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Banx Suspensions
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Batik Suspensions Study of 1y36
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THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Oct. 22, 1932
Report of Economic Policy Commission--by R. S. Hecht, Pres. Hibernia Bk. &
Tr. Co., New Orleans--"Bankers Favor Unification of Banking
Through Federal Reserve System"
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Federal Reserve Bank of St. Louis
fr
1. Banking Reform.
one of the drawbacks and weakIt has long been generally admitted that
was that we had more banks than
nesses of our American banking system
the Nation. Unfortunate as were
were required by the economic needs of
it can safely be said that there
the circumstances which brought it about
correction of this particular weakness in
has in recent years been a marked
years the number of banks in the
American banking, for during the past 11
to 20,000 through suspensions,
United States has been reduced from 30,000
In this way many uneconomic
consolidations and voluntary liquidations.
of the remaining institutions was
units were eliminated and the position
thereby strengthened.
with which the process of eliminaUnfortunately the violenceand rapidty
depression carried it to disastrous
tion has operated during the period of the
unsettlement and public alarm.
lengths that increased general business
good banks and the ruin of many
This in turn caused the suspension of many
have weathered the storm. Doubtexcellent bankers that would otherwise
deprived of the banking facilities
less, also, many communities have been
present a real need. In the main,
for which their business activities
reduced the number of banks in
however, the processes that have so largely
extent weeded out institutions from the
the United States have to a great
g heads:
banking field that fall under the followin
been granted charters because of in
1. Banks that should never have
tions to engage in banking on the
qualifica
adequate capital, lack of proper
ent available business to support them
part of their organizers, or insuffici
started.
were
they
n the places where
permanent local changes later reduce,
2. Banks in places where prob ibly
to a point below the amount necessary t,
the volume of available business
.
facilities
support then existing banking
or incompetent managemen
3. Finally, institutions in which improper
had come into control.
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA COnvention--Oct. 22 1932
Annual Address of the Pres.--H. J. Haas, VP First hat. Bk., Philadelphia
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Federal Reserve Bank of St. Louis
that has been
bank failure matter
ive safety
public aspect of this
question of the relat
There is another
the
is
that
happened t
of focus, and
compared with what
thrown entirely out
its
depos
yo
as
s
sted to bank
loss ratio for mone
of money entru
. What was the
money invested i
during the year 1931
with
ared
here
comp
elsew
as
it
the outset of 1931
deposit in banks at commodities.
aggregate
it in all banks the
stocks or bonds or
there was on depos
estimated, some
1931
dy
of
t
alrea
outse
At the
we have
857,2513,000,000. As
. That would
be lost to depositors
sum of about
was
may ultimately
money in our banks
the
is,
8500.000.000 of this
That
.
of 1% of the total disastrous year in the history of the
be less than 9-10
most
the
throughout
99-1-10% safe
Bureau of Labor
commodities? The
nation.
at the
dollars invested in
odities stood at 77
comm
all
How about
for
price index
was a drop of 14%
This
Statistics wholesale
close
the
and at 66 at
sentative group stood
opening of 1931
index for a repre
s? A standard
bond
loss of 18% •
a
t
abou
mber
Dece
How
81.6 in
ary 1931 and at
at 996 in Janu
1
ard index comprising over 400 good
Finally, how about stocks? A stand
on of 48% during 1931 alone, and at
American stocks suffered a depreciati
below the 1929 average price level on
the end of that year it was over 69%
d their positions.
which a great many investors in this field establishe
is not a fair comparison as
Some one might very properly state that this
tly they have shown a
s
many are still holding their investment and recen
that it is impossible at this time to
material improvement marketwise so
is true and the calculation must
determine their ultimate losses. This
its in closed banks. We
then be comparable to the recoveries made on depos
nal hanks reported chargedo know, however, that during 1931 natio
nt holdings which is 65-100% in
offs equal to 1.55% of their total investme
s. Again one might say that
d
excess of the ultimate loss on close bank
er losses to depositors
banks continued to fail during 1932 involving furth
d on the New York Stock Exchange
but here again we find that bonds liste
r 1930 to 475 billion dollars
dropped from 49ii billion dollars in Septembe
n dollars in only four months and
in January 1931, a loss of two billio
g the current year. The same
continued their losses for sometime durin
ed a drop of 40 billion dollars from
h
thing held true in stocks whic show
nued their depreciation during
September 1929 to January 1931 and conti
1932 until only recently.
1
1
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Sept. 23, 1933
The Need for Revision of the Glass-Steagall Act and a Sane Legislative
Program for Banking--by Geo. V. McLaughlin, Pres., Brooklyn
Tr. Co., Brooklyn, NY
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Federal Reserve Bank of St. Louis
se in the number of
In addition to the excessive increa
a progressive exwas
there
1920,
banks between 1900 and
liquidity between 1920 and
pansion of bank credit and loss of
and investments rose
1930. The volume of bank loans
eligible for rediscount
paper
of
tion
steadily while the propor
ed steadily, due to a diverat Federal Reserve Banks declin
estate and securities and,
sion of credit into loans on real
urgent need for liquidity-';
the
When
.
, into purchase of bonds
holdings of eligible col- 1
developed in 1930, 1931 and 1932,
1
not entirely the fault
was
lateral were insufficient. This
y of eligible paper
suppl
ble
availa
the
se
f of the banks, becau
in the financing methods
has been decreasing, due to changes
situation has been met
this
of American business. While
ments to the Federal
amend
ency
emerg
gh
temporarily throu
come fo.• a study to
Reserve Act, I think that the time has
bank paper might
sound
of
types
determine what additional
the liquidity of
ring
impai
ut
witho
lity
eligibi
admitted to
3e Federal Reserve Banks themselves.
the
)
SOURCE:
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention
Nov. 17, 1934
Lest We Forget--by Jesse H. Jones, Chinn. RFC
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Federal Reserve Bank of St. Louis
Decentrultzution of Credit
I am also inclined to the opinion that a further decentralization of credit
/control is worthy of consideration. There is still a great deal of concentrated power, and Congress might look further into the question of interlocking directors and control by influence.
I should also like to see our banking laws amended, limiting the amount
of deposits that any bank may accept, to a fixed proportion of its sound
capital. A ratio of eight to one should, in my opinion, be the limit.
I agree that this limit could be safely increased in exceptional cases,
but laws must be passed that fit the majority and not the minority.
Such laws properly enforced, would be the best deposit insurance that we
could possibly have, and the least expensive.
3
The RFC has tried to be helpful to all banks alike, and all have had
service and assistance on exactly the sa,me terms and conditions, and upon
the same considerations, East, West, North and South, big and little,
)
t
liquid and frozen.
r
4
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Nov. 17, 1944
CONSTRUCTIVE CUSTOMER RELATIONS CLINIC
Doing the JUo Ourselves
By JOHN H. PUELICHER, President Marshall & Ilsley Bank, Milwaukee, Wis.
Preceding the remarks of Mr. Puelicher, the following
comments were made by Dr. Harold Stonier, presiding as
Chairman:
It has been a source of very deep regret to us that due to the illness in
I is family, we have not had the opportunity of having with us during the
last two sessions of the Clinic the auw who has not only been responsible
for the administration of our work in customer relations but for a greater
period than that—in fact, extending over some fifteen or sixteen years—
has been Chairman of the Public Education Commission of the American
Bankers Association. . . .
But I am delighted to know that he was able to leave his home yesterday
and is with us this afternoon. I know that you would feel a very deep
personal sense of loss if it were not possible to hear from him, because I
don't know of any man in the country who is an outstanding banker and
at the same time is considered everywhere in academic circles an outstanding
educator, any man who is better equipped to set the setting of this type of
work and give it the inspiring leadership he had during the last fifteen
years than the gentleman I am about to introduce.
Mr. Puelicher: Mr. Chairman, I am always at a loss how to begin after
an introduction of this kind. So much is expected of one. The public
educational work is a work that developed from very small beginnings.
It was being realized that the public confidence and the public understanding of banking was needed to make banking safe and to makfi banking successful. Had the public underst000 their part in the game of banking.
much that happened ie the last three or four years would not have haprened.
II
The public education work began with lectures in schools and before CiVie
organizations with speeches on the radio, and in many ways achieved its
work not to its entirety but achieved the work for the time being. But
the work was not done as it should have been done, not because of the
fault of the banker, but because of the lack of understanding of the part
was, as I said before, evidenced in the dark days of the past few years.
We know that banking must have the confidence of the public to have
banking safe. During those dark days it was repeatedly found that all
eo work
piecf
e
thought American Institute of Banking hat' done a wondrful
in the education of the bank employee, officer and clerk alike. In its
courses there had been no place for a course of instruction dealing with
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Federal Reserve Bank of St. Louis
relations with the public, and so much cf our trouble during the days of the
runs on banks emanated from behind the counter.
I told the story repeatedly of what happed in our own institution, of hew
a clerk because he hadn't the courage to say,"That is not in my department, and I don't know," made a statement which had it not immediately
been corrected—because the customer rushed to some officer—might
have led to a catastrophe.
In our dealing with the work of public relations, I mean in our own institutiolas. we start out by endeavoring w impress upon the young people
who come in contact with the public that honesty is one of the niain issues
that confronts them, never to pretend to know a thing that they do not
know. If a man goes to a teller and inquires about a line of credit in
regard to which the teller knows nothing, not to pretend knowledge, but to
send the customer to the man who should know.
It is because of an unwillingness to admit a lack of knowledge that a
great deal of trouble came to banks during the runs of 1930 and 1931 and
1932.
I look upon this work as so important that for my own institution, although there may be others more capable, I would not even trust it to
others. I insist on being permitted to lead the conferences myself, because
I regard it as one of the most important things that I can do in the institution.
I want now to say one word further in regard to your own Association.
I am proud to have been a member of it. I know what the Secretaries'
organization can do to further anything worthwhile in the banking field.
I know how futile it would have been to attempt some things along educational lines except for the Secretaries' organization. and I bespeak for this
work your interest and your thorough understanding, so that you may
further it in every bank within the jurisdiction of your State organization.
I thank you for permitting xne to come to you.
Chairman Stonier: I think you have ample demonstration of what It
1/100,118 to have the effective leadership of a man like Mr. Puelicher, who
has actually not only done this partciular job in constructive customer
relations io his own bank but has also during the course of the years carried out what he has been advocathag for others in the way of going to
schocls and clubs and colleges and wherever he is called upon to speak
on behalf of good banking.
1
CLIPPINGS
EMPIRE FOLDER
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Federal Reserve Bank of St. Louis
July 1935
SOURCE: BULLETIN OF THE AIB---Vol. 17
1936)
e
(Seattle Convention—Jun
No. 3
Pages 347-48
COMPETITION IN THE SAVINGS FIELD
Dan V. Stephens, Pres.,
Stephens National Bank, Fremont, Nebraska
In the classification of financial institutions, I wish to
specfically call attention to the general mixed-up condition of these
institutions. Few of them specialize in any particular field. It is
true that small banks in small localities must combine a great many
kinds of financial transactions in order to make their institutions
profitable. A small town banker must write insurance, make farm loans,
and do a general notarial business for the community, besides running a
commercial bank, a savings bank, and making investments in a small way
for the people in the community. His duties, as a rule, in the investment field will be confined to loaning the money of one of his depositors
to another depositor on his farm or on his residence, as the case may be.
Both the borrower and thelender know exactly the entire situation.
It is so different from the transaction entered into by that same
banker prior to the depression, when he bought a bond on Timbuktu, half
way around the world, or some other out of the way place, which was sold
to him by a security house. Neither the security house nor the banker
knew the nature of the bond or its value or the probability of its payment
when it would fall due.
Billions in transactions similar to that took place throughout the
United States, where commercial banks permitted their surplus funds to be
invested in an alleged secondary reserve, which proved to be a Waterloo in
character and caused the widest spread disaster in the way of failures
throughout the country. In fact, approximately 7,000 banking institutions
were forced to liquidation, and probably 90% of them were brought to that
state through their investment in an alleged secondary reserve consisting
of bonds of every kind and character on every sort of an institution that
has ever been financed in this country.
I venture the statement that had the banks of this country stuck to
their knitting, so to speak, and invested the money that belonged to the
customers of their banks in mortgages on real estate and in other securities
known to them in the neighborhood of their banks and known to their investors,
they would have come through this depression with a comparatively clean slate.
My observation has been that not more than 15% of the losses sustained
by these banks that were liquidated arose out of local investments. The
greatest loss, of course, and the one that broke their backs and put them
out of business, arose out of the invastments in stocks and bonds that were
sold by the high pressure salesmen of security houses. This statement is not
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Federal Reserve Bank of St. Louis
Dan V. Stephens
Pages 347-48 (contd.)
designed to be an attack upon the security houses but merely a statement
of the facts as they existed.
STICK TO BUSINESS
This leads me to the conclusion that most of our troubles could have
been avoided had banks stuck to their business of attending to commercial
loans and commercial transactions instead of attempting to become investment brokers dealing in stocks and bonds. A commercial bank with $1,000,000 or more in deposits has all its official staff can do competently
if it attends properly to the customers it has and cultivates an understanding of their business and the manner in which they are conducting
their business, as well as to theinvestment of such surplus money as it
may have in loans to its various customers.
It requires a knowledge of the business of every customer of the bank
who is a borrower in order that that business may be properly served and
safely served.
During the five years of the depression up to January 1 this year,
our
own bank sustained a total loss of which only 15% arose out of loans made
to
the customers of our bank and the other 85$ was made through losses sustained
by investments in bonds that were alleged by the best banker
brains of the
country to be a necessary secondary reserve for the safety of our depositor
s.
The truth of the matter is we found it easier to secure credit
on the loans
that were frozen in the hands of the bank than upon much of this
secondary
reserve that we carried with such peace of mind during
the great period of
expansion.
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Federal Reserve Bank of St. Louis
Address of Hon. 3. F. T. O'Connor, Coirtroller of the Currency,
45th Annual Convention of California
Bankers Asso., Sacramento, May, 1936
*********
As you may have observed, the motif running through the regulations
is one of anti—speculation. The reason therefor is based on causes which
have been admirably expressed by the Commission on &inking Law and Practice
of the Association of Reserve City Bankers in its "Summary of Arguments on
Title II of the Banking Bill of 1955" issued in
1935.
Permit me to quote from that eemphlet:
"The disastrous 7eriod of bank liquidations is getting further
and further behind us and it is rTobable that even hankers are be—
ceming somewhat foreetful of the true causes of the trouble,
although at one t'le there would have been little disagreement as
to the factors involved. Most of the public, unfortunately, never
knew Pally the causes of our banking troubles because the facts
eere not available to them, and they elight be easily convinced
that the whole trouble can be charged to so simrlc a thing as
strict eligibility requirements.
'It is contended that a study of the assets of failed banks
would completely dispel the view that the trcubles of these banks
were due ceiefly to a lack of borrowing Tower. No one can peruse
the facts without arriving at the absolute conviction that the
troubles of the banks were due in considerable eert to assets which
should never have been n the banks at any time, under any con4itions. In the years prior to the depressions of both 1Ca and
1929 the banks became involved in the specelative fever of the age,
and many of them filled their portfolios with assets ehich were
bound to show losses with the turn of the economic tide. No
artificial methods of liquidity and no attempt to have the Federal
Reserve System hold u: the inflated balloon could - ossibly have
avoided the ultimate consequences.
"It may be of interest at this point to present a few simple
facts which were revealed by a detailed analysis of the assets of
failed banks. Of the banks failing in 1931, 105 were picked at
random from all sections of the country, and the 50 bonds contrib—
uting the greatest depreciation to the portfolios of the 105 banks
were listed, and tabulated. The two bonds which contributed the
greatest depreciation to the eortfolios of this group eere con—
vertible bonds which had been bought at prices substantially ebove
per. In other words, they were speculations. There were several
other convertible bonds in the list which aleo caused heavy losses.
Of the first 50 bonds in po'nt of depreciation, only five had
rat'ngs of the first three grades in 1929; four of these five were
convertible issues in which the ban'es losses were due to having
bought them at too Aegh a price. The remainder of the issues were
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Federal Reserve Bank of St. Louis
1
.111.111•11h.-_
-5' of the fourth grade or lo-er. These banks were
sacrificing
security for high yield. Only four of the 50
issues were brauE.
out before 1953 and 42 per cent of them were broug
ht out in 1928
or later. In other words, the bonds causing the
greatest amount
of depreciation were unseasoned issues, 1.rge1y the
product of
boom conditions in the bond market..
***** ***
The responsibility for proper investment of bank
funds, now, as in
the past, rests with the directors of the institutio
n, an there has been
and is no intention on the part of this office to
delegate this responsibility to the rating services, or in any may to intim
ate that this
responsibility may be considered as having been fully
performed by the
mere ascertFining that a particular security falls
within a particular
Inting classification.
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Federal Reserve Bank of St. Louis
** ** ****
•
EXCERPT TAKEN FROM "REPORT OF STUDY COMMISSION FOR INDIANA FINANCIAL
CREATED BY SEVENTY-SEVENTH GENERAL ASSEMBLY.
INSTITUTIONS".
Page 18.
The Bank Charter Board
"In the long series of legislative enactments modifying the old free
banking system, one of the most important was the action of the 1915 legislature
creating a charter board composed of the Governor, Secretary of State, and the
Bank Commissioner. By the terms of this act, as amended in 1917, the board
was given the right to examine the financial standing and character of organizers
seeking a charter from the state for the purpose of conducting a bank.
The
board was also given the right to ascertain the public necessity for the bank
(banks of discount and deposit, savings banks, loan, trust and safe deposit
companies).
For the first time since chartering had been provided for by a
general statute rather than by special legislative enactment this board was
given the right to refuse promoters a charter. Since 1852 the Secretary of
State had been required to grant a charter to the organizers of banks when
they had fulfilled certain simple formalities.
"Unfortunately the vast majority of Indiana's banks had been chartered
before 1915.
Moreover, the force of tradition and the political character
of the board made it impossible for it to exercise immediately a very effective
restriction of the number of new charters.*
*The number of new bank charters granted each year from 1890 to 1932
is given below.
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Federal Reserve Bank of St. Louis
Year
New Charters Granted
State
National
Banks
Banks
Year
_
New Charters Granted
State
National
Banks
Banks
1912
1913
1914
1915
41
45
23
30
3
3
4
3
1916
1917
24
33
-5
1918
1919
28
26
1
1890
1891
1892
1893
20
17
13
1894
1895
1896
1897
7
7
5
1
2
1898
1899
1900
4
11
14
1
3
13
1920
31
2
1921
1922
39
1
1901
11
14
1923
30
32
2
2
1902
1903
1904
1905
18
38
38
14
18
16
39
25
1924
1925
1926
1927
19
8
14
18
2
1
2
2
1906
1907
1908
1909
34
44
27
25
12
23
14
14
1928
1929
1930
1931
7
11
13
15
1
3
—
4
1910
37
33
9
9
1911
3
1
12
7
3
4
"Although the number of refusals of applications for charters has probably
not been as great as the sponsors of the 1915 act anticipated, there is no way
of estimating the undoubtedly large number of bank promotion projects that, fortunately for the public of Indiana, were abandoned by their sponsors because of
the necessity for passing the scrutiny of the charter board.
"Similar steps for the restriction of the number of new Charters for savings
and loan associations was taken by the legislature in 1927. A building and loan
charter board was created, composed of the Governor, Secretary of State, and the
Bank Commissioner. The board was given the right to require of the organizers
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Federal Reserve Bank of St. Louis
3 _
of a proposed institution any information that they desired and the board was
charged with the necessity of making a careful examination as to the financial
standing and character of the organizers and the proposed plan of doing business.
Thus for the first time the Secretary of State was relieved of the necessity
of granting to the organizers of building and loan associations a charter
when they had fulfilled certain simple formalities connected with making
an application."
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Federal Reserve Bank of St. Louis
SOURCE:
NORTHWESTERN BANKER----JULY 1936
WHICH ROAD ARE YOU GOING TO TRAVEL?---by Claude L. Stout, Exec. Vice Prs.
Poudre Valley Nat. Bank, Fort Collins, Colo.
gages 26-27
The cost of unprofitable banking has been terrific. This cost
is represented not only in the funds lost by shareholders and depocitors but to a greater degree in the effect bank failures have had
on general business ti.roughout the United States. Unprofitable banking
means unsrfe. Every business operating at a loss is aasoiaa. Profitz2g,
ban7,Ing is therefore by far the cheapest for you. It is the only safe
insurance egainet future banking troubles.
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Federal Reserve Bank of St. Louis
**** ****
•
*
S. Sloan Colt, Pres., Bankers Trust Co.
Address - Kansas and Missouri Bankers Associations
May 6, 1936.
** * ** **
* **
The record of the banks in our State during the period of the depression
indicated that many of them were poorly equipped to withstand the trials of
adverse economic conditions, although perhaps our difficulties have not been
as great as in some other sections of the country. Capital losses in our
commercial banks in New York State outside New York City since 1929 have
totalled between $250 and $300 million. To put it another way, all the
earnings added to surplus since 1923, all the new capital raised from 1923
through 1930, and all the assessments on stockholders and the contributions
by stockholders, directors and others since 1929, have been wiped out by the
losses and write-offs during the depression. One-sixth of the banks which
were in existence in our State at the close of 1929 have failed or have been
reorganized or taken over with waivers of deposits.
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Federal Reserve Bank of St. Louis
*** ********
•
SOURCE:
THE ECONOMIST—Dominion of Canada Special Review-London
Jan. 18
1936
Page 49
VII.--BANKING AND INSURANCE
Trends in Canadian Banking
by Prof. J. F. Parkinson
Following the model of the First Bank of the United States, the
original charter of the Bank of •diontreal (1817) contained a provision
forbidding the Bank to hold any real estate beyond that was necessary
for the conduct of its business. The first Bank Act, that of 1871, applied
this provision to all banks by denying them the right to make advances
against the hypothecation of land or immoveable property. It is of course
a mere commonplace that legislation cannot guarantee banking liquidity.
If banks cannot lend on land there is nothing, for example, to prevent them
investing in municipal bonds, which are based in turn on inflated assessments.
In actual fact, however, there is no reason to believe that the banks have
suffered any serious losses during the depression because of their security
holdings.
Despite, therefore, the absence of any other important legislative
restrictions over the disposition of assets and reserves, the Canadian
banks have shown remarkable strength throughout the depression. They have
been able to withstand the deflation of collateral values without a single
failure, although the Weyburn Security Bank, a purely western institution,
was absorbed by the Imperial Bank in 1951.
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Federal Reserve Bank of St. Louis
•
EXCERPT FROM "THE BANKING SITUATION" BY WILLIS AND CHAPMAN, PAGE 15.
"A third factor to which attention has already been incidentally given,
but which probably deserves more weight than has usually been allotted to it,
was furnished by the extensive hoarding of currency, and the substitution of
local media of exchange known as "scrip", throughout the country.
While there
are no authentic figures either as to the amount of scrip thus issued, or as
to the total of currency hoarded, it would seem likely that the latter -- which
had been estimated by President Hoover's administration about a year previously
at $1,500,000,000 -- had fully doubled in amount. The issue of scrip had probably been made in sums sufficient in the aggregate to take the place of the
currency withdrawn from circulation. It would not be surprising if a total of
one billion in scrip had been actually issued -- if we include scrip in the more
appropriate sense of the term (clearing-house certificates and other similar
According to report, the New York Clearing House within a few
expedients).
days after the suspension of the banks had printed, and had on hand in warehouse,
$100,000,000 of clearing-house certificates.
"The effect of these issues in different parts of the country was felt in
several ways.
On the one hand they tended to make actual currency less necessary
and rendered it more mobile, and hence, more likely to be presented for conversion
into cash, especially by those who desired to hoard gold. The scrip also tended
to inspire distrust on the part of those who were compelled to use it, and hence
helped to render the general banking instrumentalities of the country less
responsive.
Psychologically the reliance upon these expedients operated to reduce
confidence in the general solvency of the community. These considerations throw
light upon the actual closing of the banks of the country which was finally
decreed on the fifth of March, after the change of administration at Washington
had become an accomplished fact."
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Federal Reserve Bank of St. Louis
Address by Orval W. Adams, IX. V. Pres.,
Utah State National Bank, Salt Lake City
49th Annual Convention, Michigan B nkers Asso., June 1935
(Michigan Investor, July 13, 1955)
*********
Next, there is the matter of the proposed "liberalization" of the
law governing the making of real-estate loans. Py the proposed Banking
Bill of 1935, it is contemplated that national banks shall be permitted
to make long term real estate loans up to sixty per cent of the amount
of their time deposits an one hundred per cent of their capital funds,
whichever ia larger, and this in face of the fact that, as we all know,
excessive real estate loans have been one of the primary causes of baak
falures in the past.
We have not forgotten the criticism leveled at banks by government
for the real estate loans which they had made in past years, nor the
charge that the banking difficulties of the depression had been greatly
added to because of frozen real estate loans. But it seems the government has forgotten this, and is now urging banks to repeat the very
mistake for which they have so recently been criticized.
It is no more true today than it ever has been in the past, that
either liquidity or conservatism in investments is unnecessary to sound
banking. Loans of more than a conservative per cent of the value of
reel estate cannot be justified by any politically inspired demand.
Neither can such a demand justify the investment of any substantial
amount of demand deposits in long term real estate inveAments.
The very essence of the policy of separating investment banking
from commercial banking, lies in the recognition of the danger and
undesirability of financing long term needs by short term methods.
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Federal Reserve Bank of St. Louis
** *******
/I
Address by L. A. Andrew.
State Bank Commissioner of Iowa,
37th Annual Convention, Indiana Bankers Asso., June 1955
(The Hoosier Banker, July 1935)
'Let us consider for a few minutes the statement repeatedly made
that the unit country bank has been a failure. It is conceded that a
large number of small unit banks throughout the country have been
obliged to close, because as we have said, their customers could not
pay their obligations on account of a world-wide depression. Let us
look at the official figures for 1951. Total banks closed in that
year were 2,31C. Banks under one million dollars in resources total
1,890, and banks of over one million dollars in resources number 426.
These banks had total deposits of $1,814,000,000.00. However, banks
under a million dollars in resources have had only 1396,237,000.00 of
deposits, while banks over one million dollars had $1,417,798,000.00.
In 1932 the record was practically the same. Banks with deposits over
a million dollars each accounted for 77 per cent. of the total deposit liability. In 1930 the record was even worse, as nearly half
the deposits in closed banks for that year were found in two organisations, one a branch bank in New York and the other a group in Kentucky.
In the face of these official records we have been continually told
that banks with less than t50,000.00 capital and in towns of 10,000
and less were really the cause of the depression and had caused all
the bank trouble. This has been repeated so many tiAes that a great
many people believe it. The official figures show this propaganda to
be absolutely untrue.
'It is also said that we must have branch banking in order to
provide safety. The official records for the p at two years show
seventeen banks with 567 branches have closed with $1,612,188,000.00
in deposits. If that is large branch banking safety, the record is
certainly decidedly worse than unit banking. The official records
for Federal Reserve member and non-member banks is eoually interesting.
In 1952, for 1,125 non-member banks and 551 member banks, nearly the
same proportion is shown, the deposits of the member banks were over
one-half of the deposits of non-member banks, the figures being
$269,000,000.00 for member banks and $446,000,000.00 for non-member
.banks.'
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Federal Reserve Bank of St. Louis
**** ****
SOURCE:
ECONOMIC CONDITIONS, GOVERNMENTAL FINANCE, U.S. SECURITIFS
(The Nat. City Bank of N.Y.)
Faze 30 (Feb. 1935)
THE USE AND ABUSE OF CREDIT
There is a lt.gitimate use for credit in giving flexibility to the
economic system, enabling a more complete use to be made of the available supply of labor and industrial equipment. On the other hand, when
the supply of money and credit already is sufficient to permit the full
employment of a country's productive capacity, additional supplies, even
in the form of gold, have only the effect of diluting the purchasing
power, thus raising prices and stimulating speculation and debt-making.
As
confidence in rising prices is engendered, ambitious persons deveJop
the policy of borrowing freely, spreading their own capital over as much
property as possible, in order to gain the benefit of a further rise, and
this goes on until the structure of credit becomes topheavy and comes down
with a crash. Economists and students of banking long have pointed out
that the only security against these recurring periods of disorder and
depression is by restraints upon banking policy which will prevent the
inflation of credit and prices, with the accompanying growth of indebtedness.
Given the undue use of credit, the speculative rise of prices, the pyramiding
of indebtedness, and the outcome inevitably is collapse, deflation and
depression. The worse crises, however, have not been chargeable to credit
expansion for ordinary business purposes, but to such ebnormal influences
as war or other developments for which tile bankinc; system was not responsible,
-2.nd wiiich created conditions that were beyond its control.
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Federal Reserve Bank of St. Louis
The Commercial & Financial Chronicle--Proceedings Convention of ABA
New Orleans—Nov. 1935
1/7
THE BANKER AND THE FEDERAL DEPOSIT INSURANCE CORPORATION—SOME OF THEIR
MUTUAL INTERESTS--Leo T. Crowley, Chmn, FDIC
\Paze 22
There seems to be hardly any occasion--at least far us--to ask
why the United States has not had a sounder and more effective banking
system in the past. I think we all know the answer. There are, of
course, many reasons. I think it will be sufficient for present
purposes if I were to merely point out some of the outstanding causes.
They are:
1.
2.
5.
4.
5.
6.
7.
8.
9.
A surplus of banks, particularly banks which had no hope of
surviving.
Insufficient capital.
Inefficient management.
Unsound practices.
Over-expansion of credit.
Disastrous competition.
Lack of discrimination on the part of the public.
Inadequate supervision.
Lack of understanding of the social, economic, and legislative
trends affecting the business of banking.
This is, of course, by no means a complete list of the factors which
brought about the failure of so many thousands of banks and the loss of
billions of dollars to depositors. Nevertheless, they do account in
large measure for the collapse and prostration of the American system
of banking a few years ago. The reduction in the number of licensed banks
from 30,000 in 1920 to less than 15,000 in 1933 was the culmination of
most of these evils which had been tolerated for a fatally long time.
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Federal Reserve Bank of St. Louis
•
SOURCE:
THE COMMERCIAL & FINANCIAL CHRONICLE--PROCEEDINGS OF CONVENTION
OF ABA--New Orleans, Nov. 1955
NATIONAL BANKING SITUATION—by J.F.T.O'Connor, C/C,
Page 15
Much has been accomplished in the light of past experiences,
and, with intelligent leadership in the banking world and among our
public, the causes which brought about the total collapse of the
banking structure should never recur. It is a sad commentary on
American leadership that 12,677 banks with 47,510,640,000 in
deposits have closed during the past 12 years. Some of these
failures have been due to poor management and bad investments, but
in addition, this nation has been overbanked. A mad scramble to
establish a bank opposite every gasoline station across this
continent is not a situation which can be contemplated with any degree
of satisfaction. For the first time in the history of banking in
this country, Congress has provided a means to correct this condition
by giving to the FDIC the power to refuse to insure a State bank until
certain conditions have been complied with, and particularly until a
necessity for the State institution has been shown.
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Federal Reserve Bank of St. Louis
411
•
SOURCE:
THE DEPRESSION EXPERIENCE OF SVGS. AND LOAN ASSOCIATIONS IN THE U.S.
by Morton Bodfish-Exec. VP,
U.S.Bldg. & Loan League
Sept. 1935
Page 12
In studying the relationship of bank failures to savings and loan
difficulties, it is of considerable importance that we glance a moment at
one of the chief contributory causes of the banking troubles. This is
especially important because the encroachment of commercial banks upon a
field which should normally be served by savings and loan associations
was close to the heart of the problem.
One of the underlying causes of the whole depression situation had
been the gradual but extensive entry of commercial banking institutions
in the United States into the mortgage field. The mortgages held by banks
were usually short-term, straight obligations ranging from one to three
and sometimes five years. Faced with depression conditions, the banks
almost without exception demanded payment of these mortgages as they came due
and forced tens of thousands of honest borrowers into distress at a time when
savings and loan associations and other trustee institutions did not have funds
to take over the mortgages on which the banks had unwisely and selfishly loaned
demand deposits. (7) Real estate values began to recede almost immediately
following the stock market crash and the absence of normal mortgage credits
hastened and aggravated the decline. As the banking panic developed, unemployment became more and more general and vacancies in properties increased
,
making distressed sales inevitable and further demoralizing or rendering inactive the real estate market.
(7) The Federal Home Loan Bank Board, in its summary and
breakdown of the
home mortgage debt of the country in 1932, showed an estimated 41,044,000,000
in short-term, renewable home mortgages, held by the commercial banks. Compared
wita the Evans Clark estimate on total urban real estate mortgages held by the
banks, reported on page 8, these data from the /ederal Board indicate that
at
least a fourth of the banks' mortgage loans were in the class which should
have
been handled by savings and loan associations.
The remaining 75 per cent of
the bank mortgage loans may be assumed to consist of advances on business
properties and larger unit residential properties outside the scope of
the
associations.
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Federal Reserve Bank of St. Louis
•
Proceedings of the MISSOURI BANKERS ASSOCIATION
ANNUAL ADDii1,66 01, ME .eitEbIbtNT
Willis W. Alexander
*
*
*
*
k
*
*
*
*
*
*
*
*
(Page 25)
Further in defense of our banking system, which has survived more
trying conditions than the banking structure of any other nation, statistics
show that more than 90 per cent of the bank deposits were unaffected by
failures or suspensions during the depression, so that most of the depositors suffered no loss whatever. Does this not confirm the belief that
on the wnole the banker has so managed nis business tnat he has afforded
an exceptionally high degree of protection to his depositors, in comparison with losses suffered generally during the depression? Who believes that government-controlled banking would be administered with as
much financial wisdom, impartiality and integrity, as our bankers have
shown? Too many programs seem idealistic when they are planned in
tashington but they tend to become politically hued in the working out.
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Federal Reserve Bank of St. Louis
•
-
Clyde M. Davis (New Hampshire)
Proceedings of the 34th Annual Convention
National Association of Supervisors of State Banks
Atlanta, November 1935
* * * * * * * * In New Hampshire our total deposits in state charter
banks are $200,000,000 and of that total 98% are savings deposits. Most
of the commercial banking is done by the national banks, of which there
are 52 in number. They total about g50,000,000, taring the past two
years. Four of our savings banks have passed out of existence. In each
case the deposits have been paid in full and paid in full immediately.
This has been possible through arrangements with the New Hampshire
Savings Banks Association of which all our savings banks are members.
The last bank to pass out of existence was in December, 1934. That was
a voluntary liquidation, the bank decided to close on Friday and on
Saturday morning the depositors were able to get their money in full.
It was a bank with three—quarters of a million in deposits.
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Federal Reserve Bank of St. Louis
•
SOURCE:
THE OHIO BANKER -- JULY 1935
DEPOSIT INSURANCE ANL SOUND BANKING-by Ir. Marshall R. Diggs, Wash. D.C.
Executive Asst. to the Comptroller of the Currency
Page 10
The President mentioned the Canadian system. I happen to be
quite familiar with it. They had no bank failures up there. They
have had a few shortages, of course. In the 19 banks that we have
taken over since deposit insurance went into effect, fifteen of them
have been brought about by either shortages or dishonest practices
which are sufficient for criminal prosecution.
That is a pretty severe indictment it seems to me of the banking
fraternity, when you have fifteen out of nineteen. That is not so
bed when we say we have fifteen out of 15,000 that are insured,
fifteen of them in eighteen months in which we have found shortages
that have caused us to close the banks. But you can see how that
fifteen would have hurt another three ar four hundred banks.
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Federal Reserve Bank of St. Louis
Proceedings of the MISSOURI BANKERS ASSOCIATION
hEPOAT OF COMMITTEE ON RESOLUTIONS
k
*
*
,,.
1.
*
*
*
*
*
*
*
The Banking Act of 1935
(Page 90)
4. We are in sympathy with the purposes expressed in Title I and
Title III, believing them to be designed in the interest of tne public
as well as the interest of banking, and with three notable exceptions
to Title I, we approve in substance these two Titles.
*
C
-k
Exception No. 3:
One of the basic causes of bank failures in the past has been the
chartering of too many banks. This must not be repeated. tith the return
of business improvement we may expect a movement to organize banks in
many of the communities unable to support a bank. Political influence
can be counted upon to bring pressure to secure charters, regardless of
the economic need for additional bunks. The Federal Deposit Insurance
Corporation can do more than any other agency to discourage the chartering
of too many banks by establishing proper qualifications for admission
into the Insurance Fund.
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Federal Reserve Bank of St. Louis
SOURCE:
THE MISSISSIPPI BANKER - May 1935
ADDRESS OF HO. JEFF BUSBY, Associate Counsel, FDIC
* * * *** *** * *
Page 45
Losses Experienced in Bank Failures
* * * * * I quote at length from the able
Chairman of the Federal Deposit Insurance Corporation, Honorable Leo
T. Crowley, to the Banking and Currency Committee of the Senate in his
recent testimony on the proposed 1935 Bank Act. In speaking of losses
to depositors, because of bank failures from 1864 to 1934, he said:
"To arrive at a practical basis, estimating the amount of funds
necessary to cover the insurance liability of the Corporation, our first
consideration has been the volume of losses which depositors have borne
during the pest.
"From July 1, 1864, the beginning of the National Banking system, to
June 30, 1934, about sixteen thousand commercial banks, with deposit
s of
nearly nine billion dollars, are known to have suspended operations.
Losses to depositors in these banks are estimated at three billion dollars
over and above all recoveries.
"Our estimates indicate that about one billion dollars of the nine
billion which was on deposit in commercial banks that failed during
the
seventy year period, were secured by pledge of collateral, or otherwi
se.
Of the remainder, some six billion dollars were in accounts of less than
$5,000, or constituted the first $5,000 of large accounts.
Two billion
dollars represent the volume of these deposits which was in account
s with
balances above 4;5,000.
"For every t100 deposits in the entire commercial banking
system, about
32 cents a year was lost. Of this figure, it is estimated that
24 cents
represents losses to depositors with balances not in excess
of t5,000,
while the remaining 8 cents represents losses to deposit
ors having
balances in excess of $5,000. For these four years, losses to
depositors
are estimated at $1.32 per year for each $100 of deposits in the commerc
ial
banking system. Comparable losses during the depression of
1870's
amounted to 35 cents, and during the depression of the 1890's amounted
to
23 cents.
