a u t h o r i z e d to branches, In the forbid 1865, a u t h o r i z e d S t a t e banks having the head o f f i c e and branches into national banks and r e t a i n in their location. Branch banking systems f o r p a r t i c u l a r p u r p o s e s were a l s o a u t h o r i z e d when Congress a u t h o r i z e d t h e savings banks, land banks, Federal Corporation. however, Federal r e s e r v e banks, intermediate The e s t a b l i s h m e n t banks, b r a n c h e s i n e a c h of and safeguards. joint these systems, and subject the e s t a b l i s h m e n t of to it the establishment of branches would be a d v i s a b l e to examine c a r e f u l l y the r e s t r i c t i o n s and safeguards which Congress has about stock I n d e t e r a i n i n g what l e g i s l a t i o n s h o u l d now b e e n a c t e d w i t h r e f e r e n c e t o by commercial banking i n s t i t u t i o n s , the postal a n d t h e War F i n a n c e was p e r m i t t e d only under c e r t a i n c o n d i t i o n s certain restrictions of Federal land banks, credit of establishment branches i n the banking systems thrown it has heretofore authorized. The l e g i s l a t i o n a u t h o r i z i n g t h e s e v a r i o u s banks w i l l be d i s c u s s e d very b r i e f l y . systems of branch X-6523 — 30 — 1. F i r s t B a n k of Bank o f the United States. the United S t a t e s . I n 1791 Congress The c h a r t e r of chartered the F i r s t t h i s "bank p r o v i d e d t h a t i t s h e a d o f f i c e s h o u l d "be l o c a t e d a t P h i l a d e l p h i a a n d a u t h o r i z e d i t s b o a r d of directors to e s t a b l i s h "branch o f f i c e s w i t h i n t h e U n i t e d S t a t e s wherever thought f i t , It e i g h t b r a n c h e s of appears that f o r p u r p o s e s of d i s c o u n t a n d d e p o s i t . t h e F i r s t Bank of were e s t a b l i s h e d i n v a r i o u s p a r t s 2. Second Bank of the United States. e s t a b l i s h m e n t of in the country, the United S t a t e s with The c h a r t e r t h a t 18 of establishment f o r p u r p o s e s of The N a t i o n a l of b r a n c h e s , t h e Supreme Court of d i s c o u n t and d e p o s i t . Bank Act did not the United S t a t e s 640, that it t i o n a l banks could not Act. Even a f t e r c i s e of their "additional that rendered its Louis v. establish branches under decision, offices11 f o r of expressly f o r b i d the 1924, when decision in the State of M i s s o u r i , was d e f i n i t e l y and f i n a l l y s e t t l e d t h a t n a - the the provisions i t was c o n t e n d e d t h a t , i n c i d e n t a l powers, within the l i m i t s f i t within It appears a n d i t was n o t u n t i l J a n u a r y 28, f a m o u s c a s e of F i r s t N a t i o n a l Bank i n S t . U.S. t h i s bank a u t h o r i z e d i t s such b r a n c h e s were e s t a b l i s h e d by t h i s b a n k . national Banks. 263 of its head office to e s t a b l i s h branch o f f i c e s wherever they thought the U n i t e d S t a t e s , 3. the I n 1816 Congress a u t h o r i z e d t h e t h e S e c o n d Bank of c i t y of P h i l a d e l p h i a . directors of the United States national of that in the exer- banks could e s t a b l i s h t h e p e r f o r m a n c e of certain limited functions c i t y or town i n which t h e y were l o c a t e d . X-6523 Although the National establishment 1865, of 31 - Bank A c t b r a n c h e s "by n a t i o n a l ( S e c t i o n 5155 of did not banks, the R e v i s e d S t a t u t e s ) State banks having branches with c a p i t a l and branches and r e t a i n Moreover, in definite proportions their under branches, the Act expressly authorize t h e amendment of M a r c h 3 , specifically provided that a s s i g n e d to of of November 7, the 1918, the head o f f i c e into could convert regardless n a t i o n a l banks l o c a t i o n of a national such b r a n c h e s . bank having bran- ches r e t a i n e d upon conversion from a State another national c o n s o l i d a t e d bank could r e t a i n the Where the State branches by the ing it into bank and the law was suitable, d e v i c e of a national batik c o u l d c o n s o l i d a t e w i t h therefore, organizing a State bank, national banks of n a t i o n a l branches. could acquire bank w i t h branches, and c o n s o l i d a t i n g w i t h - i t . were i n e x i s t e n c e 103 branches the convert- I n 1925 t h e r e banks acquired under these Statutes. All February 25, lish of this, 1927, the l i m i t s located but by c o n s o l i d a t i o n o r or course, was c h a n g e d by t h e McFadden A c t of which expressly a u t h o r i z e d n a t i o n a l banks branches within offices are of of t h e city expressly forbids otherwise, or them to establish lodated, limits except This w i l l provisions operation prior to t h e p a s s a g e of be d i s c u s s e d i n more d e t a i l u n d e r a In this of connection, S e c t i o n 25 of bg.nk h a v i n g a c a p i t a l it may b e p o i n t e d o u t of or a c q u i r e , the city, t h e y may lawfully estthat Act. separate heading. the Federal Reserve Act, and surplus of that r e t a i n or a c q u i r e by c o n s o l i d a t i o n or c o n v e r s i o n b r a n c h e s ablished and in actual estab- town i n w h i c h t h e i r h e a d b r a n c h e s beytind t h e town i n w h i c h t h e it1 h e a d o f f i c e s a r e to that, under the any n a t i o n a l $1, 0 0 0 , 0 0 0 or more w i t h the X-6523 - 3 2 p e r m i s s i o n of " t h e F e d e r a l Reserve Boar4 and upon such c o n d i t i o n s and u n d e r s u c h r e g u l a t i o n s a s m a y b e p r e s c r i b e d "by t h e in foreign countries States; but or this privilege Reserve System under 4. Postal dependencies or savings system i s under trustees control, savings thereof, under such r e g u l a t i o n s as contemplates that 5 per the Treasurer of such d e p o s i t s shall but of Chapter 20). This the S e c r e t a r y of the Treasury d e p o s i t s of n o t more t h a n an a g g r e g a t e amount Interest funds at the r a t e cent of p o s t a l savings savings deposits shall the Treasurer of securities of s y s t e m may s u r r e n d e r s p e c i f i e d amounts and receive cent per t h e r e f o r bonds of The l a w be k e p t w i t h city, town or such deposits, t h e B o a r d of that under certain circumstances savings $2,500 the b a l a n c e of l o c a t e d in the d e p o s i t o r y which r e c e i v e s may b e i n v e s t e d i n b o n d s o r o t h e r the p o s t a l of 2 p e r of These d e p o s i t s may b e w i t h d r a w n be d e p o s i t e d i n banks the postal T i t l e 39, the United S t a t e s as a reserve and that The l a w a l s o p r o v i d e s in establishment t h e P o s t m a s t e r G e n e r a l may p r e s c r i b e . under c e r t a i n circumstances with tors the depository and receive to be p a i d upon such d e p o s i t s . of the Federal o f f i c e d e s i g n a t e d by the P o s t m a s t e r may b e r e c e i v e d f r o m a n y o n e p e r s o n . village of S u c h f u n d s may b e r e c e i v e d f r o m a n y one p e r s o n i n a m o u n t s $1.00 or m u l t i p l e s annum i s Code, General, Every post as a postal from the p u b l i c . of the United s u p e r v i s i o n a n d a d m i n i s t r a t i o n of a b o a r d of the Postmaster and the A t t o r n e y General. of t h e McFadden A c t . I n 1910 Congress a u t h o r i z e d c o n s i s t i n g of • G e n e r a l may a c t insular possessions system (United States the may e s t a b l i s h " b r a n c h e s d e n i e d t o S t a t e member b a n k s t h e p r o v i s i o n s of Savings Banks. the postal is Board, Trustees. these deposits the United States. their or deposits Deposi- in certain the United S t a t e s . It X-6523 appears from these f a c t s "branch " b a n k i n g w i t h Washington, the that ^ the p o s t a l saving system is D . C* a n d w i t h " b r a n c h e s l o c a t e d i n It appears f i s c a l year General in from the Annual Report e n d i n g J u n e 30, 1929, of post 794 such d e p o s i t o r i e s offices. Postal savings depositories deposits held for of the the Postmaster that at savings including the v a r i o u s p o s t different parts there were 6,770 p o s t a l offices, a form of c o n t r o l l i n g and supervising board l o c a t e d in d e s i g n a t e d by the P o s t m a s t e r f o r the 33 - the located depositors country, General c l o s e of in operation offices that year in the various i n "branch p o s t at the end of that f i s c a l y o a r amounted to $ 1 5 8 , 0 5 5 , 5 3 8 . 5 5 and t h e r e were 416,580 d e p o s i t o r s . 5. Federal Reserve Banks. to p r o v i d e for the currency, elastic In 1913 Congress e n a c t e d the F e d e r a l R e s e r v e Act establishment t o a f f o r d a m e a n s of a n d to e s t a b l i s h a more States the (United States division not more of of F e d e r a l the r e s e r v e "banks, Title 12, and the "banking i n the United This a c t authorized Chapter 3). continental United States, t h a n 12 d i s t r i c t s exclusive of Alaska, establishment in each d i s t r i c t one F e d e r a l r e s e r v e "bank. to c e r t a i n b a n k i n g powers and to p e r f o r m c e r t a i n exercise The A c t a u t h o r i z e d s u c h F e d e r a l the national and S t a t e banks which were members of reserve the Federal eral reserve bank. Board with supervisory powers over a n d S e c t i o n 3 of Board to p e r m i t the or t h e c r e a t i o n of the F e d e r a l Reserve Act a u t h o r i z e s require any Federal of functions for to become stock in a Fed- the Federal entire Federal into r e s e r v e "banks r e q u i r e d or p e r m i t t e d s y s t e m by t h e p u r c h a s e of It provided for f u r n i s h an r e d i s c o u n t i n g commercial paper, e f f e c t i v e s u p e r v i s i o n of Code, to reserve Reserve system, the Federal Reserve r e s e r v e bank: t o establish branch X-6523 - 3 4 - ' "banks w i t h i n t h e F e d e r a l r e s e r v e d i s t r i c t i n which i t i s l o c a t e d o r w i t h i n t h e d i s t r i c t of any F e d e r a l r e s e r v e bank which may have b e e n s u s p e n d e d . . P u r s u a n t to t h i s a u t h o r i t y t h e Board h a s p e r m i t t e d t h e F e d e r a l r e s e r v e banks t o e s t a b l i s h b r a n c h e s w i t h i n t h e i r r e s p e c t i v e d i s t r i c t s . number of s u c h b r a n c h e s which h a v e b e e n e s t a b l i s h e d i s 2 5 . "be s e e n t h a t , when C o n g r e s s e n a c t e d t h e F e d e r a l R e s e r v e A c t , The t o t a l I t will thus it authorized t h e e s t a b l i s h m e n t of a s y s t e m of banks h a v i n g b r a n c h e s w i t h t h e s u p e r v i s o r y power o v e r such s y s t e m v e s t e d i n t h e F e d e r a l R e s e r v e Board, w i t h i t s o f f i c e s i n W a s h i n g t o n , D. C . , and the t a n k i n g f u n c t i o n s v e s t e d i n t h e F e d e r a l r e s e r v e banks and t h e i r b r a n c h e s l o c a t e d i n v a r i o u s p a r t s of the U n i t e d S t a t e s . I t w i l l he n o t e d t h a t Congress i n t h i s i n s t a n c e r e - s t r i c t e d t h e e s t a b l i s h m e n t of "branches of a F e d e r a l r e s e r v e "bank to t h e d i s t r i c t i n which t h e p a r t i c u l a r F e d e r a l r e s e r v e "bank i s l o c a t e d , except i n t h o s e c a s e s where a F e d e r a l r e s e r v e bank may h a v e "been s u s p e n d e d . G# F e d e r a l l a n d banks a n d J o i n t s t o c k l a n d b a n k s . I n 1916 C o n g r e s s e n a c t e d t h e F e d e r a l Farm Loan Act t o p r o v i d e f o r l o a n s on f a r m l a n d s s e c u r e d by m o r t g a g e s ( U n i t e d S t a t e s Code, T i t l e 12, Chap. 7 ) . T h i s Act a u t h o r i z e d t h e c r e a t i o n of t h e F e d e r a l Farm Loan Board w i t h s u p e r v i s o r y powers a n d t h e c r e a t i o n of F e d e r a l l a n d "banks a n d j o i n t s t o c k l a n d b a n k s w i t h power t o make f a r m l o a n s a n d , w i t h t h e a p p r o v a l of t h e F e d e r a l Farm Loan B o a r d , t o i s s u e f a r m l o a n "bonds. States, I t was p r o v i d e d t h a t t h e c o n t i n e n t a l U n i t e d e x c l u s i v e of A l a s k a , s h o u l d be d i v i d e d i n t o 12 d i s t r i