"The experience of the past seventy years indicates that to repay
losses suffered by all depositors in our suspended commercial banks, en
assessment of 33 cents per t100 of total deposits, or one-third of
one
per cent of total deposits in all open commercial banks, would have
been
necessary. Excluding the losses incurred during the
three depression
periods (1875-1676, 1892-1697, 1931-1934) and confining ourselves to
losses occurring during the balance of the seventy years, en assessment
of one-eighth of one per cent would have been necessary.
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Federal Reserve Bank of St. Louis
THE MISSISSIPPI BANKER — May 1935
Hon. Jeff Busby
Page 45 (contd.)
"In the past, the number, timing and geographic concentrations of
bank suspensions have been chiefly due to fundamental weaknesses in
banking structure and the course of economic events. Suspension of
individual banks within the areas affected has reflected, in the mein,
the quality of bank management. In the future the magnitude of losses
which will result from bank failures will also depend upon the trend of
economic events, the changes which may occur in the structure and
functions of the commercial banking system, the calibre of the individual
bank management, the extent to which the system is reinsurA, against
defalcations, and the quality of the supervision exercised over these
banking institutions."
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Federal Reserve Bank of St. Louis
***** *** *
•
Discussion on Address of Mr. OtConnor
Proceedings of the 34th Annual Convention
National Association of Supervisors of State Banks
Atlanta, November 1935
******* **
M. E. Bristow (Virginia):
*********
The only comment I have to make on the speech of the distinguished
speaker today is regarding the number of bank failures. Economists
started it and they have been going along that line, giving the number
of bank failures for the last five or ten yrars. As a matter of fact,
we are still overbanked in many sections. Mr. Cummings told about
Rhode Island, they were not overbanked in their state and that is the
main reason they were free from bank difficulties. In those parts of
the country with the greatest number of bank failures too many of the
banks were undercapitalized. If we profit by this experience and try
to avoid it in the future it is a long step forward, but these people
start out to deliver a subject on banking and they start in by telling
how many banking failures we have had. Some of those were glorified
loan shops and never did deserve the name of a bank. I maintain a lot
of so—called banks should not be shown in statistics as constituting
the number of bank failures. I did not really intend to take up so
much time, but I feel rather strongly about it.
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Federal Reserve Bank of St. Louis
**********
SOURCE:
THE ILLINOIS BANKERS ASSOCIATION BULLETIN--BAAY 1935
OUR CURRENCY SITUATION AND PROSPECT--by Prof. E. W. Kemmerer, Dept. of
Economics & Social Institutions, Princeton University,
Princeton, N.J.
,Page 61
a
It is/striking fact, I think, that between 1910 and 1920,
our farm mortgage indebtedness in this country rose from $3,300,000,000 to $7,900,000,000, and most of that took place during the time
of the boom prices of the war and early post-war period when crops
were high in price and land was bought at those abnormally high
prices practically on a margin. There was comparatively little
increase in the farm indebtedness of this country from 1920 to the time
of the crisis.
Inability to meet these obligations, of course, meant many
foreclosures, and the inability to collect mortgage charges with
the declining value of farm land wrecked thousands of small banks
scattered throughout the agricultural sections of our country. These
failures had their usual unfortunate repercussions upon all lines of
business in their respective communities and these, in turn, extended
to more distant places. Had our banking system not already been
seriously defective, it might have stood the strain of this economic
depression without disaster, as the banking system of Canada has done.
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Federal Reserve Bank of St. Louis
SOURCEi The JoArlial of Business of the University of Chicasm.(Juiy, 1935)
gal* FaAtan. -.amass emdaemodies by R. U. Thomas.
Page 299
If one oombises poor management with fraud and violation of banking laws into one gamma class of "internal causes" and contrasts the
magnitude of the oliatersal causes" of failure with that of the "external
causes" consisting of depreciation of assets and depression, it becomes
clear that the "internal causes" are the predominant ones in all save the
depression periods. One may conclude, therefore, that a prevention of
the operation of these "internal 'muses" consisting of incompetent management, fraud, and violation of established banking law would go far in
abolishing bank failure even in bad times.
Page 601
•rhe Chicago experience supports the opinion expressed in the Report
of the Study Commissidi for Indiana Financial Institutions to the effect
that the most frequent causes of bank failure, even in depression years,
are to be found in faulty management and lax control, and that care in
chartering new banks and intelligent competent supervision will go far
in correcting the evil of bank failures.
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Federal Reserve Bank of St. Louis
SOURCE: The Journal of lissieeese of the University of Chicaeot.(July, 1935)
Peak Failures - Causes and Remedies by R. G. Thomas.
09n olilk*Attgla
The evidence presented here shows that faulty management rather
than external circumstanoee is the major cause for bank failures. During prosperous times framialent and illegal banking practices loon large
among the causes of failures. During periods of prolonged depression
weak and inefficient management, unable to meet the rigorous requirements
of the times, eamtributes heavil7 to failure. It follows, therefore,
that the most fruitful remediee for benk failure must be souteet in the
direction of improved management.
There are, naturally, two general methods of approach to the problem
bad benk-management. The first consiats of using direct
iaproving
of
second involves altering the institutional frames** withthe
pressure;
in which bamkors must reaction. One form of direct pressure might well
consist of a requirement that all bank executives should demonstrate their
possession of 4 miaimum amount of kaowlelze of sound banking principles
and practice by passing SOSO form of examination. %eh a plan might give
rise to a body of "Certified Beakers" vhieh would asaist in the promotion of a profeseimal attitude among bankers in general. In addition
to such eeasureel there must be retained and strenetheesed the existing
sethods of examinntion and control by public authority. The intelligent
bank examiner and supervisor can very effectively improve the quality
of bank management by insistence upon sound loan and investment policies
as well as by the detection of fraudulent and illegal practices.
Not only, is sore effective direct pressure for good management
policies needed but also such changes in the institutional framework
surrounding banking activities must be made as will be conducive to
better asnagemsat. Ws are confronted with the question of what changes
are desirable.
It is commonly held that small banks are much more susceptible to
failure than the large and, therefore, large banking units are to be
encouraged. This study, however, shows that the failure rate of large
banks is quite as great as that of small banks during the last few
years. An attempt to prevent failures by encouraging development of
banks of larger sise cannot in itself be expected to be particularly
beneficial. One benefit from such an attempt might arise from the
fact that the increase in the sista of banks in rural areas would necessitate the introduction of branch banking. If branch systems of the
type capable of promoting diversification of lease and deposits resulted
it should bring a definite gain in bank stabilitir.
Another proposed improvement in the banking grates takes the fora
of minimum requirements for the ratio of stockholders' equity to deposit liabilities. This study indicates that such requirements would
be of little consequence in preventing failures. The failed banks
studied generally had a ratio of stockholders' equity t3 deposits as
substantial as that of the surviving banks and in any event well above
the oammouly suggested minimum.
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Federal Reserve Bank of St. Louis
Although state bank failure experiemoe was considerably worse than
than of national bilks, membership in the Federal Reserve System appears
to be of little benefit. When one tikes into account the fact that most
state member banks are located in irfte less expoaed to depression,
their superiority over nom-member bulks becomes unimportant in the light
of their decided inferiority in comparison with national becks. Attempts
to force all state banks into membership of the Federal Reserve System
appear to be of little use in preventing failures.
On the other hand this stuoy indicates that very definite gains
could be realised by the abolition of the dual system of chartering
banks. This is true first because the Atte-chartered banks have been
such more sniceptible to failure than the national banks ndsomeads
because the dual system has coatributed to over expansion of new banks
during periods of prosperity. This ha i in =le tended to increase the
number of inexperienced and incompetent bankers in tiJ) field and resulted
in excessive competition leadin, to unwise banking practices. 71e effectiveness of public supervision could be greatly enhanced by a unified
system of comwercial banks under federal control.
In both good and bad times defective bank-management has all too
frequently taken the form of excessive loans to the benkls own officers.
This fact suggests two possibilitiee for improvement. First, the prohibition against loans by banks to their executive officers, as provided
in the Banking Act of 1935, should be extended to include loans to firms
controlled in any substantial measure by owe bank officers. This would
definitely ban the doubtful practice of attemptinti an impartial appraisal
of the banker's on credit standing and should go ftfr in reducing the
abuses of excessive and fraudulent loans to insiders.
Second, temptation to borrowing by inside interests might well be
reduced. An outright prohibition of all banking affiliates mold be a
wholesome change. Thin could be done with no harm to banking efficiency
if branch banking barriers were abolished. Also branch banking, in
contrast to unit banking, furnishes a more adequate outlet for the
energies and abilities of the capable banker and reduces somewhat the
urge to develop outside business interests.
The possibilities of improvement in the mmmagement of banks seem
greater under a sound branch bankirg. system than under a unit banking
system. Bevever, the evidence indicate* that branch bankini; as we have
it in the Suited States has not on the average been owl to the average performance of the national banks which are predominantly of the
unit form. Branch banking, to be of any serious consequences, must be
allowed to develop over wider areas than those allowed at present.
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Federal Reserve Bank of St. Louis
*Liquidity and Solvency of National Banks, 193-33"
By George W. Edwards
From The Journal of Business of University of Chicago,
April 1934
********
From this analysis it would therefore seem that the failures of
country banks in the depression were due not so much to illiquidity
or inadequacy of reserves, as to insolvency or insufficiency of net
capital Naiads. The remedy in the future lies in the maintenance of a
sufficient proportion of net carital to shrinkable assets particularly
securities other than United States governments. This relation can
be effected through both private 1-olicy and public regulation. The
banks themselves should at all times restrict the variable factor of
their security investment account within a reasonable relationship
to the more constant factor of their net capital. Present legislation
:italization 7enerally fixes the amount in relation to the
on bank ca,
population of the )1F,ce where the bank is located. However, a bank
in a small locality may well hold more securities than an Institution
In a large city, and the former is legally permitted to have a small
undercapitalization in re3Jition to shrinkable assetr, particulnrly
securities other than United States governments, as a fundamental
cause of bank failures, and conse—uently change the basis of minimum
capitalimition from that or population of the locality to the amaunt
of shrinkable assets, particularly securities.
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Federal Reserve Bank of St. Louis
SOURCE:
ASSOCIATION NEWS BULLETIN - Savings Banks Association of
State of New York
Sept. 26-27, 1935
ADDRESS OF HENRY R. KINSEY, Pres.
Page 15
CAUSES OF BANK FAILURES
I can state without fear of contradiction that in the case of
financial institutions throughout the state which have failed, the
failure was caused by one, two, or all of three things. Not to
mince words, they were bad management, insufficient capital, and
too high interest or dividend payments to depositors and stockholders. Sometimes one was the cause, sometimes two, sometimes
all three.
Although no savings bank has appeared in the list of failed
institutions, we can still apply to our own pictures these causes
of difficulty, not to gloat over our success, but to take counsel
as to how we should improve ourselves in the future.
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Federal Reserve Bank of St. Louis
A CONSIDERATION OF BANK INVESTMENT POLICIES--Prepared by Prof. B. H. Beckhart,
for the Commission on Banking Law and Practice, Association of
Reserve City Bankers---May 29, 1934
Pages 44-45
The failure of many member banks to follow a conservative invest- 1
ment policy is indicated in a recent study made of failed member banks.
This study shows that the investment policy of many banks was at fault
in that bonds were bought primarily for yield; that banks indulged in
bond trading which consisted of selling high grade issues and reinvesting
the proceeds received in securities of a lower grade and of retaining
poor bonds with a large depreciation with the expectation of selling
those securities later at a more favorable price; and that convertible
bonds and unlisted bonds, real estate and irrigation bonds of a poor
quality were bought. In short, many of the banks which failed were
guilty of buying low grade and unseasoned issues and of buying convertible
bonds at a high premium. The consequences of these practices became an
important factor in the bank failure situation through 1931 and 1932.
In the case of 105 banks which failed through 1931 it was shown in this
study that the depreciation in the book value of their bond account at
the time of the last examination prior to failure came to 14.3 per cent,
which represented in dollar amount a depreciation from 09,753,972.06
to 459,779,939.97.
Summary
From the tables presented it would appear that the investments of
member banks through the period covered, whether or not we take the policies
followed by the English and the Canadian banks as yardsticks of measurement,
were disproportionately large, relative to time and to total deposits. To
too great an extent were member banks gambling with the future changes in
the long-time rate of interest, as well as with more immediate factors. And
as mentioned before, the time deposits of member banks have been akin to
demand deposits and probably more closely related to demand deposits than the
time deposits of the English and the Canadian banks, which would render all
the more dangerous the building up of a large investment account.
Closely related to the absolute increases taking place in the investment portfolio of member banks is the fact that the quality of the securitieF
held declined. Bad investment practices were an important cause of bank
losses in the case of all member institutions, and in the case of many
institutions were an important cause of their failures. Not enough emphasis
was laid on the relative degree of safety of the bonds purchased, on their
marketability or upon a staggering of maturities. Many banks were inexpert
in bond analysis and this reflected itself in the losses suffered.
1
See also study by Robt. B. Warren, in Operation of the National
and Federal Reserve Banking Systems, Hearings before a subcommittee
of the Committee on Banking & Currency, U.S.Senate, 71st
Congress,
3rd Session, 'Pursuant to S. Res. 71, Part 5, pp. 655-660.
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Federal Reserve Bank of St. Louis
•
SOURCE:
THE MISSISSIPPI BANKER -- MAY 1934
ADDRESS BY HARVEY C. COUCH--Member of Board R.F.C.
Page 32
One of the greatest weaknesses in our banking system has been
the over-rapid increase in the number of banks. At the close of
the Civil War, there was said to be one bank for every twenty
thousand people. In 1921 this had increased to six for every
twenty thousand. And the planning of Lee, the courage of Stonewall Jackson, the force of Bradford Forrest, the determination of
Grant and all the resources of the U.S. could not save them all
when the crash came.
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Federal Reserve Bank of St. Louis
SOURCE:
A CONSIDERATION OF BANK INVESTMENT POLICIES—Prepared by Prof. B.H. Beckhart
for the Commission on Banking Law and Practice, Association of
Reserve City Bankers---lay 29, 1954
?ages 59-160
Ideally the commercial loan portfolio should reflect a wide
distribution of risk by industries and by borrowers. Country banks
frequently find it impossible to effect such distribution of risk and this
inability on their part has been an important cause of the failure of the
small banking institution. This situation could no doubt be remedied if
branch banking were permitted over large geographic areas. The development
of extensive branch systems would greatly strengthen the commercial loan
portfolio of the banking system through the industrial and the geographic
distribution of risk effected thereby. As an important by-product of this
movement would be the fact that country sections would benefit from the
greater proportion of open-market assets held by the large city banks.
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Federal Reserve Bank of St. Louis
•
SOURCE:
THE CALIFORNIA BANKER—JUNE 1954
THE AMORTIZATION OF REAL ESTATE LOANS--by Will C. Wood, Vice Pres.,
Bank of America N.T. & S.A.
Page 230
° To conclude the discussion of amortization of loans, may I
point out that real estate loans, all things considered, have stood
up well during the period of depression. Among the assets of banks on
which losses have been taken, real estate loans have been responsible
for a smaller percentage of losses, computed on the basis of volume
carried, than any other type of loan or investment.
The percentage of loss on total real estate loans the country
over is less than the percentage of loss on total commercial loans;
less in fact than the percentage of loss on total bond investments.
This is true in spite of the fact that a large percentage of real
estate loans have been flat loans.
If we shape our future policy in the real est=te loan field so
that amortized loans will be the rule, we shall be able to meet any future
financial crisis with much more assurance even though the future depression
should be as severe as the one which we hope is now passing. "
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Federal Reserve Bank of St. Louis
SOURCE:
BIENNIAL REPORT OF THE BANK COMMISSIONER OF THE STATE OF KANSAS-Sept. 1, 1934
Page 3_
The records of this office disclose the fact that the bank failures
during this period were due largely to the low price level of
agricultural commodities. There were a few instances of dishonesty
and incompetency.
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Federal Reserve Bank of St. Louis
Discussion following speeches by F. D. I. C. Officials
National Asso. of Supervisors of State Banks
33rd Annual Convention, Baltimore, Md., October 1934
Mr. Broderick: May I refer back to the remarks. It is a very fine
staff you have with you this aorning, and, so far as the State of lew
York is concerned, it is not possible to have received more fair treatment or more constructive cooperation than re have had from your organization. We have worked in perfect harmony and are very fortunate in our
choice of the Chief Examiner in New York acting for your Corporation being
an experienced examiner trained under one of the best examiners in the
country, and we are grateful to your organization for your cooperation
and arriving in constructive results in the State of New York. We have
a long ways to go. Looking back, we can see mistakes--looking back you
probably have a better vier of the system we have had for twenty years.
The thing to do is to retain the best of the old and correct that which
is found wanting. It is a little difficult for a man in your position
and in ours, at times, not to use your official position for the Puetherance
of ideas of your own. If there is one t'Ang which helped to bring about
the condition we have gone through more than the interest paid on deposits,
I don't know what it is. Certainly excessive dividends have been paid,
but speaking of the investment section of the East, the higher 4 nterest
paid on deposits forced these banks to invest in loans Which carried more
than a fair business risk and to invest in securities which should not
have been in the portfolio of any institution. Banking institutions are
no different from ordinary business, the income determines them but the
theory is still correct, if the income is twenty shillings and the outgo
twenty-one, they are not making a success of it and the question arises
how to continue the institutions,5Your remarks and those of your associates are very sound, but I would personally like to say something on
behalf of bank commissioners. They have received advice wIth the best
intentions, constructive and designed to help, and I know you have, as
I believe other government officials also have in mind, the big load has
been carried by the bank commissioners and the Comptroller of the Currency and upon them the duty rests to carry on, and 2ay I say the debt
that is owed the bank commissioners of the states is one not understood.
They have been on the firing line for years, taken criticism and subjected
to all sorts of suits, both civil and otherwise, but they have carried
on and held the line and I do think they are entitled to praise as well
as criticism. Maybe we have too many institutions, maybe the system is
wrong--I don't know, but I believe in the maintenance of the two systems.
For twenty years I have advocated unit banking. My friends do not all
agree with that, but I am consistent in my belief that in unit banking
there is strength and if all institutions were members of the Federal Reserve it would be for the best interest of all, but I do not believe it
would be for the best interest of the banking institutions of this
country or their depositors to unify all banks in this country under the
National Banking System.
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Federal Reserve Bank of St. Louis
- 2-
J. $. 49ve (Mississippi): I have listened with a great deal of interest to Ar. Crowley's address and the discussions of his able assistants,
all of which has been of a great deal of benefit to me. I see one thing
in Mr. Crawley's address which appeals to me very much and I think to each
member of the Associations that is the question of the dual banking
system. If I utOerstand what he has to say, he does not say it in so
many words, but he is in favor of the dual banking system. We hive gone
on record in this Convention, year after year, for the dual banking
system, knowing the country is sufficiently large to take care of and
maintain, and requires, both classes of service, state and national, and
if vie continue to maintain and hold the dual sy2.tem we must do some of
the things Mr. Crowley suggests. We maFt cooperate with the National
authortties, strengthen our banks, mreedine out losses and make them
strong, efficient iaFtitutions. In other words, we must prove ourselves
and prove these banks--make them sufficiently sound to take a part in the
business of the government and the country and maintain their part in
carrying on. The only way we can do that is with the Pall cooperation
of the F. D. T. C. and its examiners and the R. F. C. in ccntinuing to
build capital structure.
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Federal Reserve Bank of St. Louis
Address by L. A. Andrew, Iowa
National Asso. of Supervisors of State Banks
33rd Annual Convention, Baltimore, Id., October 1934
*** *** * *
Let Us consider a few of the attributes or a good unit bank: It
hes sufficient capital to take care of a proper ratio with deposits. The
shares are rather closely held, giving a few men the responsibility.
Officers and directors are chosen from the outstanding men in the community and from asiong those who are not steady borrowers. Those with
any entanglements of promotion or connections with enterprises that
might require a large amount of money are excluded. Officers are paid
a salary sufficient to free them from o-itside domination and from the
necessity for other earnings. In the loaning of money the usual careful method is !'ollowed. The carrying of a larger reserve than has been
customary in the past, this should include a secondary reserve of short
maturities in government and other high class securities. Bankors must
always remember that demand deposits are payable on demand, and this
should always be the first consideration when loans are made from deposits
of that source. Loans =1st be made only on complete credit information
and only to those who know how and when the loan is to be paid. Loans
must be made only to those who can repay from the operation of their
business and at a definite time on definite transactions. If savings
and time deposits are carried in volume and are really Time Deposits a
certain percentage may be put into loans on real estate !which have
amortisation payment requirements. In regard to time and savings deposits, T have been of the opinion for several years thet they should
be governed by laws which re - uire those who receive interest on their
deposits to g've at least ninety days notice of withdrawal and require
the bank to demand such notice. I know of hundreds of banks which were
forced to close because they foolishly educated their patrons to think
that time and savings deposits were payable on demand. Arurthersore,
interest paid on deposits ::iut be kept well below the average interest
returns on loanable funds. A bank must first be conducted on a profitab
basis. Ranks must be profitable to be safe. Of csursc, such a program
includes the charging for all services at a proper rate to shos the bank
a profit. I also believe that banks should limit the amount of deposits
on which they pay interest. The accumulation of a large amount of time
and savinee de-osits has forced many banks to make unsafe loans and investments in order to employ the money. The ideal unit bank might be
one which pays no Interest of any kind on deposits and carries at least
half of its assets in cash And government bonds and other first class
bonds of early maturities. Aring the eight years spent as Superintendent
of Banking we learned: That loans in which officcrs or directors were
interested were usually the poorest loans in the banks. Deposits of
trust funds and those payable on demand should be kept that way. A bank
is not a charitable in, titution and must make a profit. If the field
is too small for a profitable bank there should be a consolidation. we
will have fewer banks in the future and aust have better banks.
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Federal Reserve Bank of St. Louis
** ******
Annual Report of the F. D. I. C.
For the Year Ending December 31, 1934.
(Pages 68 and 69)
[
'
In the case of five of the nine insured banks
Causes of bank suspensions.
failing in 1934, suspension was the direct result of criminal activities of
bank officers.1 The remaining four failures may be attributed to bad management,
insufficient Easiness to provide enough earnings for maintenance of a bank, and
internal discord. No specific information lks been collected regarding the
reasons for the failure of the uninsured licensed banks which suspended.
Various factors are responsible for the small number of failures of
licensed banks during 1934. The Reconstruction Finance Cor)oration made large
sums available not only through purchases of capital obligations but also
through direct loans, and other governmental agencies facilitated the refinancing and liquidation of loans. Furthermore, the suspensions which
occurred prior to and immediately subsequent to the banking holiday eliminated
a large proportion of the weak banks. The declines in the volume of business,
in prices and in incomes characteristic of the downward swing in business
activity from 1929 to 1933 had ceased.
Periods of recovery subsequent to banking crises have in the past been
characterized by relatively few bank failures. The unusually low rate of
failures during 1934 cannot, therefore, be expected to continue.
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Federal Reserve Bank of St. Louis
** * * * *****
SOURCE: PROMPINGS MISSOUPI NAMES A=CItTION--NAT 14-1.546, 1E174
Tht FAUhl OF TR. UNIT BANX--addreasby L. A. Andrew
?Ws 92-4
If savings and time deposits sre carried in vAumc and are
really Tine Leposits, a certain percentage may be put intro bent
on real estkte which have awortirstion !.maysient recuircments. In
regard to time sad savings deposits, I htve been of the opinion
for several years that they should be governed b, laws which recuire
those who receive interest on their deposits to give at least ninety
days notice of withdraws]. and reouire the brnk to dealtnd such notice.
I know of hundreds of banks which were forcod to close beccune they
foolishly educatrd their patrons to tbl.nk tht, time Nnd savings
deposits were payable on demand. Furthermore, interest *aid on
deposits must be kept well below the average interest returms on
loanable funds. A bank mast first be mamducted on a profitable basis.
Banks mot be profitable to he safe. Of eourse, aucb a program inc1u.2.es
the sbargin for all ourviess at a proper rate to show the beak a profit.
I aloe believe that banks shield limit the amount of deposits on ws-,Ich
they pay intermit. The sieummlatien of a large amount of tine and
maw deposit has fame, nary banks to make ornate loans and investasats in order to maploy the now. The Ideal unit bank might be one
shish aye no interest of spy klad on depilate and carries at least
half of its esrets in cash and early maturities of government and other
first glass bona*. le found ut during eight yeare spent as State
Superintendent of Oilskins That lopns in which officers or directors
had any interest were usually the poorest loess in the banks. Deposits
of trust funds and those payable on demand Should be kept that way. A
bank is not a chbritable institution and wait makee profit. If the field
is too small for a vrofitable bank there should be/smnaolidatias. Se will
have fewer banks in the future and mest have Dottie banks.
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Federal Reserve Bank of St. Louis
•
SOURCE:
PROCEEDINGS OF MISSOURI BANKERS ASSOCIATION--May 14-15-16, 1934
THE BENEFITS OF DEPOSIT INSURANCE--paper by Leo T. Crowley
Pages 107-108-109
Recently we have completed an analysis of the banks within the
state, classifying them by size. Heretofore, size classifications
have been by the amount of book capital or by the volume of loans
and investments. We have undertaken to classify the banks within your
state by the amount of their deposits, since this is the source of the
bank's funds and since these funds form the basis for the bank's earnings.
What does the picture look like?
The groups which we chose are as follows: Banks with deposits of
$150,000 or less were placed in the first group, banks with deposits of
$150,000 to $500,000 were placed in the second group, and banks with
deposits of $500,000 to $1,000,000 in the third, and so on. Seventy-six
per cent of all the insured banks in the state on March 51 of this year
had total deposits of less than t500,000. In other words, of all the
banks in the state, 76 per cent by number were in the first two groups.
On March 51, there were 262 banks within the state—licensed banks-with deposits of less than $150,000! I do not wish to appear to be
opposed to small banks. I believe that they have performed a valuable
function in hundreds of American communities which they have served. I
believe that they have been a wonderful help in building up our country,
and I am sure that the people of Missouri have received an excellent
service and benefit from the small banks within the state. But, on the
other hand, I believe that the large number of failures of small banks
point out a lesson which should be recognized and of which we should make
good use.
In this connection let me call to your attention the results of
another study which we recently made, and which very forcibly brings
home a vital fact concerning the future experience of banking within
the State of Missouri. Of the 600 banks which were members of the
Temporary Insurance Fund on March 51,187 were in towns of a population
of less than 500. In addition, 113 banks were in towns of between 501
and 1,000 inhabitants. In this group of towns there were 21 which had
more than one bank. In other words, there are 300 banks in towns of
less than 1,000 population, and of those 500 banks, 48 are in towns
with more than one bank.
What, gentlemen, are the profit opportunities for a bank of this
type? I do not wish to go into detail on this particular subject at
this time, but let me suggest that your association give it further
consideration. That this state has had so many bank suspensions can,
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Federal Reserve Bank of St. Louis
C)
-
Leo T. Croyley
Pages 107-108-109 (contd.)
I believe, be accounted for to a certain extent by the number of very
small banks. To be sure some of the existing small institutions are
better run and enjoy better management than do some of the larger banks,
but at the same time you are entitled to know that there are more banks
in this state with deposits of less than t150,000 than in any other state
in the Union. May I not suggest that you give this whole matter further
study? I am sure it merits your consideration, and I am likewise sure
that it is a point which vitally concerns all of you.
Again let me state that I believe that the small community should
not be deprived of the service which is made available to it through
banking facilities. On the other hand, I find it hard to justify the
existence of two or three banks in a community which can hardly afford
to support one bank.
The unification of banks is often proposed as a solution to this
problem. I strongly favor the unit system of banking. However, for it
to survive and to regain the ground lost in these later years, there
must be realization of the fundamental principle that, for the unit
system to be successful, its individual banks must be profitable. One
of the best means of achieving this end is to consolidate competing
banks where, from the profit standpoint, more than one is unwarranted.
Such a common sense approach to the restored growth of the unit system
should do much toward promoting its future success. In Aissouri the
field for this work is particularly fruitful.
Furthermore, I wish to take this opportunity of pointing out for
your consideration the danger involved--and it affects all of us--if many
of the banks which experience has shown to be unwarranted are again rechartered and are again allowed to embark upon the business of banking.
The establishment of multiple banking facilities in communities which
cannot afford them, works a hardship not only upon the members of the
local community, but upon correspondent and affiliated institutions in
the larger centers. The reestablishment of those institutions which
experience has shown cannot be supported by the volume of business available within the community will only be a drain upon the Insurance Fund,
as well as a cause for the loss of a considerable volume of local capital.
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Federal Reserve Bank of St. Louis
SOURCE: PROCEEDINGS OF MISSOURI BANKERS ASSOCIATION—MAY 14-15-16, 1934
REPORT OF COMMITTEE ON RESOLUTIONS--Thornton Cooke, Chairman
Page 88
IX.
TAXATION
Attempts are constantly being made to change or remove the
conditions attached by Congress, in Section 5219 of the Revised
Statutes, to the permission it gives the States to tax national
banks. We are opposed to any change that would reduce the protection
those conditions give to banks against discriminatory taxation; and
in practice that protection inures to the benefit of state banks as
well as national. The most dangerous bills on this subject now pending are House Bill No. 9045, by Mr. Steagall, and Senate Bill No. 3009,
by Mr. Shipstead. Each of these would legalize the kind of assessment
which, practiced unthoughtedly and illegally, but perhaps with some
restraint, caused many banks in the past, as a former Missouri Commissioner of Finance has said, to organize with insufficient capital and
to distribute earnings unwisely, and so to be caught when depression
came with capital funds insufficient to protect depositors. Beyond
question, taxation of the kind these bills would legalize has been a
contributing cause, and sometimes the chief cause, of many of the bank
failures of recent years. In the public interest, therefore, even more
than our own, we oppose these bills.
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Federal Reserve Bank of St. Louis
Proceedings Missouri Bankers Association--May 14,15,16, 1954
THE FUTURE OF THE UNIT BANK—address by L. A. Andrew
Page 96
The acute period of our banking trouble, followed by the
President's banking holiday, was brought on mainly by the
failure
of several of our largest banks not in any State system. In
fact a
total lack of confidence in the large reserve banks in New
York and
Chicago and a total collapse of the entire banking system
showed
that the people of the country had no more confidence in the
socalled "Bigness" than they had in the unit country bank.
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Federal Reserve Bank of St. Louis
•
SOURCE: THE CALIFORNIA BANKER--JUNE 1934
BANKING AND RECOVERY--by Hon. J. F. T. O'Connor, C. of C.
Page 246
*****
Banks That Fail
There are just two kinds of banks that fail: the bank that
makes bad loans and the bank that makes no loans. A bank that makes
no loans can no more hope to succeed than a merchant who has his
merchandise upon the shelf and does not sell it. The banker's commodity
is money. He must sell it in his community in order to survive and pay
his operating expenses, the same as the merchant must sell his merchandise.
We have had the insurance of deposits in this country for more
than twenty years. When William Howard Taft was President, he suggested
to the Congress the Postal Savings Bill, which was approved, and while
the deposits are limited to $2,500, the postal deposits in this country
increased some 675 per cent in a few years.
They are still over a billion and a quarter, and I stated before
the American Bankers in September last year that I believe that when we
made a success of bank insurance by the federal government, with the cooperation of the banks, we would attract a great percentage of that money
back into the banks, where it belongs, in the legitimate channels of
trade and finance. Before I stop this morning, I am going to give you
some figures on that.
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Federal Reserve Bank of St. Louis
SOURCE:
THE CALIFORNIA BANKER—JUNE 1934
ADDRESS OF THE PRESIDENT—William A. Kennedy,
Pres., The First National Bank of Pomona
Page_ 202
Our opponents flatter us with endless attack. What do they
say? That thousands of banks have failed. True, but they have
been destroyed chiefly by economic forces over which banks have
had little or no control. Further, a higher percentage of funds
involved in bank closings will be salvaged and repaid to depositors
of closed banks than will be saved to them from any other funds
they have invested up to 1929.
Heavy Losses in Securities, Conimoditi,--s, etc.
Popular ideas of losses resulting from bank closings have been
grossly exaggerated, as many of these banks have paid off depositors
dollar for dollar while others paid a high percentage. Thousands of
accounts in closed banks are worth much more than the same amount
invested in most commodities or securities considered sound at the
time the deposit was made.
Just how safe this money deposited in American banks really was
is not fully realized until it is compared with money used for other
purposes.
Dow-Jones Index Figures
The Dow-Jones index covering all bonds listed on the New York Stock
Exchange stood at 95.54 in January, 1931, and at 73.36 December 31st of
that year, a decline of 22 points. In that year alone the total market
value of all bonds listed on the New York Stock Exchange declined by
$7,750,000,000 as compared with il,690,000,000 tied up in banks closed
that year.
What is the situation in respect to stocks? The tow-Jones index
of industrial stocks shows a depreciation in 1931 from 96.01 to
74.79.
Their index of utilities dropped from 62. to 30.; railroad stocks declined
even more violently from 98. to 31. The reductions in these three
chief
classes of stocks represented losses of many billions. At June 30,
1932,
the indices for these three groups of stocks stood at approxima
tely half
of what they were at the close of 1931.
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Federal Reserve Bank of St. Louis
William A. Kennedy
Page :,03
l'et us also look at the commodity prices. The Unitsed States
Government's wholesale price index for all commodities dropped from
78.2 to 68.6 at the close of 1931, a drop of 12.4 per cent. From this
calculation it is obvious that the depreciation in commodity values
during 1931 wasmore than fifteen times as great as the average loss
in bank deposits.
It is almost impossible to estimate the decline in real estzte
values, but the losses in this important field kept pace with those
in the investment classes mentioned above, varying somewhat in different
communities, but on the whole representing an average loss comparable
with other investments. During this period possibly the most serious
and fundamental of all losses was in farm products, the index prices
for which have been consistently subnormal for many years.
It must be apparent that such widespread contraction of assets
in practically every line of business hLs been the chief cause of the
losses sustained by banks, resulting in the closing of so many of them.
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Federal Reserve Bank of St. Louis
* ** * ** ***
SOURCE:
Commercial Banking in a period of inflation. Prepared for
the commission on banking law and practice, Association of
Res. City Bankers.--Frank D. Graham Mar. 5, 1934
Page 13
The majority of commentators both on the French and on the German
situation are of the opinion that there was a loss in proprietors' real
capital during inflation. If this is true it is highly improbable that
American banks, with greater restrictions on investment and on the
transfer of funds abroad, could benefit under similar circumstances.
Even if the minority of commentators, who doubt that there was any such
loss in France and Germany, are right, it by no means follows that
American banks could do as well. Actual failures of banks might, however,
be checked. There were few bank failures in France and Germany during
inflation and such failures as there were could hardly be attributed to
that cause. Capital may be diluted by currency depreciation but it also
becomes of less importancep preserving the immediate solvency of the bank.
The stronger and more conservatively managed banks probably lose ground
relatively to their weaker and less cautious competitors but this again is
a function of the degree of inflation. In the United States this tendency
would now be enhanced by the guaranty of bank deposits.
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Federal Reserve Bank of St. Louis
SOURCE:
ANNUAL REPORT OF COMMISSIONEh OF BANKS FOR MASS.PART II -
1934
Page ii
TRUST COMPANIES
On November 13, 1934, the Aorcester Bank & Trust Company, which
had been in charge of a conservator since March 1933, was re-opened
under the name of the Worcester County Trust Company after having
taken over the business of the Worcester County National bank,
Worcester and Fitchburg, the North Brookfield National Bank, the
Spencer National Bank, and the Second National Bank of Barre, all of
whose offices are now being maintained as branches. The total
assets in the commercial and savings departments were over t36,000,000
and the trust department assets exceeded $35,000,000.
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Federal Reserve Bank of St. Louis
Address kr Merle Thorpe, Editor,
The Natiomes Business
lath Annual Convention, Indiana Bankers Asso., May, 1954.
(The Hoosier balker, June, 1934)
** * * * ** *
The nation has never before mitmeesed smell a gamma' and ematimas
aaskraking of Our business life. Thus unwittingly vie have semkesed the
faith and confidence of the people in the very inatituttans and preemies*
they meat use to bring balk prosperous times.
We began with the boubs4 Hankers have borne the brunt of the
general umehroking that has boss going on. There is no closed season
for the banker. He has sleep been fair same for the demagogue.
If the banker lends sassy and Masses interest, he is a usurer. If
he doesn't lend money to 24m4 Dick sad Marry, he is a tight-wad.
The bank crisis, which led to ss loch criticism of asmkere and eur
banking machinery, was sewed primarily by an unreasemiag fear on the
part of the public. Criticism against a bank.* policy of lending in
really a criticism against the public state of mind. Banks, perhaps
more so than other businesses, are, and most be, sensitive to a state
of mind. Is this, the balk is a commemal institution. Its strength or
weakness at a given tine may be due as mash or more to the farces outside, in the community, as to the policies or practices inside, within
the control of eanagenest.
IT1 our effort to remedy and reform, we too often forget this. lea
improvement will come from consideration of basking fundamentals ead
sound public policies, nthPr than seem* Oripteme or euperficialities4
Good banks are the prodaets of properly equipped, far-seeing ass of high
professional standards, with a keem SORIA of public interest,. Ilmt geed
banks eau be seehomed4 and ewen wreebed, by agencies beyond their omn.
trol, much as unwise gewermmestal eredit or currency policies, punitive
repression or businese development, slander and hysteria. Seed mummymeat and improved efficiency of bank empoutivos eesmet be supplied by
lam* The banker ahead not be expected, any sere than any other sam4
is fumes the valtweseeable„ or to predict the unpredictable, espeeially
*here mass thinking and mass action are canonise& The basic difficulties ef banking Institutions have been arawbsd *rand the controls
of management. There are bat relatively few easeptisas to this. All
over the land, sousd mod sagacious asap plaeing disibang, of duty before
personal profit, have ambled &merle= banking to weather a storm of
unprecedented properti,
* * * * * * * **
America has good balks and good bankers. It is interesting, in ear
present state of self-criticise, to note that very reeently there were
those in both Camsda and Ingland who were Avocating our banking system
for their countries. There is roon for improvement, as always, but in
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Federal Reserve Bank of St. Louis
-2at pre.
seeking baprevenent, we should avoid making restrictions, aimed
.
develop
the
hamper
mould
that
ventimg a repetition of recent mistakes,
In
times
geed
times.
normal
vent of banking functions so 4esirable in
there is no criticism of banks for giving too meek credit, althea. im
y
fast pooh a misteke is usually more productive of widespread enmit
deemed.
mt
Wary than the other extreme of failing to meet every insiste
should help our bankers to resist, ratter them to eam140, the
farm to, the public's need.
fin
It is my observaties at, Washington that sow me-sailed reforms are
urged beeemse of reeemtmest agftinst the occasional beiker, who, by
4reibedisss or bad judgmest, has brought ran to his imstitation. The
desire is to runish bankers c_uite as muck as it is to safogmard banks.