c t s a n d t h a t i n e a c h d i s t r i c t t h e r e s h o u l d be e s t a b l i s h e d one F e d e r a l l a n d b a n k . I t was n o t r e q u i r e d , however, t h a t o n l y one j o i n t s t o c k l a n d hank be e s t a b l i s h e d i n e a c h d i s t r i c t . Such F e d e r a l l a n d "banks and j o i n t s t o c k l a n d b a n k s were a u t h o r i z e d , w i t h the a p p r o v a l of t h e F e d e r a l Farm Loan -35- X-S523 B o a r d , t o e s t a b l i s h b r a n c h e s w i t h i n t h e d i s t r i c t i n which s u c h banks are located. The F e d e r a l Farm Loan Board was a l s o a u t h o r i z e d t o d e s i g - n a t e a F e d e r a l l a n d bank which might e s t a b l i s h a . b r a n c h i n P o r t o E i c o a n d t o d e s i g n a t e a F e d e r a l l a n d bank r h i c h might e s t a b l i s h a b r a n c h i n t h e T e r r i t o r y of Alaska* I t w i l l be seen t h a t i n t h i s i n s t a n c e Congress has a g a i n p r o v i d e d f o r the e s t a b l i s h m e n t of a b a n k i n g s y s t e m w i t h b r a n c h e s w i t h t h e s u p e r v i s o r y powers over s u c h s y s t e m v e s t e d i n a b o a r d w i t h o f f i c e s i n Washington, 2D. C., and t h e b a n k i n g f u n c t i o n s v e s t e d i n banks and b r a n c h e s t h e r e o f l o c a t e d i n v a r i o u s p a r t s of the country. I t i s s i g n i f i c a n t t h a t h e r e a l s o Congress h a s r e s t r i c t e d t h e r i g h t of each bank t o e s t a b l i s h b r a n c h e s t o t h e a r e a of t h e d i s t r i c t i n which i t i s l o c a t e d * I t a p p e a r s t h a t no b r a n c h e s of e i t h e r F e d e r a l l a n d banks or j o i n t s t o c k l a n d b a n k s have been e s t a b l i s h e d i n t h e U n i t e d S t a t e s . One b r a n c h of a F e d e r a l l a n d b a n k , however, h a s b e e n e s t a b l i s h e d i n P o r t o Hi c o . 7. War F i n a n c e C o r p o r a t i o n , I n 1918 Congress e n a c t e d l e g i s l a t i o n t o c r e a t e the War F i n a n c e C o r p o r a t i o n and a u t h o r i z e d t h i s c o r p o r a t i o n to make l o a n s t o p e r s o n s , f i r m s , or c o r p o r a t i o n s whose o p e r a t i o n s were n e c e s s a r y or c o n t r i b u t o r y t o t h e p r o s e c u t i o n of t h e w a r . Code, T i t l e 1 5 , Chap. 9 ) . (United States By a l a t e r amendment t h e c o r p o r a t i o n was a l s o a u t h o r i z e d t o make l o a n s f o r a g r i c u l t u r a l p u r p o s e s . p o r a t i o n was a l s o a u t h o r i z e d t o i s s u e i t s n o t e s o r b o n d s . This c o r The manage- ment of t h e c o r p o r a t i o n was v e s t e d i n a b o a r d of d i r e c t o r s c o n s i s t i n g of t h e S e c r e t a r y of t h e T r e a s u r y and f o u r o t h e r p e r s o n s a p p o i n t e d by —36— X-6523 t h e P r e s i d e n t , w i t h t h e a d v i c e and c o n s e n t of the S e n a t e , t h a t t h e p r i n c i p a l o f f i c e of the I t was p r o v i d e d c o r p o r a t i o n s h o u l d "be l o c a t e d i n the D i s t r i c t of Columbia, "but the c o r p o r a t i o n was a u t h o r i z e d t o e s t a b l i s h a g e n c i e s or b r a n c h o f f i c e s i n any c i t y , or c i t i e s , of t h e U n i t e d S t a t e s , u n d e r r u l e s and r e g u l a t i o n s p r e s c r i b e d by i t s b o a r d of d i r e c t o r s . Cong- r e s s t h u s a u t h o r i z e d the e s t a b l i s h m e n t of a b r a n c h b a n k i n g s y s t e m f o r a p a r t i c u l a r p u r p o s e and s u b j e c t t o c e r t a i n r e s t r i c t i o n s and s u p e r v i s i o n . At the p e a k of i t s a c t i v i t y t h e War F i n a n c e C o r p o r a t i o n h a d 33 l o a n i n g a g e n c i e s or b r a n c h e s i n o p e r a t i o n i n v a r i o u s p a r t s of the country in connection with i t s loans for a g r i c u l t u r a l purposes. 8. F e d e r a l I n t e r m e d i a t e C r e d i t Banks. I n 1923, Congress amended t h e F e d e r a l Farm Loan Act so a s t o a u t h o r i z e t h e c r e a t i o n of F e d e r a l i n t e r m e d i a t e c r e d i t banks. ( U n i t e d S t a t e s Code, T i t l e 12, Chap# 8 . ) This amendment p r o v i d e d f o r t h e e s t a b l i s h m e n t of twelve F e d e r a l i n t e r m e d i a t e c r e d i t b a n k s , one t o be l o c a t e d i n e a c h of t h e c i t i e s i n which a F e d e r a l l a n d bank i s l o c a t e d , and a u t h o r i z e d t h e s e i n s t i t u t i o n s p u r p o s e s and t o i s s u e d e b e n t u r e s . t o make l o a n s f o r a g r i c u l t u r a l The powers g r a n t e d to t h e s e i n s t i t u t i o n s a r e t o be e x e r c i s e d u n d e r t h e s u p e r v i s i o n and c o n t r o l of t h e F e d e r a l Farm Loan B o a r d . I t appears that in t h i s instance, a l s o , p r o v e d a form of b r a n c h b a n k i n g . Congress h a s a p - I n t h i s c a s e t h e c o n t r o l and s u p e r - v i s o r y f u n c t i o n s a r e v e s t e d i n t h e F e d e r a l Farm Loan Board w i t h i t s o f f i c e s i n W a s h i n g t o n , D. C., and the b a n k i n g f u n c t i o n s a r e v e s t e d i n the F e d e r a l i n t e r m e d i a t e c r e d i t banks l o c a t e d i n d i f f e r e n t p a r t s of t h e country. -37The McFadden A c t . X-6523 ^- No d i s c u s s i o n of C o n g r e s s i o n a l l e g i s l a t i o n of "branch "banking would he complete w i t h o u t a d i s c u s s i o n of t h e McFadden Act of Febr u a r y 2 5 , 1927, though the p r o v i s i o n s of t h a t Act a r e f a m i l i a r t o e v e r y one who h a s made any s t u d y of the s u b j e c t of b r a n c h b a n k i n g . (a) R a t i o n a l Banks, The p r o v i s i o n s of t h e McFadden Act w i t h r e f e r e n c e t o b r a n c h e s of n a t i o n a l banks may be summarized a s f o l l o w s : ( 1 ) Any n a t i o n a l bank may r e t a i n and o p e r a t e s u c h b r a n c h or b r a n c h e s a s i t had i n l a w f u l o p e r a t i o n on F e b r u a r y 25, 1927, r e g a r d l e s s of t h e i r location. ( 2 ) Any n a t i o n a l b a n k which has c o n t i n u o u s l y m a i n t a i n e d and o p e r a t e d n o t more t h a n one b r a n c h f o r a p e r i o d of more t h a n t w e n t y - f i v e y e a r s i m m e d i a t e l y ' o r e c e d i n g F e b r u a r y 25, 1927* may c o n t i n u e t o m a i n t a i n and ope r a t e s u c h b r a n c h , r e g a r d l e s s of t h e l e g a l i t y of t h e e s t a b l i s h m e n t tif such b r a n c h or t h e m a i n t e n a n c e of i t p r i o r t o t h e e n a c t m e n t of t h e McFadden A c t . (3) Where a S t a t e bank c o n v e r t s i n t o a n a t i o n a l bank such n a t i o n a l bank may r e t a i n and o p e r a t e any and a l l b r a n c h e s of such S t a t e b a n k which any b a n k had i n l a w f u l o p e r a t i o n on F e b r u a r y 2 5 , 1927, r e g a r d l e s s of t h e i r # location. (4) I f a S t a t e bank c o n s o l i d a t e s with a n a t i o n a l bank, such cons o l i d a t e d n a t i o n a l b a n k may r e t a i n and o p e r a t e any and a l l b r a n c h e s of e i t h e r t h e S t a t e b a n k or t h e n a t i o n a l bank which any bank had i n l a w f u l o p e r a t i o n on F e b r u a r y 25, 1927, r e g a r d l e s s of t h e i r l o c a t i o n * ( 5 ) -'here two or more n a t i o n a l banks c o n s o l i d a t e , such consoli** d a t e d n a t i o n a l bank may r e t a i n and o p e r a t e any and a l l b r a n c h e s of any one of t h e c o n s t i t u e n t n a t i o n a l banks which any bank had i n l a w f u l o p e r a t i o n on F e b r u a r y 2 5 , 1927, r e g a r d l e s s of t h e i r l o c a t i o n . -38- X-6523 ( 6 ) A f t e r F e b r u a r y 25, 1927, n a t i o n a l t a n k s may e s t a b l i s h and o p e r a t e new b r a n c h e s s u b j e c t t o t h e f o l l o w i n g c o n d i t i o n s and l i m i t a tions: ( a ) Such b r a n d i e s may be e s t a b l i s h e d and o p e r a t e d o n l y w i t h i n t h e l i m i t s of t h e c i t y , town or v i l l a g e i n which t h e p a r e n t bank i s s i t u a t e d ; (b) Such b r a n c h e s may be e s t a b l i s h e d and o p e r a t e d o n l y i n t h o s e S t a t e s t h e laws of which p e r m i t S t a t e banks to e s t a b l i s h and o p e r a t e s i m i l a r b r a n c h e s ; ( c ) ITo such b r a n c h may be e s t a b l i s h e d i n a c i t y , town or v i l l a g e of which t h e p o p u l a t i o n by the l a s t d e c e n n i a l c e n s u s was l e s s t h a n 2 5 , 0 0 0 ; (d) Hot more t h a n one such b r a n c h may be e s t a b l i s h e d i n any c i t y , town or v i l l a g e of which t h e p o p u l a t i o n b y t h e l a s t d e c e n n i a l c e n s u s does n o t e x c e e d 5 0 , 0 0 0 ; ( e ) Not more t h a n two s u c h b r a n c h e s may be e s t a b l i s h e d i n a n y c i t y , town o r v i l l a g e of which t h e p o p u l a t i o n by t h e l a s t d e c e n n i a l c e n s u s does n o t e x c e e d 1 0 0 , 0 0 0 ; (f) I n any c i t y , town or v i l l a g e the p o p u l a t i o n of which e x c e e d s 1 0 0 , 0 0 0 t h e d e t e r m i n a t i o n of t h e number of b r a n c h e s which may be e s t a b l i s h e d by n a t i o n a l banks i s l e f t t o t h e C o m p t r o l l e r of t h e Currency; and ( g ) ITo s u c h b r a n c h s h a l l be e s t a b l i s h e d or moved f r o m one l o c a t i o n t o a n o t h e r w i t h o u t f i r s t o b t a i n i n g t h e c o n s e n t and a p p r o v a l of t h e C o m p t r o l l e r of t h e C u r r e n c y . -3S~ (7) X—652*5 The term ""branches" a s h e r e u s e d i n c l u d e s any "branch- "bank, "branch o f f i c e , "branch a g e n c y , a d d i t i o n a l o f f i c e , or a n y "branch p l a c e of "business l o c a t e d i n a n y S t a t e or t e r r i t o r y of t h e U n i t e d S t a t e s or i n t h e D i s t r i c t of Columbia where d e p o s i t s a r e r e c e i v e d , checks p a i d or money l e n t . (3) T h i s s e c t i o n of t h e McFadden Act does n o t a f f e c t t h e e s t a b - l i s h m e n t or m a i n t e n a n c e of b r a n c h e s by n a t i o n a l banks i n f o r e i g n c o u n t r i e s or d e p e n d e n c i e s or i n s u l a r p o s s e s s i o n s of t h e U n i t e d S t a t e s p u r s u a n t t o the p r o v i s i o n s of S e c t i o n 25 of the F e d e r a l R e s e r v e A c t . (9) The words " S t a t e bank* 1 , " S t a t e b a n k s " , "bank" or "banks" as u s e d i n t h i s s e c t i o n i n c l u d e s t r u s t companies, s a v i n g s banks or o t h e r such c o r p o r a t i o n s or i n s t i t u t i o n s c a r r y i n g on t h e b a n k i n g b u s i n e s s u n d e r a u t h o r i t y of S t a t e l a w s , ( 1 0 ) . N a t i o n a l banks a r e e x p r e s s l y a u t h o r i z e d to t r a n s a c t a t b r a n c h e s e s t a b l i s h e d or m a i n t a i n e d i n a c c o r d a n c e ^ i t h t h e p r o v i s i o n s of the McFadden Act any and a l l b u s i n e s s which might b e l a w f u l l y t r a n s a c t e d a t t h e head o f f i c e . (b) S t a t e Member Banks of t h e F e d e r a l R e s e r v e System. Under t h e McFadden A c t , any S t a t e bank which, on F e b r u a r y 2 5 , 1927, had e s t a b l i s h e d and was o p e r a t i n g a b r a n c h or b r a n c h e s i n c o n f o r m i t y w i t h t h e S t a t e l a w , may r e t a i n and o p e r a t e s u c h b r a n c h or b r a n c h e s w h i l e r e m a i n i n g or upon becoming a member of t h e F e d e r a l R e s e r v e System. In other words, any nonmember S t a t e bank which, on F e b r u a r y 25, 1927, h a d e s t a b l i s h e d and was o p e r a t i n g a b r a n c h or b r a n c h e s i n c o n f o r m i t y w i t h t h e S t a t e law and which becomes a member of the F e d e r a l R e s e r v e System i s e n t i t l e d -40- X-6523 by law t o r e t a i n s u c h b r a n c h or b r a n c h e s , r e g a r d l e s s of t h e number or l o c a t i o n t h e r e o f ; and any S t a t e member bank which, on F e b r u a r y 2 5 , 1927, had e s t a b l i s h e d and was o p e r a t i n g a b r a n c h or b r a n c h e s i n c o n f o r m i t y w i t h t h e S t a t e law i s l a w f u l l y e n t i t l e d to r e t a i n and o p e r a t e s u c h b r a n c h e s w h i l e r e m a i n i n g a member of t h e F e d e r a l B e s e r v e System, r e g a r d l e s s of t h e l o c a t i o n or number of s u c h b r a n c h e s . The o n l y r e s t r i c t i o n on the e s t a b l i s h m e n t of b r a n c h e s by S t a t e member banks i s t h a t no S t a t e bank may become a member of t h e F e d e r a l R e s e r v e System or may r e m a i n a member of t h e F e d e r a l R e s e r v e System e x c e p t upon r e l i n q u i s h i n g any b r a n c h or b r a n c h e s e s t a b l i s h e d a f t e r F e b r u a r y 25, 1927, beyond t h e l i m i t s of the c i t y , p a r e n t bank i s l o c a t e d . town or v i l l a g e i n which t h e I n o t h e r w o r d s , no nonmember S t a t e bank may be*- come a member of t h e F e d e r a l R e s e r v e System e x c e p t Upon r e l i n q u i s h i n g any b r a n c h or b r a n c h e s e s t a b l i s h e d a f t e r F e b r u a r y 2 5 , 1927, beyond t h e l i m i t s of t h e c i t y , town or v i l l a g e i n which the p a r e n t bank i s s i t u a t e d ; and any S t a t e member b a n k which e s t a b l i s h e s a b r a n c h or b r a n c h e s beyond the l i m i t s of t h e c i t y , town or v i l l a g e i n which t h e p a r e n t bank i s l o c a t e d a f t e r F e b r u a r y 25, 1927, must e i t h e r r e l i n q u i s h such b r a n c h or b r a n c n e s or g i v e up i t s membership i n t h e F e d e r a l R e s e r v e System. The McFadden Act p r e s c r i b e d no l i m i t a t i o n s upon t h e number of b r a n c h e s which S t a t e member b a n k s may e s t a b l i s h or m a i n t a i n w i t h i n t h e l i m i t s of t h e c i t y , town or v i l l a g e i n which the p a r e n t bank i s l o c a t e d , n o r does i t r e q u i r e any s p e c i f i e d p o p u l a t i o n of t h e c i t i e s , towns and v i l l a g e s i n which S t a t e member banks may e s t a b l i s h or m a i n tain branches. -43.-* X™ 652c) On t h e o t h e r h a n d , no e x c e p t i o n i s made a s t o f o r e i g n "branches £ of S t a t e member "banks and t h e A t t o r n e y G e n e r a l has h e l d t h a t t h e y may n o t l a w f u l l y e s t a b l i s h f o r e i g n b r a n c h e s and r e m a i n members of t h e F e d e r a l R e s e r v e System s i n c e t h e p a s s a g e of the McFadden A c t , a l though t h e r i g h t of n a t i o n a l banks t o e s t a b l i s h f o r e i g n b r a n c h e s u n d e r t h e p r o v i s i o n s of S e c t i o n 25 of the F e d e r a l R e s e r v e Act i s e x p r e s s l y p r e served. There a r e many i n e q u a l i t i e s i n t h e b r a n c h b a n k i n g p r o v i s i o n s of the McFadden Act a s t h e y a f f e c t n a t i o n a l banks and S t a t e member b a n k s , r e s p e c t i v e l y , and t o a c e r t a i n e x t e n t t h a t Act f a i l s t o p l a c e t h e s e two c l a s s e s of banks on an e q u a l i t y vrith r e s p e c t t o the e s t a b l i s h ment of b r a n c h e s . X-6523 —42— VII. 1. POLICY OF FSKSRAL RESERVE SYSTEM ON BRANCH BANKING Annual R e p o r t f o r 1915. - I n i t s a n n u a l r e p o r t f o r t h e y e a r 1915, p . 2 2 , t h e F e d e r a l R e s e r v e Board recommended t o Congress t h a t n a t i o n a l banks "be p e r m i t t e d t o e s t a b l i s h b r a n c h o f f i c e s w i t h i n t h e c i t y , or w i t h i n the c o u n t y i n which t h e y were l o c a t e d . The F e d e r a l A d v i s o r y C o u n c i l , u n - der d a t e of September 2 l s t and November 16, 1915, had recommended t h a t t h e n a t i o n a l bank a c t be amended s o a s t o p e r m i t n a t i o n a l banks t o e s t a b l i s h branches under c e r t a i n conditions. 2 . Recommendations d u r i n g 1916* tion, C o n s i s t e n t l y w i t h t h i s recommenda- the Board i n 1915 p r e p a r e d and t r a n s m i t t e d t o Congress t h e d r a f t of an amendment t o the F e d e r a l r e s e r v e a c t . I n t h e terms of t h i s amend- ment n a t i o n a l banks l o c a t e d i n c i t i e s of 100,000 and o v e r h a v i n g a c a p i t a l and s u r p l u s of $ 1 , 0 0 0 , 0 0 0 or more would have been p e r m i t t e d t o e s t a b l i s h b r a n c h e s w i t h i n t h e c o r p o r a t e l i m i t s of the c i t i e s i n which t h e y were l o c a t e d , and any n a t i o n a l b a n k s l o c a t e d i n o t h e r p l a c e s w o u l d , w i t h t h e a p p r o v a l of t h e F e d e r a l R e s e r v e Board and u n d e r s u c h r e g u l a t i o n s as t h e Board m i g h t p r e s c r i b e , have been p e r m i t t e d t o e s t a b l i s h b r a n c h e s w i t h i n t h e l i m i t s of t h e c o u n t y i n which t h e y were l o c a t e d or w i t h i n a r a d i u s of 2 5 m i l e s , i r r e s p e c t i v e of c o u n t y l i n e s , b u t n o t i n any case o u t s i d e t h e S t a t e or F e d e r a l r e s e r v e d i s t r i c t of the p a r e n t bank. ( F e d e r a l R e s e r v e B u l l e t i n , p p . 3 2 3 , 3 2 7 ; 1916 Annual R e p o r t , pp. 29. 145.) Under d a t e of November 2 0 , 1916, the F e d e r a l A d v i s o r y C o u n c i l renewed i t s recommendation r e g a r d i n g t h e e s t a b l i s h m e n t of b r a n c h e s by n a t i o n a l b a n k s b u t added t h a t t h e p r i v i l e g e of e s t a b l i s h i n g b r a n c h e s -43- ' X-6523 s h o u l d a p o l y to a l l banks i n t h e n a t i o n a l 'banking s y s t e m and n o t o n l y t o such n a t i o n a l banks a s ""ere l o c a t e d i n S t a t e s which p e r m i t t e d S t a t e i n s t i t u t i o n s to e s t a b l i s h branch banks. ( See p a g e s 28 and 54 of 1916 Recommendations). An amendment d r a m i n compliance w i t h t h e recommendations of the Board was a d o p t e d by the S e n a t e , d u r i n g 1916, and t o g e t h e r w i t h o t h e r amendments was r e f e r r e d to a c o n f e r e n c e committee of the House and S e n a t e . I n c o n f e r e n c e i t d e v e l o p e d t h a t the amendment was n o t a c - c e p t a b l e t o t h e House c o n f e r e e s and t h e S e n a t e on recommendation of i t s c o n f e r e e s r e c e d e d from i t s p r o p o s a l . 3 . Annual R e p o r t f o r 1917. ( 1916 Annual R e p o r t , p . 1 3 5 . ) I n i t s 1917 Annual R e p o r t to Congress, page 33, t h e Board recommended an amendment t o the F e d e r a l R e s e r v e Act t o p r o v i d e t h a t any n a t i o n a l bank l o c a t e d i n a c i t y or i n c o r p o r a t e d town of more t h a n 100,000 i n h a b i t a n t s , and p o s s e s s i n g a c a p i t a l and s u r p l u s of $ 1 , 0 0 0 , 0 0 0 or more, may, u n d e r such r u l e s and r e g u l a t i o n s as the F e d e r a l R e s e r v e Board may p r e s c r i b e , e s t a b l i s h b r a n c h e s , n o t to e x c e e d 10 i n number, w i t h i n t h e c o r p o r a t e l i m i t s of the c i t y or town i n which i t i s l o c a t e d , p r o v i d e d t h a t no such b r a n c h s h a l l be e s t a b l i s h e d i n any S t a t e i n which n e i t h e r S t a t e banks nor t r u s t companies may l a w f u l l y establish branches. The Board s t a t e d t h a t " S t a t e banks which become members of the F e d e r a l r e s e r v e system a r e a l l o w e d b y l a v t o r e t a i n any b r a n c h e s which may a l r e a d y be i n e x i s t e n c e and, w i t h t h e a p p r o v a l of the B o a r d , t o e s t a b l i s h new b r a n c h e s , n a t i o n a l banks r i u c h have t a k e n over S t a t e banks having b r a n c h e s a r e p e r m i t t e d t o c o n t i n u e the o p e r a t i o n s of t h e s e b r a n c h e s . There seems t o be no r e a s o n f o r -44- X-6523 X such d i s c r i m i n a t i o n "be t* Men members of t h e F e d e r a l r e s e r v e s y s t e m , a n d w i t h t h e viev T of p l a c i n g them more n e a r l y upon terms of e q u a l i t y , "bes i d e s a f f o r d i n g i n many c a s e s L e t t e r s e r v i c e to t h e p u b l i c , i t i s recommended t h a t p r o v i s i o n "be made f o r the e s t a b l i s h m e n t of b r a n c h e s b y n a t i o n a l banks, under proper l i m i t a t i o n s . " 4. Annual R e p o r t f o r 1918, I n i t s Annual R e p o r t f e r t h e y e a r 1918, p , 83, t h e B e a r d renewed i t s Recommendation, e x p r e s s i n g t h e o p i n i o n t h a t n a t i o n a l banks were " a t a s e r i o u s d i s a d v a n t a g e i n m e e t i n g t h e c o m p e t i t i o n of S t a t e banks w i t h b r a n c h e s " , and t h a t " t h e p r o p e r d e v e l o p ment of t h e F e d e r a l r e s e r v e system makes i t n e c e s s a r y t o c o o r d i n a t e a s f a r as p o s s i b l e t h e powers of a l l member b a n k s . " This c o o r d i n a t i o n of powers c e u l d n o t be e f f e c t e d w i t h o u t amendment of e x i s t i n g laws u n d e r which "some member b a n k s , b o t h N a t i o n a l and S t a t e , a r e g i v e n a d v a n t a g e over o t h e r member b a n k s . " The Board renewed i t s recommendation • f p r e v i o u s y e a r s , b e i n g c o n f i d e n t t h a t t h e p r o p o s e d amendment would "prove b e n e f i c i a l t o the F e d e r a l r e s e r v e s y s t e m , a s w e l l a s t o t h e comm u n i t i e s concerned**. The F e d e r a l A d v i s o r y Council a l s o renewed i t s recommendation t h a t an amendment of t h i s c h a r a c t e r s h o u l d b e e n a c t e d * ( p . 6, 1918 Recommendations of F e d e r a l A d v i s o r y C o u n c i l . ) j?" Developments d u r i n g 1919» I n 1919; a b i l l was p a s s e d by the S e n a t e %'hich p r o p o s e d t o a u t h o r i z e n a t i o n a l banks i n c i t i e s of 5 0 0 , 0 # 0 or more p o p u l a t i o n , h a v i n g a c a p i t a l a n d s u r p l u s of $ l , t 0 0 . « 0 0 or more, t o e s t a b l i s h n o t e x c e e d i n g IS b r a n c h e s w i t h i n t h e c o r p o r a t e l i m i t s of the c i t i e s i n which t h e y were l o c a t e d , p r o v i d e d S t a t e law extended a s i m i l a r p r i v i l e g e to S t a t e banking i n s t i t u t i o n s . Under X-6523 -45- d a t e of September 16, 1919, the F e d e r a l A d v i s o r y C o u n c i l u r g e d t h e F e d e r a l R e s e r v e Board t o u s e e v e r y e f f o r t t o s e c u r e t h e p a s s a g e of t h i s b i l l i n t h e i n t e r e s t of sound b a n k i n g and t h e g r a n t i n g of e q u a l b a n k i n g f a c i l i t i e s t o a l l p e o p l e i n t h e same b u s i n e s s , ( p . 19 of 1919 Recon>- m e n d a t i o n s of F e d e r a l A d v i s o r y C o u n c i l * ) 6« Annual R e p o r t f o r 1919. The Board i n i t s Annual R e p o r t f o r t h e y e a r 1919, p . 64, made s u b s t a n t i a l l y t h e same recommendation r e g a r d i n g t h e b r a n c h b a n k i n g amendment a s i t had made i n i t s Annual Rep o r t f o r t h e y e a r 1918, and commented upon t h e b i l l above r e f e r r e d t o as f o l l o w s : "Under t h e p r e s e n t law n a t i o n a l banks can n o t a f f o r d t h e same f a c i l i t i e s t o t h e p u b l i c as a r e g i v e n by S t a t e banks h a v i n g b r a n c h e s , e x c e p t i n c a s e s where S t a t e banks and t r u s t companies o p e r a t i n g b r a n c h e s have merged w i t h n a t i o n a l b a n k s , when e x i s t i n g b r a n c h e s may b e c o n t i n u e d by t h e n a t i o n a l b a n k s . *** While the b o a r d would p r e f e r t o have t h i s p r i v i l e g e ( of e s t a b l i s h i n g b r a n c h e s ) e x t e n d e d t o n a t i o n a l banks i n c i t i e s of n o t l e s s t h a n 1 0 0 , 0 0 0 i n h a b i t a n t s , o r , f a i l i n g t h a t , have t h e p o p u l a t i o n l i m i t r a i s e d to 200,000, i t wishes t o p o i n t out t h a t t h e l i m i t f i x e d i n t h e S e n a t e b i l l does n o t a f f e c t t h e p r i n c i p l e i n v o l v e d , and i t t h e r e f o r e r e s p e c t f u l l y recommends once more t h a t n a t i o n a l banks b e p e r m i t t e d t o e s t a b l i s h b r a n c h e s i n c i t i e s i n which t h e y a r e l o c a t e d u n d e r s u c h l i m i t a t i o n s a s i n t h e wisdom of Congr e s s may be deemed d e s i r a b l e . " 7* Recommendation of Agents 1 Conference i n 1921. The C o n f e r e n c e of F e d e r a l R e s e r v e A g e n t s h e l d i n O c t o b e r , 1921, a d o p t e d a r e s o l u t i o n f a v o r i n g t h e e s t a b l i s h m e n t of b r a n c h e s i n the same c i t y i n which a n a t i o n a l bank i s l o c a t e d , p r o v i d e d S t a t e banks a r e p e r m i t t e d t h a t p r i v i l e g e u n d e r S t a t e l a w , ( p p . 