SO4 a motive is scarcely conducive to semad bankiag legislation.
Bitter *pares never write good lam.
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Federal Reserve Bank of St. Louis
**** ** * *
Address by Henry H. Sanger, V. Pres.,
Manufacturers National Bank, Detroit
Convention of Michigan Bankers Asso., June PP., 1954.
(Michigan Investor, July 7, 1954)
***** *****
In the past, the country banks of Michigan have practically
been
compelled by the State Banking Commissioner to invest half
of their
sav-ngs in mortgage loans, and that if they could not get good
mortgage
loans, they said, "Buy real estate bonds." You all know what
happened
to the country banks of Michigan.
I had the opportunity to inspect the bond lists of a great many
country banks in the last two or three years, and it was
really
pathetic. I remember one bank in particular that had a little
less
than $200,000 in a diversified list of bonds, one or two bonds
of
different issues. Ninety-eight per cent of them were in
default,
and, in my opinion, there was not one of them that would
ever pay out.
I said to the banker, "Your bank is busted." This was before the
moratorium. I said, "What are you carrying those bonds
on your
books at?" He said, "At par; we paid par for them.
We feel eventually
they will pay out." I said, "Why do you feel that way?"
"Well, we
hope they will." I said, "How does the banking commissioner
permit
you stay open?" He said, "We are the only bank in this commun
ity, and
he wants us to stay open." I said, *How do you dare take
deposits?
How do you do a banking business when your capital is four
times wiped
out?' "Oh," he said, we take it in, but we don't pay it
out.' Needless to say, a short time afterwards they folded up and closed
their
doors.
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Federal Reserve Bank of St. Louis
******* ***
SOURCE:
ANNUAL REPORT OF THE SUPT. OF BANKS OF THE STATE OF CALIFORNIA-June 30, 1934
Page 12
Depositors are urged to keep in mind that their losses are due to
the mismanagement of former boards of directors and managers, and
to the general depression.
Page 16
* * * Savings deposits show greater resistance to the effects of
depression and have not declined in the past as rapidly as commercial
deposits. Very likely their recovery will be slow since it will
depend on normally prosperous times, during which the man of small
means can earn a surplus over and above his expenses.
Page 128
(Statement of Ed. Rainey, retiring Supt. of Banks)
4. Deposit insurance has brought about a period of tranquillity
during which no bank runs have occurred and, in my opinion, has completely removed the fear of insecurity which has always been the cause
of hysterical, destructive runs.
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Federal Reserve Bank of St. Louis
Address by Prentiss M. Brown
Michigan Member of Congress
Convention of the Michigan Bankers Asso., June 22, 1934.
(Michigan Investor, July 7, 1934)
**********
The Steagall Banking Guaranty law was passed by the House of
Representatives in the spring of 1932. You gentlemen, myself as a banker,
and many others protested against it. That protest was of sufficient
strength so that the Steagall bill never got out of the Senate Committee
on Banking and Currency. Therefore, we did not have an insurance law
when the banking troubles began to gather in the fall of 1952, and the
early winter of 1933. Possibly it might have ruined the Federal Deposit
Insurance Corporation if it had been created before the banking troubles.
But I have a very careful study made by the general counsel of the Mutual
Savings Banks of the State of New York, and I want to say to you gentlemen that that is a tremendous organization, in which he shows that if
we had started to insure bank deposits immediately after the Civil War,
and had assessed no more than you gentlemen have been assessed in your
banks for the temlorary fund per year, that we could have paid all of
the losses that have occurred in all of the national and state banks of
the United States from the Civil War down to the present time, including
the great depression of '32, 1 55, and '34, and I don't know how much
longer. But it is a fact that the principle of the Federal Deposit
Insurance Corporation, if it had been applied during all of those years,
according to the study made, and he has the statistics, and I have them,
would have taken care of all of the losses that we have suffered. Of
course, no one can be blamed. We all felt that we could stand up without it. But the great force of the business depression was sufficient
to give us this insurance system.
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Federal Reserve Bank of St. Louis
*********
SOURCE: PROCEEDINGS OF MISSOURI BANKERS ASSOCIATION-May 17-18-19, 1935
ANNUAL ADDRESS OF THE PRES.-M. E. Holderness
Page 22
Reverting for a moment to the figures for bank failures in
this state given a few moments ago, we find the history of bank
failures in other states vary from our own in percentages only,
and with these facts and figures before us, we may make the
observation that bank failures are no more a phenomenon than
commercial failures, and perhaps only emphasize the process of
evolution through which our comparatively new country is passing.
In 1930, Fred Brady, then president of the Missouri Bankers,
said:
"No bankers are to be found anywhere who have labored
harder or more honestly than have our Missouri bankers to
save their institutions. Personal fortunes have been
sacrificed to protect their depositors and keep their institutions solvent. Not all the banks that have closed their doors
have failed. In many instances it is the community that has
failed. If the banks' customers had responded to their
obligations, the banks would be open today. Their failure
may have been the result of conditions for which the citizens
were wholly blameless. Tet the bankers have often been
crucified on a cross of economic conditions and crowned with
the thorns of failure of their borrowers."
What Mr. Brady said in 1930 equally applies to the year just
closing.
Bank closings have doubtless been accelerated by rapid transportation methods, and the extensive building of good roads, which
made the larger number of banks unnecessary, but reliable
studies
made by a commission of Indiana, indicate that these failures are
more immediately due to the following causes, and in about the
ratio indicated:
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Federal Reserve Bank of St. Louis
Improper loan policies
Inefficient managementm
Declining price level and earningsm
Public state of mind
Improper chartering
Infidelity or breach of trust
Other causes
•
Per Cent
32
26
12
12
7
5
8
100
0
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Federal Reserve Bank of St. Louis
Proceedings Missouri Bankers Association—May 1953
REPORT OF COMMITTEE ON EDUCATION AND PUBLIC RELATIONS—G. V. Kenton,
Chairman
Pages 79-80
Your committee is well aware that there are tvoschools of
thought regarding the present banking situation. One favors
sensible and well directed publicity; the other an attitude of
absolute silence.
Publicity is of two kinds--good and bad. Examination of
conditions surrounding most bank closings will reveal that bad
publicity has predominated and has been chiefly responsible for
the failures. All too frequently whispered words and silently but
quickly spreading rumors have taken their toll of banks, while
bankers have sat by as silent as the Sphinx, making no effort to
fight back at this disastrous form of publicity. Mankind is so
constituted that bad news psreads more quickly than good news, but
good publicity can be made to predominate in such situations if
properly directed through your friends and potential friends.
Proceedings Missouri Bankers Association-May 1935
CONCERT OF ACTION BY COUNTRY BANKS FOR SAFETY AND PROFIT--Haynes McFadden
Page 114
The item of self-preservation is moreover a stronger incentive
to concert of action. Duplicate loans are a nightmare. No matter
how close and thorough your analysis of your owncase may be, there
are still crooks who will make false statements to obtain credit.
How many banks have waked up busted, after finding the security behind
certain loans to be subject to the prior lien of another lender?
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Proceedings Missouri Bankers Association—Aay 1933
Page 129
MR. GIESELMAN: The gentleman from Festus talks about
flexibility of rules. I examined his bank one time. You
cannot take one thing in Festus and apply it in Hallsville.
I have seen banks that have gone broke through notes of
directors and officers, but have also seen a number of banks
that had all good notes that could not open one hundred per
cent on account of their bond accounts. I think there are just
as many that could not open on account of their bond accounts as
on account of bad notes.
•
SOURCE: PROCEEDINGS OF MISSOURI BANKERS ASSOCIATION-MAY 17-18-19, 1933
REPORT OF THE COMMITTEE ON SERVICE CHARGE—C. A. Wisdom, Chairman
Pages 73-74
The analysis of closed banks in Missouri for 1932 aa to the
apparent stability and safety of service charge banks as compared
to nonusers, again bears out our findings of 1930 and 1931 that
service charge banks are more stable and safer than banks which do
not use the charges. In 1932 there were 105 banks closed in Missouri.
Eighty-two were nonusers, 16 were service charge banks, and 7 were
service charge banks eliminated by merger with other service skimp'
charge banks. Disregarding the service charge banks merged with other
service charge banks, the ratio of stability was better than 5 to 1 in
favor of service charge banks. This is the third year that we have
made the comparison between users and nonusers. Our first figures
were made rather hesitatingly, because no analysis of this nature had
ever been made and we did not know just how the findings would run in
future years. In 1930 we had nothing on which to predicate future
possibilities as to ratios, except the type of banks that were using
the service charges. However, since making the analysis for three
years we feel that we can very confidently and with considerable
certainty assert that service charge banks are better, more stable
and safer banks than nonservice charge banks as a class. We believe
that this fact should be given proper consideration by both bankers and
bank patrons.
Conditions have changed; banking practices are definitely changing;
banks will be operated on more scientific, more profitable lines; the
experiences of the past three or four years have impressed on bankers
the advisability of changing, and they will of necessity be forced to
change their methods of conduct and operation. The banker of the
future will know that he can no longer operate without profit vnd will
conduct his bank on the basis of service well rendered, with safety, and
require v fair compensation for such services.
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Federal Reserve Bank of St. Louis
Proceedings Missouri Bankers Association--may 1933
REPORT OF THE COMMITTEE ON BETTER BANKING—F. C. Hunt, Chairman
Page 103
This Committee is the baby member of our Association, hence
in the experimental stage. Questiornaires were mailed to our
entire membership with an idea to enable us to determine that type
of loan is the best for the interior or country banker. In analyzing
the returns, we find that collateral and livestock loans rank far
ahead of any other type of loan. Prior to 1930, the liquidation
experience with personal loans was very good. Since 1930, this
type of loan has a bad record.
Since 1930, farm mortgage loans have the worst record, and
real estate loans--other than farm mortgage loans--have caused
nearly as much trouble.
Surveying the questionnaires to find out what type of loan
has been satisfactory, bankers replied as follows:
50
42
40
16
10
10
5
mentioned
mentioned
mentioned
mentioned
mentioned
mentioned
mentioned
collateral loans.
personal loans.
livestock loans.
chattel and crop loans.
real estate loans.
farm mortgage loans.
capital loans.
Asked which class of loans caused the most trouble, bankers
replied in this manner:
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Federal Reserve Bank of St. Louis
42
37
31
23
12
6
5
mentioned
mentioned
mentioned
mentioned
mentioned
mentioned
mentioned
farm mortgage loans.
real estate loans.
personal loans.
capital loans.
chattel and crop loans.
livestock loans.
collateral loans.
SOUECE:
THE CALIIORNIA BANKEls-4UNI. 195B
SOME TEAGHTS ON THY FUTURE OF AMERICAN BANKING—
Albert C. Agnew, Legal
Adviser, Fed. Figs. Bank, San Frnciecc
PaEe 193
MR. AGNEW: May I quote to you two paragraphs from
an article
entitled "Why the Banks Collapsed", written by Dr.
Bernhard Oetrolenk
and ,Jublishd in the Aa) issue of Current hietory?
They will serve
fairly as e b:‘ckgroune for what I have. tv say:
"The exciting events of these weeks (during
the recent crisis)
brought to a culminetion forces lone present in
the American banking
systeol Speculation, the first and greatest
of these forces, time
and again in the history of the United Etetes,
has lured bankers to
their ruin. American bankers have never been
able to cirtinguish
between comssercial, investment an slJeculsti
ve Iowan. Although it is
a principle of smand btnking in couatri(c
like England, Scotland and
Canada that demand deposits in commercial banks
should be loaned
exclusively for self-lic,uideting commercial
transactions, com.J(rcisl
bankers in the United btates have always faile
d to confine their
activities within thht field."
Dr. Ostrolenk, after reviewing the pe_roxyame
throuth which our
financia - structure passed during Marsh and
April, 19, an. the
extr4„ordinary measures take to save it
from complete collapse, concludes
his article with this significant state
ment:
"Nhile the government sought speedily
to repair the damage done
by the bankers, the problem of perma
nent benkins reform remained. ..
Th, emission of credit, to be const
ant and sound, must be supervised from
the at ndpoint of the public welfare rathe
r than of privw,e profit."
* *** * ***
Page 196-197
gore Effective
Examiners should be required, under heavy
penaltics, to set forth
in examination reports a fulT description
of all violations of the law, and
all assets and liabiliti s subject to their
criticism. Within a limited
time after a report of examination ha been
submitted to the board of direetors, each director should be required to
certify that the report hts been
read and the secretary of the bank to certi
fy that a full statement of all
assets criticised bias bees spread upon the minut
es. Published reports
of tbe bank submitted ninety (Awe following
the re?ort of examination should
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Federal Reserve Bank of St. Louis
Albert C. Agnew
Pages 196-197
be free of a:sets listed as bed and doubtful by the examiner. To
avoid subjecting a bank t- errors in classification of lovas by
examiners, there should be created a board of appal, to which the
bank could submit for final determination iteme criticized as bad
and doubtful, over which controversy bad arisen between the examiner
and the tank's officers and directors. /It should be said in passing
that investigations of banks which have failed clearly indicate thet
in many instances ultimate suspension was brought about by a failure
to eliminate, years before suspension, assets which had been constantly
criticized by examiners.
**** ***
Relation of Use to uaserd
Nearly 80 per cent of the banks suspending during the eleven years
fron 1921 to 1i451 had loans and investments of les& than *500,000. Of
the hanks having loans and investments of $150,000 and under, 55 est of
each 100 failed. The rate of failures decline& as the size increases.
It has been demonstrated, speaking generelly, that the small bank--under
t50,000--cannot earn a living rate of return, cannot command competent
management, and during times of stress provides a menace for the entire
banking structure. The minimum capital for commerciel banks should be
raised to t100,000 or more for country communities, with proportionately
higher minima for cities. All existing institutions should be required
to bring their paid-up capital to the required minims within a reasonable
time in the future, upon penalty of the forfeiture of their charters.
A bank, perhaps more than any other type of institution, suet fortify
itself in periods of prosperity against periods of depression, sled the
isemagemat is properly expected to strengthen its position in good years
in order to be prepared for the problem of lean years. Yet it has been
fond that in the avalanche of failures recently occurring, in the great
majority of cases the trouble has been caused by the following: loans made
without adequate security ano credit information or without proper regard
to moral risk; eoncentration of too large a proportion of loans in the gleM,
industry or gimp of interests; large loans to officers and directors;
loaning of eommercial deposit*, payable upon demena, in ncelLuid and -r,itri
commitments; and losses on band accounts.
30,0
for Better Ba king
These conditions arise, of course, Cron a number of oausec, but in
my opinion the chief cause is incompetent management. I have seen too many
instances of two banks operating in the same community, with the same ta pe
of investments available to each, with the same field of operations, one
able to withstand the pressure of recent months and emerge successfully,
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Federal Reserve Bank of St. Louis
Albert C. Agnew
Oages 196-197
and the other going down under the first pressure, to belie
ve that there
is any primary cause other than lack of business judgment
behind the
counter. No banker, be he honest, wilfully rendere
himself incapable
of reelizing on besets to meet depositor demand, but man
a banker has
so placed his institution through Sheer ignorance of th
primary
roquieites'of sound banking. It has 'aware been a
mystery to we why we
should require a certificate of qualification from our
doctor, our lawyer,
our miaieter, yes, even our underteker, but entrust
our worldly goods to
the care of one whose immediate prior occupation may have
been that of
shearing sheep and whose only qualification consists
in an ability, with
others, to raise the small capital required to buy
a hank charter. What
i 1 have said leads to the suggestion that the law shoul
d provide thet no
'bank charter be granted until the examining autho
rity, after careful and
personal investigation, is satiefied that the propo
sed management is
thoroughly experienced in the business of banking, of
good and successful
past record and unimpeechable integrity.
i
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Federal Reserve Bank of St. Louis
** * *****
•
elm lieestaro or the INullag dirstsse
rtiladary Tam 0,, of I. T.
Paper proseatod at lb* asoting or
hadoey of Polities'. esIowa.
January, N5.
(trestedlap of lb* Asedear of %wittiest 111114116**. Va. 111)
lir Mews Don dbalasese
** * * * * *•
Ova, wary individual bask otssmis supariesera national or auto,
to oadmoser to satires the Ira sad assurosit massis•
look of Ike astir* otiestero sends tbo Psdaval ilsosrao *Mon, a
asoposettro orgsalnatias of las mem beilbse to posolle swam ad a
ammo of rodloosseldng paw. aid setbsrlisod to samastse surtoda rights
at supervision mar its ariboro*
*
Ike&Waft, •
nor be attlos
•*
sa ~ratimons aseseselag
?sea tbe boot lafte
iS olovoserser portal, ises passel obsersibloao
rivet, the vast *sprity of then more duo to eissasagasent weMOM prinolpally in aver-lsenagt in saplaitatlos br Wimps* sad din,
rooters and in am diosigaid of lord rattriettlegh th40 Pelmost
ia depeessies, folloatag olosely as that of littit bast of sourse,
bed on important influonoe, sad the gro4t 'eduction of sal valves bag
vanisood Walking difficult far IOW ballk• But the attprertare or mit
baking esonst rotat to the asproodAmi U as alibi, oleos tbesseeds or
4111.111111, alleeleil Waits is all parts if tbo soustry Mao stood Its steak
sad rassinod straw sad solid* Nor bees doprosiatIoe In bawd values
sneer to base bole as important almost In mitual ?allures oneopt diem
interim smart Liao bat, boss 1111,41based for
ir blob yield, partioollsellir
by honks polies
iatarost rats* for scriags doposite*
lbs oseced oboarratisa is %bat about 110 pre at of the Mims*
any *ass of very mall isool baskso hostas Issas sad invesbasats or
lose thou MOM)sash* Nabs so mall as this aro ralativolg saw
paoolvo to overate* 2bolr pronto are negligible* NW oessot pair for
asperiised *1111041111.**60 WPM if it ionhooaU aralloblo• liesievar,
sip good seeds sal the vassal tastismor towards issoluees seaOsidivatiaa owe akin to their dirrimatiosip talk* bleidag business
I. Isom please*
It aleamsegoasst see the prinsigel ewe of fattens. it ems Nit
that the tellue if beak espervisim to eursreet it ei.4$14 else be eso.
ellieed mow eiseraiery sham in the reepesellility for *et bee aseirreit•
fie She Ober Wadi I bellies, lbw* if seem it memot to pined, that
Ii. sopsemPlessy .ristatL 5 beth.netlesel and stelae Iwo new been
se Armes as in the pAst bss. Sot in aosigatai a 'hare if the
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Federal Reserve Bank of St. Louis
•
t
responsibility to supervisiem4 It east be home in Iliad that neither
balkiest lees aer bulk sepervisiee en sorer perils's the positive femettea
of assuring owed bank emeagemset. Delik supervisor, 4b set ammo beaks
said, at best, they eau may perform the alepitive feminism of eritteisimg„
after the feet, the Isms eed trreetmeets which beak sessegers hems model
mod *ell by extreme esesures, which the lam seldom permit, ma they
sake their critielses effective if bask *Meer* sod directors are not
imperative. In feirness to bask supervisies as an effective element is
the banking structure, it Oheeld also be otsereed that molder our us.
sailed "deal system', pertly eatiseel tanks sad partly state beaks, there
has bees a grevtag teedeugy teverde eempetitive relaxation *f legal restrict:km en booking; aud toverds seepetitive graatiee of charters,
efts withset dee regard to the empariesse of applits and to gaieties
beehleg rasilitiesi thew** Greeting everwhashed plies. sad amesad
bookies esepetitisa. Ia oddities, the ease with 'hi* a airtime' bank,
if eritisised tee severely, sae seavert itself iet* a state beak, or
vise verse.-a posses *Meth every supervisor naturally likes to avoid-has farther teeded towards lees strtst mpervieisa.
Were basally, however, reeeet temhiag failures have eepbasieed too
inhereet wesiblesses of the mit lead balk. 'First, that it is too smik
affeeted by local prosperity or adversity, partiemlarly in plass, *ewe
there is a single interest, agrioaltural or industrial. Adequate
tiversifisatise 0 portfolio is leakieg; there are tee espy egg, in see
basket. Seemed, that the smaller the place, the less beak *Mears are
likely te apply the perspective of gamma eredit mooditions to their
local oredit problems or te realise the aosessity of a esbeteatial
eleseet of liquidity in the portfoliss4 That some city bulk *Moors
have also boos ovally Ohort.sighted does met alter the ems
the variaes reasdiet Ai* have hem suggested fir this
siteftfter absW4 ties proposals: (1) greater tatfleetim; (2)
ullespresd brae* beektega
(1) Greater tbifisaliggo lb* met authoritative proposal ter
sweater mitieatima is the 'banking stmestere is that *bleb the Tederal
Reserve Seardmeatneuely mad, to the busking esmeittees of Osogress
sa Nara le, 29121, as talisman 'It should be reeognised that offestive
seperwieles of banking is this coestai has bees serienely beapered by
the Geepotitiee totem* amber and nes.seekber bumble aed that the
sstehlieleasst or a mined getss of bashing valor maims' sepervision
is esseattal to hisdamatel beekias ream*
There sea be me dealt that the propeeal of the ?Moral Seism
leard6 if it *geld be Weight *beet, would be se lepsotset step in
eases*, There are today stoat 11,0011 aaticeal bake sed 14520 state
beaks (other thee satael savings banks). All state banks with saffidget sapital have bad the option fir seir years of either esseeetimg
lute natimeal banks or of joining the rowel Meserve System). It is
obvious, therefore, that **Meatiest of a borkimg strueture these
roots ge for bask tato our history eonld be Weight abent ealytir
formsk Wee already Wee snorted seeh feeise--first ghee the
Vatic:hal left Mt um passed; sad sewed, ghee the Pedant beery,
System IMO created. lash aseesplished its immediate objective, bet
*either has prevented bank failures•
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Federal Reserve Bank of St. Louis
•
z
It should aloe be obeereed that mancattee *Mt' the framework
of the latiesel Dm* Mt woad set reedit the great mass of smell state
beaks whisk mew Tow* isseffilsiont witni to quail!7 as national tanks.
/heir member would be firths, losreased if the minimum **pita of
matiemel beaks were teereesed prom 01'5,000 to 0$0,000 se the beigams
bill mew Were Oftgrome propoose• tot these very small stets bombs,
as aim* ledisated, ere the semree of moot of our book fallures•
Cowan there Amid be advemiages to wine/atter mew seitiesel
empowvisies4 It would remove present sompetitiom betweem national mad
state setheritiee reseitlag is lowered Segel restrictions, lees strict
supervislem wed lower stomderde is greetteg mew Oberters• Ileveribelese
it appears te me set to go really to the rest of the tremble. Tor, as
already Wielded, supervision to largely morttive and exerted after the
feet. 10ea the proposal of the bmshims bill to permit the ?edema $.
serve 'Word to posove officers amd dtrestero of bombs *ilk smogs ta
vesafe or umeemsd preetices dose met prodods safe sad send effteera or
direetore to take their place, last is redly needed is something
positive, measly better bask memegommet. The small beak*. T em eso.
wineed, oem *either fled air afford bettor aanagassat emeept through
a Menge in the beiklmg 'tractors Ohish will pmrmit this to be operated
as breeches of a larger bank.
WildeoxpAd Draw* Bugliggt. This leads direetly to the seemed
proposed rose* for the reoeot flood of bask failures, 16.1147 vide•
speed breed' bembluge This in itself would dembtless bring about,
set br fares bet I, evolution, ea important measure et smifioaties. A
large bulk with beemebes mould hardly afford'
met le be a member e the
Piderel liserve Spviem6 liereever, the estfloutima imuld probably (weer
largely Aida the framework of the noticed beekieg erotism, since
star the National leak Act is eapeble of permitting bomoshes freely to
epees state limes unless, Weed, snob Mira brew* legislation
should stimmlate some of the states to off* reetpreoel bread' bilk
sourteelee smog themselvee•
$ (1) It would offer to
smell eaaittos, -wtt as
sew, the busking servieee of tmstilmaLeas sufficiently large he be able to hire sompetent mod emo.
poriemeed managesent,
(2) ?be portfolios is Ai* the deposits of small sommunities would
be boosted lead be diveweifted tastemd of wilily loodi, sod umder any
reasomiliky semeervalive memesseemt they Should else have a sobotontial
element of liquidlir,
(t) In oddities to present outside supervising, the bwomObes mould
he sabjeat to soatimmems iatermal empervisiem• This meld be really
authoritative empervislea beamse it would hove power instantly is Chomp
loeal memagemeat wherever it wee prowls. Ismattelosierf. Iledoefftee
control ever the larger looms Mould toed Is Oho* everweetemelems of
local credit, Ada bare proved to be es relmoos for leeel berreeers as
for legal bomba. Amd heed-office FurChase of soourities should be mere
smart mid seasonstrie.
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Federal Reserve Bank of St. Louis
•
4(4) areelhos feed to spooked tostatively in small plume mod later
they proved mnprofitible• Seder unit hankies, ft& small
withdrawn
Ise-1
nke, ems lostsblishad, madam withdrew except by failure.
(1) The trn4itismal
in favor or the adminisAmericas
war
tratissiorlsoal bombers of tonal deposits mid aredita, sad against
alloringadietent beaker to say *ban sod hoe es** loss' ass guy
borrow.
(2) lhe fear that loc.al deposit, war to demisted ow emd leaned is
larger Waft*
?heft I believe are the ebjeetiose usually adonesod, and their are
°lovely allied. In them there is no* to be said fir Me of this.
In actea1 emperiesms, beesver, bqbeily fteoppear4,•* * * * * * **
In the nein, beeever, teaks with tseasehos, like unit banks, are is
busiemeo to sibs nemsy; ratio fOr lead credits are newt,' elvers
higher thea nosey nesiket rates; and the fastest
bees& eft grey
end booms profitable is by making all the good load learns it sea.
moreover, UMW by a larger capital, the branch souk ontemd larger
Individual oredits than the local hank, and it eon draw as the bead
office for additiseal funds ebon local credit requiremeete lamed local
deposits.
Ibis's is this furtimerookieeties.that if a bask with say one
hundred immeshes ler. to fall, every ase of its offtees meld cleft,
"bereft if eeSh of its offieee sere a loss' beak, probably a femur
mobs, ef *ma mold fail. This, to
Wad* is the one1410480011461
eblestioa to tom* bunking over a vile awes, limo is, of ewe% as
guy of assuring emend umnsgemeat for all Wake haying widespread
treashos4 Sat to Shrink free bran.* bunking assenoe of this risk is
to yield to a soma otiespaix. Both beat %Main aid Causia, !torso
as with se* deposit houbleg prevails, two had failures of books with
braadhem• But the percentage of their resolve's involved has bees as
emeh less that is ater unit teak failures that the answer to this
ebjestios is reasonably satisfaetory. 4 * 4 * * * *
Itsperiemoo Ohms that the leading and supervisory organisations
*Joh balks drift emtemeive bomb bunking have to maintain and as
afraid to maintain contribute pfterfnlly in themselves towards earefel
nemeginset, 'bile the wide area soverod brinzs diversifIsation of risk.
* * *•*•'4 Many spospe and skeins Pave teen formed awaiting
the efteesery authority to convert into tresebeel the enures of waits
has greatly weakened the opposition of the smiler unit beaks; and the
banking efteittees of Gowen have intredneed a bill providing that a
natiomal bank may establiak biemihes within its son state and ftf
miles beyond its borders, ?bus, as a remedy for the °Wife. WOMMOSOSO
of unit basking, we &moor likely seen to embark upon branch tell
side NI side with unit basking. If mad when we take this feedesemiil
step tomes a taroussibieg skuigs is our basking structure, it seems
impertamt that we sibeeld talus the step net tentatively or half-heartedly
bat fully eenvineed of its desirability as a national policy desigeed
afford bettor preteetift to deposits.
to
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Federal Reserve Bank of St. Louis
•
s
leseesep Like ow other supporters of unit banking,
I have s
rielet events to Mange my views, and I mew ie.
gard brio& balking as the omly fordemental remedy for the demonstrated
seaknooses of unit barik$ii. pertiollerly is the smailfr plisses* pet to
bosoms as effective telOrmiset of natianal psU bras& liseking dhemld
be peenitted to developoWhorsenditiese most favorable to its
Mom ooditioes involve questiems of, (I) area; (2) sup*rvisie:71
7
14
sespettttes with unit balks.
(1) Aisip Wader lb* banking bill, a eational bulk mey establish
brsambes
within the Units of its own state sod within eurodoses territory fifty miles outside* This provisissa While a
tromemdeas step 11 advance, still savers of half-hoortodesee. If we are
valise to go this faro we night better reeegnise at the outset that
stet* lines are easily political 1,, ther them eeemeniel sad that we
shell
mem have to amend the law to permit brook** over more *literal trade
areas, as esAlsrptreller Pole meetly rerommemded. To shot oer hems&
banking up in forty-eight separate esupertments as if it were semetkl
ag
we feared, is to ignore the emperiemes of all the other owentries of
the wild shore, as far as I Iners, there is no territorial reeePic
This does not mean that I mead eontemplate for the United States,tian4
ovum
for the distant fakers, bone* balklog shish covered the entire
oesetry.
Diatom* as sectional feelings are against it; proper diversificatio
n
does met require it; *ad obviously there east be some limits* Set
merely all will agree Ihat a vtate.plus fifty mileo.will in many eases
prove a lisitaties that has elements of isisafeness• In states overagrioaltmotto Mir example, state lines will render it diffisalt to attain that timdmmental requisite of branch banking.* diversified
portfolio. The limits, it moms to net Joule% be selloiently lids, and
mere than this, saffiedently elastic, to permit of sowed diversi
fieatio
The twelve !Federal Reserve Districts approrinate natural trade trees, tmn*
s7ite of some arbitrariness, and they appear to se to be the nest
practiemble limits *Ws ehlek to works Dat the Federal Deserve Board,
*doh seder the proposed bill is to authorise all treeakees ahead, it
geese to se. be empowered to allow bremehes to overstep district limes
is asseeaary to sever trade sues or to assure diversifiestioa.•*
*•
(t)jj. widespread breast booking intro:Isom into the
*traitor* the puihility set of mere bank failures, bat or larger and
more eswiese failures. The balking bill wisely provide, that the
establiahmest of every teen& shall be inkiest to the approval of the
Federal Rimer,* ',Bard. this Ames both properly nod senesely epee) the
Beard and the Federal lesdeme leaks the prinary responsibility flier the
mood development of branch tanking* It seems inpertiint that they
shonld also have authority to prevent week state inetitatiems with
breadhos from blooming meekers of the Deserve Slyetes ir eseversies into
or eessailidaties with satiosal banks* Ilhother the tussah basking institutions whim are peraitted to devil* shall be etreag amid eased or
Ashl merely represent a epees egotism of ettettes salt beak senagemeat
is the seta, spas the etaaderde ehlak the Federal Deserve heard
;as a guide for its settee, end the rigidity sad rnthlesesese
with shish It detainee to aethorise hismehes for egg! task Whole past
reeerd esd policies have set been seised sod safe* Uwe sheald be sie
plat* in teen* banking for offteers or direeters she seek to operate
banks in their ems selfish interest. And there is no questies that the
:=61:
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Federal Reserve Bank of St. Louis
g
PUtaie
The supervision of them larger institations will briag hoestor
responsibilities to their supervising. lot is the other Melt with
fever it to supervise, sore moneentrated attention een be gives; and
the ability of these larger inietitutions, both to find emd to per fer
aped memagere, should renews sae of the present diffieulties is the
supervision of small leoal banks.
eseoad element is the development of brush beakimg is the speed
Wei thigh it pressed.: and it is possible thrit here agate the rederal
lieriwire Seer& war be able to amerciesareertraining inflames. Proper
eammleatieme to maw %reach teehlag systems eemmet be develeped
eiremight. lame uneatistarbory eituatioas woad be likely to eemar if
a iespetitive eeremble fir leinuebee, sub es has reliantly takes plass
in oertain areas, should be repeated over the seem*, as a *els,
lhortmaately the present difficult period favors moderation in the
speed of establiehimg bremebee.
A third factor, vith Aid: so mama or state supervise, has
yet bees able to cope, bat with sick it is to be hoped the Federal
%serve Beard nay fiad ft may to deal, is the competitive paytag if
high rates of interest is deposits, particularly seeing. deposits.
*ere met controlled by slowing; helm or other arrampumate, these
rates, have mite generally Ludt dIseetly to the mamma of inferior
heads with high esamen, ememg ChM. en the lee of avegages, the
mortality is bigm.
(!)
The initial establishasat
of treadles
sac pressed
lines of least resist4.noe
tir abeerhtmg leeal emit banks. Nay strong local banks, however, as,
deellue to teems tremahee mad the question will this arise *ether a
larger institartirm should be permitted to put a branch in en& places.
ihile the else of the plass will have a bearing 411 the decisiem, I
shield like to express a purely persemal view that as seatiment in
small plums will naturally fever the lima bask, the villimgmees of a
strove( well*managed teak to maintain a bread* alongside the local beak
should at least be is important pragmatism in favor of grantiag the
atica,••*•*••* Provided a bank has geed memagememt, it
in enteral, be allowed to bring its servieee amd advantages to
them pla_i ahem its imagers think they can profitably operate.
::11:
This closing thought serves to emphasise ar belief that amass
la the banking strmeture ahead be appremehed prinerily tree the item&
point of safety if deposits rather this tree the standpoint of amen*
of credit to be miteaded loca117. Ts* eftis in the peat the latter
has appeared Ube** primry *Wont,s if banking legislatioa. with
mill reeegnition of the fnet that lamas create deposits, le shall be
is safe ground, aevertbeless, if we raraphrase the taniliar loglisk
adage, and ear, 'Let we take vire of the derosits mad the loans will
take sere of themeelves.*
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Federal Reserve Bank of St. Louis
a
is Is a mood to give foll flapper. Wiellftemoses emerted to the
public Interest*
•
George V. McLaughlin, President,
Brooklyn Trust Company, Brooklyn, N. Y.
40th Annual Convention, New York State Bankers Asso., June 1933.
*** * * * * *
Unquestionably, we lost the confidence of the depositing public some
time ago and have not fully regained it, although we have rapidly improved
in the last three months. Furthermore, there is no question that we deserve some of the treatment that we have received from our clients and
also from the legislators.Dut if we would look for the fundamental
trouble, or rather the principal cause of our banking troubles, I think
we would have to subscribe to the reason given by Dr. Anderson last night
when he said that for some seven or eight years, we had artificially easy
money. It stood to reason that with increased deposits, the banker would
look for new avenues of investment. That sums up in a few words my
opinion of the fundamental cause of our troubles.
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Federal Reserve Bank of St. Louis
Address of Willis H. Sargent, Chairman,
Committee on Banks of the Assembly of New York State
40th Annual Convention, New York State Bankers Asso., June 1933
And then, I want to say just a word in closing, about size. Size has
not been any guarantee for security or safeness or soundness in this State.
If it were, you wouldn't have had the Bank of United States catastrophe.
want to refer to something I said a moment ago, and say to you that in
my opinion many of the small institutions of this state which found themselves in trouble at the time of the banking holiday have been gotten into
the trouble, if not deliberately, certainly because of a strong degree of
negligence, through the sale to them by the big banks of New York City of
securities which those banks didn't want to keep for themselves.j
0
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Federal Reserve Bank of St. Louis
•
Francis H. Sisson, V. P., Guaranty Trust Co., N. Y.
Speech - Annual Convention, Pa. B. A., May 1933.
Source: The Financial Age, May 1933.
************
In another major aspect are bank customers charged with as great a
responsibility in protecting the safety of their banks as are bankers themselves. I refer to the utilization of the assets of the banks by their
-Banks have failed in the vast majority of cases be[
borrower customers.
cause their loans and securities, created in good faith by bankers in
cooperating with the business interests of the country, proved unsound under
subsequent conditions. An unsound loan is created by the borrowers as well
as the banker. A large part of the condition of unsound credit that has
contributed to the depression was caused by the pressure, competitive and
otherwise, placed upon the bankers in their community to go along with its
industrial and mercantile interests in their business plans to what later
events proved to have been unwise lengths.-T
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Federal Reserve Bank of St. Louis
** ** ********
•
SOURCE:
ASSOCIATION OF RESEEVE CITY BANKERS—Commission on Banking Law
and Practice
Bulletin No. 2
July 24, 1933
Page 6
* * * The records show that the overwhelming proportion of bank
failures has taken place among the group of banks which were inadequately
capitalized and so small as to afford no opportunity for the development of
sound banking experience.
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Federal Reserve Bank of St. Louis
II
•
SOURCE:
THE GUARkNTY OF BANK DEPOSITS--A report of the Commission on
Banking Law and Practice, Association of Res. City Bankers
Chicago, Nov. 1933----Bulletin No. 3
Page 19
Although nearly one-half of the banks of the country have been
eliminated since 1920, there are still many uneconomic units in our
banking structure. A bank which does not earn a fair average rate of
return over a period of years not only is unable to build up reserves
against bad times, but, in order to improve profits, is under constant
temptation to take risks which in the end are likely to lead to failure.
Pages 24-25
INTEREST ON DEPOSITS.--Under the provisions of the Banking Act of
1933, member banks were prohibited from paying interest on demand deposits.
It was the motive of the framers of the bill to discourage competition in
interest payment, which has worked against conservative banking„and to
provide a saving to the banks which would enable them to write off losses
and build up capital structure. They also had in mind that
•measure
would_provide funds out of which to meet the assessments under the guaranty
planor many years there has been considerable sentiment among bankers
against indiscriminate payment of interest, and there are many reasons
why restrictions should have been imposed earlier. Compeon between
IIks in interest payment has undoubtedly been a source of wenkness in the
banking structure. It has led many banks to purchase high yield securities
and to make loans at high rates of interest. It has also doubtless been
one of
eScors which has prevented many banks frail wrng off losses
as they occur or from building up the necessary surplus to meet emergency
conons. -1
Figures have been presented by the Comptroller of the Currency which
indicate that interest paid on demand deposits by member banks has averaged
$246,000,000 per annum during the past five years. For the past year, however, payments probably amounted to less than one-third of that amount.
There is little basis as yet for estimating the amount of saving from this
source which might be available for assessments, because there are many
offsetting factors to be considered. It is very obvious, for example,
that many banks are becoming more cautious in their loan and investment
policies, with the result that they will probably show lower earnings in
proportion to assets. Moreover it will take many years for even some of
the good banks to write off accumulated losses and build up the necessary
surplus for safety. A more rigid policy of wrng off future losses as
they occur will probably further reduce earnings. * * *
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Federal Reserve Bank of St. Louis
•
SOURCE:
THE GUARANTY OF BANK DEPOSITS--A report of the Commission on
Banking Law and Practice, Association of Res. City Bankers
Chicago, Nov. 1933----Bulletin No. 3.
eage 29
* ** But the banking difficulties experienced during the past twelve
years have not been due to a mere lack of confidence on the part of
the depositing public. Unfortunately the trouble is much more
fundamental. If the same banking structure and the same quality of
banking are allowed to continue, the guaranty of deposits may postpone
the date of closing in some cases but it can hardly be expected to
obviate ultimate losses, because no bank can operate indefinitely with
bad assets and no profits. * * *
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Federal Reserve Bank of St. Louis
•
SOURCE:
ECONOMIC CONDITIONS, GOVERNMENTAL FINANCE, U.S. SECURITIES - Mar. 1933
(The Nat. City Bk. of N.Y.)
Page 34
The
* * * ***
Banking Situation
The banking difficulties are not new in origin, but are of the
same character as those experienced in other areas earlier in the
depression. The fundamental cause of trouble goes back to the wartime
rise in prices and wages and inflation of credit. This established a
level of valu. s which as people became accustomed to it seemed to be
real and permanent, and a great volume of indebtednes2 was created upon
the basis of those values. When it turned out that they were inflated,
the decline in prices and in property and investment values left the new
indebtedness without adequate support. In many cases the position of
banks, subject to call for repayment of their deposits upon demand or
short notice, and at the same time unable to collect their loans, or cash
in their investments without severe loss, became a most difficult one.
Even where excessive long-term commitments had been avoided, and an adequate
percentage of well-secured loans of short maturity was held, many borrower
s
have been unable to make their payments promptly, leaving no choice other
than to extend their loans, to collect them with the inevitable conseque
nces
of bankruptcies, foreclosures or sacrifice sales of collateral,or to take
losses upon them.
To meet this situation the Reconstruction Finance Corporation was
organized, and on January 31, 1933 had loaned approximately $900,000
,000
to banks and trust companies, of which nearly $500,000,000 had been
repaid. This assistance hhs been invaluable in supplying banks with
liquid
funds against their slow assets, enabling them to meet withdrawals
and
averting the spread of panic. But the continued decline in
business
earnings, commodity prices, and in the value of real estate,
the chief
cause of recent troubles, has made the situation one of continue
d difficulty.
The publication of the names of banks borrowing from the R.F.C.
has
contributed to the unsettlement, and President Hoover has
acted constructively
in asking Congress to stop this practice.
Page 35
Importance of An Economic Program
Incomparably the most important consideration in the situatio
n is
that banking conditions are not independent of general
business conditions.
The best program for overcoming the banking difficulties
is a program to
vvercome the political and economic difficulties which are
prolonging this
depression, subjecting the people to a distress under which
they give way
to a disorderly alarm, and delaying recovery in the value
of the banking
assets.
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Federal Reserve Bank of St. Louis
One year ago at about this time the United
States was passing through
Economic Conditions, etc.-March 1933 (Nat. City Bk., N.Y.)
Page 35 (contd.)
a period of unsettlement and disturbance to confidence of which the
causes were the unbalanced Federal budget; the agitation of the bonus
payment proposal, threatenin,; t
money standard; and the apparent deadlock in the controversy upon reparations. The effect of this disturbance
was b flight of cr.idttl to safety out of active employment in the
markets, out of the banks, and even out of the country. All this led to
a period of acute financial difficulty, evidenced by banking troubles,
currency hoarding and gold shipments. But the crisis was successfully
surmounted and a general, rapid and vigorous recovery followed when the
causes of the disturbance were removed, through passage of the tax and
economy measures by Congress, defeat of the bonus proposal, and adoption
of the Lausanne agreement upon reparations.
The conditions of one year ago now have their counterpart again. Thu
evidences of alarm are the same, and the underlying causes are the same.
The Federal budget continues unbalanced, with action upon it waiting the
new Administration; the agitation for inflationary policies or a change
in the monetary standard has been revived; and intergovernmental debts
are again disturbing international relationships and prolonging the international currency disorder, which is stifling trade and pulling down values
in all countries.
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Federal Reserve Bank of St. Louis
SOURCE:
26th ANNUAL REPORT OF DIVISION OF BANKS -- STATE OF OHIO
December 31, 1933
12a_x_e_2113_
LIQUIDATION BUREAU FOREWORD
In the year ended December 31, 1933, thirty-six banks were closed
for liquidation, impounding $255,533,372 in deposits. Without further analysis and comparison this statement of impounded deposits
would be staggering. If, however, we deduct the three large institutions
which greatly magnify the reflection of abnormal conditions, we find
that the remaining thirty-three banks closed caused an impounding of
only *15,692,098 or $6,500,000 less than were impounded in 1930. It
is, of course, well recognized that incidents leading to the bank holiday
early in the year were responsible for the closing of three large institutions and no doubt a substantial proportion of the remaining thirtythree.
CLOSINGS
During this four-year period, 178 banks have closed, impounding
deposits of $513,011,119. This period was particularly disastrous
in its effect on banks and while we are not prepared to say that all the
institutions which closed were weak and poorly managed, a careful
study of Exhibit J will show that on the average the asset position of
these banks had become seriously unbalanced; assuming, of course, that
the percentage ratios of the 503 banks which remained open are indicative of a more healthy condition by reason of the fact that they did
remain open. In presenting Exhibit J we are not presuming in Column
B to say that this is an ideal proportion of assets and liabilities. We
present these percentages only as facts.
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Federal Reserve Bank of St. Louis
Annual Report for State of Ohio - Dec. 31, 1933 (contd.)
Page 75
CLOSINGS (contd.)
PERCENTAGE RATIO OF ASSETS AND LIABILITIES
TO TOTAL LIABILITIES
(A) FROM CLOSING STATEMENTS 142 BANKS IN LIQUIDATION-Jan. 1,
1930--Dec. 31, 1933.
(B) FROM CALL REPORTS 503 BANKS OPEN AS OF DECEMBER 31, 1933.
(A)
Closed Banks
ASSETS:
Cash and Due from Banks
U.S. Bonds
Municipal Bonds
(Total U.S. and Municipal)
Other Bonds
Mortgage Loans
Collateral Loans
Unsecured Loans
(Total Coll. and Unsec. Loans)
Banking House and Furn. and Fix
Other Real Estate
Other Assets
TOTAL
LIABILITIES:
Bills Payable
Public Funds
Demand Deposits
Time Deposits
Capital Structure
Other Liabilities
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Federal Reserve Bank of St. Louis
TOTAL
5.
1.
3.
(4)
10.5
22.5
7.
40.
(47)
5.
5.E
0.5
100.
11.5
6.
26.
58.
18.
0.5
100.
(B)
Open Banks
15.3
*
*
15.4
10.5
27.
*
*
24.
3.6
2.1
2.1
130.
2.1
4.1
25.9
52.5
13.8
1.6
100.
*Figures not separated on recapitulation of Call heports
s*.
SOURCE:
ASSOCIATION NEWS BULLETIN -- Savings Banks Association of
State of N.Y.
October 16-17- 1933
HOW SAVINGS BANKERS MAY ADAPT THEMSELVES TO FEDERAL LEGISLATION-- by
A. A. Berle, Jr.
Page 41
Under the deposit insurance plan, of course, savings banks are
asked to contribute equally with other classes of banks to the
stability of deposits the country over. Savings banks do a
different kind of business, and they are a different kind of risk.
The unsecured loan is practically unknown in the savings bank. The
law has so carefully restricted their operations in most places
that they have pretty solid collateral behind all of their deposit
liability. You are, therefore, in the position of taking a wholly
secured group of liabilities and asking them to insure on the same
basis .58 liabilities which are unsecured. I hasten to say that this
implies no criticism of the commercial banks, the fact being of
course that commercial banking is a definitely different type of business.
As a result, the savings banks have turned in a score for solvency
and success far in excess of the rest of the banking system of the
country. In New York, for example, there has been no failure in over
thirty years. In our neighboring state of Massachusetts, the total
losses have been less than one per cent. In other words, the savings
bank system has weathered the panic of '73, and the panic of '36, and
the difficulties of 1914, and the depression of 1921, and three years
of this depression without material casualty. It, therefore, is in a
position to take pride in its own strength. It can say actuarially,
we are a different risk, and that ought to be recognized. There is
very real reason for saying that it is not wholly just to ask the
best acturial risk in the country to share the same burden as the
worst actuarial risk in the country.
I
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Federal Reserve Bank of St. Louis
0. Howard Wolfe, Pres., Pa. B. A.
Speech — Annual Convention, Pa. B. A., May 1933.
Source: The Financial Age May 1953
** * ****** **
Alalysis the Basis of Synthesis
I once heard a famous physician say that any fool can prescribe medicine;
real professional skill lies in the ability to diagnose disease. Should we
not therefore attempt to discover what ails us before we try to fix the blame
or to find the remedy? We need hold no brief for those bankers in high or low
places who have abused the trust placed in them. If we analyse carefully the
disclosures that have come out of New York and other large centres, I think we
can agree that the fault lies in the field of ethics r- ther than in inadequacy
of banking law. We have had presented to us the rather sorry picture of
bankers who very obviously were giving too much of their time in the effort to
get rich, and it makes no particular difference whether they were speculating
generally or in the stock of their own institutions. Various and several
reasons have been advanced to explain the catastrophic list of bank failures
throughout the country during the past ten years, such as too many banks, poor
management, one crop banking, inadequate capital, and other causes. These
factors have always been with us, and to a certain extent may continue. The
basic, fundamental cause of wholesale failures has been the business depression,
and nothing else. It is mathematically and economically impossible for any
banking system to meet the demands of its depositors 100 per cent when all
business, not just a part of it, upon which banking rests, is unable to meet
its bank obligations when due.
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Federal Reserve Bank of St. Louis
***** * * * * **
•
SOURCE:
ANNUAL REPORT ON BANKS OF DEPOSIT & DISCOUNT, ETC.- N.Y. 1933
Page 6
NEW YORK STATE AND THE NATIONAL PROGRAM
During the first two months of the year, the department continued the policy which it had followed in 1932, of cooperating in
strengthening individual situations wherever possible in order to
hold the banking structure together and prevent a further loss of
confidence and contraction of credit. In that period, only one bank
and one private banker were compelled to close their doors, and
had it not been for the wave of fear which swept in from the West,
where bank holidays had already become numerous, the one proclaimed by the Governor in this State on March 4, would not have
been necessary. However, once New York was placed on a holiday
basis, it would have been folly to have attempted to keep banks of
other states open, not only because the fear which had gripped the
public was spreading rapidly, but also because the tremendous balances of interior banks on deposit in New York could not be made
available. * *
*
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Federal Reserve Bank of St. Louis
SOURCE:
THE CHANGING STRUCTURE OF AMERICAN BANKING--R. W. Goldschmidt
1935
CHAPTFR XI
Some Suggestions for Reform
Pages 241-42
The previous chapters have been devoted to showing, among
other things, that the weakness of the American banking system can
be attributed to six primary causes:1. The absence of a sufficient safeguard against excessive
expansion of credit.
2. The existence of forty-nine different banking systems,
leading to a competition in laxity and making co-ordination extremely
difficult.
5. The legal barriers to the development of a system of branch
banks, which are a necessity after economic changes have made the
exclusive existence of unit banks, usw3lly of very small size, an
inherent cause of weakness and instability of the banking system in
great parts of the country.
4. The excessive use of bank credit in financing urban real
estate developments.
5. The close connection of commercial banks with the security
markets, resulting, on the one hand, in a dangerous dependence of
the value of bank assets on stock and bond quotations, and, on the
other, in an equally dangerous influence of investment bankers on the
administration of commercial banks.
6. The diminishing role that commercial banking in the strict
sense of the word has come to play within the American banking system
as a whole and even within the activities of National Banks, State
Banks, and Trust Companies.'
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Federal Reserve Bank of St. Louis
•
SOURCE:
THE CALIFORNIA BANKER—JUNE 1955
ADDRESS OF THE PRESIDENT--J. F. Sullivan, Jr.
Page 181
** * *****
Fundamental Banking Practice
In this day and generation it has become general knowledge
that banks derive their chief income from interest and dividends
on investments, and that it is necessary for banks to make such
investments so that they will have income sufficient to defray
operating costs. It would be a reflection on the intelligence of
the American people to accept, without protest, the oft-repeated
assertion that it was commonly believed that banks simply took
funds deposited and held them intact until they were called for
again. The mere fact that almost all bank receipts are in the
form of checks that must be cleared and paid before they become
solvent credits available for withdrawal ought to make this point
clear and explicit. American people are thoroughly accustomed to the
use of checks, and it is silly to imagine that they believe each
bank can wave a Midas wand and instantly convert their checks, drafts
and other negotiable instruments into gold or equivalent funds
immediately available on demand.
People know that banks must make investments. They also
know that these investments must take the form of loans to individuals,
secured by collateral, or to business houses, or in bonds issued against
municipal credits, or in bonds or mortgages upon some form of real
property. They also know that any bank keeps on hand only a reasonable
amount of ready cash, constituting a revolving fund for convenience
in making the relatively small number of cash transactions. The people
are aware that current values have contracted to a greater or lesser
degree in all basic commodities, in manufactured goods; in lends and
buildings and leases; in railroad properties and all other forms of
utilities; and finally, as a direct result of the abnormal delinquencies
in tax payments, that the credit of their respective city, county and
State governments has been more or less jeopardized.
Since all these changes reflect in the current prices of securities
of various classes, and since banks usually invest in such securities,
it follows that the banks must have suffered a contraction in their asset
valuations to a greater or lesser degree. Unquestionably these factors
have been chiefly responsible for the closing of a large number of banks
in recent years, more so than any inherent faults in the banking system
itself.
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Federal Reserve Bank of St. Louis
**** * ****
The California Banker—June 1933
CAUSES OF THE RECENT BANKING CRISIS AND SUGGESTIONS FOR THEIR
AVOIDANCE
IN THE FUTURE--Address by Alden Anderson, Pres.,
Capital Nat. Bank, Sacramento
Page 258
********
Mushroom Banking
Commencing about with the inflation era of war time, and
continuing until the so-called stock boom "blow up" in 1929,
there was a persistent urge to start new banks, mostly small ones,
throughout the country. It is said that in some sections of the
i igrain belt, particularly in the smaller towns, there was a bank
lof some kind for every four hundred of inhabitants. The money of
] such banks was loaned locally and they were mainly one or two
chief
1 crops districts. When deflation started, wheat and its by-products
led the downward trend, and everything dependent on them
went, too.
When people wanted their money from such banks, and their working
funds were gone, there was nothing to do but close the bank and
wait
for their frozen assets to thaw out/The number of banks
closed, even
though the total amount of deposits so affected is not so
great, is
scandalously large and seems to impeach the ability of our
people to
understand and practice safe and sound banking. Some will
say we want
more law, and more supervision. Great Britain and Canada
have had
the same depressed conditions that we have had and had no bank
failures,
and they have fewer banking laws and requirements and less supervi
sion
than we have today. According to the latest enumeration I
have seen,
(had)this-bbuntry has-,9882 bank failures since 1900 and Canada
has had nine.
Such figures are appalling. Is it any wonder deposit
ors in remaining banks
became uneasy? One must conclude that the striking differe
nce in these
totals is because of the difference in banking systems
.
(
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Federal Reserve Bank of St. Louis
S
SOURCE:
THE CALIFORNIA BANKER--JUNE 1933
SOME THOUGHTS ON THE FUTURE OF AMERICAN BANKER--by Albert C. Agnew
Legal Adviser, Fed. Res. Bank, San Francisco
Pages 193-94
I have no hesitation in designating as the chief and underlying
cause of weakness a cause from which most of the other difficulties
encountered have flown, either directly or indirectly--the existence
of the multiplicity of State banking systems and the competition between
those systems and that governing national banks. I do not intend to
imply that, upon the correction of this condition, all the other ills
to which the system has been heir would be cured. On the contrary,
other fundamental and radical changes are vital and necessary, but, in
my humble opinion, the unification of commercial banking under one law
and one control throughout the United States is the logical and essential
starting point.
We have within the continental United States 48 separate and
distinct State banking systems, each governed by separate laws, with
differing supervisory control, each governed by separate policy (or in
many instances no policy whatever), and all competing with the national
system for supremacy in number of banks and total resources.
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Federal Reserve Bank of St. Louis
•
SOURCE:
THE CALIFORNIA BANKIE--JUNE 1933
SOME THOUGHTS ON THL FUTURE OF AMERICAN BANKING--by Albert C. Agnew
Legal Adviser, Fed. Res. Bank, San Francieco
Page 197
* ** * *** **
Capital Loan Abuses
The post-mortem examination conducted on a failed commercial
bank usually discloses a generous supply of capital loans which, in
it:
cases, are inferior in quality to those held by competing life
insurance companies, building and loan associations and savings banks.
In countries where there exists a commercial banking tradon, it iE
a fundamental principle that deposits payable on demand may not with
safety be locked up in capital and long-term commitments. I suggest,
then, for your consideration, the inclusion in this imaginary bank code
which we are drafting a provision prohibiting commercial banks from
lending on real estate or other fixed and nonliguid capital assets
and from accepting as security or owning ix the same except in satisfaction of loans which would otherwise be losses.
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Federal Reserve Bank of St. Louis
** ********
SOURCE:
THE TARHEEL BANKER - N.C. BANKERS ASSOCIATION PROCEEDINGS
OCTOBER 1933
YOUR CUSTOMERS AND YOUR BANK - by Dr. Harold Stonier, National
Educational Director A.I.B.
Page 35
** ** * * * ****
In many cases banks have failed only because the communities
first failed the banks--the people had not taken the proper
attitude or assumed the proper responsibility toward those institutions. This group constitutes over 90 per cent of the people who
contact the banks, large banks as well as small banks, throughout
the country.
** ******** *
RECENT BANKING LEGISLATION - by Hon. Henry B. Steagall
Page 63
***********
* * * From time to time as weaknesses were disclosed, new
legislation has been passed for improving the system. The
culmination of these efforts is found in the passage of the Federal
Reserve Act of 1913. Through this measure, we sought to decentralize
and diffuse control of bank credit and to provide an elastic currency
suited to the needs of agriculture, industry and commerce. This
legislation was followed by a period of prosperit, never known before.
In the midst of our unparalleled achievements there came a spirit of
exaltation which might have well suggested the truth proclaimed by
the wisest of men, "that pride goeth before a fall."
We forgot the lessons of experience. We departed from established
rules of business. Our bank system ceased its primary service to
agriculture, industry and commerce. We turned to new fields of
activity, to investments, stock market activities and speculation. In
many instances the legitimate uses of bank credit were subordinated to
the support of stock gambling and international high finance. There
followed an orgy of speculation fostered by many holding high place in
the financial world and under wdose leadership thousands of bankers
and business men were lured into the mad rush to get something for nothing-all to the neglect of legitimate business. Bank credit was inflated,
values lifted to a fictitious level and agriculture, industry and commerce
stripped of normal support. Our financial leaders became intoxicated.
They went on a spree. They charged the machine with high powered gas
and soared away toward the heavens, seeming to think only of a place
to land or of the wreck that was bound to come.
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Federal Reserve Bank of St. Louis
-2-
THE TARHEEL BANKER - Oct. 1933
Recent Banking Legislation by Hon. Henry B. Steagall
Page 63 (contd.)
It is needless to indulge in censure or abuse. If reconstruction is to be effective and complete, we shall need the best effort
both of government officials and financial leaders. The work cannot
be accomplished wholly from within nor can it be successfully imposed entirely from without. Needed reform and improvements must
come from the lessons of the past to be applied by those in active
control of our banking system.
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Federal Reserve Bank of St. Louis
EXCERPT TAKEN FROM "REPORT OF STUDY COMMISSION FOR INDIANA FINANCIAL
INSTITUTIONS". CREATED BY SEVENTY-SEVENTH GENERAL ASSEMBLY.
Page
Eux
"A particular problem of this nature is specifically recognized by
granting to the commission the power to regulate the "withdrawal of funds
from any financial institution to which the act is applicable".
The problem
of hysterical "runs" by bank depositors is one that received the utmost consideration from the Study Commission.
Early in 1932 waves of panic swept
through certain sections of the United States. They reached such proportions
that solvent banks in 22 states were forced to restrict their payment to
depositors in order to keep from closing their doors. In most instances,
such action on the part of the bank was without legalization.
Notwithstanding
this fact questionnaires sent by the Study Commission to the various state
bank departments throughout the country revealed that not less than 658 banks
had taken this somewhat desperate chance to prevent closing. (See Table XLII.)
TABLE XLII
Banks Restricting Payment Of Deposits 1/
(To May, 1932)
Name of State
1. Alabama
2. Arkansas
3, Colorado
4. Connecticut
5, Delaware
6. Georgia
7.
8.
9.
10.
Idaho
Illinois 2/
Indiana
Kansas
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Federal Reserve Bank of St. Louis
Number of
Number of banks in each state with
banks in
restricted withdrawals
each State On all accounts On savings accounts
220
329
1
2
150
4
191
None
45
•
323
96
1,221
705
806
1
None
_
200
None
None
1
2
50
Usual Notice
None
11
-Uncertain
None
•
Name of State
11.
12.
13.
14.
15.
Kentucky
Louisiana
Maine
Michigan
Minnesota
16.
17.
18.
19.
20.
Mississippi
Missouri
Montana
Nebraska
New Hampshire
Number of
Number of banks in each state with
banks in
restricted withdrawals_
each State On all accouits JOn savings accounts
419
191
79
639
752
20
1
None
50
50
20
2
None
280
11110
122
602
65
6
12
7
None
"
40
None
"
"
2
3
21. New Mexico
22. New York
23. North Dakota
24. Oklahoma
25. Rhode Island
27
566
254
320
25
None
None
"
II
South Carolina
South Dakota
Tennessee
Texas
30. Vermont
138
None
56
279
5
5
380
700
58
None
50
1
None
"
"
31.
Virginia
306
11
None
32.
33.
34.
35.
Washington
228
None
6
--
__
--
26.
27.
28.
29.
West Virginia V
Wisconsin
Wyoming
Total
None
"
"
8
None
4
781
19
19
58
None
None
448
210
12 Data compiled from questionnaires sent to the 48 banking departments. No
replies were received from 13 states.
The banking department of Illinois could give no detailed information as to
any restrictions but it is known that some banks in that state took this
step. Examples are the institutions of Urbana and Aurora.
„2/ No definite information as to actual number of banks on the restricted basis.
Practically all the banks in the northwestern part of West Virginia adopted
the rule of restricted withdrawals. All banks in Martinsburg adopted the
rule. Also banks in Parkersburg and Wheeling.
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Federal Reserve Bank of St. Louis
3
"Prior to June, 1932, legislation in at least four states* had taken
cognizance of the seriousness of such a situation. Legislation had been proposed in at least two others**.
All of the recently developed plans used by
these states were carefully studied as the basis for formulating the proposal
to give the Indiana Department flexible discretionary powers needed to deal
with these situations as they may arise in future years.
*Florida, Massachusetts, Michigan, and Virginia.
**Illinois and New York.
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Federal Reserve Bank of St. Louis
•
SOURCE:
REPORT OF THE C/C----1932
?age 4
In considering those causes responsible for bank failures
in this country, it is significant to note the rapid increase in
the number of banks chartered during the 20-year period beginning
June 30, 1900. On this date the total of all reporting banks was
10,382, while 20 years later, June 30, 1920, the total was 30,139,
representing an increase of 19,757 chartered banks, or an average
yearly increase of 988. While these figures are net and therefore
short of the actual number of chartered banks by the number of
suspensions, voluntary liquidations, consolidations, etc., they are,
nevertheless, large enough to reveal the effects of the relaxation of
requirements for organization and the favorable economic developments
of the period.
Lax State laws and the passage by the Congress of the act of
March 14, 1900, reducing the minimum capitathation of national banks
from $5J1000 to $25,0000 facilitated the organization of thousands of
small banks in small towns, particularly in agricultural sections
throughout the country, while rising prices and increasing prosperity
made it possible for these banks to thrive. But with the turn of the
times, which set in with the beginning of the post-war period, we have
come to realize the danger in permitting the organization of small undercapitalized institutions. These banks, many with incompetent management,
have been forced to yield to the reverse of those economic conditions
which made them prosperous. Failures among this type of bank have been
at a rate almost as great as that at which they were organized. Of all
suspended banks since 1920, 65.7 per cent have had capital of less than
$50,000.
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Federal Reserve Bank of St. Louis
Referendum No. 63 on the Report of
the Special Committee on Banking, Part I
Chamber of Consisrce of the U. E. A.
December 9, 19Fr
Committee Report
* 4 *
*
The regrettable record of the past ten years (September 1, 19E2, to
August !1, 19321 inclusive) of the susrension of 9,553 banks in the United
States, 4,83'Ks of these suspensions having occurred since the beginning of
the acute depression, clearly indicates the persistence of the need of
providing better protection for depositors' funds. The gravity of this
problem is reflected in mumsraus ways. The actual losses to depositors
and others, the disturbing distrust of banks and the resultant contrsction
of credit have produced far-reaching injuries. Strong dersositaries are an
imperative need. This necessity has been foremost in the Committee's consider. tions.
No selfish interest of stockholder or bank officer, no narrow view of
what constitutes the credit reouirements of business, and no popular prejudice must be permitted to delay such adjustments in our banking structure
and methods as will protect the savings and other deposits of our people.
Effective means must be found of fostering the general development of more
strong institutions under the supervision of men of proved integrity and
ability.
Banking fAindamentals and not surface symptoms or superficialities are
the true key to iisprovement. Neither law nor public supervision can be devended u:s>n to correct all abuses in banking, prevent bank failures, or save
the community from personal or business mishaps. Good banks are mainly the
products of properly equipped, far-seeing men of high professional standards
with a keen sense of public interest.
The human element in banking is a principal factor. Capacity for good
.nanagememt and Improved efficiency of bank executives cannot be supplied by
law. Indeed, rigid prescription of statutes that would seek to insure
automatic safeguards presents the danger that some bankers may be encouraged
to fsel that practices not definitely prohibited are to be defended solely
because they are lewdly pr,rmissible. The adoption of any public controls
o banking, that are devised upon an assumption that the lowest standards of
practice will prevliil, csn cause injuries as surely as failure to discountenance practices admittedly bad.
The business of banking is far too important to be subjected to partisan
strife or longer to be an open field of .dventure for the poorly equipped.
The development of sound management of banks is more a charge upon business
and professional associations, and upon conservative banking and business
leaders, than it is upon legislative or Asainistrative
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IL_
Federal Reserve Bank of St. Louis
0M41072071M*
•
Vrner
711
* * * * * * Similarly, past mistakes in banking are not a true measure
of possible future excesses. Restrictions aimed narrovsly at preventing a
repetition of recent mistakes must avoid hampering the development e banking
functions which are legitimate and desirable in themselves when undertaken
with good ju-.'gment ani wide experience.
There is no Jisposition to discharge bankers of such blame as is properly
theirs for permitting credit to find unsound uses. It must be realised,
nevertheless, that an individual bank, or banks as a business group, may not
be able to avoid the impairment of the general quality of bank loans and investments and other maladjustments of bank credit which may result, for
instance, from an excessive total supply of credit proceeding from such
factors as the operations of the reserve banks or from heavy influxes of gold.
When banks are not in a position to escape an excessive supply of credit, it
is almost impossible for them as competitive institutions to prevent this
credit from working out in channels which may 7,rove to be unnavigable. It
would be a mistake to assume that, in order to avoid future investment abuses,
for in-lance, we need only to lay down a number or rule.s or to enact statutes
restricting the type or quantity of security operations in which banks may
engage.
The reserve banks make the actual credit contacts with the member banks,
involving such knowledge of their pr7sctical operations ss cannot he possessed
by the Board in Washington. Greater centrslisation of rower in the Federal
Reserve Board in the control of relationships between the reserve batiks and
the member banks presents obvious dfl:v..;ers of weakening district autonomy and
of subjecting member banks to unnecessary interferences by a small, far removed, politically appointed group of men who are not possessed of firsthand knowledge of district situations and of the conditions and operations
of the member banks.
We recognize there is a belief th ,t reserve authorities have not been
sufficiently rigorous at times in denying accommodation to some member banks,
especially those which made louns that sere used in speculative transactions
when the banks themselves 'Fere borrowlag 4*rom the reserve tanks.
In making its recommendation the Committee is coaseisue that there
zight be danger that the general credit situation, which would lead to the
exercise by a reserve bank of such power of direct action, would not be the
consequence of mistaken or improper uses of credit by individual banks.
Experience has shown that reserve officials through their control of open
market or rediscount activities may be largely, if not mainly, responsible
for an unwieldy or unnecessary general volume of credit.
Their action in the direct control of reserve bank operstion, beyond
the practical determination of member banks, might be inconsistent with the
maintenance of sound credit conditions.* Such an unwieldy or unnecessary
general volume of credit inevitably would affect the quality as well as the
velume of member banks loans. Reserve authorities, therefore, efter being
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Federal Reserve Bank of St. Louis
granted the additional poo/er proposed, should be zealous to avoid the unfortunate condition that -would result if they are not careful in regard to
their obligation to avoid an excessive volume of reserve credit. A member
bank, or all the member banks, should not be subjected to numerous unnecessary
regulations, restrictions and arbitrary influences designed to correct a condition for which It or they cannot be held primarily responsible.
It would be unfortunate to reduce the attractiveness of membership in
the system for many large institutions, 'which, because of the practical importance of state laws governing trust operations or saving* benklmgo prefer
or feel compelled to conduct such busineames under state charter. Ilkaberehip
in the syster;: for an institution engaged almost entirely in savings or trust
business, or both in combination, would have no great practical value for it
or for the system itself. /n fact the expense and limitations amid nreclude
the membership of many desirable banks.
Our position is in direct opposition to a recent proposal (sections 5
and 16 of Glass bill) that after a period of three years a stock certificate
of a member bank should not be permitted to represent stock of any oth.-r
corporation except a member bank and the ownership, sale or transfer of such
certificate should not be emmditioned up/n the transfer of stock in any other
corporation except a meiber beak. We perceive no public benefit or other
merit in this proposal as it affects the affiliation of non-member banks with
member banks.
We believe that the banking relationships between a member bank and its
affiliated nonmember bank should be subject to regulations of federal banking
authorities, including, where necessary, their right to require concurrent
examination of both banks. While acceptance by federal authorities of the
state examination of the nonmember bank should be permitted, there should be
agreement required that the affiliate shall be subject to federal examination
Umlees the state examination is made concurrently with federal examination
of the member bask.
The Oemmittee recommend. that:
Subject to the regulAion of federal liv,Inking authorities, a
member bank of the reserve system should be permitted to maintain
corporate affiliation with a comrany organized to transact the
business of originating, buying and selling conservative investment securities.
Public regulation of a security affiliate of a member bank
should prohibit such affiliate from offering to the public in its
own name shares of its stock or the stock of any affiliated institution and should provide precise limitations upon the amount
and character of any loans or credit advances made by the member
bank to such affiliate.
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Federal Reserve Bank of St. Louis
- 4It is recognized that some abuse* have attended the eetablishment and
operation of sPcurity affiliates. The Committee believes, however, that thl
situation is susceptible of correction without the abolition of the affilit
* * * * * * * Under proper examination and regulation the security affiliate of a bank can be prevented from visiting undue risk or injury upon
the capital funds or ler,osits of a bank. With snob segregation or risk the
business of traiing in conservative securities can be a source of strength
to a bank and cen be conducted in the Nblic interest more favorably than
under unregulated corporations or ,.irtnerships.
As suggested, the Committee, in opposing the abolition of the security
affiliates of member banks of the federal reserve system, favors complPte
and rigorous examin-tions of such affiliates, limitations upon their operations and restrictions upon the credit dealings between them an the lw•-nks
with which they are affiliated.
The Committee recommends that:
The right of national banks and state member banks to coolant transactions in conservPtive investment securities on their
own account and for the account of others should be maintained.
Your Committee holds that the exclusion of the Secretary of the Treasury
from the Board is desirable because the prenence of an official who ranks so
high in party councils tends to oversido,,,r the Board, with the consequence
that membership on the Bokrd is made less attractive than it would otherwise
be. Furthermore, it must be remembered that the Treasury is a frenuent
borrower and is consemiently inclined to attach major importance, in the decisions of this body, to the maintenance of easy conditions in the money
market so as to facilitate the placement of government loans at minimum
rates. There may be times *hen a reserve policy fnvorable to the maintenance
of low interest charges in government borrowings may be of far less importance
than a policy Which would induce a more conservative use of credit by the
business community.
The Committee recommends that:
carefully restricted grant of power Obeild be gives to
federal banking authorities to remove for OOOOO OR officer or
director of a member bank four responsible, after suitable
hearings, for =Aimed unsafe or unsound basking practices.
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Federal Reserve Bank of St. Louis
While it is recognised that banking security is not runaamentally a
matter of size, and thAt there are strong small banks, as well as strong
large banks, a study or the solvency records or •lifferent clPsses of banks
supports the opinion that there is a direct relationship between the size
of a bank, its earnings, and the safety or its deposits.
If there is to be lcIal recognition and public supervision of group
banking as well as more libeml grants of power in the establishment of
branch banks, it becomes necessary to require a larger capital structure
for banks. As hem been stated, the present need is not for more banks but
for stronger banks with ability to serve wider areas than vas possible for
many of the banks that have gone out of business with detriment to their
communities, denositors, and shareholders.
It is especially inrortant that the banks that are subject to the
supervision of federal authorities, namely, the national banks and the
state member banks of the reserve system should have adequate capital
structures. The federal government should set a standard in the case of
these banks that would recognise the public desire for the maintenance of
adequate capital and of good management. * * * *
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Federal Reserve Bank of St. Louis
* * * *****
Itsfereedma Ille** IS ma the Illeport
the lipselal Ommeittee ea Samitimg, Part I
Chamber of Casessyse of the IL S. A.
losgaisrat 116 len
Argesersts le the Ilegative
I%sCOmmitiesOs report sed reseememdatieme appear te preoeed upon the
theory that ter vsehmesses 'bleb have appeared in the balking system if the
sematry the individual beaks of the eemmtry have been primarily respeasible
amd, therefore, the remedy is to give to the federal reserve beaks and the
Federal Meeerve lewd enlarged peers if oustrel ever national sad state
beaks that are membere of the federal reserve metes*
In memo ipeirtere this point of vise is 4s1apad to ea& am extent that
there is advememy of federal bogie/atlas *LehdAAmemprete a plan for
seimealled 'unified baehAme, shish meld de am, with state semmerolal bombs
supervised by state authorities amd ammo all semmeraial beaks In the sommter
to be in a nutiemal erste% sentrelled by the fedeeal reserve bulks sod the
Yederal Reserve /Ward* Ties deverner el the leserve lewd, tangential members
of the Senate Osmattee on amtkiag mud Ourremiy, sod sone peusiment bneisses
sea have egpreseed themselves as in freer of enoh legislation* A business mea
Whe is ealemat for his publics service said, in MA
1011AmmaCJIMadia
*If I were speaking is tersest thew*•• egad say that
all esemerelal deposit balking in the tilted States shoOld be
serried ma mode, awe lop--that amenimatise of beaks me their coetrels should beimMkm,sae authority* 'heir marvels BMW be
mobilised in the federal reserve ',retie* Them ve oould develop
fee the esentry ae a What* a semi banking system, and definitely fix
responsibility* That woad mean that all banks of deresit, as
distinguished fres savings, Should be national banks*
nismalAMMIR
IlAs it is mee, beaks ere Ma:tared both by the netting/ govern.
swat mud by es* of the ferty-eight states* They are in sompetitiee,
eadt esdeesesteg to offer Ihe most attraetive eharters and the meet
liberal lees, Is war nothing of the liberality of administrative
officials is isleepretheg the lam* The matiemal bookies eat has
Is esupetelestas3y with the Meet liberal ones* Cemoequently, there
has bees a sweetest teeing to liberalise trAnkiag lees and I.
wefts their admilmistratiose In emlb eases the argument is always
mode that it is desirable to liberalise the law se as to suable the
Woke to be of greater serviee to berreeers*
SISOLVAmmisMa
4wit
'The firet emestiam elvers regardieg bloke doing a demaim1444
badmen should be the eafety of the deposits and the ability of the
book to reties them Is depositors twribmdly 'pee mime% gutless they
be time deposits, lothemight of mercies to beeromers should be perNitted to impair the safely amd oeserity of depositors* Beaks ef deposit are, after all, primarily onstediams of liquid funis. Only sueb
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Federal Reserve Bank of St. Louis
use of such funds should be permitted as mmy be assistant with the
interests of tie depositors.
iniamstulsznesc
'In the early years ef our govemment, our business was Issipar dime
moving fine bead to beads It wee felt at the ties* mod
furring'
V
JWsp0T17 se, ti‘st weMbeeld hum a notional sad =irons earremer.
.ioutI, Ceagreee woe *imposer to eau new slid regulate the value
thersof. This poem me sods effective es to mot mewby the Illatiost'
lessik Ante fitse Our bueleme is carried as sostly by tressfers of book
deposits, narrow Zeroing esly a mall part of our messy tramlines. jr
sestrol or our arrow were nesemery in the beginning by the federal
gmemenal oestrel of our hash deposits by it mos woad sass desirable*
to have transferred, either affiraatively or by aeolememee, many powers
to the federal government which ought not to be tiers* I me bitter4
opposed to the impairment of the rights of the states in their appropriate
field. It doss moms strange, iswevar, that in the face of sash positstics toward federal authority we should have retained divided rather them
unified Dower over our deposit basking system*
nssept for the eurremoy in empsekets, our banks of deposit bold
the liquid espital of the pesplow ef IN Vatted States. The *mew of
this eopltal tram ems of us to mother, promptly end safely, eheuld be
facilitated* That mem, however, that every boat of deposit is truly
*gaged in a aelliemel business. Its soundless aid safety is of mews
to loar people everysism. Our business etdeposit banks is not leml in
sfass, in my jedgeent, it
Ohmmeter; it is, mad siosead be, natiomal*
by
sheeld be gmereed
the netimal law.