111-115 of p r o c e e d i n g s of O c t o b e r , 1921, C o n f e r e n c e of F e d e r a l Reserve A g e n t s • ) -46$• Annual r e p o r t f o r 1922. X-6523 Again i n i t s r e p o r t f o r 1922, pages 5 - 6 , the "board commented, b r i e f l y upon b r a n c h b a n k i n g d e v e l o p m e n t s , n o t i n g t h a t t h e e s t a b l i s h m e n t of b r a n c h e s by t h e l a r g e r S t a t e banks "had gone s# f a r i n a few S t a t e s , n o t a b l y C a l i f o r n i a , and i n a few l a r g e c i t i e s , i n c l u d i n g New York, C l e v e l a n d and D e t r o i t , as t o r e d u c e g r e a t l y t h e number of n a t i o n a l b a n k s . " The b o a r d e x p r e s s e d the o p i n i o n t h a t t h e a c t i o n of t h e C o m p t r o l l e r of the Currency i n p e r m i t t i n g n a t i o n a l b a n k s t o open " a d d i t i o n a l o f f i c e s " w i t h i n the c o r p o r a t e l i m i t s of t h e c i t i e s i n which t h e y were l o c a t e d i n S t a t e s which p e r m i t t e d b r a n c h b a n k i n g "does n o t meet t h e s i t u a t i o n i n C a l i f o r n i a a m does n o t f u l l y meet i t i n t h e c i t i e s m e n t i o n e d , " and t h a t "an amendment t o t h e n a t i o n a l ban :ing a c t a l l o w i n g n a t i o n a l b a n k s the same p r i v i l e g e g i v e n t o S t a t e banks i n S t a t e s where b r a n c h b a n k i n g i s p e r - m i t t e d i s much t o be d e s i r e d . " I n t h i s c o n n e c t i o n t h e b o a r d n o t e d a s u g g e s t i o n made by t h e J o i n t Commission of A g r i c u l t u r a l I n q u i r y i n i t s r e p o r t t o Congress d e a l i n g w i t h the p r o b l e m of r u r a l c r e d i t , t o t h e e f f e c t t h a t "a s y s - tem of l i m i t e d b r a n c h b a n k i n g might f u r n i s h a p o s s i b l e s o l u t i o n of this problem". "Open t h i s s u g g e s t i o n t h e b o a r d commented a s f o l l o w s : "Such s y s t e m s a r e i n f a c t a l r e a d y e s t a b l i s h e d i n some s e c t i o n s of our c o u n t r y , n o t a b l y i n C a l i f o r n i a , and a p p e a r t o have gone f a r t o w a r d s o l v i n g t h e p r o b l e m . B r a n c h b a n k i n g has l o w e r e d t h e r a t e of i n t e r e s t i n some of t h e l e a d i n g a g r i c u l t u r a l s e c t i o n s of C a l i f o r n i a , and a t t h e same time h a s p r o v i d e d added s e c u r i t y f o r t h e d e p o s i t s #f t h e f a r m e r s . There a r e i n t e r e s t i n g n e i g h b o r h o o d b r a n c h b a n k i n g g r o u p s i n o t h e r S t a t e s , which a p p e a r t o be s e r v i n g t h e i r communities w e l l . " -47£» Animal He-port f o r 1923. X-6523 F i n a l l y , i n i t s 1923 r e p o r t , page 4 8 , the b o a r d n o t e s t h e d i f f i c u l t i e s w h i c h o r i g i n a t e i n t h e d i f f e r e n c e s of S t a t e laws and the c o m p e t i t i v e d i s a d v a n t a g e s u n d e r w h i c h n a t i o n a l "banks o p e r a t e i n S t a t e s which p e r m i t b r a n c h b a n k i n g , and e x p r e s s e s the hope n t h a t i t can "by a d m i n i s t r a t i v e measures f i n d some r e a s o n a b l e method of h a r m o n i z i n g e x i s t i n g d i f f e r e n c e s of i n t e r e s t of S t a t e and n a t i o n a l banks i n t h e m a t t e r of b r a n c h b a n k i n g , and t h u s l a y t h e b a s i s f o r a p o l i c y which w i l l r e s u l t i n s h a p i n g the development and p r a c t i c e of b r a n c h b a n k i n g i n the U n i t e d S t a t e s a l o n g u s e f u l and s e r v i c e a b l e l i n e s . n 1 0 . A d m i n i s t r a t i v e P o l i c y of the Board "prior t o November, 1923. I n a c t i n g upon a p p l i c a t i o n of S t a t e member banks f o r p e r m i s s i o n t o e s t a b l i s h a d d i t i o n a l b r a n c h e s w i t h i n t h e system t h e b o a r d , p r i o r t o lTo~ vemoer, 1923, had c o n s i d e r e d each c a s e upon i t s m e r i t s , g i v i n g c o n s i d e r a t i o n t o p u b l i c c o n v e n i e n c e and t o t h e p a r e n t bank*s c a p a c i t y f o r p r o p e r l y o r g a n i z i n g t h e b r a n c h and a s s i m i l a t i n g the b u s i n e s s t a k e n o v e r . As a m a t t e r of g e n e r a l p o l i c y r a t h e r t h a n s p e c i f i c a l l y of b r a n c h bankixg policy, the board i n i n d i v i d u a l cases withheld i t s approval u n t i l s a t i s f i e d t h a t e s t a b l i s h m e n t of t h e a d d i t i o n a l b r a n c h or b r a n c h e s i n q u e s t i o n would n o t i m p a i r the s o l v e n c y or l i q u i d i t y of t h e p a r e n t b a n k . I t gave c o n s i d e r a t i o n t o t h e r a t e of e x p a n s i o n of t h e g i v e n b r a n c h s y s t e m ; c o o r d i n a t i o n of b r a n c h e s a l r e a d y a c q u i r e d ; h e a d - o f f i c e c o n t r o l , s u p e r v i s i o n , and p e r s o n n e l ; a f f i l i a t i o n w i t h o u t s i d e c o r p o r a t i o n s , r e l a t i o n of c a p i t a l and s u r p l u s to d e p o s i t l i a b i l i t i e s , e s p e c i a l l y i n r a p i d l y e x p a n d i n g b r a n c h s y s t e m s ; methods of a c q u i r i n g b r a n c h e s ; and g e n e r a l l y t o l o c a l c o n d i t i o n s and needs i n so f a r a s t h e y c o u l d be c l e a r l y d e f i n e d . The B e a r d d i s t i n g u i s h e d b r a n c h e s from p a y i n g and -48- X-6523 r e c e i v i n g s t a t i o n s n o t v e s t e d w i t h d i s c r e t i o n a r y power t o make l o a n s , e x c e p t f o r i n c o n s i d e r a b l e sums and, w h i l e r e s e r v i n g t h e r i g h t tm r e c o n s i d e r i n case such o f f i c e s i n any i n s t a n c e d e v e l o p e d i n t o f u l l f l e d g e d b r a n c h e s , i t made a p p r o v a l of s u c h o u t s i d e o f f i c e s more o r l e s s a m a t t e r of form, e x c e p t where i t a p p e a r e d t h a t t h e e x p e n s e of m a i n t a i n i n g them might i m p a i r t h e c a p i t a l of t h e b a n k . A l t h o u g h t h e b o a r d had n o t f o r m u l a t e d any a r b i t r a r y r u l e r e q u i r i n g s i m u l t a n e o u s e x a m i n a t i o n s of head o f f i c e s and b r a n c h e s , i t had n e v e r t h e l e s s r e g a r d e d any e v i d e n c e of i n a b i l i t y on t h e p a r t of S t a t e a u t h orities t o conduct p r o p e r e x a m i n a t i o n s of banks m a i n t a i n i n g e x t e n s i v e branch systems as being i n i t s e l f adequate j u s t i f i c a t i o n f o r l i m i t i n g f u r t h e r e x p a n s i o n of s u c h s y s t e m s . I t f e l t t h a t r e s p o n s i b i l i t y f o r the conduct of a d e q u a t e e x a m i n a t i o n s m u s t , i n t h e case of member as of nonrnember b a n k s , be assumed p r i m a r i l y by S t a t e a u t h o r i t i e s r a t h e r t h a n , i n t h e c a s e ef member b a n k s , by the F e d e r a l r e s e r v e bank of t h e g i v e n district. I n g e n e r a l , i t may be o b s e r v e d t h a t , p r i o r t o November, 1925, the b o a r d p e r m i t t e d e x p a n s i o n of member bank b r a n c h s y s t e m s u n d e r S t a t e s u p e r v i s i o n and c o n t r o l , i n so f a r a s such e x p a n s i o n was c o n s i s t e n t w i t h sound b a n k i n g p r i n c i p l e s of e f f i c i e n t a d m i n i s t r a t i o n , a d e q u a t e S t a t e s u p e r v i s i o n , a n d complete s o l v e n c y . 1 1 . R e s o l u t i o n of Hovenfoer 7, 1923,^ On November 7, 1923, t h e F e d e r a l R e s e r v e B o a r d a d o p t e d a r e s e l u ^ f o n (X-3881) f o r m u l a t i n g c e r t a i n g e n e r a l p r i n c i p l e s f o r g u i d a n c e ef the b o a r d i n a c t i n g upon -49- X-6523 i n d i v i d u a l c a s e s p r e s e n t e d t o i t i n a p p l i c a t i o n s f o r a d m i s s i o r t o memb e r s h i p of S t a t e banks o p e r a t i n g b r a n c h e s o u t s i d e t h e c i t y or town or c o n t i g u o u s t e r r i t o r y i n which t h e p a r e n t bank was l o c a t e d and i n a p p l i c a t i o n s of S t a t e member banks f o r p e r m i s s i o n t o e s t a b l i s h s u c h branches. This r e s o l u t i o n r e a d s as f o l l o w s : "Resolved. That the b o a r d c o n t i n u e h e r e a f t e r as h e r e t o f o r e t o r e q u i r e S t a t e banks a p p l y i n g f o r a d m i s s i o n t o the F e d e r a l r e s e r v e system t o a g r e e as a c o n d i t i o n of membership t h a t t h e y w i l l e s t a b l i s h no b r a n c h e s e x c e p t w i t h t h e p e r m i s s i o n of the F e d e r a l R e s e r v e B o a r d ; be i t further " R e s o l v e d , T h a t , as g e n e r a l p r i n c i p l e , S t a t e banks w i t h b r a n c h e s or a d d i t i o n a l o f f i c e s o u t s i d e of the c o r p o r a t e l i m i t s of the c i t y or town i n which t h e p a r e n t b a n k s a r e l o c a t e d or t e r r i t o r y c o n t i g u o u s t h e r e t o ought n o t be a d m i t t e d t o the F e d e r a l r e s e r v e s y s t e m e x c e p t upon c o n d i t i o n t h a t t h e y r e l i n q u i s h such b r a n c h e s or a d d i t i o n a l o f f i c e s ; be i t f u r t h e r "Resolved, T h a t , as g e n e r a l p r i n c i p l e , S t a t e banks w h i c h a r e members of t h e F e d e r a l r e s e r v e s y s t e m , ought n o t be p e r m i t t e d t o e s t a b l i s h or m a i n t a i n b r a n c h e s or a d d i t i o n a l o f f i c e s o u t s i d e t h e c o r p o r a t e l i m i t s of the c i t y or town i n which t h e p a r e n t bank i s l o c a t e d or t e r r i t o r y c o n t i g u o u s t h e r e t o ; be i t f u r t h e r " R e s o l v e d , That i n a c t i n g upon i n d i v i d u a l a p p l i c a t i o n s of S t a t e banks f o r a d m i s s i o n t o t h e F e d e r a l r e s e r v e s y s t e m and i n a c t i n g upon i n d i v i d u a l a p p l i c a t i o n s of S t a t e banks which a r e members of t h e F e d e r a l r e s e r v e system f o r permission to e s t a b l i s h branches or a d d i t i o n a l o f f i c e s , the b o a r d , on and a f t e r F e b r u a r y 1 , 1924, w i l l be g u i d e d g e n e r a l l y by the above p r i n c i p l e s ; be i t f u r t h e r "Resolved, That t h e term * t e r r i t o r y * c o n t i g u o u s t h e r e t o 1 a s u s e d above s h a l l mean t h e t e r r i t o r y of a c i t y or town whose c o r p o r a t e l i m i t s a t some p o i n t c o i n c i d e w i t h the c o r p o r a t e l i m i t s of t h e c i t y or town i n which t h e p a r e n t bank i s l o c a t e d ; be i t f u r t h e r -50- X-6523 n R e s o l v e d . That t h i s r e s o l u t i o n i s n e t i n t e n d e d tm a f f e c t the s t a t u s of any "branches or a d d i t i o n a l o f f i c e s e s t a b l i s h e d p r i o r t o F e b r u a r y 1, 1924, e i t h e r t h o s e of b a n k s a t t h e p r e s e n t time members of the F e d e r a l r e s e r v e s y s t e m or t h o s e of banks s u b s e q u e n t l y a p p l y i n g f o r mem^ b e r s h i p i n said system. n The F e d e r a l A d v i s o r y C o u n c i l , however, was n o t i n c l i n e d t# favor this resolution. Under d a t e of November 19, 1923, i t s t a t e d wit. r e f e r e n c e t o the r e s o l u t i o n t h a t " i t b e l i e v e s t h a t the r e s o l u t i o n , i f c a r r i e d i n t o e f f e c t , w i l l g i v e a p o s i t i o n of monopoly t o t h o s e S t a t e banks t h a t have e s t a b l i s h e d S t a t e - w i d e system of b r a n c h e s , w h i l e t h o s S t a t e banks t h a t have r e f r a i n e d from b r a n c h b a n k i n g w i l l be p l a c e d i n a p o s i t i o n of g r e a t d i s a d v a n t a g e . " ( p . 11 ef 1,925 Recommendations of F e d e r a l A d v i s o r y C o u n c i l . ) 1 2 . Recommendations r e McFadden B i l l . On F e b r u a r y 11, 1924, t h e s o - c a l l e d McFadden b i l l was i n t r o d u c e d i n Congress g i v i n g t o n a t i o n a l bank t h e r i g h t t c e s t a b l i s h b r a n c h e s and i m p o s i n g some r e - s t r i c t i o n s upon the e s t a b l i s h m e n t of b r a n c h e s by S t a t e member h a n k s of t h e F e d e r a l r e s e r v e s y s t e m . As has been shown a h o v e , t h e Board had r e p e a t e d l y recommended t h e e n a c t m e n t #f l e g i s l a t i o n a u t h o r i z i n g the e s t a b l i s h m e n t of d o m e s t i c b r a n c h e s by n a t i o n a l banks and a numb e r ef b i l l s d e s i g n e d t o a c c o m p l i s h t h i s g e n e r a l p u r p o s e were i n t r o duced f r o m time t o t i m e . These b i l l s were i n v a r i o u s forms and c o n - t a i n e d v a r i o u s l i m i t a t i o n s and r e s t r i c t i o n s , b u t none of them was e v e r p a s s e d by C o n g r e s s . -51- X-S523 On May 26, 1924, and A p r i l 23, 1926, i n l e t t e r s a d d r e s s e d . t o Congressman McFadden and S e n a t o r McLean, r e s p e c t i v e l y , e x p r e s s e d i t s g e n e r a l a p p r o v a l of t h e McFadden h i l l . the Board The F e d e r a l Ad- v i s o r y C o u n c i l i n 1924, 1925 and 1926 a l s o recommended enactment of the h i l l * and on F e b r u a r y 25, 1927, i t was f i n a l l y e n a c t e d i n t o la-?. 13. A d m i n i s t r a t i v e P o l i c y d u r i n g 1924. At i t s m e e t i n g on J a n u a r y 7, 1924, the B o a r d gave c o n s i d e r a t i o n t o t h e a p p l i c a t i o n s of t h r e e "banks f o r p e r m i s s i o n t o e s t a b l i s h "branches f r o m time t o time over a p e r i o d of s e v e r a l months i n a c c o r d a n c e w i t h c o n t e m p l a t e d p r o grams of d e v e l o p m e n t , and a d o p t e d a r e s o l u t i o n t o t h e f o l l o w i n g e f f e c t : That no "blanket a u t h o r i t y t o e s t a b l i s h b r a n c h e s would be g r a n t e d ; t h a t e a c h a p p l i c a t i o n must be p r e s e n t e d s e p a r a t e l y i n r e g u l a r form and manner, s u b j e c t t o a p p r o v a l of t h e S t a t e b a n k i n g a u t h o r i t i e s and a recommendation of the F e d e r a l r e s e r v e bank of t h e d i s t r i c t ; that ap- p l i c a t i o n s to e s t a b l i s h branches in non-contiguous t e r r i t o r y , filed b e f o r e F e b r u a r y 1 ( u n d e r the b o a r d ' s r e s o l u t i o n of ITovember 7 ) m i g h t be c o n s i d e r e d by t h e Board a f t e r t h a t d a t e ; and t h a t t h e b o a r d r e s e r v e d r i g h t t o p a s s on each a p p l i c a t i o n on i t s m e r i t s . ( See X - 3 9 3 7 , ) 1 4 . R e g u l a t i o n s of 1924. On March 2 7 , 1924, the b o a r d i s s u e d a r e v i s e d and f u r t h e r e l a b o r a t i o n of i t s r e g u l a t i o n s f o r m u l a t e d u n d e r t h a t g e n e r a l p r o v i s i o n of the F e d e r a l r e s e r v e a c t which a u t h o r i z e d i t t o p r e s c r i b e c o n d i t i o n s of membership f o r S t a t e b a n k i n g i n s t i t u t i o n s a p p l y i n g f o r a d m i s s i o n t o the s y s t e m . a month l a t e r , I n t h e s e r e g u l a t i o n s , as amended on A p r i l 7, t h e b o a r d took o c c a s i o n t o g i v e more f o r m a l s t a t e m e n t than i t had p r e v i o u s l y g i v e n t o p r i n c i p l e s which would g o v e r n i t i n a p p r o v i n g t h e e s t a b l i s h m e n t of b r a n c h e s . X-6523 - 52 By S e c t i o n IV of i t s R e g u l a t i o n H, as amended A p r i l 7, 1924, the Board s t a t e d t h a t i t would p r e s c r i b e t h e f o l l o w i n g c o n d i t i o n s of membership f o r e v e r y S t a t e 'bank t h e r e a f t e r a d m i t t e d t o t h e F e d e r a l Res e r v e System: " ( 4 ) Such hank or t r u s t company s h a l l n o t , e x c e p t a f t e i a p p l y i n g f o r and r e c e i v i n g t h e p e r m i s s i o n of the F e d e r a l R e s e r v e B o a r d , e s t a b l i s h any b r a n c h , a g e n c y , or a d d i t i o n a l o f f i c e . n ( 5 ) Such bank or t r u s t connany, e x c e p t a f t e r a p p l y i n g f o r and r e c e i v i n g t h e p e r m i s s i o n of t h e F e d e r a l Res e r v e B o a r d , s h a l l n o t c o n s o l i d a t e w i t h or a b s o r b or p u r c h a s e t h e a s s e t s of any o t h e r bank or b r a n c h bank f o r t h e p u r p o s e of o p e r a t i n g s u c h bank or b r a n c h bank a s a b r a n c h of t h e a p p l y i n g b a n k ; nor d i r e c t l y or i n d i r e c t l y , t h r o u g h a f f i l i a t e d c o r p o r a t i o n s or o t h e r w i s e , a c q u i r e an i n t e r e s t i n a n o t n e r bank i n e x c e s s of 20 p e r c e n t of t h e c a p i t a l s t o c k of such o t h e r b a n k ; nor d i r e c t l y or i n d i r e c t l y promote the e s t a b l i s h m e n t of any new bank f o r t h e p u r p o s e of a c q u i r i n g such an i n t e r e s t i n i t ; nor make any a r r a n g e m e n t t o a c q u i r e s u c h an i n t e r e s t . " Tnese c o n d i t i o n s ^ e r e p r e s c r i b e d f o r a l l S t a t e brinks and t r u s t companies "'hich were a d m i t t e d t o membership between A p r i l 7, 1924, and F e b r u a r y 2 o , 1927, a n d were c o n d i t i o n a l l y p r e s c r i b e d f o r a l l i n s t i t u t i o n s a d m i t c e d oetween F e b r u a r y 2 6 , 1927, and v a n u a r y S, 1928. Prior to A p r i l 7, 192-1, t h e s e c o n d i t i o n s , or c o n d i t i o n s s u b s t a n t i a l l y s i m i l a r tnereto, -ere p r e s c r i b e d f o r s p e c i a l r e a s o n s f o r a number of S t a t e banks and t r u s t companies a d m i t t e d t o t h e System. I n S e c t i o n VI of t h e same R e g u l a t i o n , t h e Board s t a t e d t h e a d m i n i s t r a t i v e p o l i c y which i t ,vr ould p u r s u e i n a c t i n g upon a p p l i c a t i o n s l o r p e r m i s s i o n t o e s t a b l i s h b r a n c h e s u n d e r t h e s e c o n d i t i o n s of membership as f o l l o w s : " SECTION 7 1 . PRIKCIPUJS GGV^ 'irG- hSTABLISHi/EITT OF BRA2TCELS. " I n passing; u i o n a p p l i c a t i o n s by S t a t e banlcs and t r u s t companies f o r p e r m i s s i o n to e s t a b l i s h b r a n c h e s , a g e n c i e s or a d d i t i o n a l o f f i c e s , u n d e r c o n d i t i o n 2To. 4 of S e c t i o n IV, or u n d e r any s i m i l a r c o n d i t i o n "'hich nay have "been p r e s c r i b e d by t h e F e d e r a l R e s e r v e Board rad a g r e e d to by any bank or t r u s t company h e r e t o f o r e a d i n i t t e d to the F e d e r a l r e s e r v e s y s t e m , t h e F e d e r a l R e s e r v e Board r i l l observe the f o l l o w i n g p r i n c i p l e s " ( 1 ) The F e d e r a l Reserve Board r i l l as a g e n e r a l p r i n c i p l e r e s t r i c t t h e e s t a b l i s h m e n t of b r a n c h e s , a g e n c i e s or a d d i t i o n a l o f f i c e s by such banks or t r u s t companies to t h e c i t y of l o c a t i o n of t h e p a r e n t bank and t h e t e r r i t o r i a l a r e a w i t h i n the S t a t e c o n t i g u o u s t h e r e t o , a s s a i d t e r r i t o r y h a s been d e f i n e d i n the b o a r d ' s r e s o l u t i o n of November 7, 192Z, e x c e p t i n g i n i n s t a n c e s where t h e S t a t e b a n k i n g a u t h o r i t i e s have c e r t i f i e d and t n e b o a r d f i n d s t h a t p u b l i c n e c e s s i t y and a d v a n t a g e r e n d e r a d e p a r t u r e from the p r i n c i p l e n e c e s s a r y or d e s i r a b l e . i 11 (2) The F e d e r a l F e s e r v e Board as a g e n e r a l p r i n c i p l e w i l l n o t c o n s i d e r an a p p l i c a t i o n by such bank or t r u s t company i o r a p e r m i t to e s t a b l i s h a b r a n c h , agency or a d d i t i o n a l o f f i c e , u n l e s s the a u t h o r i t i e s of the S t a t e i n which such bank i s l o c a t e d r e g u l a r l y make s i m u l t a n e o u s e x a m i n a t i o n s of the h e a d o f f i ce and a l l branche s , r:g e n c i e s or a d d i t i onal o f f i c e s of sucn b a n k , nor u n l e s s t h e e x a m i n a t i o n s made oy the S t a t e a u t h o r i t i e s a r e , i n t h e judgment of the Fede r a l R e s e r v e Board, of such c h a r a c t e r i n e v e r y r e s p e c t as to f u r n i s h the F e d e r a l Reserve Board • v i t h s u f f i c i e n t i n f o r m a c i o n a s t o t n e c o n d i t i o n of such bank and t h e c h a r a c t e r of i t s management to e n a b l e the F e d e r a l Reserve Board f u l l y to p r o t e c t the i n t e r e s t s of t h e p u b l i c . 11 (3) The F e d e r a l Reserve Board as a g e n e r a l p r i n c i p l e r i l l r e q u i r e each bank or t r u s t company which e s t a b l i s h e s or m a i n t a i n s b r a n c h e s , a g e n c i e s or a d d i t i o n a l o f f i c e s to m a i n t a i n f o r i t s e l f and such b r a n c h e s , a g e n c i e s or a d d i t i o n a l o f f i c e s an a d e c u a t e r a t i o of c a p i t a l t o t o t a l l i a b i l i t i e s and an a a e c u a t e p e r c e n t a g e of i t s t o t a l i n v e s t m e n t s i n the form of p a p e r or s e c u r i t i e s e l i g i b l e f o r d i s c o u n t or p u r c h a s e by F e d e r a l r e s e r v e b a n k s . "(-1-) The F e d e r a l Reserve Board r i l l n o t c o n s i d e r any a p p l i c a t i o n t o e s t a b l i s h a b r a n c h , agency or a d d i t i o n a l o i i i c e u n t i l the S t a t e banking a u t h o r i t i e s have aooroved t h e e s t a b l i s h m e n t of such b r a n c h , agency or a d d i t i o n a l of n e e , and t h e d i r e c t o r s or e x e c u t i v e committee and t h e F e d e r a l r e s e r v e a g e n t of t h e F e d e r a l r e c u r v e bank of t h e d i s t r i c t i n which such bank or t r u s t comna. >y i s l o c a t e d have made a r e p o r t upon t n e f i n a n c i a l c o n d i t i o n of the a-v-lying bank or t r u s t company, t h e g e n e r a l c h a r a c t e r of —b4w X-S52, " ' i t s management, wliat e f f e c t t h e e s t a b l i s h r c e n t of ^uch u-ranch* a g e n c y or a d d i t i o n a l o f f i c e ^oulcL have upon o t h e r t ^ n k s or b r a n c h e s i n t h e l o c a l i t y i n which i t i s to b e e s t a b l i s h e d , and whether i n t h e i r o n i ^ i o n , i t would he i n t h e i n t e r e s t of the p u b l i c i n s u c h l o c a l i t y , t o g e t h e r w i t h t h e i r recomm e n d a t i o n a s t o w h e t h e r or n o t t h e a p p l i c a t i o n s h o u l d b e granted. n (5) When p e r m i s s i o n i s g r a n t e d f o r t h e e s t a b l i s h m e n t of s u c h b r a n c h , a g e n c y or a d d i t i o n a l o f f i c e same s h a l l be e s t a b l i s h e d and opened, f o r b u s i n e s s w i t h i n s i x months a f t e r such permission i s g r a n t e d . I f such b r a n c h , agency or a d d i t i o n a l o f f i c e i s n o t e s t a b l i s h e d w i t h i n s u c h time t h e p e r m i t s h a l l become v o i d , u n l e s s the time i s e x t e n d e d by t h e b o a r d f o r good c a u s e , " ( 6 ) The F e d e r a l R e s e r v e Board r e s e r v e s the r i g h t t o c a n c e l any p e r m i t which i t may g r a n t h e r e a f t e r t o e s t a b l i s h a n y b r a n c h , a g e n c y or a d d i t i o n a l o f f i c e whenever i t s h a l l a p p e a r , a f t e r h e a r i n g , t h a t such b r a n c h , a g e n c y or a d d i t i o n a l o f f i c e i s b e i n g o p e r a t e d i n a manner c o n t r a r y t o t h e i n t e r e s t of t h e p u b l i c i n t h e l o c a l i t y i n which i t i s e s t a b l i s h e d . 