11111latdat.1
Mow, I realise that of the 14,000 banks of deposit doing business
in the Waited States only about 7,000 of this are national benke end
17,000 are state books. leder them eireemet000es, we probably comet
bore, immediately at least, for the surrender by the state* of their
right to gpeut banking *barters. ger eau is expect reincorporation
rapidly of state beaks ender national 'barters. The practical question
is, therefore, ghat, if anything, ass we or sbenld we de now? I think
it mad be highIr desirable that all banks of deposit bolding themMimes mist to tbe pablic to de a national or intereatimel business
Medd be required to be umbers of the federal reserve system, as
aotireal beaks USW are. This would atoms. *obeli:* all of our banking
reserves into me 'antral system, shish is as it should be. * * *
in have spokes snly of banks of Aeposit, as distinguished from
banks for savings* / believe that banks for savings sad for the adninistratiaa of trusts or ether sposisl time funds should be state
banks, sad that these powers should not be ineluded in motional banking
charters, 4•* *• • it
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Federal Reserve Bank of St. Louis
*•
•*•
••
•
-
blammilimmighilLbr
The fimmtttoo itself does mot iissuss or **moat* losnittod boakinie„ nor
does it albs the essential distinettoa, omphosisod in the gestation set out
above, totem dopmmit bunking sad othor kinds of Wain sad service offered
by beaks but adoption of the Closattoo's reomassmdatiese would assossarily
load in the direst's' of emnifiod hashisiss slue both the ilommithres roomss
t
moodations and posposals for unified banking rest span Jammed smotti
other
or
federal
!hoards
eadOmml reserve bleb sad the Yedowsl Um,*
salheritiso* over the took* of the emostry, this weld be justiriod only if
it wore dosenotrated that the sountry.* unfortunate experience in book failures
vas primarily dee to oisuonagsnont om the post of the honks thenselves and that
the ossres pursued by the foam' reserve books and the ?Wars' Reserve Board
GO to 'arrest greater depends'se upon them.
had been on
An analysis of the foots, it can be rairly coutomded* disolosee that
banks gore forged into eonditions not of their oum making and that the
palsies of tho Mosel reserve banks and the Fedora Rosen. ilsord wore
primarily reoprosible for these conditions. It woad sees to haLele thet on
salaried powers eboulA nor be conferred upon the roman* banks sad the 1044TIPB
Board.•• * * * *
** * *** **
By early robremry, 1929, the 1S4eral boom loard was making extreme
statements to beaks, in which it was talking about their usposalative loans.'
This was tantamount to sm attempt to transfer the primary responsibility for
what had happened* sad that was to occur, from these with Ass in fact it lay,
to the beaks. As for this responsibility, the member of the Federal Poser,"
Board spostod above odds
do not think amything that the federal reserve system could
hove done, either by omission or sammissiom in 1927, could have
avoided a crisis of nese sort ocomivally. the causes of the present
crisis and depression go far dospor than the stock market. The
atoehvamirket walk goo symptomatic of miters' and dislocatioa.
winning all thrum. the fisansial and osonomie otructure of the
world, whisb slow or later would hfive seortod their effectr. lot
If there had been greater amorommn of that Was involved in the
eSsasmie disorganisation loft after the *oat War, the federal reserve myston osuld have parssod more temperate policies, with the
result Unto *ban the crisis ammo, it would have been far less intense, severe, sod devastating:sad the rooniting depression less
overwhelming and prolomeoW
er
immsomprort original ggplup,
withhold above, there was loparlaro of a
In the events whisk have be
intoadod
fomdansatal kind fres the purposes of the ?odors' isoorve let. It was
twelve
the
that
sod
State*
that them should be on sontral banks for the United
opera.
'Oar
with
rogismal resorws beaks should be institotisms for redisoonnt,
of
needs
basimess,
time, and their sorronsy, rising and falling with the
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Federal Reserve Bank of St. Louis
Instead, they were operated as one institution and for purpose. foreign to the
Federal Reserve Let as it stands, etth disastrous sommmuilldidh In the final
analysis, there les interferense en a great peals sad in meet essential ways
with the bashing business of the eomatry end all of those Shea it streets.
/*stead of bedag seegemeive to the used* of the beaks and ie tosimesso.fte oldest
for ebleh the reserve spates vas ereated--fedmeal reserve authorities imuterteib
to use power, net gives to this for such a pespeee, to 'rests eoaditiaes directly affeetiug baking sad business. Is other verde* it vas an attempt at
government memmgemest. Logisally* the emperiesse Ai* followed would seen to
afford me remove for conferring added peeves upea the reserve banks and the
Federal Sessweellierd.
'that the inpro.eica is the Waited States has he some yr nerstary
fasters, end has been pereleaged IMMO deflationary proceeses that seeld be
sheaked and eilriveted, has he mostly declared by a yell-basun ilmrepese
aesseidat,•* *••••
iglighwite. of Deflptima
elbe deflation was intrstamed lir the campaign against stockemehosige speeulation Ukiah the federal reserve Arms, in the
warmiega, testi. rpm the wing of 1911. This
deism*
see** imeluded a reetrietiem of credit.* Ala headieepped
ems
prsdactAvity mad started the fall in sammeditr priSes
leg
far-reeeh
Met
the
Out
s.
disastrou
se
bosuns
te
e
seteremrd
SOMONIVOM40 of this compels' vas that it set pubUitopision in
the direstion of deistic'. * * * A faLl of prises soused lor
meaetary fasters the. gives rime to rrofound disturbenees is the
404010Mmic equilibrium. Is view of than. disturbanoes, people in
*merles endeavored to restore equilibrium by pressing desa ether
prisss to a level (eith those *Joh had already fells farthest.
People were blind to tho fact that this method could never reetewo
espilibrium at all, but seald oily result in the continuatios of
the Emma presses fdotalties.•*•
andimUlaLiordigallis
*Me beak legislation of the United States in conjunctiva
with the prevalent vie, ft the country of private bomb in role.
ties to the federal reserve beaks had set the whole mores of
ievelepment in the direction of deflation. Atlantis. bad 11T40...
viousty been se absorbed la preventing air possible inflation that
the deer had been left wide epee for deflation* without eqr
sespleien of the Amager that bilked therein.••• The vsr,
struoture of the *sited Slates banking system entailed the met.matte aecestuatiss of the deflation with soesonlating strain",
L1104 of OollSOtioo
*This disastrous merememt sell& have been checked may by
a determined patio' of sati-deflatima on the part of the federal
reeerve bomb.* mod WI their active intervention with a view to
the sorteasies of the effective supply of mesas of payments•*•
•••*•••
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Federal Reserve Bank of St. Louis
It would not soon to follow that current 'auditions, inauding sempetition
between natiomal UMW and state banks, make nsasseary ability of national
balks to have beak affiliates pub MI sewing* banks, organiwed under state lam.
tm
In quotations which are whited above, there is diseuamism of provisiams
al
esumsrei
their
with
hisimess
a
would enable natiemal bombs to oembime amvemes
a
for
mamas
as
e
eited
essetime
busingas without the dlnidesntages ehish are
separate swims inetitutieli.
In rest, omphaele upon sup, used for a *Missal bank to bwe affiliates of
eny Mad terms attentios in the wremg direetiem..the direetion of 40dition of
various klede of business enterprise, beeemimg mere and wore remote fro" coodal braking, on the ground that natiomal banks most resolve opportunities
!ler eempetities with state bests as the letter are by state legislation gives
iseressisgly liberal piers. Particularly whom fedsral legislation is seder
semaideration, atteatisa should be dirooted is the swats directives—toward
reterniag the natiemal basks and all hanks admitted to usibership in this
federal reserve gates exclusively to tree senssrelal banking and to massive'
Whieh will permit commercial busking to assume the volume and the aativi* the
seuntry greatly mode and will asks emamersial Making again a mosessful fora
to their proper
of emterprioe, and to restoration of the federal reserve banks
with the
basket
al
eemmeroi
fir
mt
of
rediseem
femetiome as great institutions
al
eisseroi
the
ipso
fsmadsd
directly
emiremey they sapply for the asmmtm,
entivity of the oeuntry.
•* *
•
•
•
•
•
The real question is Whether or set imsestment bamkiag should be allowed
to be am adjamet of balks that are nowhere of the fedsrel reserve system,
ehleh WAS intsudid, rad should be eintimmod, to provide facilities for the
amerce or the sountry. Invesimmmt banking bas a very different falsettos-the function of providing the mapital raqmiresonts of indastry in all of its
ferns. Considerltions Which have bees aentiemed above amsordingly sees to
al
require that investment bashimg Mead not be related is any way to ocanorcl
booking.
•
••
*•* *•
es, that
It night be added, as another erommat against seemrity affiliat
ity to
opportun
special
almost towvitably imilt affiliates aro la a position of
persist
the
of
sell sororities to the smeller banks that see serreopsairsto
book. IS long as the pressat rystem ismthisee.omsd it hem am Important pleas
have greet
Is ear basking system.-whershy large links in inperteet seaters
be
shield
simbers of ierresreadeat basks in smaller planes, the relations
have
not
dolly If basking native wad the beak in the large seater should
es to its
a epeeist interest, OM ladireetly, in selling partismlar emouriti
emesperadent banks.
on that
limo Is the farther objestion that there seems to he an assumptiin is-
t to essege
as trained to sommertial beabing are ipso facto, competen of
Wme wry
tyres
three
the
vestmeat balking. In fast, the !limitless is
are often as
desist=
and
as different, and the bases for imesessfal juegment
gees to
years
in
resent
diverse that the assomptioa is umniendo liperiesee
all If
devote
gibs
thsee
to
Wiest. that imvestmemt basking sem best be loft
their time and attention to it.
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Federal Reserve Bank of St. Louis
-6-
;#071,wee mop poLBoard
There are mood business reasons The mattunkes the assharohip of the
Secretary of the Tressury em the Pectoral Seeerve beard* lhem Shampoos masted
the Toderal Reserve Act It provided epeelfleally for ang•efficie. membership em
the Board of the Semetary of the treseary as an espromelem of its desire that
there be a close seeperatima between the Treasury and the tedepal reser,* bAnk
tag authorities*
Pispal Ag,pqies
fader the Act, the Seeretary of the Treasury aq. use the reserve beaks as
the geoseamsmtos timid ageate. This pernisolAsbaa bees utilised sines the
Immimmise of 1916. It is met seeememry to refer mew to the Derv/sem of the
reserve basks in the ear flamelems ihea the eotest of thm goviement's present
flammeial eperatieme are eonsideredi the eateitill sad value of the service, pa's
farmed by the reserve teskei without met to the memememmA4 are obviemmo
ate, mod is amordenee with meed business practise,
It is therefore
have reprecestatim in the direeties of the federal
that the Treasury
reserve system. It is to be remembered, too, that there is public advantage
in beviag the fiscal operations of the government handled by the reserve basks
sod that if the Secretary of the Treaemry ceased to be a melber of the 'Federal
Reserve Lard, he might refuse to eoetimee this arranvemmed6 There is farther
reams is the aromatics** that the metes issued by the reserve beaks are
obligatiess of the lialted Stetss go/eremite illth six appointed members mod
wag two em-offielo--the Seevetary of the Treasury and the Comptreller of the
earreemy—the Board is esertaisly is a potties to base its deeisioss upon
further reuse of vital
emeMiimraties of the memeral public interest*
impoilarese is that the boas ef the emeetey have a very divert interest to
the veveremestal finamial policies, eed aseherstip of the Seeretary of the
ireesary as the Board my afford mem ter ampassaima aid dimmable of that
interests
ftiggia_glimp OffiimmumAigrectork
proposal to give to reserve Woke or to the Federal Deserve Beard
power to remove *Meer* mod direetors of basks that are members of the reserve system merely Ohm there immr be a disagreement as to pollee' is aamosooseat of a bedit4 or about the semedams e a Ism to itself perfectly legal,
at ems twelves a violatim of primeiple sad esateime so assures's of besedit
***
for serme. 410
It met amp be remembered that bathing is a private hominess suggested
to vabLic regulation. The capital of a bilk is contributed by private eft**
holders sad bolesgs to thma. They sleet direotere and the direst's., in imma
elm* tho *Moore, at the mem time, to semtemplatios of law, remising ta
close tom& with the nemememeat ef the heat* Revelatory legislation amid
properly premelleesmemelifieatioas required in directors sod in officers0
tint there is a departure free the principles of regulation ihes there is
proposal that, imetead of amenatability of officers being to directors mad
ameantability of directors being to stockholders, both sheald be amematabie
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Federal Reserve Bank of St. Louis
to *gametes greeted ay the federal gpvelement• This wield he tantamount Is
putaie aritherity Wing easy same of the most esseetial resetlems Si mamago.
meet* Pareethetisally, It mey be ailed that, as is maid 'hes public
melberities propose to take ever nestles* of asegamest, tier de WA ion
esatemplate that they will ammo, emy or the reepsesihilildmosteenegeesete
ImmissmIptftr-rillattima
ihe Mewl reserve bombs beer each the sem relatiee to member bests as
member beaks de to t4tir oms esstemers. These are business relatioaships.
Aside free the pere4 business setters of disosuntingo Cheek eelleetion, repo
UAL** as to memos, the issue eme redeeptles of notes, mad certain right,
as to periodic ensmimatioes, the Morel Iteeerre Act is silent ea the powers
eseveised by reserve basks over their members* This bestows relattosablp is
emelagems to that whisk mists ordinarily between oemmereial organisations,
The Satre-duties of ~sive forces other then would arise **tiffany throe*
business iateraetiess venld be entirely imesesistest with the spirit of this
relatioeshipi It has boss toned that pereeseive powers of the reserve beaks
is emeenreging conservative polities* as the part of sober belie has bees
effeetive mad it is evidest that in the emereise of this feneties the reserve
banks bet* gone as far as it is wise is predeetiag themeolves Late the memage.
meat of iedivideal banks.
In the privilege of periodic exasisatissell to ietersiao lass ;trestle's aid
general operations, and the right to use reessuabla mad husimese-like dinereties
in the greeting at credit aessesedatios, the reserve beaks hove e rola degree
of control smd ono that •loss set partake vadely of raternalien*
lbehdleral %starve Semrd in its relatlea with the bemkiat Weless acts
*Pei* the twelve federal reserve basks. lieeeese of the wide admisistrative
meters of Its duties there is ordiearily ee direst eastaet with eseher banks.
Its general duties are the giving of breed fimensial advise eed the development of largo finommdel policies whieh are earring eat throw. the iestrumemtality of the federal reserve beets. To istreinse Into this deliberative
body the added &sties of hesrisag sled deciding as eases of malpraeties of
umber beihs reported to it is eafstr as well as ineemsistest with its duties.
It would involve the same interferon.* is local ammegsseet as would be that
sass if meek posers more gives to the federal reserve Webs.
Lliddias Padua of nig
Imp views at the lismuseie Polls, ismeiselen or
the Amelia's Seeker,
Aasseiatiee ea the proposal with respeet to removal of *Mears end direetere
were earlier this yeereepressed as fellows'
ofieshisg, being a ssegmpublie busimoss, must mesesserily be ese.
trolled by strict laws gpveraieg its operations. Nevertheless,
basking in its actual eperatiese oasnot be conducted by statute, ner
is it feasible to substitute rigid rules enforced by public officials
for inditidual initiative and reepoesibility.
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Federal Reserve Bank of St. Louis
00000000
*•* * * * rt seems Got likely, housver, that the SST* trans.
for of the responsibility fren one set of homes Wogs, that is,
the
officers of beaks, to another set of human beings, that is, the
officials in Ilembingtma„ will prove a ponecoa for our financial ills
or be a guarantee against a reretition of the some errors of human
jue,irsent in the Mon*
'Admittedly the federal 'seem authorities should have bread
peewee of supervision over the general rimemial pelletal of bombe
emd te some estest ewer their practical operations* Set it is
emtremely doubtful that the omeetsent of se& a 21/N 411. OM proposed
Shia largely seetralises ametreI over detailed eperethe, functions
of banks in the heads of gererament oftleials is /Whinges* would
improve the eitmaties•
*After all it must be remembered that set a fee of our Waimea*
leaders esd beakers have heroterire orproneed the view that mod of
the blame fer the mdme apesslatios and emseelmat
later 40,11aPlos at
19/9 ettaaboe to the seam, emmee policy at the /federal Reserv
e heard
then In *Mee* It asthma met *ether ee *free with that criticism;
it is motioned solely to empheeive the fast that *Motels is
Washington are so less 80004 to ammo at judgmeet thus are
awoken
is gm Tort or elsewhemo, sad samosessotly * tarlissur iserease
of the
prow at government officials over the basimisi strmeturs is set
neememily a guarantee ror better bmatimg
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Federal Reserve Bank of St. Louis
SOURCE:
THE OHIO BANKER - JULY 1932
WE MUST REBUILD THE BANKING BUSINESS BUT WE MUST HAVE A NEW PLAN -- by Craig
B. Hazlewood, Vice Pres. of First National Bank of Chicago, and
last President of the A.BJ.
Page 25
******* ***
Banks have been wrecked by bad management, and in rare instances
by fraud within their organizations, yet the great majority of bank
suspensions during the last two years were due to external causes,
with some of which even the best of bank management was unable to
contend.
******* *
*
Page 28
Bankers are coming soon to the time, i believe, when they will
discriminate fairly in the interest rate between short-time and longtime deposits. Lwiany banks have been paying too high a rate on demand deposits and three-months' and six-months' certificates of
deposit, a rate which has forced them to invest the proceeds in
long-time high-rate bonds and similar securities. The consequence
has been that when the holders of these certificates unanimously
decide to take their money, banks are forced to liquidate long-term
investments at the most unfavorable moment. You know, and I know,
banks which have closed primarily because of this difficulty with
certificates of deposit. If the rates for this short-time money had
been commensurately low, the money would have been invested in shorttime maturities and this part of the trouble would have been avoided.
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Federal Reserve Bank of St. Louis
********** *
Address of Henry M. Zimmerman, President,
Michigan Bankers Association
46th Annual Convention, Michigan Bankers Asso., July 1932
(Michigan Investor, July 23, 1932)
Right here, however, I wish to call attention to the communistic
element, especially in our several industrial communities which I am
convinced is making a concerted attack upon our American banks. Let
me quote from an editorial which appeared in the Detroit Free Press of
June 301 1932.
"It is the idea of the Communists that if they can make the
public lose confidence in the banks and so precipitate embarrassing or
ruinous runs, they will be layin the foundation for general political
and social upheavals later on. -rst, they will cause trouble and
misery and then they will foment disorder and violence. These activi—
ties of the Communists are just as much a conspiracy against the peace
and safety of the people of the United States as a direct plan for an
armed uprising would be; but they are much more difficult to detect
and combat; and in some localities the Reds have met with a certain
amount of success."
From personal experience, let me suggest that wherever it shows
its head, its activities should be challenged; its slogan is "Get the
banks first and the industries next." They 7ork chiefly under cover,
spread slanderous and alarming rumors. Their purpose is to stir up
suspicion, discontent and distrust. Its attacks upon our banks have,
in more than one case, been effective.
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Federal Reserve Bank of St. Louis
•
"When Large City Banks Close"
By Aaron Hardy Ulm
Source: Barron's, June 6, 1932
5cc.<
**** * ****
Conclusion
It is evident that the recent unprecedented hoarding wave first became
formidable, if it did not actually first arise, with the falling of city banks
of such size and importance as to cause their collapsing to arouse widespread
fears regarding the banking system as a whole and that the wave ran thereafter
more in consonance with the impressiveness of leading city-bank failures than
with merely increasing number of all bank suspensions.
Hence, with respect at least to public reaction to banking developments,
the center of weakness in the banking system would seem to have been in the
city-bank section of the banking structure rather than in that of the small
country bank.
It freniently has been stated that the run of small country banks which
suspended in the 1921-29 period failed with, as it were, the communities in
which they had operated. Those communities were mostly agricultural.
But it is doubtful that most big city-bank failures in 1930 and 1931 were
owing as much to community collapses and regressions as to weaknesses peculiar
to the banks. The doubt certainly is justified with respect to numerous
resounding bank crashes which seem to have started the big-scale hoarding wave
in late 1930. In the 1921-29 period, bank failures did not cause people to
be fearful, in any great measure, of all banks. Patrons of closed banks
turned, as a rule, to other banks. But from late 1930 on, many people evidently
viewed the numerous closings of leading city banks--in 1951 195 banks closed
in cities of 100,000 or over population--as indicative of dangerous weakness
in the banking system as a whole. Therefore, money fled, on a scale verging
upon the catastrophic, from the banking structure.
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Federal Reserve Bank of St. Louis
r"-
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•
Proceedings of 31st Annual Convention
National Asso. of Supervisors of State Banks
Philadelphia, July 1932
** * * *****
Harold W. Horsey (Delaware):
** * ** ** *
* * * * * That is, gentlemen, the trouble which Delaware, like many
other states, is troubled with--too many small and unnecessary banks.
Fortunately, however, through the cooperation of our bankers and the
public spirit of some of our citizens, the few situations we have had
in Delaware the past year have been bridged over and the State system
has suffered no casualty in the way of failures. One National bank
did close this year, but it has been already reopened. So our State
has been most fortunate and the citizens haven't had the condition
aggravated by the way of bank closings as in other parts throughout the
country.
Oscar Nelson (Illinois): Mr. Chairman, Mr. Sims and Gentlemen: I
haven't anything in particular to report, except my share of trouble in
Illinois. I think, however, that banking has been strengthened by the
closing of small banks. There were too many banks to begin with.
Our legislature meets in January, 1933, and undoubtedly there will
be new legislation. We have lost, in the last two and one-half years,
about four hundred banks and it has gotten to a point where I am appointing ban examiners as receivers so as to give them a job. We will
be out of banks if we have many more closings.
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Federal Reserve Bank of St. Louis
* **
******
•
•
Proceedings of 31st Annual Convention
National Asso. of Supervisors of State Banks
Philadelphia, July 1932
** ******
President Love (Miss.): No one, of course, dislikes the large
number of bank failures as much as we commissioners, because the people
at home have to blame someone and it falls on the bank commissioner, but
it is an admitted fact that the bank failures are not so much caused
by the laws, or probably the administration of the laws--either state or
national. Gentlemen, we don't want to get away from the fact that these
failures have been caused by business falling down, and every bank has
a clientele and when the clientele gets into trouble it naturally is
reflected in the banks, and the banks are no stronger than the people
who do business with them. The bank has to loan money and accommodate
the public which deposits money with it, and when that section falls
down by reason of conditions it is naturally reflected in the banks.
We don't hear so much about other kinds of failures--all kinds of
businesses are falling down--but it seems all the talk has been about the
banks and all the criticism about the bank failures and laws governing
these conditions. We, of course, realize that a bank has a different
business, but it reflects the business conditions throughout the country
rather than bad banking and bad laws. Yet we do admit we can improve
the management and supervision, and certainly the laws can be improved,
and we stand ready to work shoulder to shoulder with those in power,
with that in view.
•
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Federal Reserve Bank of St. Louis
** ********
•
SOURCE:
THE CALIFORNIA BANKER--JUNF 1932
t.oe'
EXECUTIVE MEETING OF TRUST SECTION—John Veenhuyzen, Vice-Pres.,
Security-First Nat. Bk. of Los Angeles,
Retiring Chinn, of Trust Section
Pane 250
It is to be regretted that we have to record the fact that
during the year one bank with a trust department went into receivership, because of impaired public confidence caused by the unfortunate
acceptance and administration of 8 few trusts which have proven
financially disastrous to very large numbers of persons.
The remedy for this will be found only by closer cooperation and
association of trust officers in this State, by membership in this
Trust Section and in local group meetings, and by education of the
staffs and employees of trust departments in all fiduciary matters.
Much good can be accomplished by more extensive and frequent examination
and supervision of trust departments by Federal and State authorities,
and particularly if such examinations are conducted by persons specially
trained for such purpose.
This receivership of a closed bank with a trust department has
already demonstrated that there is a lack of a clear description of
the powers of such receiver in dealing with the trusts and their assets
so suddenly thrust into his care and management. Hoping that no further
instance may ever again occur which will give need to qhestion these
powers, it would, nevertheless, be well for this Section to give study
and attention thereto solely as a matter of preparedness.
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Federal Reserve Bank of St. Louis
•
SOURCE:
NEW YORK STATE BANKERS ASSOCIATION - 1952
THE WAY OUT - Address by Henry I. Harriman, Pres. of the Chamber of
Commerce of the
x-
*
Pages 244-45-46
BANKS
Prosperity will not return to America until fear is replaced by
confidence and credit is available both to the producer ahd the
consumer. During the last sixty-five years there have been twentysix bank failures in Canada and not one during this period of
depression. We, in turn, have had more than 5000 bank failures
in the last five years and during that same period, the funds of
depositors tied up in failed banks have exceeded five billions of
dollars. This has caused widespread alarm, the withdrawal of funds
and the hoarding of cash, and banks have been looked upon with
fear rather than with confidence. I do not favor the Canadian
system for the United States and I do not desire the abolition of
state banking as I believe it has its proper place in our economic scheme; but I am certain that national banks should be given
tVe right to establish )111 branches under;quitable conditions, at
least within the limits of the state in which they are located,
and I further feel that it should be illegal to establish a
national or state bank with a capital of less than $50,000. Fiftynine per cent of the suspended banks had a capital of less than
$25,000 and ninety per cent of them were located in cities and
towns of less than 25,000 people.
The guaranteeing of bank deposits is unsound both in theory
and in practice. It must inevitably lead to unsafe banking. On
the other hand, I do believe that a federal liquidating oorporation
should be organized which should immediately take over the assets
of failed banks, appraise the value of the property taken over and
promptly return to the depositors so much of their deposits as such
appraisal shows to be ultimately good. In ninety per cent of
bank failures this would mean the prompt return to depositors of
over sixty per cent of their deposit.
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•
SOURCE:
NEW YORK STATE BANKERS ASSOCIATION - 1932
EXTENSION OF THE CLEARING HOUSE PRINCIPLE - Address by A. A.
McDonnell, Executive Vice Pres., Bankers Tr. Co.,
Little Rock, Arlansas
Page 141
The lack of reserves, gentlemen, is in my opinion what
has caused thousands of bank failures. Those little banks
out across the country make twenty-five per cent on their
twenty-five thousand dollar capitalization and they pay it all
out year after year after year. When they run into a depression,
they haven't any fat to take up when they begin to lose weight.
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Federal Reserve Bank of St. Louis
hi
•
SOURCE: PROCEEDINGS OF MISSOURI BANKERS ASSOCIATION--May 16-17-18, 1932
ANNUAL ADDRESS OF THE PRESIDENT--Charles B. Mudd
Page
19_
In times of such economic distress, financial issues become
paramount. It therefore has been but natural that financial
institutions should be put to the test. The fact that many of them
have failed to weather the storm should not bring down upon the
heads of all bankers such violent criticism as has been voiced in
many quarters, any more than the failure of other types of business
should call for a condemnation of all our theories and practices.
I rise in defense of our banking structure as a whole and our
bankers in general. While our failures appear large in numbers, they
have not vitally affected the banking resources of the nation, being
only about 2 per cent of the total. Should we stand condemned because
we have been forced by the very laws of self-preservation to sacrifice
credit on the altar of liquidity? Crcs have charged our bankers
with narrow-mindedness in loan policies, but do they know that truly
desirable and safe loans have been scarce? Would they have us take
undue risks, further complicating the credit structure? Is the banker
to be blamed for calling loans or throwing securities into a depressed
market when that was his only recourse to prepare for withdrawals of
a fear-stricken public?
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Federal Reserve Bank of St. Louis
•
SOURCE:
THE OHIO BANKER — JULY 1952
WE MUST REBUILD THE BANKING BUSINESS BUT WE MUST HAVE A NEW PLAN -- by Craig
B. Hazlewood, Vice Pres. of First National Bank of Chicago, and
past President of A.B.P.
Page 27
Again, there is a provision in the Glass Bill which would make
it illegal for a bank owned by a bank group to loan on the stock
of that group. This is just as logical as the prohibition of
loans on the bank's own stock. As a matter of fact, a very large
part of the losses in the National Hank of Kentucky, at Louisville,
were accounted for by loans on the BancoKentucky Company stock,
which was the stock of the bank's own holding company.
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Federal Reserve Bank of St. Louis
bOtTACE:
Report of Bsnks of Deposit & Discount, etc., Ma. l9Bk
,Paize 45.
t
*
*
Banking DeThe investigation, conducted by examiners of the
in ascerted
resul
has
dent,
partment designated by the superinten
prosecution
nal
crimi
ing
bring
taining the cause of the collapse, in
in changes
certa
of
g
makin
the
to bear upon those responsible, and in
red
refer
,
tzent
Depar
ng
in the examination procedure of the BanhI
n
lntio
legis
new
to in our previous Annual heports. The need for
made
were
tions
also presented itself, and, accordinLly, recoaaeada
liaw, some of
in the form of proposed amendments to the Banking
which were adopted by the Legislature in 1950.
ons was the
It was disclosed that forgery in all of its ramificati
notes
chief manner by which defalcation was accoapliehed. Many
credit
appearing in the names of prominent individuals of good
Falsiries.
standing proved upon investigation to be skillful forge
the
g
hidin
ficetion of bunk records played an important part in
delalcation, * * * * *
SOURCET
BIENNIAL. REPORT OF THE BANK COMMISLIONER OF THF STATE OF KANSAS-Sept. 1, 1932
Page 3
The record:, of this office disclose the fact that the failures
were largely due to the low price level of agricultural comxodities,
with a few exceptions being dut to dishonesty and incompetency.
During the above mentioned period tlie deposits in ate banks in
Kansaa have decreased #65,247,754.5S. The gradual shrinkage of
deposits hue made it highly unprofitable to operate many banks
volumes have decreased to a very low point, making it neceswho
sary that this department exert every effort to bring about mergers
and consolidations wherever possible.
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SOURCE':
25th ANNUAL REPOFT OF THE DIVISION OF BANKS * STATE OF OHIO
DEPARTMENT OF COMMERCE, DIV. OF BANKS
December 31, 1932
page 8
HOARrING AGAIN DENOUNCED
In the preceding annual report of the Division of Hanks, the
practice of hoarding was vigorously condemned. The Superintendent
of Banks again denounces this evil and warns those who indulge in it
that such a course of conduct may cause them to be regarded in the
light of public enemies. Hoarding, besides being an ugly form of
selfishness, strikes at the vitals of banking institutions, seriously
retards the return of normal business conditions and incalculably
harms all the people. True and right—thinking citizens will abhor
so baneful a practice.
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•
SOURCE:
Report of Banks of Deposit & Discount, etc., N.Y. 1932
Page 6
The depression has affected banking institutions as well as general business corporations, and one of the principal ?roblems to
solve is the strengthening of the capital structure of our banking
institutions in the various sections of this State. Directors of many
of our institutions have endeavored to do their full share to preserve the interests of depositors and to benefit the community
through voluntary private contributions of many millions of
dollars.
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SOURCE:
ECONOMIC CONDITIONS, GOVERNMENTAL FINANCE, U.S. SECURITIES
(The Nat. City Bank of N.Y.)
Page 17--(Feb. 1932)
THE RECONSTRUCTION FINANCE CORPORATION
The enactment of the Reconstruction Finance Corporation Act on
January 22 is recognition by the government of the interest of all the
people in supporting the credit-granting institutions against panicky
demands by their depositors, and in bridging over the refinancing
difficulties of the railways, in which the country's savings are so
largely invested, in order to prevent unnecessary foreclosures and losses.
In this letter last November was included a description of the
background of the banking difficulties, to which we refer readers who
may be interested in a fuller exposition than our space now permits. The
situation is that the great decline in the market prices of commodities
and manufactured goods of all kinds, of securities, and of real estate,
has left many banks and credit institutions with loans on their books
which may be good, but which at present cannot be paid off and which do
not conform to the legal requirements that would make them eligible for
rediscount at the Federal Reserve Banks. In short, many solvent banks
find themselves lacking in liquid assets which can be converted into cash
without forced sale. This would not cause acute difficulty in normal
times, when bankers can count upon merely normal demands for funds by
their depositors; but when fear takes possession as it has in some localities,
and depositors become collectors instead of lenders, the institutions affected
by these panicky demands must also become collectors. A contraction of
credit sets in which forces the sale of bonds by the banks, and of their own
assets by those who cannot obtain credit, both at sacrifice prices. These
sales in turn depress values, depreciate the assets of other persons and
other banks, and so the effects go around the ,
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•
SOURCE:
MASSACHUSETTS COMMISSIONER OF BANKS - ANNUAL REPORT 1932
Part I, relating to Svgs Bks and Institutions for Svgs.
PaRe Y.
2. GENERAL SUMMARY.
*
*
*
In reviewing the figures pertaining to the investments in real
estate hereinbefore quoted, it will be seen that approximately onehalf of the total book assets of the eighteen bunks at the times
of their closings consisted of mortgages on real estate, and real
estate held in possession and foreclosure. It may readily be
concluded that the real estate element constitutesthe principle
assets of the close0 banks and accordingly depositors must depend
largely upon the results of the administration and disposition of
the real estate for the return of their money.
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•
SOURCE:
THE CALIFORNIA BANKER--JUNE 1932
RECONSTRUCTION—address by F. J. Belcher, Jr., Pres. First Nat. Tr. &
Svgs Bk., San Diego
Pages 297-98
** * ** *
The Bank Crisis of 1931
Then came the financial crisis of 1931. Due to the decline in
prices, many banks, unable to make liquidation of bank assets keep
pace with the liquidation of bank credit, had to close. These bank
failures became so numerous as to shake public confidence, and the
people began hoarding money.
The resulting decrease in member bank reserves forced a further
contraction of bank credit. Further pressure on bank borrowers to
pay, more bank failures.
Our European creditors became frightened. Persistent rumors
circulated abroLd that the United States would be forced to abandon
the gold standard, and gold in settlement of foreign balances was withdrawn. This created a further reduction of our credit base, a greater
decrease of reserves, more pressure by banks on borrowers to pay.
Bankers became frightened. In many communities, due to lack of
liquid assets, banks were forced to cease entirely any extension of
credit, and became collectors instead. In the larger communities, where
the banks were more liquid, credit was available in the limited amounts
required by industry, but the bankers were jealously guarding their
supply of eligible paper against the possibility of further reduction
If reserves.
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Federal Reserve Bank of St. Louis
Peyton's Answer, 2-26-35, to 1-9115
In File 327.-3
* * * * * * **
9. A. (2) The Federal Reserve Agent should have the ::ower to veto an
application for a Natinal bank charter even though the
Comptroll&r of the Currency is in favor of grnnting it.
The regional banks understand local situations and are not
subject to Influences which ti4lt be brought to bear upon
the Comptroller. Past experience has indicated that such
authority in the hands of the Federal Reserve Agent rould
have prevented numerous bank failures in this district.
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Federal Reserve Bank of St. Louis
•
SOURCE: BIENNIAL REPORT OF THE BANK COMMISSIONER OF THE STATE OF KANSAS-Sept. 1, 1932
Page 3
The records of this office disclose the fact that the failures
were largely due to the low price level of agricultural commodities,
with a few exceptions being due to dishonesty and incompetency.
During the above mentioned period the deposits in state banks in
Kansas have decreased $65,247,754.55. The gradual shrinkage of
deposits has made it highly unprofitable to operate many banks
whose volumes have decreased to a very low point, making it necessary that this department exert every effort to bring about mergers
and consolidations wherever possible.
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Federal Reserve Bank of St. Louis
Mier, Banks Do Not Fail° Horace
Pomeroy, New York
(Journal of the Canadian bankers' Asso., July 1932)
_z* * * * * * * *
A most distinctive feature of the Canadian banking practice is thrt in
the case of insolvency the notes of the bank
the firrt lien on its
assets, sn4 further emcnred by the Bank Circulation Dedemption FUnd to which
all banks subecribe on the basis of 5% of their average circulation not
Covered by gold or Dominion notes deposited in the inalral gold reserves
Catablished in 1913. This is forward looking bank legislation, and illuminates the fact of Canada's almost total lqck of bank failures.
Up to 1923, following the failure of the Home Banks banks' balsam
sheets were audited and certified only by public chartered accountants*
Investigations after the failure of the Home Bank clearly indicated that
the chartered acoountant who certified their balance sheet was incompetent
and apparently had been chosen on this acoonnt. The failure produced such
widespread repercussions that the Government obligated itself to pay a
certain proportion of the deposits. To loosen the likelihood of ouch a
situation as was fogad in the Home Bank arising again, the Government by
legislation made provision for the appointment of au Inspector-General of
Banks.
Through ao-oporation and supervision by the Dominion Government,
through the sodium of periodic returns ani the regulation of note issues
and romorves, a progressive move toward efficiency and a high degree of
safety le scoured* * * * * *
**** *** * * *
Now vital. then, becomee the enamor of 4 banking system and the
istegrity of a bank's personnel; the degree of seriousness with vhish
member of a bank's board of directors regards his trusti In Canada the
qualifications of a director are defined sad recordm of attendance at
board meetings kept and brought to the attention of the bank's shareholders.
* * * * ** * * * *
But the secret of Canada's banking soundness lies not only in the
brmamb bank idea, but more in the method of training its eel for
poeitions in them so that as they progress and the tine coon for executive decisions, they may have the experience necessary to decide wisely
and promptly.
When
bottom, a
manifest,
office to
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Federal Reserve Bank of St. Louis
a young man gets a Joh in a Canadian beak be starts sit the
clerk. if 10ton/ones, faitbfhlnees mad gement' ability are
he is aswed up atop by step. He is thea seat from the home
the brae*, say is Ildmeatea. rrom there, after a few years,
be mer be transferred to Vancouver; from there maybe to St. John; free
there beek again to Calgary, and Se 016 Be esquires an intimate kneeled.*
of Cemeda, snd finally roaches the hems offiee again
an executive, say
assistest manager, them semager, general manager, vice rresident, president, This procedure is not preetieed by a few beaks. It is true of all
or this.
How valuable this man now tesemesi In some Canadian locality, the
question of a loan comes up. The executive knows the conditions of that
locality through first hand intimate knowledge; he probably knows
personally the heads of the business seeking the loan. If it be granted
it is a good bet thwt the borrower was justified in seeking it and it
will be paid.