1 1 15» A f t e r t h e McFadden A c t . As a r e s u l t of t h e amendments t o t h e F e d e r a l R e s e r v e Act c o n t a i n e d i n the McFadden A c t , t h e Board i s s u e d a new s e t of r e g u l a t i o n s a p p l i c a b l e t o member banks which became e f f e c t i v e on J a n u a r y 3 , 1928, B e f o r e t h e s e new r e g u l a t i o n s became e f f e c t i v e and a f t e r the p a s s a g e of t h e McFadden A c t , a numoer of S t a t e banks and t r u s t companies were a d m i t t e d t o membership i n t h e System. These b a n k s and t r u s t companies were a d m i t t e d s u b j e c t t o c e r t a i n c o n d i t i o n s of momb o r s h i p which u s u a l l y i n c l u d e d t h e c o n d i t i o n s i n t h e 1924 R e g u l a t i o n s r e g a r d i n g t n e e s t a o l i s i i r n e n t of d r a n c h e s , and such c o n d i t i o n s were s u b j e c t t o any cnanges win en t n e Board found t o be n e c e s s a r y on a c c o u n t of the an,.elements t o t n e F e d e r a l Reserve Act c o n t a i n e d i n the McFadden A c t • A f t e r the BoarcUs 1923 R e g u l a t i o n s became e f f e c t i v e ( J a n u a r y 192%) t h e s e "banks •'%reio a d v i s e a of t n e new c o n d i t i o n s of memborsnip t o which thf>y ^ e r e s u b j e c t . X-S523 -55- As t h e McFadden Act p r o s c r i b e d , the c o n d i t i o n s u n d e r which "branches m i g h t be established by State mssiber bankst the Board?1 did not include a cond i t i o n i n t h e s e new r e g u l a t i o n s i n t h a t c o n n e c t i o n # I n S e c t i o n V of R e g u l a t i o n H, however, i t s t a t e d i t s i n t e r p r e t a t i o n of t h e p r o v i s i o n s of t h e McFadden Act r e g a r d i n g b r a n c h e s of S t a t e member banks a s f o l l o w s ; " 1 . Any S t a t e member bank which, on F e b r u a r y 15, 1927, had e s t a b l i s h e d and was a c t u a l l y o p e r a t i n g a b r a n c h or b r a n c h e s i n c o n f o r m i t y w i t h t h e S t a t e law i s p e r m i t t e d t o r e t a i n and o p e r a t e t h e same w h i l e r e m a i n i n g a member of t h e F e d e r a l r e s e r v e s y s t e m , r e g a r d l e s s of t h e l o c a t i o n of s u c h b r a n c h or branches. M 2. Any nonmember S t a t e bank w h i c h , on F e b r u a r y 2 5 , 1927, had e s t a b l i s h e d and was a c t u a l l y o p e r a t i n g a b r a n c h or b r a n c h e s i n c o n f o r m i t y w i t h S t a t e law may, i f o t h e r w i s e e l i g i b l e , become a member of t h e F e d e r a l R e s e r v e s y s t e m and r e t a i n and o p e r a t e s u c h b r a n c h e s , r e g a r d l e s s of t h e i r l o c a t i o n . " 3 . I n o r d e r t o remain a member of t h e F e d e r a l r e s e r v e s y s t e m , e v e r y S t a t e member bank must r e l i n q u i s h any b r a n c h or b r a n c h e s e s t a b l i s h e d a f t e r F e b r u a r y 2 5 , 1927, beyond t h e c o r p o r a t e l i m i t s of t h e c i t y , town, or v i l l a g e i n which t h e p a r e n t bank i s s i t u a t e d , " 4 . Any S t a t e member bank which e s t a b l i s h e s any b r a n c h or b r a n c h e s a f t e r F e b r u a r y 25, 1927, beyond the c o r p o r a t e l i m i t s of the c i t y , town, or v i l l a g e i n which the p a r e n t bank i s s i t u a t e d mast e i t h e r ( a ) r e l i n q u i s h s u c h b r a n c h or b r a n c h e s or ( b ) f o r f e i t a l l r i g h t s and p r i v i l e g e s of membership and s u r r e n d e r i t s s t o c k i n the F e d e r a l r e s e r v e b a n k . " 5 . Mo S t a t e bank which h a s e s t a b l i s h e d any b r a n c h e s s u b s e q u e n t t o F e b r u a r y 2 5 , 1927, beyond the c o r p o r a t e l i m i t s of t h e c i t y , town, or v i l l a g e i n which t h e p a r e n t bank i s s i t u a t e d may become a member of t h e F e d e r a l r e s e r v e s y s t e m e x c e p t upon r e l i n q u i s h m e n t of e v e r y such b r a n c h • " 6 . S t a t e member banks may e s t a b l i s h b r a n c h e s w i t h i n t h e c o r p o r a t e l i m i t s of t h e c i t y , town, or v i l l a g e i n which t h e p a r e n t bank i s s i t u a t e d w i t h o u t o b t a i n i n g p e r m i s s i o n of the Federal Reserve Board. -56VIII. X-65PZ POLICY OF FiilOSRAL aSSjfoVj SYSIZH GIT CHA.IH BAMI17&. 1 . C o n d i t i o n s of ifeinbeyshj-n. p r i o r t o thv e n a c t m e n t of the Mo Fadden A c t , t h e B o a r d p r e s c r i b e d c o n d i t i o n s of membership u n d e r T h i c k S t a t e banks could be admitted t o the Federal r e s e r v e system, i n order t o e f f e c t some d e g r e e of c o n t r o l over chair, b a n k i n g . One of the c o n - d i t i o n s " ' i i h "'hich S t a t e banks e n t e r i n g t h e F e d e r a l r e s e r v e s y s t e m were r e q . ^ i i o d t o comply, r e a d s a s f o l l o w s : " ( 5 ) Such bank or t r u s t company, e x c e p t a f t e r a p p l y i n g f o r and r e c e i v i n g t h e p e r m i s s i o n of t h e F e d e r a l R e s e r v e B o a r d , s h a l l n o t c o n s o l i d a t e " i t h or a b s o r b or u r c h a s e the a s s e t s of any o t h e r bank or b r a n c h bank f o r t h e p u r p o s e of o p e r a t i n g s u c h bank or b r a n c h b a n k as a b r a n c h of t h e a p p l y i n g bank; n o r d i r e c t l y or i n d i r e c t l y , t h r o u g h a f f i l i a t e d c o r p o r a t i o n s or o t h e r w i s e , a c q u i r e an i n t e r e s t i n a n o t h e r b a n k i n e x c e s s of 20 p e r c e n t of the c a p i t a l s t o c k of s u c h o t h e r b a n k ; n o r d i r e c t l y or i n d i r e c t l y p r o mote t h e e s t a b l i s h m e n t of any new bank f o r t h e p u r p o s e of a c q u i r i n g such an i n t e r e s t i n i t ; n o r make any a r r a n g e m e n t t o a c q u i r e s u c h an i n t e r e s t . " T h i s c o n d i t i o n of membership was i n c o r p o r a t e d i n t h e B o a r d ' s R e g u l a t i o n s of 1924 and -7as p r e s c r i b e d f o r e v e r y S t a t e Bank a d m i t t e d t o membership b e t w e e n A p r i l 7, 1924, and J a n u a r y 5 , 1928. As a r e s u l t of an amendment t o S e c t i o n 9 c o n t a i n e d i n the McFadden Act ( F e b r u a r y 25, 1927,) t h e r e Iz some doubt w h e t h e r t h e Board now has a u t h o r i t y to p r e s c r i b e t h i s broad c o n d i t i o n and, t h e r e f o r e , i t has b e e n u n a b l e t o e x e r c i s e t h e same d e c r e e of c o n t r o l o v e r c h a i n b a n k i n g . I t h a s , however, p r e s c r i b e d the f o l l o w i n g c o n d i t i o n of membership f o r e v e r y S t a t e bank or t r u s t company a d m i t t e d t o membership s i n c e J a n u a r y 3 , 1928. X-5523 -5711 ( 3 ) E x c e p t a f t e r ap " l y i n g f o r and r e c e i v i n g tiie p e r m i s s i o n of t h e F e d e r a l Heserve B o a rd , s a c h t a n k or t r u s t company s h a l l n o t a c q u i r e an i n t e r e s t i n any o t h e r b a n k or t r u s t company, t h r o u g h t h e p u r c h a s e of s t o c k i n such o t h e r bank or t r u s t company t " 2. Recommendations f o r L e g i s l a t i o n , As e a r l y as J a n u a r y 8 , 1926, the Board a d d r e s s e d a l e t t e r t o Congressmen McFadden (X-4500) recommending t h a t t h e r e b e i n c o r p o r a t e d i n the p o n d i n g McFadden b i l l c e r t a i n p r o v i s i o n s designed to secure adequate information regarding nat i o n a l and S t a t e member banks which a r e c l o s e l y r e l a t e d i n management, o p e r a t i o n or i n t e r e s t s t o o t h e r b a n k i n g i n s t i t u t i o n s a n d , i n p a r t i c u l a r , t o a f f o r d some check u p o n t h e a b u s e s f r e q u e n t l y o c c u r r i n g from c h a i n banking. These s u g g e s t i o n s were n o t a d o p t e d b y C o n g r e s s . A copy of the B o a r d ' s l e t t e r i s a t t a c h e d h e r e t o a s E x h i b i t DD. 5 . C o r r e s p o n d e n c e r / i t h Hon. L o u i s T. McFadden r e A d m i n i s t r a t i v e C o n t r o l . - Under d a t e of May 2 , 1927, Congressman McFadden a d d r e s s e d a letter to the C o m p t r o l l e r of the C u r r e n c y , s u g g e s t i n g t h a t he a d o p t a d m i n i s t r a t i v e m e a s u r e s c a l c u l a t e d t o c o n t r o l or p r e v e n t t h e g r o w t h of c h a i n b a n k i n g among n a t i o n a l banks and s e n t a copy of h i s l e t t e r t o t h e F e d e r a l R e s e r v e Board w i t h t h e s u g g e s t i o n t h a t t h e Board s h o u l d a d o p t s i m i l a r a d m i n i s t r a t i v e m e a s u r e s w i t h r e f e r e n c e t o S t a t e member b a n k s of the F e d e r a l r e s e r v e s y s t e m . The B o a rd , u n d e r d a t e of May 1 8 , 1928, ( X - 4 8 5 4 ) , r e p l i e d t h a t i t was p o w e r l e s s u n d e r t h e law t o t a k e any such a c t i o n . The Board c a l l e d a t t e n t i o n t o t h e f a c t t h a t i t had s u g g e s t e d l e g i s l a t i o n a l o n g t h i s l i n e , b u t t h a t Congress had n o t a d o p t e d i t s s u g g e s t i o n s , and a l s o c a l l e d a t t e n t i o n t o t h e f a c t -58- X-6523 t h a t Congress i n the McFadden Act had amended the law bo as a p p a r e n t l y t o t a k e away the B o a r d ' s power t o c o n t r o l t h i s p r a c t i c e t h r o u g h cond i t i o n s of membership. as Z t h i b i t IS ?•, The B o a r d ' s l e t t e r , a copy of which i s a t t a c h e d c o n c l u d e d w i t h t h e s t a t e m e n t t h a t t h e remedy l i e s with Congress. 4, Annual R e p o r t s f o r 19.27 and 1928> In a d d i t i o n to the c o r - r e s p o n d e n c e v ' i i h Congressman McFadden above r e f e r r e d t o , t h e Board h a s i n i t s a n n u a l r e p o r t s f o r t h e y e a r s 1927 and 1928 b r o u g h t t o t h e a t t e n t i o n of Congress t h e f a c t t h a t the expanding o p e r a t i o n s of f i n a n c i a l companies s p e c i a l i z i n g i n t h e p u r c h a s e of hank s t o c k have p r e s e n t e d s p e c i a l p r o b l e m s t o F e d e r a l and S t a t e o f f i c i a l s c h a r g e d w i t h the r e s p o n s i b i l i t i e s of "bank s u p e r v i s i o n . I t was p o i n t e d out t h a t such companies have b e e n o r g a n i z e d i n i n c r e a s i n g numbers and t h a t s i n c e t h e y a r e n o t d i r e c t l y engaged i n t h e b u s i n e s s of b a n k i n g a s d e f i n e d i n F e d e r a l and S t a t e s t a t u t e s , t h e y have n o t b e e n s u b j e c t t o s u p e r v i s i o n or r e g u l a r e x a m i n a t i o n by b a n k i n g a u t h o r i t i e s . p a g e s 3 1 - 3 2 of 1927 Annual R e p o r t . ) (See The d i f f e r e n c e between b r a n c h and chair: bt -iking was e x p l a i n e d and i t was p o i n t e d o u t t h a t t h e more c o n s i d e r a b l e d e v e l o p m e n t s i n c h a i n b a n k i n g have b e e n g e n e r a l l y i n S t a t e s which p r o h i b i t t h e e s t a b l i s h m e n t of b r a n c h o f f i c e s by b a n k s . Tne c h a i n b a n k i n g s i t u a t i o n i n t h e U n i t e d S t a t e s was a l s o summarized f o r t h e i n f o r m a t i o n of Congress. Annual R e p o r t . ) ( See g a g e s 5 0 - 3 1 of t h e 1928 —59— 5. X-552o C o n f e r e n c e s of F e d e r a l R e s e r v e A ^ e - t s and g o v e r n o r s of F e d e r a l R e s e r v e Banks i n 1927 and 1923. The 1527 f a l l c o n f e r e n c e s of f e d e r a l r e s e r v e "bank Governors and F e d e r a l r e s e r v e a g e n t s c o n s i d e r e d t h e d e v e l o p ment of i n v e s t m e n t companies f o r t h e p u r c h a s e of bank s t o c k , and t h e F e d e r a l r e s e r v e a g e n t s were of t h e o p i n i o n t h a t a d a n g e r o u s s i t u a t i o n i s d e v e l o p i n g which s h o u l d "be Drought t o t h e a t t e n t i o n of t h e F e d e r a l R e s e r v e Board and t h e b a n k i n g a u t h o r i t i e s ^ i t h t h e view t h a t some l e g i s l a t i o n s h o u l d be o b t a i n e d p l a c i n g s u c h companies u n d e r the j u r i s d i c t i o n of t h e b a n k i n g d e p a r t m e n t s . The F e d e r a l r e s e r v e bank Governors f e l t t h a t t h e p o s s i b l e d a n g e r s i n c i d e n t t o a w i d e s p r e a d development of s u c h companies make i t a m a t t e r f o r the c o n s i d e r a t i o n of t h e F e d e r a l reserve system. The Governors d i s c u s s e d t h i s q u e s t i o n f u r t h e r a t t h e i r A p r i l , 1928, C o n f e r e n c e and w h i l e n o t h i n g d e f i n i t e was recommended, i t was s bated t h a t t h e q u e s t i o n i s a m a t t e r t h a t d e s e r v e s t h o u g h t f u l consideration. 6. Committee t o S t u d y Chain Banking» The q u e s t i o n of b r a n c h , c h a i n and g r o u p b a n k i n g development i n the U n i t e d S t a t e s w i t h p a r t i c u l a r r e f e r e n c e to t h e e f f e c t s of bank s t o c k o w n e r s h i p by i n v e s t ment t r u s t s and h o l d i n g c o r p o r a t i o n s , was c o n s i d e r e d by t h e F e d e r a l A d v i s o r y Council i n 1929, a n d , on November 19, 1929, i t recommended that, 11 The F e d e r a l R e s e r v e Board a p p o i n t a committee t o s t u d y t h e m e r i t s of t h e b r a n c h b a n k i n g s y s t e m as p r a c t i c e d i n t h i s and o t h e r countries, ( c o n d i t i o n s i n Canada b e i n g a p p a r e n t l y more comparable w i t h our own), the g r o u p or c h a i n b a n k i n g s y s t e m as d e v e l o p e d -SO- X-6523 i n t h i s c o u n t r y ana else-There, ana t h e u n i t banki:„; system of t h i s and o t h e r c o u n t r i e s ; and f u r t h e r , t h e e f f e c t of ovmeichip of "bank s t o c k s by i i i v : s t m o u t t r u s t s a n d h o l d i n g c o r p o r a t i o n s , i n o r d e r t h a t the Fedei> Besvrvo ,-ioard may "be i n p o s s e s s i o n of a c c u r a t e and a u t h o r i t a t i v e i._formation on t h i s m i n o r t a u t s u b j e c t . " The December, 1929, Conference of F e d e r a l r e s e r v e baxuc Govern o r s aud F e d e r a l r e s e r v e a g e n t s v o t e d to concur i n and e n d o r s e the recommendation of tno jfodural A u v i s o r y Council t h a t a committee be a p p o i n t e e t o s t u d y the s u b j e c t of 'branch, c h a i n and group h a n k i n g . A c c o r d i n g l y , on F e b r u a r y 27, 1930, the Board a p p o i n t e d a committee f o r t h i s p u r p o s e , naming as members t h e r e o f , M e s s r s . G-oldenvreiser and Smead of the B o a r d ' s s t a f f , and Messrs. Rounds, Fleming and C l e r k , Deputy Governors of the Fede r a l r e s e r v e banks of liew York, C l e v e l a n d a n a San F r a n c i s c o , r e s p e c t i v e l y . - 61IX. BiM X-6 5.13 FAILURES I n c o n n e c t i o n w i t h t h e s u b j e c t of b r a n c h , grout) and c h a i n b a n k i n g , some c o n s i d e r a t i o n must be g i v e n t o t h e u n f o r t u n a t e l y l a r g e number of bank s u s p e n s i o n s and f a i l u r e s i n t h e U n i t e d S t a t e s , e s p e c i a l l y i n view of t h e f a c t t h a t t h e a d v o c a t e s of b r a n c h banking c o n t e n d t h a t t h e solution, of t h e p r o b l e m of bank f a i l u r e s l i e s i n t h e s u b s t i t u t i o n of b r a n c h e s of s t r o n g , w e l l managed banks f o r s m a l l , u n i t banks i n t h e r u r a l communities. F o r t u n a t e l y , t h e F e d e r a l R e s e r v e Board has r e l i a b l e s t a t i s t i c s w i t h r e g a r d to bank f a i l u r e s and has made some s t u d y of the c a u s e s of t h e s e f a i l u r e s . 1. F e d e r a l R e s e r v e B o a r d ' s Annual Re-port f o r t h e Year 1926. - On p a g e s 3.0 t o 13, i n c l u s i v e , of the t e x t of t h i s r e p o r t , the Board c a l l e d a t t e n t i o n t o t h e f a c t t h a t , d u r i n g t h e y e a r 1926, 956 banks w i t h d e p o s i t s of n e a r l y $ 2 7 5 , 0 0 0 , 0 0 0 had s u s p e n d e d , a s compared w i t h 512 s u s p e n s i o n s i n v o l v i n g d e p o s i t s of a b o u t $175,000,000 i n 1925, and 777 s u s p e n s i o n s i n v o l v i n g d e p o s i t s of a b o u t $215,000,000 i n 1924. C e r t a i n s t a t i s t i c s were g i v e n w i t h r e f e r e n c e t o the number and p e r c e n t a g e of member and nonmember bank f a i l u r e s and t h e c a u s e s of t h e s e f a i l u r e s were d i s c u s s e d b r i e f l y . One of the f u n d a m e n t a l c a u s e s a p p e a r e d t o be t h a t i n many communities, and e s p e c i a l l y i n s m a l l communities, t h e r e were more b&nks than could p r o f i t a b l y engage i n the l o c a l b a n k i n g b u s i n e s s and many of t h e s e banks had i n s u f f i c i e n t capital. A s t a t i s t i c a l t a b l e b r o u g h t out the f a c t t h a t n e a r l y t w o - t h i r d s of the bonks which f a i l e d d u r i n g 1926 had a c a p i t a l of $25,000 or l e s s and were s i t u a t e d i a towns of l e s s t h a n 1 , 0 0 0 i n h a b i t a n t s . The s i t u a t i o n d e s c r i ced m t h e f o l l o w i n g p a r a g r a p h , a p p e a r i n g on page 12, u n d o u b t e d l y a c c o u n t s f o r the p r e s e n t t e n d e n c y t o b u i l d u p c h a i n s ' of banks w i t h s t r o n g u&-agcrnent or s u p e r v i s i o n i n view of t h e l e g a l re— - 62 - X-6523 s t r i c t i o n s on branch "banking: "Some s m a l l basics i n s m a l l communities have found i t d i f f i c u l t t o make a d e q u a t e e a r n i n g s by c o n d u c t i n g t h e i r b u s i n e s s a l o n g s t r i c t l y c o n s e r v a t i v e l i n e s , and have n o t b e e n a b l e to a f f o r d t h e expense of e n g a g i n g s k i l l f u l and e x p e r i e n c e d managers. The volume of b u s i n e s s done b y s m a l l banks i n r u r a l communities, f u r t h e r more , has d i m i n i s h e d i n r e c e n t y e a r s , a s t h e r e s u l t of inroorvement i n roads and t h e w i d e s p r e a d u s e of a u t o m o b i l e s , which has l e d many bank customers t o p r e f e r t o d r i v e t o t h e c o u n t y s e a t or o t h e r n e a r - b y c e n t e r and t o u s e the f a c i l i t i e s of t h e l a r g e r banks i n t h e s e t o w n s . " The g e n e r a l economic c o n d i t i o n s l e a d i n g up t o t h e f a i l u r e s d u r i n g the y e a r 1925 were d i s c u s s e d c o n c i s e l y on page 13; a n d , on pages 190 t o 196, i n c l u s i v e , t h e r e were p u b l i s h e d a s e r i e s of t a b l e s c o n t a i n i n g v a l u a b l e s t a t i s t i c s on bank s u s p e n s i o n s d u r i n g t h e y e a r s 1921 t o 1926, inclusive. A copy of t h i s r e p o r t i s a t t a c h e d h e r e t o as E x h i b i t 2. 3T. Report on Bank S u s p e n s i o n s , 1921-1927. - Under d a t e of A p r i l 11, 1928, Mr. 3 . L. Smead, Chief of the D i v i s i o n of Bank O p e a t i o n s , s u b m i t t e d to t h e F e d e r a l R e s e r v e Board a comprehensive r e p o r t on bank s u s p e n s i o n s i n the y e a r 1927 and d u r i n g t h e y e a r s 1921 t o 1S27, i n c l u s i v e . t h i s r e p o r t i s a t t a c h e d h e r e t o as E x h i b i t A copy of G&. This r e p o r t showed t h a t , d u r i n g the y e a r 1927, t h e r e was a t o t a l of 662 bank s u s p e n s i o n s i n v o l v i n g t o t a l d e p o s i t s of $ 1 9 4 , 0 0 0 , 0 0 0 , and. d e t a i l e d f i g u r e s were g i v e n f o r t h e v a r i o u s c l a s s e s of b a n k s . The r e p o r t a l s o showed t h a t , d u r i n g the s e v e n - y e a r p e r i o d , 1921-1927, 4 , 5 1 3 banks w i t h an a g g r e g a t e c a p i t a l of $169,000,000 and d e p o s i t s of $ 1 , 3 5 1 , 0 0 0 , 0 0 0 had s u s p e n d e d o p e r a t i o n s . Baring t h e sane p e r i o d 559 banks w i t h a c a p i t a l of $ 2 1 , 0 0 0 , 0 0 0 and d e p o s i t s of £200,000,000 had r v e v e n e d , i e a v m g n e t f a i l u r e s of 3 , 9 5 4 banks w i t h an a g g r e g a t e c a c i t a l of $ 1 4 8 , 0 0 0 , 0 0 0 and d e p o s i t s of $ 1 , 1 5 1 , 0 0 0 , 0 0 0 . D e t a i l e d s t a t i s t i c s a r e given f o r the various -65c l a s s e s ' of t a n k s . X-6523 wLv/ Those s t a t i s t i c s showea t h a t , of t h e t o t a l of 4 , 5 1 3 "banks t h a t s u s p e n d e d o p e r a t i o n s d u r i n g t h i s s e v e n - y e a r p e r i o d , 3 , 3 0 9 "-ere l o c a t e d i n p l a c e s h a v i n g a p o p u l a t i o n of l o s s t h a n 2 , 5 0 0 and t h a t more than SO p e r c e n t of a l l s u s p e n d e d banks Here l o c a t e d i n p l a c e s h a v i n g l e s s than 1,000 i n h a b i t a n t s • I t a l s o showed t h a t n e a r l y 40 ocr c e n t of t h e suspend** ed banks had a c a p i t a l of l e s s t h a n $25,000 and t h a t o v e r 63 p e r c e n t of them h a d a c a p i t a l of $25,000 or l e s s . On p a g e 5 of t h i s r e p o r t t h e p r i n c i p a l c a u s e s of b a n k f a i l u r e s d u r i n g this seven-year period i-T ere d i s c u s s e d a s f o l l o w s : "The p r i n c i p a l cause of bank s u s p e n s i o n s d u r i n g the 7 - y e a r p e r i o d was r e p o r t e d a s t h e a c c u m u l a t i o n of a l a r g e p r o p o r t i o n of w o r t h l e s s , slow or p a s t - d u e "paper, b u t i n q u i t e a number of c a s e s p o o r management and h e a v y w i t h a r a w a l s were a s s i g n e d a s l a r g e l y r e s p o n s i b l e f o r t h e s u s pension. The c a u s e s of s u s p e n s i o n l i s t e d i n t h e o r d e r of i m p o r t a n c e , i . e . , b a s e d on t h e number of times shown a s h a v i n g been a p r i m a r y or c o n t r i b u t o r y c a u s e , a r e as f o l l o w s : 1. 2. 3. 4. 5. 6. ?. 8, 9. D o u b t f u l , slow or p a s t - d u e p a p e r Heavy w i t h d r a w a l s P o o r management D e p r e c i a t i o n of s e c u r i t i e s Loans to o f f i c e r s and d i r e c t o r s Defalcation l o a n s t o e n t e r p r i s e s i n which o f f i c e r s and d i r e c t o r s were i n t e r e s t e d F a i l u r e of b a n k i n g c o r r e s p o n d e n t F a i l u r e of o t h e r l a r g e d e b t o r s " •Tiaile " d o u b t f u l , slow or p a s t due p a p e r " was g i v e n as the most imp o r t a n t cause of bank f a i l u r e s a n d " l o a n s t o o f f i c e r s and d i r e c t o r s " and " l o a n s t o e n t e r p r i s e s i n which o f f i c e r s and d i r e c t o r s were i n t e r e s t e d " Wore l i s t e d as s e p a r a t e c a u s e s , i t might w e l l be a r g u e d t h a t t h e s e c a u s e s c o u l d a l l b e g r o u p e d u n d e r t h e h e a d of " p o o r management," making t h a t the p r i n c i p a l c a u s e of bank x'ai.;.ur as . borne s t a t i s t i c g i v e n w i t h r e f e r e n c e t o t h e number of f a i l u r e s of baiitis ox) e r a t i n g o r a n c h e s a n a , on page 5, t h e r e i s an i n t e r e s t i n g d i s - mission of t h e f a i l u r e of c e r t a i n c h a i n systems, n o t a b l y the Witham System, with 179 "banks i n Georgia, and F l o r i d a and 10 i n New J e r s e y and Hew York. 3 . Study of Bank Suspensions, 1921-1929. - A s i m i l a r r e p o r t c o v e r i n g t h e n i n e - y e a r p e r i o d , 1921-1929, i s now i n course of p r e p a r a t i o n . The i n f o r m a t i o n p e r t a i n i n g to t h e causes of f a i l u r e s has not y e t "been comp l e t e l y t a b u l a t e d , b u t i t a p p e a r s t h a t the r e l a t i v e importance of t h e causes of s u s p e n s i o n s w i l l not be v e r y d i f f e r e n t from t h a t shown i n the r e p o r t f o r the y e a r s 1921-1527. 4 . F e d e r a l Reserve Board Annual Report f o r t h e Year 1S29. - While i t has not y e t 'been completed, a p r e l i m i n a r y d r a f t of t h a t p o r t i o n of the Board*s Annual .Report f o r t h e year 1S25 which d i s c u s s e s bank f a i l u r e s i s attached hereto as Exhibit EH. From t h i s i t a p p e a r s t h a t 642 banks w i t h a g g r e g a t e d e p o s i t s of $235,000,000 suspended o p e r a t i o n s d u r i n g t h e y e a r 1929. This was l a r g e r t h a n any y e a r except 1926, when h o t h the number and d e p o s i t s of suspended banks wore t h e l a r g e s t on r e c o r d . Although member "banks c o n s t i t u t e only about o n e - t h i r d of t h e t o t a l number of banks i n the U n i t e d S t a t e s , only about o n e - e i g h t h of the t o t a l number of banks which suspended d u r i n g t h e y e a r were member banks; and a l t h o u g h the d e p o s i t s of member banks a r e a p p r o x i m a t e l y t h r e e - f i f t h s of t h e a g g r e g a t e d e p o s i t s of a l l banks i n the c o u n t r y , t h e d e p o s i t s of t h e member banks t h a t suspended d u r i n g the y e a r 1929 were o n l y about o n e - f o u r t h ox the a g g r e g a t e d e p o s i t s of a l l suspended banks. During the n i n e - y e a r p e r i o d , 19."1-1929, a t o t a l of 5,642 banks were r e p o r t e d a s h a v i n g suspended o p e r a t i o n s e i t h e r t e m p o r a r i l y or permanently on account of f i n a n c i a l d i f f i c u l t i e s , and of t h i s number 657 have s i n c e X-6523 — 65 — v ^ been reopened, l e a v i n g 4 , 9 8 5 a s the n e t number of "banc f a i l u r e s . The d e p o s i t s of the tames which suspended o p e r a t i u r s during t h i s n i n e - y e a r p e r i o d a g g r e g a t e about $1,720,000,000 and the d e p o s i t s of the reopened banks a b o u t $240,000,000, l e a v i n g the n e t d e p o s i t s of f a i l e d banks a g g r e gating $1,480,000,000. A number of i n t e r e s t i n g t a b l e s a r e i n c l u d e d i n t h i s d r a f t of t h e r e p o r t and one of them shows t h a t over 62 p e r c e n t of a l l the banks which f a i l e d d u r i n g t h i s n i n e - y e a r p e r i o d had a c a p i t a l of $25,000 or l e s s and t h a t over 60 p e r c e n t of t h e t o t a l number were l o c a t e d i n towns w i t h a p o p u l a t i o n of 1,000 or l e s s ; 9 1 . 