In stressing same of the advantagee of the branch banking tiptoe,
a Canadian bank accountant recently said:
Concentration of the surplus funds of Canada through the system' at
breach banking make* for the equitable distribution or the lemufthle funds
of the nation, with the result that meney is taken from the communities
where business does not require its use, and it is loaned where needed
throe* the efficient local bank ismagors, under the skilled guidance of
this matere and tried judgment of the head office officials, ehe at all
tines are watching the pass of the nation's business. These things have
helped to an inezitimable degree the development of Canada, where the
people of the new oommunities can borrow at the tame interest rates as
those of relative financial standing in the business centres.
As practised in Canada branch banking means distribution of the
loaning and earning risks not only to all parts of the nation, bat to
foreign countries of good possibilities, ehieh he resulted not only
in that highly prised diversification, but in the expansion of the
nation's exrort trade as well.
The co-operation, good management, and safety of deyositors which
are mentioned •!Is highly desirable, are all attained in Canada, throurh
the branch banking system and through The Canadian Bankr1410 Associction.
Their effects are patent in the solidity of our bankinz institutions in
this time of worldwide esseomic stress.
** * ^ * * * * * *
Canadian bank stocks aro regarded in Cqnada as prime investments,
and are widely held by pawls of both large and small means for income
return. This is evideneed by the fact that In the past fifteen years
more than 80 per cent. of the total issues of Canadian banks have been
sold within Canada. Due to the character of Investment buying in Canadian
bank stocks, and the Pact that practicIlly all Charlie are ovned outright,
their market is usually verstable.
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Federal Reserve Bank of St. Louis
During the past few years the desirability of Canadian bank stocks
as an Avestment has bosom more ."ully
4
aprreciated by United States investors, and the large number of American shareholders is constantly increasing.
Canadian secilrities represent one of the soundest forma of invest33ent. ?hey have back of them not only one of the sounlest banking systems
of the world, but they have back of them as well a people of marked
integrity, notably free from pretense and notably industrious and saving.
Whether this state of affairs is inspired and fostered by the confidence
and -lental security with which Canadians regard their hanks is not claimed
here, but it might well be so.
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Federal Reserve Bank of St. Louis
** ** *** ***
Proceedings of Slat Annual Convention
Nrtilnal Asso. of Supervisors of State Banks
Philadelphia, July 1932
President Love (Miss.): * * * * * * *
The next subject "Charters of New Banks": I belive I speak for
the Convention in stating that many bank failures are due to extreme
liberality in granting Charters, both by State and National authorities,
and this Convention in previous meetings has endorsed the idea of extreme caution in granting charters; and where we find a community needs
some kind of banking facilities, yrt has not sufficient business to
justify the organization of a new bank, the thought is that this community can be beat taken care of by the establishment of a branch
office operated and controlled by a nearby larger bank, and it is
going to be necessary, as I see it, that the various states that do
not permit branch banking get a law passed by their Legislature permitting branch banking within restricted areas.
1. E. Bristow;(Virginia): I presented some thoughts the other
day. I see by the records where I said, according to the America,'
Banker, "that it would seem some 90% of the failures in 1929 were
failures in banks which should never have been chartered.' What I
Intended to say was that 90% of these failures prior to 1929 were in
banks which should never have been chartered.
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Federal Reserve Bank of St. Louis
Address by S. L. Cantley, aissour. Gommiaaioner ui
36th Annual Convention, Indiana Bankers Asso., May, 13
(The Hoosier Banker, June, 1932)
********
I take it to be conceded that banks, both state and national, the
business barometers, the mediums through which commerce must clear aa,
'
the lighthouses for many an adventurer upon the sea of finance, have
failed in part to measure up to the confidence imposed in them. T.0„i'.
8re many contributing causes, but in my judgment, impractical and inefficient laws, purporting to regulate the business of banking, are 4
principal source of weakness. Very few statem_Alid laws sufficient
within themselves to permit of proper control. !Most states made it
compulsory on state banking departments to grant charters to all who
applied, regardless of the need for a bank or the fitness of the applicants for the managmment of a bank. The uncontrolled and practically
unlimited licensing of banks, both state and national, therefore,
came the sand upon which we builded. This provided positions for
incompetent bankers and set up thousands of job, spite, church, school,
borrower and every conceivable type of banks organised for selfish
reasons, destructive in their inception and failures when chartered.
They came at a most propitious time to accomplish their work of destruction rather than building for and perpetuating an orderly and
stable development. We began building roads and automobiles which, I,
turn, unfolded panoramic illusions to millions of people who judge
by appearance rather than by substance. Others had made fortunes ix
new ventures through speculation so Shy shouldn't they, but they
needed credit. ?lashed with anpareat prOpperity as were the wildc-L
banks of by-gone days, our bankers unguardedly loaned too liberally.
The World War came along at exactly the right time to complete t ruin, and, while very larrly responsible, !)ffers the most plausibie
excuse for the results of what had already begun. Inflation is the
most fertile soil for transitory and superficial growth and we had it
beyond the Biblical sixty or a hundred-fold.
Deflation followed; sale values, never real, declined precipitam4y;
the waters subsided; the ignis fatuus of the quagmire ao longer show and
the smaller, weaker and inexperienced were exposed, in fact, left to die.
Proper management mould have done much to save us rres destruction, but
under such conditions, was impossible. Supervision might have more
generally controlled but it lacked power. Supervising officials oould
criticise and recommend but about the only actual power they had was to
close banks and that is destructive rather than constructive. Criticisms
innumerable were made, recommendations as numerous were offered but, in
many cases, they were like the seed sown, little of which fell upon good
ground and bore fruit. * * * * * * *
***** ***
lo must have a founrition upin which to build and that founation
is law. We have entirely too much law but not the right kind. There
is too mum law in business but not enough business in law, just as
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Federal Reserve Bank of St. Louis
- 2there is too much politics in government and not enough government in
politics. The doctrine of individual liberty, or the right to do about
what one pleases and when and where regardless of the rights of others,
is soaetiees dangerously exaggerated in a democracy such as ours. I am,
therefore, mindful of the fact that what I au about to say may be so
radical as to arouse a storm of opposition, but even that may be worthwhile. The legal restrictions which I will sagest are based entirely
upon my experience of nine years with the beaking department of lissouri
and same of Wen are in effect in your State so I am now told.
** * *****
1. I would have double liability on stockholders of all banks*
with the additional par value liability paid up at the time of organise,.
tion and invested in 'United States Government bonds as a reserve, the
earnings of which up to seventy-five per cent, to be paid to toe contributing stockholder and the remaining twenty-five per cent, to be
used to pay expenses and to go into the general earnings of the bank.
At the present time and with present banks I would advise cutting down
or eliminating entirely dividends until such tine as investments in
general become more profitable. Stockholders should be pleased to have
present capital investments preserved and be willing to waive dividends.
This is fundamentel to a general business recovery find is vital to banks
in particular.
2. I could require a minimum capital of y125,000.00 with the provision that no dividends be paid by any existing bunk with less capital,
until each time an the capital assets equal the minimum capital required
and them pass the elrniru7s to a permanent increase of chpital stock.
S. I believe beaks should be placed in two well defined but distinct
classes, namely, commercial banks and savings banks, but making it possible
for one bank to operate a commercial department and a savisgs department,
entirely distinct and separate in every detail. This latter provision is
to take care of small communities which cannot afford more than one bank.
4. T believe commercial banks or the comaercial departnent of a
dual bank should receive only demand deposits upon which they would not
be permitted to pay interest or prefer depositors by a pledge of assets.
If public funds under control of public officials, as custodians of each
funds, were carried in this department and collateral was required, have
them set up as a special deposit and so shown on all rublished statements.
These funds ehoull bc invested in restricted securities approved at the
time of acceptance by the letting officials. The published statement
should show this fact and also of what these securities consist. Such
deposits should be predicated entirely upon the investments so made and
should in no wise jeopardize the interests of general creditors of the
bank.
5. I would hews the savings banks, or savings deportment of a dual
beak, accept only time and savings accounts upon which liberal time
limits for withdrawal are to be imposed. The savings and time deposits
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Federal Reserve Bank of St. Louis
- 3are not to be loaned but are to be invested in United States Government
bonds and in municipal bonds of the highest type, limited perhaps to state,
city and school bonds of municipalities in A-1 standing nm44 in any event,
to direct obligations based upon general advaloree taxes for redemption.
I would positively forbid investing the funds of any bank, savings- or
commercial, in any other type of bonds. Let individuals and institutions
absorb the floatation of all other types of securities and bury their losset
with themselves so that they will have no one else to blame. Most of these
securities are not now and never were proper investments for banks of deposit. They depend generally upon earnings and that is speculative.
6. I would either divorce entirely investment affiliates from banks
or subject them to the supervision of state and national banking departments.
7. / would seriously consider having savings banks and savings departments pay dividends rather than interest, pro-rated from earnings on
each prescribed investments on a fifty-fifty gross basis, the depositor
setting half of the gross earnings and the bank the remainder. This,
mder present conditions, would operate to the advantage of the greater
amber of banks since they do not now retain half of the gross for them.
eaves, because of unprofitable rates paid on deposits.
B. I would subetitute for the present annual examination by a committee of stockholders an annual audit by aprroved accountants who are,
in addition, practical bankers.
9. I rould give to banks fiduciary powers but the proceeds of any
estate or beneficiary of any kind to be properly and ma'ely regulated as
to investments and entirely segregated as a general liability of the
bank.
!'or Commercial Banks, Mr. Cantle, proposed the following:
1. A maxima loam limit of ten per cent, of capital and surplus
to any individual, firm or corporation, direct and indirect, sholAd be
imposed. (Indiana sew has approximately this legal protection.)
2. Present legal reserve ratios should be maintained and an
additional equivalent if not a greater sum invested in United States
Government bonds, State or City, under the same restrictions governing
the investments of savings banks, for a secondary reserve.
3. These restrictions an bank investment would provide an outlet
certain for the higher type of securities and tend to stabilise prices
thus minimising losses to banks by reason of possible forced sale.
4. Restrict the maxima amount of any one type of loans that may
be carried such as real estate loans, commercial paper, call loans,
chatteled loans, etc.
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Federal Reserve Bank of St. Louis
4
5. lather rafts* emtirely loana to officers and/or directors of
banks or so restrict them as to protect the bank beyond a doubt. In
seven years in the business of supervising bank activities, covering a
period of the gre-ltest bank mortality and the most destructive depression we have ever experienced, I have knoll'n of very few failures
where the officers and directors were not borrowing, directly or indirectly, from the bask. In nearly every failure inside lines were
heavy and this, in a large sense, disqualifies an officer from intelligently passing upon other credits.
6. There should be far more rigid requirements to qualify as a
bank director and much more drastic regulation of their Attlee. Too
many directors and even officers have been mere figureheads in bank
monmessmat. They can know the value of the bankle assets and it is
their moral and legal duty to know.
7. Have uniform type of report of officers to directors at
regular meetings as to minimum of information to be canveyed. Make
them really something worthwhile.
8. Require discount committees and require them to be active.
9. Limit the amount of dividend to be paid to the taxis= legal
interest rate in the State. All other net earaince to be held in reserve, unless and until distribution of such earnings were authorized
by State or Federal suparvising authorities.
10. Make some r*orm of clearing house or credit bureaus compulsory
in defined territories. I have never changed my mind a particle about
the value of organized co-operation in banking. It is the chief argnaent for branch banking and is even more valuable to the unit banker.
U. In the case of real estate loans, limit to first mortgage
loans of not over forty per cent., based upon conservative and disinterested appraisal, a written report of which, signed by the appraisers, bearing date and supporting data for the figures approved,
together with a new and like appraisal for each time renewed, to be
filed, and make compulsory the filing of an abstract of title Amiss
merchantable title under all conditions. Permit the Govermmemt to
enlarge upon the activities of Federal ram Loan Banks and flosese
farm mortgage loans largely.
1P. Place a percentage limit on rublic funds accepted for deposit
unier any condition. The present method of placing public fun,is on t.
auction block is wrong and should be prohibited.
15. Remove unlisted bank stocks from a fixed dividend to a
dividend earned basis. Trying to plug or maintain markfgAat for unlisted
stocks on a fixed or ,irtificial basis, in my judgment, is fundamentally
unsound.
14. Banks should im, ose service and activity charges an nearly
uniform as possible. A considerable part of the earn,ngs should come
from these and other by-products.
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Federal Reserve Bank of St. Louis
r
5
So meek for beaks. What about banking departments?
1. Take the department out of politics entirely an give
it
authority to enforce needed regulations. At present it can
only maw.
send that corrections be **de. Banking is a quasi-public
business, so
closely akin to public utilities that I as not altogether
convinced
but what it might be so classed and so regulated, but in any
event, it
even more directly affects the clublic welfare.
2. Liquidate closed banks through the department altoget
her. It
would be far less expensive, especially as to legal fees, and would
make for greater efficiency in batik liquidation.
* * * * * * * Guaranty laws are funiamentally unsound end for that
reason have proven a failure wherever tried, and insuring deposits,
through the medium' of pledging of essets or by ?urety bonde, is neither
feasible nor practical. It, therefore, resolves itself into good
banking and, in view o° past experiences, the best env& be expected
only through the medium of greater legal restrictions and greater
individual and administrative responsibility. These thincs cannot and
should not come in a day. To attempt them hastily and injudiciously
would spell uisaster. Condition will not permit.
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Federal Reserve Bank of St. Louis
** * *****
•
SOURCE:
THE CALIFORNIA BANKER--JUNE 1932
HOW MUCH SHOULD A BANK EARN?--by Andrew Miller, Secy. Calif. B.A.
Page 232
Through all this record of bank failures runs the thread of
gradual but steadily diminishing earnings, even in the generally
prosperous years before 1929, until it has become a threat to the
very existence of our banking institutions. Slowly but surely
bankers and depositors alike have admitted that "only a profitably
operated bank is a safe bank." Not mere size or even an unbroken
dividend history is a sure indication of bank safety. The public
has come to inquire into the earning power of its bank, realizing
that in a nice, fat cushion of capital and surplus in relation to
deposits; in prudent and experienced management; and in a good
annual earning capacity lies safety for the depositor.
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Federal Reserve Bank of St. Louis
•
THE TARHEEL BANKER--June 1952- (Proceedings N.C. Bankers Association)
ANNUAL ADDRESS OF THE PRESIDENT-Robert M. Hanes, Pres., Wachovia
Bank & Trust Co., Winston-Salem
Page 28
It
great many solvent Ti well-managed banks which should be
operating today, and which have gone through many distressing times
before, are now closed due to public hysteria and unusual and unwarranted demands by unreasonable depositors. The closing of one
bank has often resulted in the wild rush of depositors on many of
the nearby banks, cgusing suspensions and closings of many worth
while institutions. 1*-A-44L-OP,
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Federal Reserve Bank of St. Louis
•
SOURCE:
ANNUAL REPORT OF SUPT. OF BANKS - CALIFORNIA 1952
Page 11
*
*
*
* * * A contributory cause, which made necessary the closing of a
Ailmber of solvent banks, was their known affiliation with some other
institution which had been forced to close its doors.73Generally
speaking, California is a distinctly bright spot on the National map
of bank failures and her enviable record would have been even better
had fear not been engendered by the calamities that were occurring
meantime in the east and middle west.
California may be very proud of its banking record in the trying
times of the last fiscal year. This Department is particularly proud
of the record made by State banks. * * *
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Federal Reserve Bank of St. Louis
op- SOURCE:
AMERICAN ECONOMIC REVIEW, VOL. 22 (1952)
BANK FAILURES IN THE UNITED STATES--Walter E. Spahr, N.Y. University
Beginning at page 214 thru 246
It is instructive as well as interesting to note that in
Canada, by way of contrast, bank failures appear to have very little
relation to commercial failures. The remarkably few failures which
have taken place in that country indicate that the branch banking
system there is much better qualified to resist the strain of business
fluctuations than our system of unit banking is able to withstand the
effects of business fluctuations in this country. Her business
fluctuations are not as severe as ours and one contributing factor
II ust be found in the fact that her banks are able to stand by and
assist business in times of need. It may be noted, also, that bank
failures are almost unknown in England, although, she has her business
fluctuations. It would appear, therefore, that a fundamental explamation
of the causes of bank failures in this country is to be found, partly at
least, in the nature of our banking structure.
Conclusions derived from the statistics of bank failures. Before
proceeding to a further analysis of the causes, prdblems, and possible
correctives of bank failures, it may be helpful to summarize the essential
conclusions at which we have arrived after an analysis of our statistical
data:
(1) The heaviest failures, absolutely and relatively, are among
the state banks; (2) the failures are greatest among banks with small
capitalization; (5) they are heaviest in small towns and villages; (4)
they are heaviest among banks autside the Federal Reserve system; (5) they
have been uniformly heavier than failures of commercial enterprises since
1920 but not during the period 1892-1920; (6) they accompany very closely
the rise and fall in commercial failures usually reaching the peak at
the same time; (7) they are not only caused by business recessions but
contribute to unsound business conditions; and (8) they are more
pronounced than in any other country in the world even in fairly normal
and prosperous times, which would seem to indicate that there Ere some
fundamental and organic defects in our banking structure that require
51111
An Analysis of the causes of bank failures. If the preceding conclusions are correct3y deduced from the available statistical evidence, it
would seem that logic compels us to attach the problem of increasing
bank failures by examining what appear to be the most outstanding and
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Federal Reserve Bank of St. Louis
4*)
fundamental defects of our banking structure which have contributed
to the present unhappy situation, es well as those factors that lie
outside the field of banking.
We shall consider the problems and possible correctives under
the following main heads;
1. The defects inherent in the organic structure of our
commercial banks and banking system.
2. Those due to the inadequate control of our credit structure
by the Federal Reserve system which, in turn, result from two limitations,
(2) those inherent in the structure of the Federal Reserve system, and
(b) the inability or reluctance of the Reserve authorities to devise and
apply adequate principles of credit control.
5. Those causes lying outside the banking field.
1. Defects inherent in the organic structure of our commercial
banks and banking systeMt---5) We have an unnecessary and an unwise
division of our commercial banks into national and state banks with
forty-nine legislative bodies regulating and granting special privileges
to their respective banks. For a long time state banks received
privileges not accorded national banks; then the national banking law
was liberalized to place national banks on an equality with state banks,
with the result that this competitive liberalization of bank laws has led
us to permit the creation of unsound banks and the indulgence of unsound
banking practices. Such a system, with its forty-nine different
jurisdictional authorities and forty-nine sets of laws, by its very nature
involves lack of uniformity in legislation, in standards of banking, in
rates of progress, and in supervision. These conditions have been permitted
to prevail for no better reason than as a conceestion to historical precedent
and the doctrine of states' rights. Commercial banking is, and cannot be
anything else than, interstate in nature and, as a result, there is no
logical basis on which to defend the present classification of our banks
into both national and state with the prevailing lack of uniformity in
banks and banking practices.
(b) We have too many banks—especially too many small banks. The
statistics of the failures place this contention beyond dispute. Competitive liberalization of our various state and national laws has been primarily responsible for this situation. The lenience on the part of our lawmakers doubtless has been due to the prevalence of the doctrine of laissez
faire in matters relating to business enterprise. As a part of this same
doctrine, each community has desired its bank and, preferably, more
than one bank in order to secure the full fruits of the competitive system.
The securing of one or more local banks was facilitated by the low capital requirements and the ease with which the laws permitted the chartering of banks. Nearly half of the banking resources of the country are in
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Federal Reserve Bank of St. Louis
11111•14,110
the hands of 1 per cent of our banks (250 in our metropolitan centers),
the other half being spread thinly among the other 99 per cent. Twentyfour banks, national and state, in New York City alone have a capitalization almost equal to that 9f,20,008 country banks situated in towns of
10,000 population or less.0)
(c) Too many banks are outside the Federal Reserve system with
the result that the Reserve authorities are not in a position to regulete
or aid them. The unfortunate aspects resulting from this situation reveal
themselves in a striking manner during crises like those of 1920 and 1929.
Of the 6987 national and state banks which failed during the decade, 83
per cent were nonmember and 17 per cent member banks. The lesson to be
drawn from this evidence should be obvious.
(d) Small unit banks often do not or cannot secure the proper diversification of their portfolios due to the fact, perhaps, that they are in
communities in which a few crops or industrial activities predominate and
provide them with an undue proportion of paper of a certain type, with
the result that the welfare of the bank depends almost entirely upon the
prosperity of the local community. Furthermore, with the increased use
of the automobile and other means of communication, much of the important
business of local communities has gone to the larger centers with the
result that small town banks tend to hold only the unimportant local business.
(e) It appears that the proportion of paper eligible for rediscount
with the Federal Reserve banks is too small for the safety of the commercial banks in times of stress. * * *
(f) Closely related to this situation is the fact that during recent
years commercial banks have been steadily increasing the proportion of
their resources given over to investments as compared with the proportion
going into loans and discounts. * * * These figures show that commercial
banks are shifting more and more from the financing of commercial transactions and are devoting an increasing proportion of their resources to
the financing of fixed capital. These changing proportions contributed
to the lack of liquidity in the resources of commercial banks and
probably reveal a contributing factor to the increased number of bank
failures. This changing proportion has an even greater significance
when considered in connection with the small unit banks which invest
such a large proportion of their resources in local mortgages. Table IX
will show something of the trend.
(g) Directly associated with the question of the increased proportion
of investments and loans on investment paper and mortgages by commercial banks are those questions relating to the increased number of investment and other non-commercial banking affiliates which have been attached
to commercial banks, particularly in metropolitan centers, in recent years. ***
It was reported that when the Bank of the United States, in New York City,
failed, it had about fifty affiliates with relationships so involved that
it is doubtful if they could be disentangled.
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Federal Reserve Bank of St. Louis
(5) Hearings on Branch, Chain, and Group Banking, Vol. I, Pt. I,
pp.22-23)
A
-4-
(h) Another factor which has contributed to the weakening of
our commercial banking structure has been the steady increase in the
proportion of time as against demand deposits. On the basis of the
average percentages for the years 1919-25, we find that demand deposits
amounted to 50 per cent, and time deposits to 52.5 per cent, of the
earning assets of the member banks of this country, while, on June 50,
1950, demand deposits amounted to 52 per cent and time deposits to 38
per cent of the earning assets. Against these time deposits, which have
increased absolutely and relatively during recent years, a reserve of
only 5 per cent is held despite the fact that the cash derived from these
time deposits is treated like the cash received from demand deposits
against which a much higher reserve must be kept. This situation has
presented an inviting, although a dangerous, opportunity to commercial
banks. It has been inviting to commercial banks because it has been
more profitable for them to expand their loans and investments and reap
greater profits. It has been a dangerous factor for the banks since
they have been led into making loans and investments of a type not
appropriate for banks engaged in a savings barking business, and also
in the fact that their reserve ratio against genuine demand liabilities
has tended to fall below that required against such liabilities. From
the point of view of the savings depositor, the situation has been
fundamentally bad, although he has received some conveniences not afforded
by the genuine savings banks. In most instances he has been able to withdraw his time deposits without prior notice, and quite often, if not
usually, his commercial bank has been more conveniently located than the
nearest savings bank. Against these services, however, is the fact that
his deposits have not been and are not properly secured by reserves and
investments as well as the fact that in the event of a run on a bank the
time depositor can be made to wait at least thirty days to present his
claims while his funds are being paid over the counter to meet the claims
of the demand depositors. If the interests of depositors are to be considered seriously in connection with bank failures, and if the small
saver is to be given the proper protection due him, then here is another
problem which needs study and correction.
(i) The unit costs in our great multitude of small banks are
relatively high and the net returns are very low. The prevalence of
ostentatious buildings and equipment is no small factor in this situation.
An analysis by the comptroller of the currency of bank earnings showed
that a large proportion of the banks outside of metropolitan centers
were not earning enough to justify their existence. This was true even
in such relatively prosperous years as 1925, 1926, and 1927. In 1927
nearly 966 national banks were operating at a loss, and an additional
2000 were earning less than 5 per cent. This co4stituted about 58 per
cent of all national banks in the United States.0) The situation among
the state banks was even worse.
(j) Another defect of our unit banking system, especially of our
small banks, is found in the poor management which generally character-
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Federal Reserve Bank of St. Louis
(4) Hearings on Branch, Chain, & Group Banking, Vol. I, Pt.
p. 5.)
-5izes them. In general, the officers are of an inferior sort. Perhaps
the cashier, and a few others in the bank, has had some formal training
in banking procedure and principles, but the training of the president
and others responsible for running the bank has probably been along
different lines. The leading citizen in most communities usually hopes
to complete and polish off his business career, whether he be the
successful grocer or butcher, by becoming the president of the local
bank. This phenomenon is a traditional and a peculiar characteristic
of American life. Such men ordinarily are individualists and resist
co-operation. They are typical small-town men, often called hard-headed
business men and the backbone of our nation. In the proper sense of the
term, however, they usually are not bankers. They may know something of
the technique of banking but little of its fundamental and far-reaching
principles. They are not well acquainted with the literature on banking,
with the tendencies, current problems, and possible solutions which should
be of interest to them. The:, resist the collecting and filing of data
on local and more general business conditions which affect their bank;
they resist modernizing methods; they often permit sentiment to plEy too
large a part in the making of local loans; the directorates usually are
filled with local business men who know little about banking and often
are indifferent regarding the bank's affairs. Everyone, of course,
recognizes that there are many fine exceptions to these generalizations;
nevertheless sober reflection must impress one with the general accuracy
of the picture and with the fact that the type of management characterizing
a large part of our unit banking system is an important factor in bank
failures. For example, the comptroller of the currency, in analyzing the
causes of the failures of the national banks in charge of receivers on
October 51, 1950, listed them as follows: (5)
Per cent
A. Incompetent management
58
B. Dishonestym
9
C. Local financial depression from agricultural or
industrial disaster
50
D. Receiver appointed to levy and collect stock assessment covering deficiency in value of assets sold...
E. Temporary suspension
1
* * ** ** * *
(k) Finally, we may mention the fact that the problem of inadequate
bank supervision is still with us. Due frequently to the youth and
relative inexperience of many of our bank examiners, it becomes a fairly
simple matter for sharp bank officers to outwit them. Usually the staffs
of examiners and of examination departments are inadequate and poorly
paid. The great number of failures is evidence of the fact that they are
unable to cope with the situation. In addition, we have the problems
arising from the conflict of authority, if not a total lack of authority,
with respect to the examination of chain and group banks and the nonbanking holding companies that are sometimes a part of these systems.
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Federal Reserve Bank of St. Louis
(5) Annual Report of the Comptroller of the Currency
(Dec. 1, 1930), pp.307-321.
-6-
We also still find difficulties in the way of quick and effective
action on the part of the comptroller of the currency in correcting
unsound banking practices due to bed management on the part of officers and directors of banks.
2. Inadequate contulj1LmtIktja our Federal Reserve authorities.
Another fundamental explanation of our phenomenal number of bank failures
is to be found in the inadequate control of credit, with particular
reference to the business cycle, which characterizes our Federal Reserve
system. This is due to the limitations placed upon the possibilities of
credit control because of the structural characteristics of the Reserve
system and to the inability or lack of ability of those in charge to
devise the principles and mechanism that are effective within the limits
which the structure of the system permits. * * *
The amount of credit in use which is beyond the control of the
Federal Reserve authorities, and yet affects business conditions and the
price level, is sufficient to upset their best laid plans. We only need
mention the tremendous amount of credit used in the stock market, the
capacity of the Federal Farm Loan system to extend too much credit to
farmers, and the various other non-commercial banking systems and enterprises lying outside the Reserve system to appreciate the significance
of this problem in the question of credit control.
Recognizing, however, these organic limitations inherent in the
nature of the Reserve system, it is believed that much more could be done
than has been done to control credit in the interest of price level
stability. * * *
* * * Regardless of the present state of individual opinion on
these points, the fact must be apparent to all that since the inauguration
of the Federal Reserve system we have witnessed the greatest fluctuations
in the price level and the greatest number of bank failures for the years
involved that this country has ever seen. From these facts the lesson
must be clear that the system is not meeting present-day demands properly and that some well-considered corrections should be made.
5. .gftuses lyinklauely outside the banking field. * * * *
If we are to attempt to correct the structural defects of our commercial banking system, the evidence would seem to indicate that all commercial banks should be brought within the Federal Reserve system if
it is to exercise genuine control over commercial credit, perform its other
functions properly, and provide the proper aid and protection to commercial banks. Furthermore, since commercial banking is interstate in
nature, it appears preferable to convert all commercial banks into na-
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Federal Reserve Bank of St. Louis
-7-
tional banks, leaving for the state banks the savings bank and trust
company business in so far as possible, although it would not seem advisable to deny these functions to national commercial banks also, since
there would be a great number of places in which there would be no
savings banks and trust companies to provide the necessary services to
the people. The questions of states' rights and constitutional limitations
do not present insurmountable difficulties. When a business becomes interstate in nature or becomes an instrumentality vital to the free movement
of interstate commerce, the business is national in character and should
be brought under national jurisdiction. In such cases the states have no
rights that demand protection since the public well-being is at stake.
As to the constitutional aspect of the question, it is quite doubtful
whether there are any constitutional difficulties involved. * * *
A further argument in favor of nationalizing all commercial banks
rests upon the fact that it is hardly rational to expect much progress,
and certainly not uniform progress, by waiting for forty-nine different legislative bodies to agree upon and pass sound and progressive legislation.
A fundamental purpose of the Federal Reserve system was to provide us
with a national policy and system but it cannot be made effective with the
present organization of our commercial banking structure. We can accomplish these things through a national law. Business cycles are national in scope as are the problems of credit control; commerce is interstate and international in nature; the problems of a proper reserve structure are national and even international in their ramifications, and such
questions can be dealt with adequately only by a governmental body with
the proper jurisdictional authority. It is an interesting fact that while
careful reflection should have convinced us long ago that a nation must
have a national commercial banking system and policy, since this is essential to national well-being, we have continued to permit a scattered
type of banking with the accompanying diffusion of authority that has
made an effective national policy impossible. Too much democracy in
banking has been a devastating factor in our economic life.
It appears also that branch banking should be provided for in order
to enable banks to secure the proper diversity in their portfolios; to
eliminate the problems now associated with small unit banking, to provide
adequate capitalization so that the banks can engage, not only in local
financing, which today is often beyond the capacity of the local bank,
but in a wider type of commercial financing; to insure a better grade
of management; and to eliminate some of the dangers now associated with
chain and group banking. It seems logical, also, for such branch banking
to be as wide as the Federal Reserve districts, if not nation-wide, in
order to secure proper diversification, and the other virtues that appear
to accompany well-organized branch banking. Under such a system, branch
offices could and should be opened where a unit bank could not exist
profitably and without danger to the community. It is interesting to
consider the fact that while we are willing to permit our large banks to
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Federal Reserve Bank of St. Louis
-8-
establish branches in the far corners of the world, we have been unwilling to permit them to establish branches within the country despite
the fact that about 90 per cent of our trade is national rather than
international and despite the fact that we could regulate domestic
branches more effectively than the foreign.
In so far as unit banking continues, the minimum capitalization
limits should be raised.
Study should be given to the question of the proportion of rediscountable paper which member banks should hold as well as to the
proportions of other types of paper, especially investment and mortgage
paper, which might be included with safety in their portfolios. In a
similar manner, study might be given profitably to the possibility of
devising a scheme for increasing the margin of collateral required as
security for loans when the price level is rising.
There also appears to be considerable merit in the proposals made
through the creation of central mortgage rediscount banks, the
aid,
to
various institutions which hold real estate mortgage paper.
Since good central banking appears to depend upon the maintenance
of liquidity, extreme care Should be taken in admitting any new type of
paper to the portfolios of the Reserve banks which might impair this
liquidity. The attempt to give a central banking system wide powers of
credit control seems to conflict at certain points with the attempt to
maintain its liquidity.
Non-commercial banking affiliates doubtless should be brought under
strict control of and be examined by the proper commercial banking
authorities, if, indeed, they should not be severed from commercial
banking institutions. Careful consideration should be given also to the
possibilities of placing strict limits upon the total amount of loans which
commercial banks may make to their affiliates in the event they are not
severed from the commercial banks.
Time deposits, especially those of a thrift or savings nature, should
be under the same restrictions as to investment as savings deposits in
savings banks and the resources segregated, or the reserves against these
deposits should be the same as against demand deposits. Perhaps an
effective combination of both ideas could be devised.
Every reasonable step should be taken to improve the system of bank
reports, examinations, and methods of dealing with recalcitrant bank
directors and officers. Until a thorough overhauling of our commercial
banking structure is effected, the Comptroller's Office should be given
authority to examine and exact reports from every unit in the chain
and group banking systems which are interstate in character or in which
a national bank is one of the units.
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Federal Reserve Bank of St. Louis
-9Steps should be taken to remove all obstacles to control which are inherent in the structure of the Federal Reserve system, and which now
hamper our Reserve authorities.
That our banking system is out of joint and in need of overhauling
seems clear. It is also well understood that out of every business crisis
come demands for revision of our banking laws. It is a national habit
despite the fact that we know we already have our bankers in legal straitjackets when compared with the freedom given to bankers in such a country
as England. Nevertheless, this seems to be the only feasible way to
correct existing defects, since we cannot afford to perpetuate our system
of little unit banks, with its amateur bankers, with its inability to
cope with modern business problems satisfactorily, and with its tremendous number of bank failures which have caused unmeasured losses and
untold misery for millions of depositors, borrowers, stockholders, officers, and directors, who have striven valiantly to accumulate a little
surplus which will afford them security in the evening time of their lives.
The Comptroller of the Currency, before the Currency Committee of the
House of Representatives investigating group, chain, and branch banking
painted the picture vividly when he said (in February, 1930): "There is
no more distressing sight than a group of citizens, men and women, clamoring before the closed doors of a bank bewailing the loss of their savings.
These losses fall upon the best and most substantial citizens in the
community and many of them never recover their previous financial condition. Multiply this local event by nearly 6,000 and scatter it throughout
the great agricultural states of the Union and the magnitude of its effects
reaches astounding proportions.
"It is estimated that 7,264,957 depositors have contributed to the
great total of more than $1,700,000,000 of deposits in failed banks during
the past nine years and that no les9 than 114,000 shareholders have suffered
losses through these suspensions." (8) * * *
The tragedies of depositors and others today, in a country that is
supposed to know something about how to devise laws to protect the needy
against unsound social institutions and devices, are a sufficient answer in
themselves to those who insist that the laws do not need revision. It is
certainly high time that those interested in the welfare of the depositors,
the common man and woman, and the public in general--and this means the
legislators, the press, the social scientists, and those outstanding bankers
who see the banking business in its proper setting—should join hands and do
all things possible to correct present defects so that the losses and
tragedies which characterize our present banking system will speedily and
definitely become events of history without probability of recurrence.
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(8) Vol. I., Pt. I, pp. 13-14.
-10-
DISCUSSION: Frederick A. Bradford--
In Professor Spahr's analysis of the causes of bank failures,
I feel that he has failed sufficiently to distinguish between those
causes which are of far-reaching importance and those which are of
minor or secondary significane. Thus, in the discussion of the
defects which are inherent in the organic structure of our commercial
banks and banking system, no particular stress is laid on any one or
more of the eleven defects described, yet it seems apparent to me
that the poor quality of the management, of the smaller banks especially,
is of outstanding significance, while the variety of jurisdictions under
which our banks operate, the excessive number of banks, and, in some
states, the inferior brand of bank supervision, are also more important
than the other seven defects. If those mentioned could be remedied, the
others would largely take care of themselves. I have little sympathy,
for example, with the notion that it is impossible for a bank in a onecrop region to diversify its business. Under sound management such a
bank would insist on holding a fair proportion of its resources in open
market paper and high-grade, marketable bonds, while confining its local
loans to the very best risks. I also question the increase in investments,
per se, as a legitimate cause of bank failures. So long as the investments
are in local mortgages, the bank does not, it is true, strengthen its
position, but probably weakens it. Investment in high-grade, marketable
securities, however, merely by helping to attain diversification, would
have tended to decrease rather than to increase the number of small
country bank failures during the period prior to 1930. Finally, although
I am quite aware of the danger of investment affiliates of commercial
banks, I am not convinced that they have played any great part in the
recent debacle of bank failures, except in the case of the Bank of the
United States.
Inadequate control of credit by the Federal Reserve authorities—
Professor Spahr's second major cause of bank failures--seems to me to
have been somewhat overemphasized. * * *
With regard to the possible correctives of the unsatisfactory banking situation in this country, it seems to me that permissive branch
banking on a rather wide scale and higher capital requirements for unit
banks are more expedient than the other changes which Professor Spahr has
suggested and would probably secure the desired results. I never tire of
quoting Hartley Withers to the effect that "good banking is produced, not
by good laws, but by good bankers." When the bankers of this country,
taken in the aggregate, learn that their first duty is to their depositors,
not their borrowers, and that no loan or investment which jeopardizes the
safety of their depositors' funds is justified, there will be comparatively
few failures, whatever the banking laws may be.
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Federal Reserve Bank of St. Louis
Theoretically, the smallest unit banks can be soundly run, but often,
-11-
in practice, they are not. It would seem desirable, therefore, to
permit branch banking and to raise the minimum capital requirements
for unit banks as the most probable and expedient methods of securing
by legislation the type of bank management which is essential to a
good banking system.
G. W. DOWRIE.--
Even if we insist that banks should be able to weather any sort
of condition that comes, it is only fair to them as it is to other members
of our economic organization that sound and effective mechanisms be devised
for the stabilization of business at home and that the closest international
financial co-operation be fostered to the end that external disturbances
may be reduced to a minimum.
I quite agree with the two papers, however, that even with a stable
economic environment our banking system needs considerable improvement.
We must not, however, fall to worshipping mechanisms such as laws,
regulations, and external supervision. The only dependable method for
achieving better banking is to develop better bankers. Sound banks are
not necessarily member banks, national banks, branch banks, or large
banks. When all of the acts of the present banking tragedy have been
written it will be found that no type or system of banking was free from
the recklessness, greed, stupidity, and dishonesty which have been present
in the existing situation. It goes without saying that a bank with larger
resources, more careful supervision, greater opportunity to diversify
risks, and ability to command better managerial talent, other things being
equal, will be better able to weather storms but even such an institution
will subject the stockholders and patrons to heavy losses unless it is
wisely and honestly managed. The ability, conservatism, and highly developed
sense of stewardship of the English banks are enabling them to weather unperturbed storms even more violent than our own banks are encountering.