6 p e r cent of a l l t h e s e banks were l o c a t e d i n towns w i t h a p o p u l a t i o n of 10,000 or l e s s , and only 8 . 4 p e r cent were l o c a t e d i n towns w i t h a p o p u l a t i o n exceeding 10,000 i n h a b i t a n t s . This c l e a r l y l e n d s some s u p p o r t t o t h e o p i n i o n t h a t branches of s t r o n g banks a r e needed i n small r u r a l communities. 5. S t u d i e s of Bank F a i l u r e s by P r o f e s s o r Sprague and Doctor B u r g e s s . - I n A p r i l , 1925, t h e Board employed P r o f e s s o r O.M.W. Sprague, P r o f e s s o r of Banking and F i n a n c e a t Harvard U n i v e r s i t y , a s a r e s e a r c h a s s i s t a n t i n t h e B o a r d ' s D i v i s i o n of Research and S t a t i s t i c s f o r t h e p u r p o s e of s t u d y i n g t h e q u e s t i o n of needed banking l e g i s l a t i o n . During the course of P r o f e s s o r Sprague* s employment w i t h the Board he made a study of t h e c a u s e s of bank failures. He p u b l i s h e d an a r t i c l e on t h i s s u b j e c t i n the J o u r n a l of t h e American Bankers A s s o c i a t i o n f o r A p r i l , 1927, a t p p . 703 and 704; and t h e r e p o r t of the committee on Economic Changes of the P r e s i d e n t ' s Conference on unemployment, p u b l i s h e d i n Volume 2 of "Recent Economic Changes", p p . 393-396, c o n t a i n s a d i s c u s s i o n of bank f a i l u r e s , which was p r e p a r e d by P r o f e s s o r Sprague and Dr. Randolph Burgess, A s s i s t a n t F e d e r a l Reserve Agent of t h e F e d e r a l Reserve Bank of New York. Quotations — 66 — A—653o %v of c e r t a i n p o r t i o n s of t h e s e a r t i c l e s d i s c u s s i n g t h e causes of bank f a i l u r e s w i l l be of i n t e r e s t . The f o l l o w i n g i s quoted from p r o f e s s o r Sprague 1 b a r t i c l e on "The Cause of Bank F a i l u r e s " p u b l i s h e d i n the J o u r n a l of the American Bankers 1 A s s o c i a t i o n f o r A p r i l , 1927, p p . 703 and 704; " S c a t t e r e d banks i n o t h e r p a r t s of t h e c o u n t r y , and p a r t i c u l a r l y banks i n the l a r g e r c i t i e s , a l s o e n j o y the advantage of l o c a l d i v e r s i t y i n loans and have funds a v a i l a b l e f o r o t h e r employment. But thousands of banks i n the West and South a r e i n a s t r i k i n g l y d i f f e r e n t p o s i t i o n . They a r e e s t a b l i s h e d i n l o c a l i t i e s i n which there i s but s l i g h t d i v e r s i t y in occupation, l o c a l i t i e s a l s o i n which the l o c a l demand f o r accommodation commonly tends to absorb a l l of the r e s o u r c e s of the l o c a l banks and a t h i g h e r r a t e s than can be secured on o u t s i d e i n v e s t ments. "The more c o n s e r v a t i v e b^nks, as a m a t t e r of r i s e p o l i c y do not employ a l l r e s o u r c e s l o c a l l y , and t h e s e banks may p r o p e r l y r e s o r t to r e s e r v e banks or t o c i t y c o r r e s p o n d e n t s f o r accommodation t o take c a r e of s e a s o n a l or o t h e r temp o r a r y r e q u i r e m e n t s . At the o p p o s i t e extreme a r e the numerous banks t h a t make l o c a l loans to the f u l l e x t e n t of t h e i r own l o c a l r e s o u r c e s , and i n a d d i t i o n a c q u i r e o u t s i d e d e p o s i t s , b o t h p u b l i c and i n d i v i d u a l , by the o f f e r of a high i n t e r e s t r a t e , and s t i l l f u r t h e r e n l a r g e the supply of Ixank c r e d i t i n the l o c a l i t y by s e c u r i n g accommodation from r e s e r v e banks and c i t y c o r r e s p o n d e n t s . Banks which f o l l o w t h i s course may a c q u i r e p r e s t i g e i n t h e i r commutiities and earn lai*ge p r o f i t s f o r s h a r e h o l d e r s i n y e a r s of abounding p r o s p e r i t y ; but c l e a r l y they a r e i n no p o s i t i o n to w i t h s t a n d s u c c e s s f u l l y a long p e r i o d of adverse conditions. Failure i s probable unless quite extraordinary c a r e and d i s c r i m i n a t i o n have been e x e r c i s e d i n the d e t e r m i n a t i o n of the amount of c r e d i t extended to each i n d i v i d u a l b o r r o w e r . I t i s a r e a s o n a b l e p r e s u m p t i o n , however, t h a t t h e l a c k of c a u t i o n m a n i f e s t e d i n the g e n e r a l p o l i c y of a bank w i l l a l s o be e x h i b i t e d i n the Q u a l i t y of the p a r t i c u l a r l o a n s t h a t i t makes. "When the problem, of bank f a i l u r e s i s approached with l u l l r e c o g n i t i o n of the p o w e r f u l i n f l u e n c e u n f a v o r a b l e to s a f e t y i n banking e x e r t e d by the absence of i n d u s t r i a l d i v e r s i t y and by the i n t e n s e l o c a l demand f o r c r e d i t , i t becomes e v i d e n t t h a t p o l i c i e s g o v e r n i n g the e s t a b l i s h m e n t of banks have n o t been s u f f i c i e n t l y d i r e c t e d toward the maintenance and improvement of s t a n d a r d s i n the management of banks. * * * ^ 67 - X^65&3 rM , "While t h e r e i s no exact r e l a t i o n s h i p between the s i c e and number of banks i n a l o c a l i t y and t h e s t r e n g t h of t h e banking p o s i t i o n , i t i s c e r t a i n t h a t t h e s e a r e f a c t o r s which have a decided b e a r i n g upon competence i n management• A comm&nity with a g g r e g a t e banking r e s o u r c e s o f , say, $5,000,000 w i l l be b e t t e r s e r v e d i n e v e r y way, i n c l u d i n g s a f e t y , by two or t h r e e banks than by s i x or more. The e x c e s s i v e number of banks induces c u t t h r o a t c o m p e t i t i o n f o r a c c o u n t s , and tends to undermine cons e r v a t i v e s t a n d a r d s i n the g r a n t i n g of c r e d i t . A decided i n c r e a s e i n minimum c a p i t a l r e q u i r e m e n t s would do much t o r e s t r i c t the number of banks w i t h i n more d e s i r a b l e l i m i t s , but whatever may be accomplished i n t h i s d i r e c t i o n should be coupled w i t h the s p e c i f i c g r a n t of power t o the a p p r o p r i a t e a u t h o r i t y , as i n the s t a t e of New York, to d e c l i n e to approve new c h a r t e r s where i t i s e v i d e n t t h a t a community i s a l r e a d y well s e r v e d by e x i s t i n g banking i n s t i t u t i o n s , and t h a t a d d i t i o n a l c o m p e t i t i o n w i l l serve no u s e f u l purpose." * * * "No doubt bank examinations might be imporved, and i n some s t a t e s v e r y m a t e r i a l l y improved, b u t incomplete i n f o r m a t i o n a b o u t the c o n d i t i o n of the banks i s not the most serious d e f e c t in e x i s t i n g supervisory arrangements. The o p i n i o n may be v e n t u r e d t h a t , a s i d e from a few i n s t a n c e s of e x c e p t i o n a l l y s k i l l f u l dishonesty* and the s p e c i a l situ-* a t i o n c r e a t e d b y chains of banks, s u c c e s s i v e examinations p r e c e d i n g f a i l u r e have r e g u l a r l y d i s c l o s e d an i n c r e a s i n g l y u n s a t i s f a c t o r y c o n d i t i o n . But i n making e f f e c t i v e use of t h i s i n f o r m a t i o n , almost insurmountable o b s t a c l e s a r e enc o u n t e r e d . Governmental a u t h o r i t i e s may c r i t i c i z e unwise p o l i c i e s , b u t t h e y can only take a c t i o n when s t a t u t e s a r e v i o l a t e d , or upon c l e a r evidence of impairment of c a p i t a l or i n s o l v e n c y . Moreover* even iri t h i n t h e f i e l d of v i o l a t i o n s of s t a t u t e s , e f f e c t i v e a d m i n i s t r a t i o n i s hampered by the cdaimon f a i l u r e of l e g i s l a t i o n to p r o v i d e p e n a l t i e s o t h e r than the c e s s a t i o n of b u s i n e s s or a r e c e i v e r s h i p . " The f o l l o w i n g i s quoted from Volume 11 of a book on "Recent Economic Changes" c o n t a i n i n g the r e p o r t of the P r e s i d e n t ' s Conference oil Unemployment* pages 693-696: "Dishonesty and g r o s s mismanagement account f o r a small number of t h e s e f a i l u r e s „ The suspension of a? l a r g e r number was p r e c i p i t a t e d by adverse c o n d i t i o n s of a p u r e l y l o c a l c h a r a c t e r , such as a s u c c e s s i o n of crop f a i l u r e s or the s u d den c o l l a p s e of r e a l e s t a t e booms i n p a r t i c u l a r towns and c i t i e s . But the g r e a t m a j o r i t y of banks f a i l e d because t h e y were u n a b l e t o w i t h s t a n d the s t r e s s e x e r t e d by the p e r s i s t e n c e of u n p r o f i t a b l e p r i c e s f o r the p r o d u c t s of a g r i c u l t u r e and X-6525 — 68 — animal husbandry - s t r e s s t h a t was p a r t i c u l a r l y severe because i t was e x p e r i e n c e d a f t e r y e a r s of a "bounding p r o s p e r i t y and extreme a p p r e c i a t i o n i n the v a l u e of jarm p r o p e r t y , and a lar;-::e i n c r e a s e i n the number of ferms mortgaged and t h e amount of mortgage i n d e b t e d n e s s . "These a d v e r s e c o n d i t i o n s a l o n e , i t can h a r d l y be too s t r o n g l y emphasized, do not f u r n i s h a complete e x p l a n a t i o n of the numerous bank f a i l u r e s of the l a s t seven y e a r s . By no means a l l , or even a m a j o r i t y , of the banks i n the l o c a l i t i e s most s e r i o u s l y a f f e c t e d have been o b l i g e d t o suspend o p e r a t i o n s . F i n a n c i a l l y weak and u n s k i 11 f u l l y managed banks have been weeded out; s t r o n g , well-managed oanks have no doubt e x p e r i e n c e d heavy l o s s e s , b u t they survive,u # * * "Tnere a r e hundreds of s m a l l banks throughout the c o u n t r y v ' n i c h a r e a b l y managed and a b u n d a n t l y s t r o n g , a n d which o v e r come the h a n d i c a p of an absence of i n d u s t r i a l d i v e r s i t y i n tne communities which they s e r v e b y the e x e r c i s e of e x c e p t i o n a l judgment and c a u t i o n . On the o t h e r hand, ^ h i l e t h e r e " i s no e x a c t r e l a t i o n s h i p between t h e number and s i z e of the e n t i r e group of banks i n a l o c a l i t y and the s t r e n g t h of i t s banking p o s i t i o n , i t i s c e r t a i n t h a t no community can hope t o e n j o y the b e n e f i t s of s a f e t y i n banking i f the b u s i n e s s i s o rg an i zed i n u n i t s so numerous as t o exceed tne a v a i l a b l e s u p p l y of competent o f f i c e r s and r e s p o n s i b l e d i r e c t o r s , and w i t h i n s u f f i c i e n t e a r n ing. power t o be a b l e to absorb i n e v i t a b l e l o s s e s , " ( * * * Ho community can p o s s i b l y p r o v i d e a d e q u a t e r e s o u r c e s , coir-* p e t e n t o f f i c e r s , and e x p e r i e n c e d d i r e c t o r s f o r one bank to e v e r y 750 of i t s i n h a b i t a n t s as i n North Dakota, or t o 1,400 as i n Iowa. And the s i t u a t i o n i n t h e s e s t a t e s - a s n o t e x c e p t i o n a l ; on the c o n t r a r y , an e x c e s s i v e number of banks have been e s t a b l i s h e d tnroughout t h o s e s e c t i o n s of t h e country t h a t a r e mainly devoted t o a g r i c u l t u r e ^ Banking t r o u b l e s were i n e v i t a b l e w i t h t h e advent of a d v e r s e c o n d i t i o n s , and f o r the s e v e r i t y of t h e s e c o n d i t i o n s the unwise u s e of c r e d i t a d m i n i s t e r e d by an i n o r d i n a t e m u l t i p l i c i t y of b nlcs was i n no small degree r e s p o n s i b l e . "
@FedFRASER