While there is much to be said for a single national system of banks
the case is not quite so one-sided as Dr. Spahr would have us believe. We
have already dumped upon the central government so many of our local
problems that it is unable to grapple with them effectively. While some
of our state laws and supervision systems are not quite up to the standards
of the national system I have found that the plane upon which banking is
done in any given community is pretty much the same for national and state
banks. The existence of a dual system has permitted better adaptation to
local needs and, through the interchHnge of ideas, has resulted in greater
progress. As has been the ease with state-wide branch banking, one state,
California, has served as the laboratory without the whole countr:, having
been subject to the necessity of experimenting with a new type of banking
structure.
I quite agree with Dr. Spahr that the small bank should be eliminated,
branch banking be given a somewhat freer hand, that stricter, as well as
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Federal Reserve Bank of St. Louis
-12more scientifically devised, regulations be made with respect to loans,
deposits and reserves, and that a better type of supervision be provided.
It is still desirable to emphasize the fact, however, that the best of
regulations and the ablest of supervision will not make our banks failureproof in the face of stupid and dishonest management.
Dr. Spahr's insistence that every commercial bank should belong to
the Federal Reserve system meets with my approval provided he confines the
term "bank" to those institutions that are commercial in fact as well
as in name. Many of those banks that are still outside of the system do
so small a volume of commercial banking as scarcely to warrant Reserve
bank membership.
As for the stricter regulation of the investment departments and
investment affiliates of banks, I would go a step further and insist that
unless this type of financial service can be rendered without bringing
distrust upon the whole institution it might better be denied to our banks.
The department store idea in finance is in itself a thoroughly commendable
one and I see no fundamental reason for denying to either qualified national or state institutions the right to engage in the whole gamut of
financial services, provided that a uniformly high standard is maintained
in every department.
My conclusion is that we should perfect our banking laws and the quality
of supervision to the highest degree but that we should regard these as only
of minor importance in our quest for a failure-proof banking system. This
latter condition we cannot achieve until we have placed only good bankers
in charge of all of our banking institutions.
JOHN F. BELL.-* * * I think that the present suggested changes in
reserve requirements of banks, however helpful they may be, can at best
be only a temporary relief. They are attempts to cure only one part of
a diseased body, when probably the entire system needs medical attention.
Professor Spahr's paper on bank failures builds a very strong case for
bank reform. It is likely that we shall pull through this present
depression in a year or so and shall then feel that our banking system is
not so bad after all. However, the record of the past ten years will stand
as a monument to costly experimentation. We have witnessed the inadequacy
of our banking laws to meet national emergencies. I am well aware that,
as has been pointed out, banking laws do not make good banking, but that
good banking is attributable to the bankers themselves. Yet we have
drawn up for the bankers elaborate codes which would attempt to set strict
limits on the bankers. That these limits have been overstepped is common
knowledge. The one paramount object to be desired in any banking system
is adequate and safe banking. It is hard to conceive how this can be
achieved with forty-eight different experiment stations, each with its
own individual laws, as we have in this country. I am in accord with
Professor Spahr's contention that a system of branch banking is a solution.
I do not believe that branch banking is a panacea, yet I feel that it would
provide a united front which might offer an opportunity for uniformity of
control. Banking, as now carried on, is essentially interstate in
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Federal Reserve Bank of St. Louis
-13-character. We have been altogether too individualistic and uncooperative in this business, as is witnessed in practically every banking
community of the entire country. I feel that the price which is now
being paid is altogether too high for a perpetuation and continuation
of our present costly system. * * *
HOWARD H. PRESTON.--
* * * It is true, however, as Professor Bell has so ably brought
out in his analysis of the nature and classification of bank deposits,
that time deposits are by no means homogeneous. A sound segregation
law should limit the protection to savings accounts and should not
include all classes of time deposits, which may include large capital
accounts. More than twenty years of experience have convinced the
i public and most bankers in California and Oregon of the advantages of
!segregation even when handicapped by unsatisfactory classification of
i
Aaccounts.
,,
The proposal to bring all commercial banks under national control
is not new, but was brought into prominence some months ago when
advocated by Owen D. Young before the Senate Committee on Banking and
Currency. It must be admitted that Gresham's law has operated in the
field of banking. There has been open to bankers the choice of two
codes under which they might operate their banks. Too often they have
chosen the one with lower capital requirements or looser supervision.
Our overbanked condition in many states can be attributed to laxity in
laws and the competition for numbers under two systems. Against this
must be set the gains from a developmental point of view of experimentation
and freedom from monopolistic control of banking resources.
If we concede that Congress has the power to establish a single banking
system, we must still recognize th/it much straw must be threshed before
such a far-reaching proposal can become the law of the land. Meantime, as
a practical proposition, it seems most desirable to move in the direction
of a single system through standardization of state banking legislation
and supervision. * * *
Existing banking codes in the seven states comprising the Twelfth
Federal Reserve District are barely a quarter of a century old. The same
condition, with modification, is typical generally. In recent years the
trend of state legislation and supervision has been toward decidedly higher
standards. The old competitive spirit has disappeared. In its stead we
find co-operation with the comptroller's department and a desire to bring
the laws up to the best standards of the national banking act. In the
matter of capital alone, states have adopted the minimum requirements
of
the national law.
In my own state of Washington the past decade has witnessed a
distinct trend toward co-ordination of bpnking policy. Perhaps
more real
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Federal Reserve Bank of St. Louis
-14--
progress may be made by concentrating our energy upon bringing up
the standard of state banking than in looking toward the ideal but
somewhat distant and uncertain goal of a single national system of
commercial banking.
Professor Spahr's proposal for branch banking deserves support.
Moreover, we should establish a national policy upon branch and group
banking. The McFadden Act in substance declared against intercommunity
branch banking and left our national banks subject to state legislation
in the establishment of city branches. The result is that in many
cities where branch banking is illegal, e.g., Seattle, group banking
has become the dominant form. It is generally conceded that branch
banking would be more economic if permitted. The result of the present
laws is to give us groups, many of which are equivalent to branches.
It is inevitable, however, that the agricultural sections of the
United States and Canada will have a larger number of banking offices.
Despite the widening of the trade area by improved roads and the use of
the automobile, the small town is still the center of business and
social life to a large proportion of our rural population. Canada, today,
has almost double the number of banking offices per capita that we have
in the United States. A branch bank can be maintained far more
economically than an independent bank. This points to branches as a
method of providing banking services to small towns. Some states, e.g.,
Iowa, have already authorized branch nbanklets"--branches only in towns
where no independent bank is in operation.
While recognizing the extension of branch banking as inevitable and
desirable, an analysis of the recent past suggests that we must proceed
with caution. Branch and group systems have been thrown together too
rapidly. Systems have been extended faster than the units could be
integrated. Life-long unit bankers have been tempted by high prices for
their banks and higher salaries than they have dared to pay themselves to
become part of a group or branch system. But they cannot adjust overnight to the new order of things.
Today we may find branch systems loaded with heavy overhead, controlled by absentee owners, unable to unify and co-ordinate the management
and operations. The making over of a system of unit banking into branch
banking will bring in its train grave problems. It will require decades,
not years, to accomplish it successfully.
Sooner or later Congress must decide a national policy regarding
branch and group banking. The information obtained at the 1930 and 1931
hearings of the House and Senate Committees will soon be supplemented
by the findings of the Federal Reserve Board's Committee on Branch, Group,
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-15-
and Chain Banking. With this and other available information a sound
policy should be formulated. In the formulation of this policy bankers
must assist, but not dictate. Senator Glass has said that all of the
opposition to branch banking has come from bankers and bankers' organizations.
Perhaps the first branch banking question to settle is the area
over which a bank may extend its branches. City branches should be
allowed universally without regard to state law. The dream of nationwide branch banking is over. Probably the first step should be to
limit branches to state lines or contiguous territory. Trade area
branches may be feasible if the trade area is narrowly defined at first.
In any event, branch expansion should be subject to restriction and
control.
Group banking should be brought strictly under the supervision of
the comptroller where any member of the group is a national bank. Soundly managed groups add strength. The evils of unsound management have
been demonstrated in such groups as the Bankers' Holding Corporation of
Seattle, or the Caldwell group of Nashville. These experiences
demonstrated that group membership may be a disastrous liability to a
successful local bank drawn into weak or speculative company through
group affiliation.
Finally, I would agree heartily with the previous speakers who have
stressed management as a solution of bank failures. Thousands of unit
banks have successfully weathered the storm pnd stress of 1930 and 1931
years whose wholesale failures have brought condemnation upon our present
system. At the same time, poorly-administered branch and group systems
have gone down with disastrous results. A changed banking structure alone,
therefore, would not be a guarantee of stability.
The state banking department in Washington has adopted a general
policy of fewer and stronger banks. (The majority of small banks were
state chartered.) Working constructively upon this policy, the department has been able to complete only three intercommunity mergers. It
would not be a serious hardship in many more cases to merge banks so that
they would be limited to trade areas of sufficient size to support a
bank adequately.
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Federal Reserve Bank of St. Louis
•
SOURCE:
ECONOMIC CONDITIONS, GOVERNMENTAL FINANCE, U.S. SECURITIES
(The Net. City Bank of N.Y.)
Page 4--(Jan. 1931)
THE BANKING SITUATION
Bank suspensions during the first eleven months of 1930, as
reported by the Federal Reserve Board, numbered 981 and involved
deposits of $515,000,000, while in the nine-year period from 1921
to 1929 inclusive, there was a. total of 5,64E suspensions involving
deposits of 41,722,466,000. As mentioned in this review last month,
over CO per cent of the banks that closed were capitalized at $25,000 or under and located in towns of less than 1,000 population, while
60 per cent were not even members of the Federal Reserve System. The
increase in 1930 over that might be called the average mortality rate
is probably no greater than should have been expected, in view of the
severe drop in security prices, farm products and other commodities,
and the slump in business generally.
*
In the last issue of this Letter we commented at some length on
the causes leading up to these widespread bank failures throughout the
country. The fundamental cause is to be found of course in the great
expansion of bank credit in what at the time was considered a wonderful
period of prosperity, but in fact was a period of general inflation
resulting primarily from the war. The basis of the inflation was the
enormous demands upon our industries during the war time, together with
the great additions to the bank reserves resulting therefrom. No such
rapid additions to our gold reserves would have been possible in peace
times and without them no such an inflation of credit could have occurred
under our banking laws.
Page 166--(Nov. 1931)
BACKGROUND OF THE SITUATION
The fundamental cause of the widespread bank failures goes back
to the wartime rise of commodity prices and wages, and to the inflation of credit made possible by the rapid increase of our bank
reserves, which likewise was a consequence of the war. Prices of everything robe, and anew level of values was established which as the people
became accustomed to it seemed to be real and permanent. A great volume
of indebtedness was erected upon the basis of these values, and when it
turncd out that they were inflated the position of the debtors became a
most difficult one. Banks, being debtors to their depositors, and subject
to call for repayment upon demand or short notice, have been involved in
these difficulties, particularly where their funds were employed to an
imprudent extent in long-term loans or investmentd.
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Federal Reserve Bank of St. Louis
Page 166 (contd.)
The situation is well illustrated by reference to the rural banks,
among which the mortality has been highest. During the war and the
succeeding boom period the prices of farm lands were marked up to accord
with the higher values of the products grown upon them, and an abnormally
active turnover of farm properties began which was financed largely on
credit. Between 1910 and 1920 the estimated total farm mortgage debt
in the United States rose from $3,600,000,000 to ("7,900,000,000 or 119
per cent. Farm real estate values by March, 1920, had risen 70 per cent
above the 1913 average. The rural banks became involved in loans which
directly or indirectly were based on these land values; and the subsequent
decline in them was the cause of a great increase in bank failures.
By the year 1928 a further rise in farm mortgage debt to $9,500,000,000 had occurred, while the decline in land values continued. Between 1928
and 1930 the total debt remained practically unchanged, but by 1950 land
values averaged only 115 per cent of the 1913 base, and on March 1 of this
year they had fallen to 106, or nearly 40 per cent under the peak. The
decline in the prices of farm products since May, 1928, when they averaged
148 per cent of the 1909-14 level, carried them down to 72 in September of
this year, a reduction of more than one-half.
These declines in prices and land values have left the new indebtedness
without adequate support, and the figures show plainly the grave difficulties
with which the banks whose business is with farming communities have had to
contend.
Similarly, the decline in values of other products and other real
estate, and in stocks and bonds, has involved banks with more diversified
assets, though much less seriously until recently, when the influence of fear
has been added to other difficulties. Even among these banks the decline in
real estate has been the most serious single cause of difficulty. it is
pertinent to say here that loans on other realty are a far greater item in
the country's banking totals than direct loans on far* lands, exceedint them
in the ratio of no less than 23 to 1.
Page 167
EFFECTS OF BUSINESS CHANGES
To a great extent this relative decline in holdings of eligible paper
by the banks has been outside of their control. The available quantity of
such paper, which is created principally by self-liquidating loans based
upon commercial transactions, declined first as corporations financed themselves more by security sales, and less by bank loans, and second due to
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Federal Reserve Bank of St. Louis
7
Page 167 (contd.)
business depression. The situation has affected principally the
small
banks since commercial borrowing has gravitated to the larger banks
in larger centers, under the influence of better communications, chain
store systems, the increasing size of business units, and similar factors
.
For such reasons the last few years have been in general a period
of declining liquidity, especially for country banks, with a marked
turn
by city banks, within the current year, toward increased liquidity through
purchase of U.S. government bonds. Undoubtedly the only recson why
country
banks also have not reversed their position is that they have been
unable
to do so. Five-cent cotton and 30 cent wheat have 1.een too great a problem for them to solve. Even where they have had an adequate percent
age
of well-secured loans of short maturity, debtors have been unable to
repay
promptly, necessitating renewal or the sale of the security at
a sacrifice,
a demoralizing necessity avoided whenever possible. Thus a "frozen
" condition of bank credit exists in many localities, the term signifying
merely
that an undue proportion of their sound assets cannot be converted overnight into cash without forced sale.
The impact upon banks in such condition of a sudden and panicky
demand
of depositors for the repayment of their funds at once becomes
insupportable.
The weakness in the situation due to lack of liquidi
ty has been evident in
two ways; first, in the inability of solvent banks promptly to
borrow upon
their assets to a sufficient extent to meet demands upon them;
and second
in selling of bonds by the banks in order to raise funds. this
depreciates
the investments of other banks, which in turn may find their capital
impc,ired,
the whole process illustrating the vicious circle in which depress
ion operates.
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Federal Reserve Bank of St. Louis
•
SOURCE:
ECONOMIC CONDITIONS, GOVERNMENTAL FINANCE, U.S. SECURITIES
(The Nat. City bank of N.Y.)
.
121gE_A--(Jan. 1931)
The rise of commodity prices and of wages resulted directly from
the war, and put the country upon a new basis of values, which as people
became accustomed to it seemed to be real and permanent. Wheat went above
$3.00 per bushel in Chicago in the early part of 1920, corn above
per bushel, which stimulated a demand for farm lands and caused an active
tPrnover at rising prices. These farm transfers were financed largely
on credit, and the census reports show that in many States the aggregate
of farm mortgage indebtedness doubled in the ten years from 1910 to 1920.
This increase, of course, was not significant of distress at the time but
of confidence and eagerness to use credit. It was due to a misinterpretation
of conditions, and ultimately produced the conditions with which the rural
hanks have been struggling ever since.
For a period of fifty years land values had been generally rising, and
public opinion was inclined to accept the war-promoted rise as merely a more
pronounced development of a natural tendency. The rural banks became involved in loans
dirctlii or indirectl./ were based on these land values.
since developed that while the war gave a temporary stimulus to Nfarm
production, with the result that farm products are back now to pre-war prices,
leaving the new indebtedness without adequate support. This is a plain
statement of the grave situation with which the banks whose business is largely
with farmers have had to contend. Another factor was the multiplication of
banks during this period of false prosperity, when bank deposits were
growing in volume rapidly, and many persons were becoming bankers without
training for the business, ,to say nothing of experience witn such conditions
as were then prevailing. Ihe country became aver-banked, and the banks overexpanded on the basis of inflated prices.
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Federal Reserve Bank of St. Louis
the prices of farm products, it gave a permanent stimulus to
SOURCE: ECONOMIC CONDITIONS, GOVERNMFITTAL FINANCE, U.S. SECURITIFS
(The Nat. City Bank of N.Y.)
Page 155--(Oct. 1931)
BANKING POLICIES IN DEPRESSION
One of the striking aspects of the present situation is that while
people on one hand demonstrate a lack of confidence in banks by with—
drawing deposits and hoarding currency, on the other they frequently
allege that lack of courage or excess of caution on the part of bankers
in making loans is one of the reasons why business is slow to climb out of
depression. Nearly everyone seems to have a favorite story of a supposedly
worthy borrower who is unable to obtain a loan for a desirable purpose, and
the projects which it is said bankers ought to undertake range from loans
of a few hundred dollars for individuals up to hundredsof millions for
financing schemes to revive world trade.
If there is caution in the situation, where does the root of it lie?
The answer is, of course, that what has caused bankers to consider liquidity
the first essential in their position, and to govern their affairs according—
ly, has been the rising fears of the people themselves. Banks/ money is not
their own, and the paramount duty of any banker is to be able to repay his
depositors on their demand. In order to do this he is required by law to
keep
primary reserves, and by prudence to keep secondary reserw-s, which are made
up of securities and bills that are salable or can be borrowed hpon in case of
need, and of loans repayable on demand. With respect to his time loans,
prudence further requires that a certain proportion of them come within the
secondary reserve, by fulfilling the requirements which make the paper eligible
for rediscount by the Federal Reserve Banks.
Of course the amount and character of the secondary reserve necessary for
a sound position vary according as times and confidence are normal, or strained.
In normal times,a banker can count upon a merely normal demand for repayment
.of
deposits. In abnormal times, with sound banks experiencing runs and the
people
readily swayed by rumors of untoward events, he can count upon nothing, and must
be prepared for the worst. To be assured of his ability to meet any possible
demands he must have a larger percentage of his loans of such quality
that he
can borrow upon the paper. More of them must be self—liquidating loans covering
specific industrial or commercial transactions, and collateral loans must be
not only good, but liquid, inthat the collateral can be sold readily in an open
market.
Despite the loose talk Upon the subject, there is no evidence whatever
that
loans of unquestioned liquidity are hard to obtain. On the contrary,
it is
borrowers who can meet the specifications who are scarce, since trade,
which
creates demand for such credits, is at a low ebb. It is doubtless true that
the
yardstick which bankers apply to applications for commercial loans
is now a more
rigid one than in times of less uncertainty and more generally profitable
business.
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Federal Reserve Bank of St. Louis
-2-
Page 155 (contd.)
Oct. 1931
But the propriety of this does not seem open to question. Morepver, the
standards applied to collateral loans must vary with the degree of confidenc
e
felt by the people in the business situation and in their investments. The
past two months have been trying ones in the security markets, and values at
times have receded rapidly. Demands by depositors have compelled banks to
sell bonds, and alarmed individuals have sold their own holdings. This has
depressed market prices in many cases without reference to intrinsic values,
and has reduced the current worth of investments of all banks, this being a
prime cause of the conservatism in making loans that is complained of.
Should the people, as borrowers, feel aggrieved at what they term the
lack of courage of bankers under such conditions? Or should they, as depositors,
feel satisfaction that bankers are guarding their ability to repay their
deposits when they want them? Whatever others may think about it, bankers can
have no choice, their obligations being determined by the law. The situation
is not an agreeable one. It is unfortunately one of the ways in which the
public's lack of confidence in banks and in investments reacts upon itself.
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Federal Reserve Bank of St. Louis
SOURCE: 18th ANNUAL REPORT, FED. RES. BOARD--1931
Pages 219-220
RECOMMENDATIONS OF THE FEDERAL ADVISORY COUNCIL
FEBRUARY 17, 1931
TOPIC No. 1.--Bank Failures and Bank Examinations.
Recommendation.--The Federal Advisory Council believes that bank
failures in recent times have been largely due to a change in economic
and social conditions.
In many instances the minimum capitalization required of banks
has not been a sufficient protection to the depositors. The difficulties
which banks have encountered can not be traced entirely to a deficiency
in our banking and examination systems. The law now gives sufficient
power and authority for an adequate examination. Improvements in examinations undoubtedly can and should be made.
There should be imposed upon the Federal reserve banks the requirement to keep themselves informed of the quality of the investments and
loans and the policy of the management of all member banks.
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c
SOURCE:
ECONOMIC CONDITIONS, GOVERNMENTAL FINANCE, U.S. SECURITIES
(The Nat. City Bank of N.Y.)
Page 167—(Nov. 1931)
** ***** *
In most cities during the boom years there was a development
of new banks, beginning small and growing on a class of business which
the old established banks would not touch. The collapse of real estate
booms in many cases left these banks in difficulties they have been
unable to survive, once the cycle of deflation exposed their weakness.
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Federal Reserve Bank of St. Louis
*** * * * ***
or
Committee on Banking
Chamber of Commerce of the United States
Preliminary Material - Meeting in Chicago
October 31, 1931
The failure records indicate that prior to 1930 the large bulk of bank
failures was among small banks mostly located in rural areas; in the years
1930 and 1931 the percentage of such failures continued to be high. In the
ten years prior to 1930, 13 agricultural states, with 22 per cent of the
population, had 71.6 per cent of the number of bank failures in the country.
Four states along the Atlantic Coast (North Carolina, South Carolina,
Georgia and Florida) had 15.5 per cent of the bank failures; nine western
and northwestern agricultural states (Minnesota, Iowa, Missouri, Oklahoma,
North Dakota, South Dakota, Nebraska, Kansas and Montana) had 56.1 per cent
of the bank failures.
It is indicated in Table II, attached, that approximately 61 per cent
of the failing banks in the pPriod 1920-1930 had $25,000 or less of capital
stock and 59 per cent were located in towns having a population of less than
one thousand. This table lists bank suspensions by years according to the
size of capital stock of the banks and the size of the town or city in which
located.
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* ** * * ***
CoVYTTTE2- . ON 1;ia.NKINI
nr-A. W1- 2e1,!r, P.c.‘c-m 612, Firat
BAnk Bldg., Chier4o,
Ma.r.iger, Finance Department, Chtmber of Commerce
Jf the Uratei States, Washington, D. C.
ILL.01444.1E
f%9
:V
'1 e1P" !- And.
'1
3
X
.4naltd City
PrAnr.sco
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Federal Reserve Bank of St. Louis
ihaemut Bank,
Walton L. Crocker, Pres.,
John Hancock Mut. Life Ina. Co.,
Boston, Mass.
M.
Chrm. of Board,
Tr.termti7,n41 Acceptane Bank,
40 Wall St., Nev York, N. Y.
David M. Goodrich, Chrm. of Bo-Ard,
The B. 7. Goodrich Co.,
2$0 Park Ave., New Tork, N. T.
Hoard A. Lob, Chsirman,
Trwiesments NatIcnal Bank &
Philaielphia, P.
(Trust Co.
Alba B. Johnson,
1521 Packard Building,
Philadelphia, Pa.
W. M. Baldwin, Pres.,
The Ul!ln T-:
, A Co.,
Geolge T. Ladd, Pres.,
United plgineering & laundry
PittsbUrcl,, Pa.
John M. Miller, Jr., Pres.,
First & Merchants Nat).. Bank,
Richmond, Va
Junius P. Fishburn, Pre o.,
Times-World Corporation,
Roanoke, Va.
Oliver G. Lucas, Pres.,
Canal Bank & Trust Co.,
New Orleans, La.
P. G. Shook,
Shook Fletcher Supply Co.,
Birmingham, Ala.
Felix M. McWhirter,
The Peoples State Bank,
Indianapolis, Ind.
J. Paul Clayton, Vice Pres.,
Centml Illinois Pnbl'^
Springfield, ril.
Sol_ 4. Lonsdale, Pres.,
lercantile-Commerce Bank &
8t. Louis, Mo.
(Trust Co.
Paul Dillttrd, Pre3.,
Dillard & Coffin Co.,
Memphis, Tenn.
Z. W. Decker, Pres.,
William J. Dean, Pres.,
Nichols, Dean & Gregg,
St. PEAll, mum.
Northwestern Bancorporation,
Minneapolis, Minn.
W. S. McLucas, Chrm. of Board,
Commerce Trust Co.,
Kansas City, Mo.
W. L. Petrikinp Chairman,
The Great Western Sugar Co.,
Denver, Colo.
Nathan Adams, Prf.s.,
American Exchange !UAL Banks
Dallhs, Texas.
J. J. Culbertson, Vice Pres.,
Southlwad Cotton Oil Co.,
Faris. Texas.
genif M. Roblnion, lhairmem,
Security-First Natl. Bank,
Los Angeles, Cal:'.
J. B. Levison, Pros.,
Firemen's Fund Ingurence Co.,
San Francisco, Calif.
Co.,
SOURCE:
ECONOMIC CONDITIONS, GOVERNMENTAL FINANCE, U.S. SECURITIES
(The Nat. City Bank of N.Y.)
Page 5--(Jan. 1931)
*****
THE SITUATION IN THE CITIES
The situation has not been so serious in the important cities,
for one reason because the banks of these cities have a greater
diversity of business than is the case of banks in the farming
communities; moreover, in larger institutions the management usually
is in the hands of individuals of larger banking experience. Under
our loose banking laws, however, banks are likely to spring up in
response to popular wants, and if loose banking is wanted somebody is
willing to supply it in boom times, for liberal commissions will attract
persons into the banking business who will do it. Hence in most cities
in recent years there has been a development of new banks, beginning
small and growing rapidly on a class of business which the old established banks would not touch.
Neither of the two banks that have failed recently in New York City,
and whose troubles have occupied columns in the newspapers and contributed
to the pessimism of the time, were members of the New York Clearing House
Association.
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SOURCE:
THE LCONOJICS OF BRANCH BANKING--BeruhLrd Ostrolenk (1950)
MINCH
CHAPTER II
BANKING IN CANADA1
rage 149
At the third regular revision of the Bank Act, in 1901, the
Canadian bankers' Association was given authority to appoint an
inspector to supervise the bank note circulation and see that no
beak iseued circuli-ction in excese of ito paid-up capital. The revision also permittc-d one bank to sell its assets to enother; also,
more detailtd monthly returne were recuired.
Pau 1$19
The fifth revision, of la25, resulted in numerous important
changes. The qualificetions of provisional directors were redefined,
while provision was made for keeping records of ettendamee et directorso
meetings and bringing them to the notice of ehareholders. Annual and
special statements were given further attention and more complete
returns were requireo fron the hanky, particuiarly in eases whore operations other thsn banking were carried on. Detailed provisions were addee
regarding a shareholderms audit of the affairs of the banks, while the
pereonal liability of direetors in case of distribution of profite in
excess of legal limits was fixed. Regulatione regarding loans were
amended hnd annual returns to the dinister regarding real 3nd immovable
property were required. Registration of seenrity for loans was provided
for; monthly and special returns were to be made when called for by tht
Minister; eertain loan* were prohibited; and the puniehment of directors
and other bank official. makimg Woe statements was provided for.
Pave i§a
During the period 1910-19k8 but one bank failed in Canada, the
Home Banks and this primerily due to inefficient management. Ihis ie
in marked mentrest with the large number of failuree in the gaited Statee
during the same period. The failure of the Home Bank, with a capital of
41,960,591 NW liabilities of t24,889,049, contrests with 4,51t bank
failures in the United States with a total cadital of S196,000,000 and
depoeits of 0.0504604000. The bank failuree in the United States
occurred mostly in agricultural regions, while the agricultural regions
of Canada remeined UMW from the bank failure epidemic of the Northweet.
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Federal Reserve Bank of St. Louis
1This chapter was eritten by Henry Hansen, Editor of
the Canadian Section of The Appalist.
Patti 153 (contd.)
(
beveral banks in Canada, other than the Home Bank, did feel
the pinch of hard tines from 1920 to 19Z4. Such aa apprached a
condition of insolvency took refuge in aaalgamation with a more
ponerful institution. In Camda the branch bank isytem offered
attractions to powerful Eastern banks who were looking for outlets
in tilt ne.ricultural Voest and the locality or business assets
compenaated for the non-liquidity of the bank. Thus in many 0~
the amalgamation iorked to the benefit of the putdic and to the
benefit of the absorbing bank.
Pages 157-55
In the branches of Canaci a banks the till money on hand
anounts to but a few hundred dollars. A unit bank in the United
States could not operate one hour on such a small amount. But this
is possible in Canada because of the principle of note issue. The
note of bank are not considered money until they are paid out by
the teller and there is no loss of interest on till money, which in
the United &tates amounts to a conaiderable wan.
This provision has been of great benefit to the entire system
and has enabled it to supply banking services to regions where a
unit bank could not possibly operate. Many growing regions have not
reached the point where financial stabilization is in sight, yet a
powerful branch bank can afford to operate with snail loss for DOM
years in order to establish itself and grow with the region. The Medeon :Jay is such a region. It is developing and nay in time beams,
center of activity but no unit bank could possibly operate there
a profit, yet the Royal Bank of Canada las opened a breneh in Cheralll.
It will probably take a email loss for some time but in the neantime it
is firmly establishing itself and giving the community the benefit of
banking facilities.
Supplying adequate banking faAilities to agriculture was one
important reason for the establishment of the branch system in Canada.
Under similar conditions in the United States such regions hEve been
hampered and retarded by the lack of proper banking facilities. The
unit system cannot supply to agricultural regions the credit they need
and the danger of failure is always more imminent.
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4.,1111.111.
Pages 159-60-61-62
The fluid movement of funds in Canada, as sell as the elasticity
of currency, hes been a greet advantage to the country as e thole,
especially to thr eericultural regione. The movement of funds from
East to West is of extreme importance eeeecielly when the crops are
to be exeorted or moved to eelline centers. Canada has been fortunate
in that through its great brench system credit ie available tt all tines,
funds move reedily from surplus to deficient regions and that its
currency is one of the most delicate syeteme of its kind. The eltsticity
of currency in the United Stater cannot and doer not measure up to the
Canadian elates, credit is not so aveilable and the movement of funds,
although facilitated through the Federal Reserve Systole and correae
pondent banks, doss not work smoothly enough and often causee delays.
There have been oases of complaint on the pert of certain croups
in Canada that they do not receive an edeeuate supply of capital or at
reasonable rates. Bether than indicating a defect of the system, this
exhibits one of the benefits to the country. The Maritime Provinces
have had to coapete with others mk with more favorable industrial
opportunities and business has declined, and while a local unit bank
mould buoy this up for some time the end would be disastrous. The more
favorably situated provinces are able to take advantage of the easier
credit while credit for less favoreble regions becomes tighter. It is
not a fault of the 'system but works as an autometic regulator of credit
and prevents overexpansion in territories not suited far some particulbr
industry. The *ndustries of the 'Aderitine Provinces most compote with
industries of the other provinces on an equal btvis and credit will
flow to mach centers where the demend is greatest hnd accometnied with
sound. industrial prospects.
Not only have Comodisa farmers been able to ebtain easier credit
but rates have been low than in corresponding regions of the United
tatese While rates vary am* no definite rata whish Canadian renters
have to pay can be quoted, Ulf range is approximately from 7 to 10 per cent,
while the rate to farmers neer the Canadien border in the United EtatE is
several per cent higher.
The reason for theee lower rates in inherent in the system. It is
due to the rapid shifting of bends from the test to the West and back egein
when not needed. The lerge number of branches fccilitetee this movement,
and various industries in need of credit at different tines are paired off
against each other. Again, the great savings in the overhead of a branch in
Manitoba compared with a unit balk in Dakota makes for lower operating soots
is Canada. If this savings in overhead did not exist many of the brandies
of Canadian banks could not operate profitably.
Diversification, a eord that at present has been assuming more end
more significance in the United States, hes been carried out in practice
in the aanadian branch banking ystem. Banks will not tie their asseta in
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Federal Reserve Bank of St. Louis
•
-4-
PeAes
169—L4-4s1-1r.
(contd.)
any one iadustry nor one locality. The unit beak in the United states
haE little Choice. It cannot diversify its aeuets to the extent that a
large branch bank can end is covelled to associete its fortune with
the industry in ite particuler loclity. If it ie in an agricultural
rftion with farmers who are land poor and eeking no profits, the bank,
unless managed with more than average skill, frce,vently trill find its
eseets frozen. * * *
In the past some hanks in Canaea have frequently had their
branches in one region. In the caae of the Onion Beek this VW; true,
but among the present chartered banks this tendency hes practicalk.
disappesred. In the ease of the Farmers Bank, which bed all its assets
tied up in a mialmc venture, the Keeley wine, the failure was reported
to be due more to inefficient and dishonest manakement that to a defect of the yetee. Such ten6encies are more prone
eeict in the
it
systems because a lerke branch ustem can attract a higher type of exeentive.
isposially is this true of positions in the heldi office, where mismanagememt is likely to be of grettest damage. The tendency to gamble *Rey *meets
of a bank has been corrected through the decennial revision of the Usk Let.
In the revision of 191Z s stockholder' audit IMO) authorised to redoes the
risk of speculetion on the part of the manageetent.
Pates 16 3-64
One criticism of the branch banking system, that is often advanced,
is that not enough interest is taken in the industries of e snail community. The proponents of the unit system point to the fact that in small
coamunities the local industry is financed by the local bank. Viewed from
the standpoint of the individual, the communal interest of a local hank has
many advantages. However, viewed from the general economic interests of
the country, it will be granted that bank after bank finances its local
industry without may regard to the demanda or needs of the nation or the
position of the imdmistry from a standpoint other than local. Canadian
banks take a wider viewpoint. The oanager of a local unit bank has not
the facilities at hand or is not so situated as to be in touch with all the
factors of a certain industry or view the industry at a whole.
A ease in the United States where this local viewpoint was carried
to an extreme has been called to the writer's attention. Within a radius
of eight miles three towns imitated each other in the establishment of a
hosiery mill. The bank of each town financed its own local mill with no
reord to the needs of the market or to the demand for this commodity.
The consecnpnoe was that as moon Its a depression hit the industry, two
of the factories went bankrupt and th+anks found these loans, ehieki
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Federal Reserve Bank of St. Louis
Pig_es
3-454(ooatd.)
ough there are no definite
amounted to a considerable Pam, frozen. Alth
r a branch Li-.nking system,
assurances that this would not heppen unde
lino by any branch would
such
g
alon
the probubilitius are that the loom
head office, which would
the
of
ew
promptlw receive the scrutiny tqld revi
for any particular
try
coun
th(.,
of
be in a position to judge the need
eosigiodity.
the bankers are in close
It is interesting to note that in Caruda
particular industry.
each
of
touch with their public and with the state
omers hnd in part
cust
of
In part this IE lJecauae of the small numbers
more than one
Ilavf
to
r
because it is not the custom of any deposito
account. * * *
public is an important feature
Personal knowledge of its financiel
s the allegations that the head
of banking in Canada and partly dioprove
interest in a pnrticular community.
office of a bank has no knowledge or
***
Page 165
been severely
system that h
Another point in the Canadian
ratio of capital and surplus to total
criticized is the decline in the
extent to which tag decline has
liabilities. Table XV/II shows the
taken place (9)
TABLE XVIII
L LIABILITIES
RATIO OF CAPITAL AND SURPLUS TO TOTA
57.55
1885
1890.......46.81
1895......56.76
1900......27.56
1905......2.48
1910......17.5F
16.76
1915
14.16
1916
11.06
1917
10.26
1918
9.46
1219
9.06
1920
10.k9
1921
1922......10.78
19k4...*..10.09
19L5...... 9.55
196........ 9.a
1927...... 9.15
1928,...... 8.4F
PaA16166-67
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against the Canedlan
Another criticism that has been directed
a money trust and redeems healthy
branch banking system is that it creates
een the vurious banks in Canada
competition. That competition exists betw
pt by the fact that one will find
is difficult to prove stEtistically exce
,
yeriow; banks. Banks are partici
in a small communit,:- several branches of
tal and liabilities.
(9) Canada /ear Book, 1929, source for capi
Pitimi 166-67 (coutdt)
ularly e34er to obtain the accounts of nee induztries establishini
themselves in armee, and this is where the greatest competition
&rises betveen bLnke. It is, however, a practice not to persuF,de
cuc,tomera to awitcn their account*.
A further criticism of the system is that the locel branch
manui,ers fail to take the interest in the cuazunit, that is maid
to be charcterietic of the mEinager of a unit bank. Thf complaint
has been made thet they are shifted just when they- have become
acquainted with the needs of the cuamunity and thzt they nre not
given sufficient authority but must refer too many matters to the head
office. This criticism ie not to true at present as it WhS when many
new branches were opening. It was more difficult for a bank to chonse
the proper mun vtul it Tr5s expanding so rapidl.v. Naturelly some inef—
ficient men were e.oined blitt these have been removed and it is to the,
interest of the bank timt its local tun display interest in his cou,
munit.y. The bank realizes this ane when a mamager has proved his
ability he is given more liberty in the making of loins. Once
certain line of creCit has been given a customer it remains operntive
with the local branch without reference to thc bead office, unless an
amount greeter than this is needed. * * *
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S
Chicago, January 10, 1924.
711E FIRAKING.
John R. filch, Chairman of the Board, and Federal Reserve Agent of
the Federal Reserve Bank of Minnespoliss Minnesota, in his report to the Federal
AMOIMe Board at rashington, D. C., bring. aat some remarkable facts as to the
MOMMISMie position of agriculture in the Northwest states.
Need the followings
Population
per Bank
1909
United States, exclusive of Island Poss.
Michigan
lisconsin
Minnesota
imenthna
South Dakota
North Dakota
3950
4670
:5920
2590
L920
946
8)9
Population
per Bunk
1921
3520
5150
2710
1520
1570
921
768
Fancy what madness oeised the people of North Dakota, hotbed of last
years of isms, discontent and misery. They had e bank to every 768 people, 384
miss, about 200 really earning their bread and butter, of which probably only
100 made a living for themselves 411d dependents. So in this "one" crop country
there is a deluge of beakers, of store'keepers, of grafters living off one
another till the babble bursts, and when the crash comes everybody is wrong but
themselves.
Supply and demand comes in again. Ranks are closing in those last four
states with tiresome regularitY. It is pathetic to think of those unfortunate
circumstances, of homes made desolate by loss of deposits or forced liquidation.
It is commercial war, and the penalty has to be paid notwithstanding many
innocent parties suffer. In this flood of Aft, reckless financing the day of
retribution coulee; just laws of nature, of preduction and consumption. The
misery of the whole thing is intemeified by WI fact that the honest runchmLn
is robbed of his heritage by unwise tamations, by graft, by penniwisse politicians
who mislead hie, and then at the critical monist fly away to other mewl and
work the next community that will listen to their siren song.
talk specially of the West and Northwest. There more than Ray time
since the end of the Civil War we need caviar), conservatism, honest conviction
to stem the tide of growing taxation's, of mortgaged towns, cities, counties and
adialast tutu* somerations. The
states — in fact, the whole country
will be an awful lead for the children to
fraud
extravagance
and
of
inheritance
bear in the long years to came.
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1
Excerpt from ad dre s_s_ by_ It._ E_. BirEzell, General__Ccuusea,
Federal Deposit Insurance Corporation, Conventior of Michigan
Bankers Asso., June 22, 1934. (Michigan Investor, July 7, 1934)
SEE
File No.
Study_ #8
Letter of
-----------------------------------------
Dated
Remarks
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,emir° Orrice. Ie.
U e. eoveneistrr'
178151
CROSS REFERENCE
FILE NO.
SUBJECT:
"Banking Research Survey" by Joseph M. Whalley, Bureau of
Business and Government Research, University of Colorado,
for the Colorado Bankers' Association
SEE FILE NO.
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2 D
THE FEDERAL RESERVE BOARD
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File No.
Subject
Excerpt from address by Henry H. Sanger, V. PreE., Manufacturers
National Bank, Detroit, at the convention of Michigan Bankers
Asso., June 22, 1934 (Michigan Investor, July 7, 1934)
------
-----------------------------------------
SEE
File No.
Stud,y 11-1110
Letter of
Dated
Remarks
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ooviarnuarr ramp.ornnr: D. 178151
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
facturers National Bank, Detroit, Convention of Michigan
(Michigan Investor, July 7,
Bankers Asso., June 22, 1934
1934)
SEE
File No. stuciyju
Letter o
Dated
Remarks
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U. 8. 00VIRN MET, ranmr. orrics: 1933
178151
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Ie
Clipping from May 1936 issue of ethep Peonle's Monty, article
on "Coming Changes in Banking"--Proposals for Pretecting the
Nation's Savings by Walter F. McCaleb.
Subject
SEE
File No.
Study tc7
Letter of
Dated
Remarks
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1
V.s.
Govs.birwr rxrcmcci uncle: IOW
178151
6%4-56
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No. 1
Subject
natter Bank lanalimei, An Analvie of Tully Bank Tailusest
by Robert leieenbwisor TM Annals, January 1934
SEE
File No.
Moldy Sit
Letter of
Dated
Remarks
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U. El. GOTERNMCNT PRINTING
comcc: io.
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THE FEDERAL RESERVE BOARD
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Speech by S. Sloan Colt, PrOmident 0 Bankers Trust Coe N, I, Ce
before Kansas and Mieeo*ri Bankers Asso. in K. C., Illay6, 1936
SEE
File No. study zil
Letter o
Dated
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L
GOVERNIIENT
parwrrNo orrtc.: 1033
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THE FEDERAL RESERVE BOARD
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Subject
Supervisory Problems Pertaining to Operating Banks and to Banks in
Possession by Hon. William D. Gordon, Secretary of Banking, Pa.
Vol. LXV. No. 24
SEE
File No.
study 10
Letter of
Dated
Remarks
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19S3
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"An investment policy for a country bank" by George W. Edwairds
Journal of Business Vol. V. # 3 July 1932
SEE
File No.
11
Letter of
Dated
Remarks
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1333
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Clipping from Proceedings N. J. Bkers. Asso., May 19541 from
address by Fred N. Shepherd, Exec. Mgr., ABA—NYC
SEE
File No. #6A
Letter of
Dated
Remarks
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71CRNMENT
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,Jan. 1954
!
ClinIng from Journal of Business., U. of Chicago
Owner's Equity in Banks and in Other Corporations by
Lewis A. Froman
SEE
File No. nu
Letter of
Dated
Remarks
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Clipped pages 55-76
"City Bkg."
.VII
from Rural Bkg. Reform by Collins Obi
SEE
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Letter of
Dated
Remarks
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oovummrr pawn.OMCI, ton
178151
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Subject
*Should America Ads:yt a Unified Bsnkina; System"?
The "Dual" System Yoe the oVelfiodw System
The Branch Blnking Controversy
°seventy of Bank Deposits
Divorce of Affiliatos
Pro and Con
SEE
Stud,' #
File No.
Letter of
Dated
Remarks
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Federal Reserve Bank of St. Louis
V. a °commis:NI parwrima orncr
1033
178151
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Subject
Chapter IV "Control after the holiday" by Upham and Lamke
Brookings institution-1934
SEE
File No.
laxy
Study # 9
Letter o
Dated _
Remarks
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U. B. DORRNIIIENT
rarcnro °enc.: toss
178151
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Subject
12,;- :_ce=t fr.ou_'!Our .Comaercia Banking Syzteaa," by 1.-t Ft Ge.pbut,
The fizmrican Economic Review, iarch 1935
from
-
SEE
File No.
Study 1O
Letter of
Dated
Remarks
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Federal Reserve Bank of St. Louis
u.
B. Goviumamxt nerwmga 0701CT: 1033
178151
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Subject
"Panic Proof Banking" by Ralph W. Manuel, Pres. of the Marquette
National Bk of Mpls, before the State Bankers Asscc. of Iowa
at De Moines, June 2, 1936
Published American Ranker as of Tune 15, P26
SEE
File No.
StudY #
Letter of
Dated
Remarks
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Federal Reserve Bank of St. Louis
1
V. a oormarnarnrr rar.qmwo orrica
1933
178151
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Subject
"Liberalizing Lending Policies of Commercial Banks"
S OURCE: "Summary of Arguments oh Tital II of the Banking Bill of 1935"
confidential report prepared by the Commission on Banking Law and
Practice, Association of Reserve City Bankers, May 20, 1935
SEE
File No.
Study j 5
Letter of
Dated
Remarks
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Federal Reserve Bank of St. Louis
U.
U. oovinmrsarr rarsrmvo 01111C1, 1033
178151
4-0
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Printed pamphlet of 51 pages containing_ Attorxxey__z_eaeral'is
report and supplemental report to the So. Dak. legislature
of the investigation of the department of banking and
2nd Supp. report by Attorney
finance Feb. 271 1930
SharDe, Feb, ,•.
General
Subject
SEE
File No.
Study #10
Letter of
Dated
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Federal Reserve Bank of St. Louis
11
II
OOTERNMUNT
rRrNTrivo °MCC
1933
178151
g•-•
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Subject
sze for
"suppiegentaa Prorm4 for Bankinz Lcziolative
Law"
Changes in Administration of lxisting
1954
Agents' COmmittoo,
Sitawk Com. on Legizlativm Program rile
SEE
File No.
8tud7 110
Letter of
-
Dated
Remarks
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Federal Reserve Bank of St. Louis
V. s. Govsnigriorr plircriNn orrics
1933
178151
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EXCERPTS VROM ADDRESS OF HONORABLE J. F. T. O'CONNOR,
COMPTROLLER OF THE CURRENCY, BEFORE THE CALIFORNIA BANKS ASSOCIATION
AT SACRAMENTO, CALIFORNIA, ON MAY 22, 1936.
It is always a pleasure to return to California.
At Del Monte,
on May 25, 1934, and again at Coronado on May 22, 1935, you honored me
by inviting me to address your convention.
It has been my purpose
each year to bring the national banking picture up to date for you and
to tell you about the present condition of our active national banks
and our receivership banks.
The banking holiday of March, 1933 seems now to be in the far
distant past, yet the lessons learned from it should never be forgotten.
On December 31, 1932, at the time of the last national bank
call before the banking holiday, total deposits in national banks
amounted to $18,518,107,000.
On March 4, 1936, the date of the most
recent bank call, total deposits in national banks reached the sum of
$24,859,455,000, the highest figure for total deposits in national
banks in the history of the national ban!:ing system.
The net additions to profits of the 5,392 active national banks
in the year ended December 31, 1935, aggregated $158,491,000.
This is
the first calendar year since 1930 in which the consolidated returns
for all national banks showed net additions to their profit accounts,
after including recoveries and deducting losses and depreciation.
During 1935, the gross earnings from operations totaled
$794,156,000, and the expenses $549,148,000, Which resulted in net earnings from current operations of $245,008,000.
In addition, recoveries
from assets previously written off, profits on securities, etc., amounted to $240,247,000, and exceeded by $72,881,000, recoveries, etc. in
the previous year.
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Federal Reserve Bank of St. Louis
Net earnings and recoveries, before charging off
Calif.
- 2losses and depreciation, amounted to $485,255,000,
Which was $66,780,000
greater than reported in 1934.
Losses and depreciation written off
showed a reduction in the year of $245,162,000, or from
$571,926,000
to $326,764,000.
Dividends declared on common and preferred
stock in
1935 aggregated $117,648,000 in comparison with dividends
of $92,225,000
in 1934.
Of particular significance to you are similar fiares
for the national banks operating in Cr,lifornia for the calendar years
1933, 1934
and 1935.
The number of banks and amount of capital are stated
as of
December 31st for each of the three years.
Dc. 31, 1933
Doc. 31, 1934
134
$ 137,292,000
130
$ 143,700,000
123
$ 142,285,000
Net earnings from
current operations
22,874,000
22,477,000
24,281,000
Recoveries, profits
on securities, etc.
4,030,000
11,331,000
22,408,000
Losses and depreciation
charged off
24,064,000
27,275,000
Not addition to profits
2,840,000
42,674,000
Deficit of
8,866,000
19,414,000
Dividends declared
8,848,000
1
,0,725
,000
13,573,000
7.46
9.54
No. of banks
Capital (par value)
% of Dividends to
Capital
6.44
Dec. 31
1935
Of equal significance are some of the principal
items of assets and
liabilities for active nationl banks in California
as of Jane 30, 1933
and March 4, 1936.
Number of banks
Loans and investments
Total deposits
Total assets
Capital stock
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Federal Reserve Bank of St. Louis
June 30 1933
135
$ 1,738,496,000
1,774,880,000
2,142,252,000
137,367,000
March 4, 1936,
123
$ 2,19,998,000
2,484,566,000
2,771,371,000
141,750,000
_
On December 31, 1935, there were 39 California national banks in
receivership.
These banks had total deposits at date of failure of
$62,651,247, of which $50,816,661, or 81.11 per cent, has been returned
to depositors in the form of dividends, offsets allowed and other payments.
The remaining unpaid deposits amounted to $11,834,586, or 18.89
per cent of the total deposits at date of failure.
Dividends have been
paid amounting to 74.39 per cent of claims proved.
Since the banking, holiday of March, 1933, dividend payments to
depositors in all national banks have totaled $724,172,998.
During this
time, rec(Avers for insolvent national banks have borrowed from the Reconstruction Finance Corporation, through the Office of the Comptroller
of the Currency, $334,469,906 for dividend purposes.
The first Recon-
struction Finance Corporation loans wore made to receivers in March,
1932, and up to the present time, the total of all such loans is
$367,430,802, of which $329,915,964 has been repaid, leaving a balance
of $37,514,838 due to the Reconstruction Finance Corporntion on May 13th,
1936.
Prior to March 5, 1933, charters had been granted to 500 national
banks in the State of California.
The first national bank chartered in
the state was the First National Gold Bank of San Francisco, Charter
No. 1741, dated November 30, 1870.
On February 25, 1884, this bank
converted into The First National Bank of San Francisco, retaining its
charter number, and on December 31, 1925, the title was changed to
"Crocker First National Bank of San Francisco."
The first branch ever
authorized under the McFadden Act of February 25, 1927, was for the
First National Bank of Los Angeles, now operating as the Security-First
National Bank of Los Angeles.
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Federal Reserve Bank of St. Louis
The last branch authorized before I left
Calif.
- 4Washington was for a branch of the Bank of America Trust
and. Savings
Association at Milpitas, California.
Since March 5, 1933, there have been 9 national banks
chartered
in California, one of which was a primary organization
.
The other 8
succeeded to the businesses of 8 national banks and one
state bank.
Since March 5, 1933, 11 banks have gone out of the system
because of
insolvency and 30 have been placed in voluntary liquidation
by their
shareholders, being absorbed or succeeded by other banks or
quitting
business.
There are now 122 national banks in operation in the
State or
California.
Although receivers have been ap-pointed for 11 'banks in
the state
since March 5, 1933, their insolvenc:, can not be attributed
to this
period, because one was a stock assessment case, the
bank having been
placed in voluntary liquidation on Uovember 24, 1924,
and the other 10
were banks which were denied licenses to reopen at the
cnclusion of
the banking holiday on March 16, 1933.
Effective as of February 15, 1956, curtain rgulations
governing
the purchasg) of i-ivestmont securities by banks, sUbjtx
t to th,.. nrovisions of Section 5136 of the Revised Statutes, were
promulted by the
Comptroller's office.
Those rgulations were issued i
cor:Tlince Tith
a duty imposed by Congress in Section 5136 77';.ich
reads:
"The association ,lay uurchase for it crin account invest
ment securities under such limitations and r,:strictirms as
the Com-otrolr of
the Currency Alty by regulation prescribe . . . . As
used in this S,,,cti(in,
the term 'investment securities' shall mean marketable
obligations ,Nidencing indebtedness of any p,:rso-.1, co-f)artnership,
:.ssociation or corporation, in the form Df 'bonds, notes and/or d.entu
res, commonly known
as investment securities, under such further
definition of the term
linvest-nent securities' as may by re,;
- ulation be prescribd by the Comptroller of the Curr..)nv."
It will also be noted that it was by virtue of the
Act of Congress
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Federal Reserve Bank of St. Louis
Calif.
- 5and not by regulation of the Comptroller'
office that the limitation
on investment is imposed in Section 5136, which provides that:
"In no event shall the total amount of the investment securities
of any one obligor or maker, held by the association for its win account, exceed at any time 10 per centum of its capital stool: actually
paid in and unimpaired and 10 per centum of its unimpaired surplus fund."
A few State Federal Reserve member banks have not understood that
the reason that both the 10 per cent limitation and the provisions of
the regulations of the Comptroller's office apply to them is due to the
fact that Congress enacted as part of the Banking Act of 1933, an amendmont to Section 9 of the Federal Reserve Act, providing that:
"State member banks shall be subject to the same limitotions and
conditions with respect to the purchasing, selling, underwriting and
holding of investment securities and stock as are applicable in the case
of national banks under pa:,-agraph 'Seventh' of Section 5136 of the Revised Statutes, as amended."
Having in mind the great extent to which tLe healthy condition of
our banks is dependent upon the exercise of sound investment policies,
and being acutely conscious of the disasters precipitated in the past
because a portion of the banks failed to exercise such sound policies,
my office made a protracted and comprehensive study of the situation
with a view to prescribing, with the effect of law, the investment
policies which must hereafter be followed -- policies which were in the
main already in force in the bettor managed institutions.
Manifestly,
the problems of the billion-dollar bank arc not the same as those of a
two-hundred-thousand dollar bank, and to frame a regulation that will
in every case operate emially and equitably on both the large and small
institution is a difficult task.
As you may have observed, the motif runninc through the regulp—
tions is one of anti-speculation.
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Federal Reserve Bank of St. Louis
The reason therefor is based on
•
Calif.
- 6causes which have been admirably
xpressed by the Commission on Ban'o-_-
ing Law and Practice of the Association of Reserve City Bankers
in its
"Summary of Arguments on Title II of the Banking Bill of 1935"
issued
in May, 1935.
Permit mu to quote from that pamphlet:
"The disastrous period of bank liquidations is getting further
and further behind us and it is probable that even bankers are
becoming
somewhat forgetful of the true cause:, of the trouble, although at
one
time there would have been little disagreement as to the factors
involved. Most of the uablic, unfortunately, never knew fully the causes
of our banking troubles because the facts were not available to them,
and they might be easily convinced that the whole trouble can
bo charged
to so simple a thing as strict olin;ibility requirements.
"It is contended that a study of the assets of failed banks would
completely dispel the View that the troubles of these bar2:s were
1:1.1.o
chiefly to a lack of borrowing power. No one can peruse the facts
without arriving at the absolute conviction that the troubles of the
banks were due in considerable part to assets which Should never have
been in the banks at any time, under any conditions. In the years
prior to the depressions of both 1921 and 1929 the banks become involved
in the speculative fever of the ago, and many of them filled their portfolios with assets which were bound to show losses with the turn of the
economic tide. No artificial methods of liquidity and no attempt to
have the Federal Reserve System hold up the inflated balloon could possibly have avoided the ultimate consequences.
"It may ho of interest at this point to present a few simple facts
which were revealed by a detailod analysis of the assets of failed
banks. Of the banks failing in 1931, 105 were picl:ed at random from
all sections of the country, and the 50 bonds contributio47 the ,-_roatest
depreciation to the portfolios of the 105 banks were listed and tabulated.
The two bonds which contributed the greatest der)reciation to the portfolios of this group were convertible hon(:i.s which had been bought at
prices substantially above par. In other words, they wore speculations.
There were several other convertible bonds in the list whie,-, also caused
heavy losses. Of the first 50 bonds in point of depreciation, only five
had ratings of the first throe ,:rados in l929; four of those five were
convertible issues in which the banks' loss,!- s were am to having bought
them at too high a price. The remainder of the issues were of the
fourth grade or lower. These bans wore sncrificing security for high
yield. Only four of the 50 issues were '-,roaht out before 1923 and 42
per cent of them were brought out in 1928 or later. In other words, the
bonds causing the greatest amount of ',.e--.)rc,ciation were unseasoned issues,
lar2,-ely the product of boom conditions in the bond market."
As is inevitable in the matter of rogulations, ouostions of intrpretation arise from time to time.
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Federal Reserve Bank of St. Louis
While there has been unanimous
•
- 77
Calif.
approval of the objective toward which these regulations are directed,
a Committee of the American Bankers Association has suggested that
some of their members desire to have clarified certain aspects of the
regulations.
The provision which has probably been of most interest
in this connection is Paragraph (3) of Section II of the regulations,
and the footnote thereto.
This pararaph prohibits the purchase of
investment securities in which the investment charcteristics are distinctly or predominatly speculative and the footnote states that the
terms used in the paragraph may be found in recognized retina manuals,
and that where there is doubt as to olicibility, then such eli•jbility
must be sup-:)orted by not less than two rating manuals.
Inquiry has been made as to whether this :leans that mcmber banks
are thus confined to the rfurchase of securities which have a rating
classification in one of the four croups according to ratin(; services.
- roper investment of ':)ank funds, now, as in the
The responsibility for ,
past, rests with the Directors of the institution, and there has been
and is no inteatiJn on the part of this office to delegate this responsibility to the rating services, or in any wrty to intimate that this
responsibility may 17;e considered as having been fully performed by the
- that a particular security falls within a particular
mere ascertainin,;
rating clssification.
Reference to theratin
recognition of the fact that
manuals was math: in the regulation in
any barilz..inc institutions, by reason of
lack of experienced personnel and access to oriinal sources, are unable
personally to investigate the background, history and prospects of a
particular issuer of securities, and consequently must rely to some extent irwn such information as has been compiled by various rating
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Federal Reserve Bank of St. Louis
Calif.
-8services in their large rating manuals.
It may also be exnected that
banking institutions will desire to supplement their own juasment
by
eheckinc; it against the opinion of others, including ratinr7s that
have
been given by rating services.
Such ratincs, however, regardless of
whether or not they are in the first four groups, are not
conclusive
on the question of oligibi.ity.
It is recognized that sonic: securities,
which are entirely eligible from a non-speculative standpoin
t at the
time they are available for purchase, may have as yet received
no rating by the rating services.
It iu also recognized that a security
with a high rating according to the services may, in the
circumstances
of a particular case, be an undesirable investment, whereas
on the other
hand, conditions existing at the time of investment may make
a security
entirely eligible, notwithstanding the fact that it has a comparati
vely
low rating according to the standard ratinc services.
In the latter
type of case, of course, there will be a corresponin:. . greater
burden
upon the bank to satisfy the examiners that a 7articular security
is in
fact eligible from a non-snecuantive standpoint.
parat-;ral)h (5) in Section II of the rec.ulations prohibits the
chase of securities convertible int) stock at the option of the issuer.
In this connection question 'as 'I)een raised as to purchasc, of securitie
s
accompanied by stock rcirchase warrants or rights.
It is unnecessary to
remind you F,entlemen of the prohibition against banks
invostinr, in
stocks.
The statement quote a few moments a;;-) relative to the
daager
of investment in convertible bonds equally applies to securitie
s carryinf.; stock purchase rihts.
They are s7eculatins - and in addition to
being objectionable as such, they in effect constitut
e a prohibited investment in stocks because the ,rice -,)aid by the bank
involves a premium
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Federal Reserve Bank of St. Louis
- 9Which in nart reflects the conjectural value of thu stock riitt, and
such purchase is to that extent not a purchase of an investment security.
Inasmuch as the brqik is prohnitcd by law from exercisirr" the
purchase warrant after it has been acquired, such portion of the bank
funds as are allocable to the oricinal purchase of the warrant, would
have been expended on no justifiable basis under the law.
Some banks have misunderstood the amortization requirements of
the rep;ulatio.as as resnects securities purchased at a price exceeding
par.
It should be made clear that the premium need only be cradually
amortized at regular intervals over the life of a security to the end
that at its maturity the security will not be carried at an amount in excess of par.
If the security is callable at a civen price above par,
exthe rate of amortization will have to be such as to have iTadually
tini7uishel the premium down to call --)rice by the call date, recardless
of whether the security is in fact called on that .ate.
Thereafter, if
on
not called, amortization shall continue from that point to maturity
the same basis as thgu,h the security had been purchased on the call
date at the call price.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
I
I
6
06-.4
Form 1; R. 131
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
M. Cagle
Fro
Mr.Tlkes
Date
June
18,a_am:s\\
Subject: Remarks at Agents'
Conference August 18, 1933.
The Federal Reserve Agents met with the Board on August 16, 1933,
in connection with Governor Black's request for a classification of the
banks of the country into four groups and at this conference reviewed
generally the banking situation in their respective districts.
There
has been summarized below some of the statements made by the agents as
to the particular problems in their districts, aside from the need for
strengthening capital.
Mr. Curtiss, Federal Reserve Agpnt at Boston
Both in the case of nonmember banks which are closed and open the
problem lies in real estate investments which are very, very heavy.
This is due to the large savings deposits in the banks. In Vermont 80%
of the savings deposits can be put in real estate; in New Hampshire 75%;
Massachusetts 70%; mad while the proportion in the other states in the
district is about 70%.
Mr. Curtiss said that the real estate problem
had been a serious one in all of their reorganizations.
Mr. Curtiss
further stated that one nonmember trust company was open having $1,400,000
of deposits and a,100,000 invested in real estate mortgages, that they
had one bank applying for membership which had originally $23,000,000 of
deposits, but which deposits had been reduced to 410,000,000, and their
real estate investments were something like 80%. The worst situation
was stated to be in Worcester County (Massachusetts) in which there were
a number of banks that probably never would open.
Mr. Curtiss said that
there should be in Worcester County a strong bank with branches.
He fur-
ther stated that there were no centers in Messachusetts which were under
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Federal Reserve Bank of St. Louis
-2-
banked, but that they had communities that were over-banked and where
consolidation would be advantageous.
Mr. Curtiss said that there was one open State member bank in Maine
which was going to be a very big problem. It was the largest bank in
the State with fourteen branches and deposits of approximately $15,000,000.
Local people had subscribed :'::,31000,000 of new capital and there was some
question of whether the bank, which had very large real estate loans, was
solvent.
Mr. Curtiss said that they had worked on the bank in conjunction
with the R.F.C., with the idea of organizing a mortgage company, to which
the R.R.C. would advance money to give them liquidity.
The bank, however,
still had the problem of capital and would need at least a,000,000, which
could not be raised locally.
Mr. Curtiss also referred to a Boston bank which was practically
operating under the supervision of the Boston Clearing House Association.
He said that the Clearing House Association banks had deposited 45,000,000
in this bank which had about a5,000,000 of deposits.
He stated that they
didn't know anything about the agreement between the Boston bank and the
clearing house, having been refused all information, and yet for a year
every loan made by that bank had been approved by representatives of the
clearing house.
He said the president of the bank had been in Europe and
part of the action had been taken while the president was away, but when
he came back they had tried to find out about the matter but the president
did not seem to know very much.
Mr. Curtiss reported that Vermont banks had large investments in
Western mortgages.
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Federal Reserve Bank of St. Louis
•
a
•
Mr. Case .Federal Reserve Agent at New York
The major problems facinE banks in the New York district were security depreciation, real estate loans, and in the case of large banks, large
corporation loans of one character or another.
Austini Federal Reserve Agent at Philadelphia
The State of Pennsylvania refused to give any information with regard to State nonmember banks, stating thet they were forbidden by law
to disclose the condition of any nonmember bank; Delaware made the same
statement; New Jersey tried to give some information.
The banks classed in group 2 were those which had possible a slight
impairment of capital.
They had a large amount of real estate investment
and depreciation in securities and more or less frozen loans.
The problem in the Philadelphie district was the same as that in New
Most of the banks were suffering from the great depreciation of se-
York.
curities, there being
SOMP
banks where there was a depreciation of 60%,
with an average of from 35% to 40%.
The real estate situation had not
been changed and it was very serious.
Some of the banks were tied up
with mortgage pools, which situation had caused the failure of some institutions and the merging of others.
Mr. Tilliams, Federal Eeserve PF,pnt at Cleveland
Depreciation in securities and real estate mortgages have been brought
about critical situations.
Mr. Stevens, Federal Reserve Azent at Chicago
The State of Michigan, where there uere the largest number of mcnber
banks, presented the worst situation in the Chicago district.
The mort-
gage situation had been a very serious one with the banks in Michigan, in
Detroit and perhaps a dozen other cities with a population of from 150,000
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Federal Reserve Bank of St. Louis
-4-
to 200,000.
The whole State at large had developed with the boom of the
autotobile industry, which meant enhancement in reel estate and local stocks
so that when the collapse come the banks were left "holding the bag".
Mr.
Stevens said this was the fundamental reason for the Michigan situation.
Mr. Sargent, Assistant Federal Peserve Agent at San Francisco
The major problem of banks in the San Francisco district was deprer.iation in securities while a second problem was the accumulatio
estate.
Five
of real
States were stated to have enacted branch banking laws so
that there was now branch banking in the entire district.
Many of the
weak situations were being cleaned up by absorptions and the establishment of new branches.
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Federal Reserve Bank of St. Louis
1
Bibliographi
At 7at;e 81, at seq. of the arch 1935 Su'vlement of The
Aroripan *conomic Review there is a paper by 'r.
Geohort,
of the wirst ‘:ational Bank in t. Louis, on - sur Correr
eial Bankin6
astew.' 'r. ;.part's paper is largely a defense of the existi
ng
system with certain sJggestions for changes.
There also follows a round table d'scussion of the subject.
The most interesting features of the round table dissuasion are
several
strong deferses of "omnibus" banking and also a suggestion
by a Mr.
C. A. Phillips that the peroeutage of a bank's deposits insure
d by the
F.D.I.C. should be based upon the ratio of the bank's ospite
l to its
deposit liabilities so that therevotald be an incentive for
banks to
bolster up their proteetive ratio. He vinimises the import
anee of
mere lig idity as distinguished from the capital ratio, mentio
ning •
recent case in "MO a bank was "70 per cent liquid and 30
per cent loss.
Altheugh not nug„ested by ter.
it is conceivable that ;he
idea of basing deposit insurance upon the ratio of espital to
eposits
might be &prated by using it to govern the assessment of the
bank rather
than to govern the poroentsge of deposits insured.
The following quotation from pages 86 and 87 of Yr. lephart's
article seems typical of the defense of the banks "safety record
" which
xight be c‘l'ered:
"The National Industrial Conference tlerd published a report
Ira June, 1434, in whteh there were pre.ented statistics indicative
of the cost of the depression from 1930 to the beginning of
1933.
This study estimated the ,;ross cost of the lepression during
this
period at 108 billion dollars, of which 7J.8 billion dollar
s
consisted of a reduction in the assets of individual proprietors
and corporations and a reduction in the produced income available
to Persons in business, recipients of rents, etc., and from intere
st
and dividends on Invested capital. In addition to V.A. it
vas
estimated that the loss to employees in ma Aim an' salari
es, etc.,
amounted to 37 billion dollars. The same sc :roe estimated the
total
national wealth in 1929 at 361.8 billion dollars. In other words,
the gross loss of the depression up to the beginning of 1933 amoln -wed
to almost 30 per cent of the total wealth of the country agers
t
the estimated 4 per osat loss of mak depositors.
"During the smme period, deposits in closed stn suspended
banks
were initially about 9.1 per cent of aggrepitte bank deposi
ts and it
is estimmted that losses ultimately will be equivalent to only about
4 per cent. Furthermore, over 90 per cent of the
deposits in our
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Federal Reserve Bank of St. Louis
-2
banks were unaffected by failures el- auspensi(ns so that
the greet bulk of be-1: depositors suffered nc lose wastever.
Regardless of what has been said of the management of our
bar4(s, on the w °le, the banker has so managed his affairs
as to afford an exceptional degree of proteetioo to his
depositors.
"Hy contrast, the market value of all listed bon-'s on
the New York Stook Eschew, showed a deoline of 32 per cent
and listed stocks declined 65 per cent. Approximmtaly 7
per cent of outstanding municipal securities were in default
on 4anuary 1, 1934, and 10 pr cent of railroad mileage has
been sf"ectel by receivnrships rilsultin; from this Asoression,
while about one-quarter of the railroads' total funded lebt
is in default or saved therefrom only by emergency credit
advances of the federal government. Furthermore, it is estimated that 11 per cent of public utility holdi, g company debt
was in default and 60 per cent of real estate soeurities have
been in difficolty during the period a,,einst the 4 per coot
net loss to bank depositors."
The fol'oeing quotation from pegs 87 seemi typieal e4
defense cf their "lendin,, record" which might be offered:
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Federal Reserve Bank of St. Louis
he
"iiith respect to the support'MO the banks have given
to the federal government during this same )eriod, it can be
shown that banks today hold about SO per cent of all outstanding
government seeurities an itmt they have provided almost 80
er cent of the additional funds required by the federal government sine* the depression began.
Another eritieism "(Itch has been directed against comport:34'1
banks recently Is that they have not been willip to make loans.
An investigation, made by the Association of Reserve City Nnkers.
indicates that facts differ from this po7nler orinion. This
inquiry, whieh embraeed eemraaroial beaks having 33 per cent of
all the 'eposits of coommereial banks of the .;:lited nate*, found
that these banks had unused lines of credit amounting to b tween
8 and 10 billirn dollars. These necessarily included not only
lines of credit to lerne corporations runriag into millions of
dollars but also those tc small busInesses with lines of credit
as small as 25 to 100 thousand dollars. The investigation
further showed that, excluding lines on collateral security end
renewal of old loans, new loans to the saaPunt of 3.77 million
dollmrs were made during the first six months of 1934."
Proponents of unit banks aake considerable ado over the few
brehen bank fai/ares. It should be 'Dome in mind that m;A‘t of the
rnc
baaks etich feilee operated over c! ,mparatively small terri-
tories, hence the auventage of diveraific..ition may be sate to have
been io,5t except in so far as it 4-a8 possible within their limits,
such as the City of hey York.
In the ease of the Peoples State Bank of South Carolina,
vaion failed to open it& aoors on January 2, 192, the cauees zay
oe etated as follovs:
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Federal Reserve Bank of St. Louis
1.
The m6m,gemeat,
not only 'Fecx zinded out
inexperienced it: branca banki46, or, for that
matter, any otAer kind of bankiqg of any considerable size.
2. ittvid and competitive expansion, Le key bank
havin6 bouisht u. le 44 branche6 Athia the
coaree of
or 3 years, ouch oIrchases being
based upon cursory exeganations by incomi)etent
examiners.
S. So restraint on the prt of tne State supervisory authorities (it via
a no:Li:ember bank)
who, if intelli6ent, couln hhve foreseen the
-'negers of the too reAd expansion and the
,4pan3ion into snail coaumnities 'mien could
not support even a branch ana in some cases a
ney aepot.
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Federal Reserve Bank of St. Louis
5. Gross over-payaent for the stock of the indeklendent
bants bought up and converted Into branches, Lae
purehrlse being siude on an ex,:Alange basis T.herever
possible but in a
greut
number of cases having been
laede for cash, and in all or practically all of the
eases on a basis far in
6XCeSS
of real values.
r
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Federal Reserve Bank of St. Louis
MEMORANDUM
"Bank Failures in the United States" in its
entirety may be lf interest in connection with #1,
certain excerpts therefrom havitag been copies and
circulated.
(In American Economic Review, Volume 22 (1952), at
page 208)
/
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Federal Reserve Bank of St. Louis
z
FAILURESk
CO4PETITION
aUPERVISION
The Attorney General's report and supplemental
report to the South Dakota Legislature of the investigation of the Department of Banking and Finance, February
27, 1930, and February 11, 1931, contain information on
the above subjects which is of interest to the respective
persons concerned.
Two additional copies of each of
these reports have been requested and will be segregated
when received. (Wilkes)
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Federal Reserve Bank of St. Louis
CRAFT IN BUSIWS
by John T. Flynn (1931)
This book contains a chapter on 'Banking Rackets"
c!Ach is mainly a description of the dishonest or unethical manipulations of bank officials in connection
with the failure of the Bank of the United states in
New York and the Caldwell c:.lain of banks and financial
organizations in the south.
The book is written in popular style and while an
interesting story of these two well-known banking failures, does not make any new recommendations or sugvestions for avoiding similar recurrences.
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Federal Reserve Bank of St. Louis
EXCERPTS
EMPIRE FOLDER
nearest "Y and E"
Better folders for better files
306S
Send your Order t3 tI
Executive Officas
DIT,3,14:, pac..0.
Representatives or to our home Office 14:ATZTii.44 AND
Fan Factez;es and
ROCHESTER, N. Y.
Branches and Age.n:s in all Principal Cities
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
J. W. Pole, Comptroller of the Currency
Hearings — S. Res. 71
,3
9
- I
1
I have already piesented to Congress conside'rable informiltiM
on bank failures in the aaricultural communities and I have cited as
a fundamental cause for these failures the great changes which have
occurred, economic and social, within the past quarter of a century,
1
1
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
•
3
which make it extremely difficult, if not impossible, for a unit bank
in a small agricultural community to meet the fundamental requirement of banking, namely, a diversification in its business. Good
management is of little avail in the absence of a sufficient volume
and diversification of local business.
1
1
1
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Federal Reserve Bank of St. Louis
I
The year 19.30 has been one of great economic depression. It has
had its effect upon the city banks, but not to any serious extent.
There have been a few failures of city banks of considerable size,
but these may be regarded as exceptional. On the other hand, the
failures of small country banks have been continuous throughout
the postwar period. The failure of a large city.bank in every case
may be traced to some specific abnormal situation, whereas in the
case of country bank failures there is evidence of a general breakdown in that system of banking, which calls for positive remedial
action.
The CHAIRMAN. Mr. Comptroller, what do you conceive to be the
general cause of the numerous bank failures for the last five or six
years?
Mr. POLE. Well, 90 per cent of the banks are in the small rural '
communities. Economic changes have put those small communities
within easy distances of the larger commercial centers where the
banks are stronger and more efficient in every respect, and as a consequence of this ready access to these centers, the cream of the banking business has gone to those centers, which has had the effect of
reducing the opportunities of the small country banks to such an
extent that they find it difficult to earn a sufficient amount of money
to charge off their losses and to pay a reasonable dividend, and
neither can they offer anything like the facilities which the city
bank can offer, and with these opportunities removed, the bank is
not able to maintain itself.
The CHAntmAN. You think that this may be partially corrected
by a system of branch banking?
Mr. POLE. I do, Mr. Chairman, and furthermore the fact that the
small bank has little or no opportunity of diversifying its investments is a fundamental condition.
1
1
1
J. W. Pole - Page 2
,
3/
Senator NORBECK. But they include in that stitement the deposits
from the 150 country banks they control. But here, let us leave
that matter. Go on to the question of bank failures in rural communities. I think the comptroller is quite right when he says the
last 5 or 10 years has shown a large amount of them. Does that
necessarily mean it is due to the banking system?
Mr. POLE. Aggravated, of course, by the local present conditions
of depression in farm prices, and so forth.
Senator NORBECK. Now, you are getting down to the point—the
inability of the producer to pay, of course. Is it not a fact that, in
the decades preceding the last one, the banks in the agricultural
communities stood up better than in other places and you had less
bank failures in Iowa,for instance, and the agricultural communities
than in the industrial sections in the East? Why not take the 50year experience instead of only the last 5 or 6 years?
/
I
•
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Federal Reserve Bank of St. Louis
It
Mr. POLE. We are faced with entirely different conditions to-day
than we were 50 years ago, so we have felt that to go back for a
period of 10 years would ordinarily be sufficient to prove and
substantiate the statement that there is something wrong with the
agricultural communities from the standpoint orbanking, and the
principal thing is, I would say, that the bank is utterly unable to
That is one of the outstanding things.
diversify its— investments.
.1
I
a• . olr
A
,3
IV,
Senator NORBECK. Now, then, I want to ask some more questions.
/ The comptroller speaks of 6,000 banks which have failed, mostly in
rural communities. Is that the statement?
Mr. POLE. I think that is a correct statement.
Senator NORBECK. Now much of that is rural communities and how
much not?
Mr. POLE. Ninety per cent rural communities.
Senator NORBECK. How would they compare, for instam e—these
banks—with the other 10 per cent? Would the other 10 per cent,
taking into consideration their capital, resources, and deposits, represent even greater failures and involve more people in distress than
the 90 per cent of the small banks that failed?
Mr. POLE. No, sir.
Senator NORBECK. Is it not a fact that the scope of a $200,000,000
bank failure in New York involved as much loss as all the bank
failures in several agricultural States?
Mr. POLE. I think, of course, that is an extremely important
failure in New York.
Senator NORBECK. Well, the one in Philadelphia was not very
much different, was it?
Mr. POLE. As to whether or not the importance of that failure
would exceed that of 90 per cent of the rural failures is a very serious
question in my mind.
4
a
1. V. Pole — Page 3
/93/
•
•
Senator NORBECK. When we are told that 90 per cent of the bank
)
failures are in agricultural communities it sounds awful, but when
we learn that 10 per cent of the city bank failures involve about as
many dollars, as many people and just as much disaster, then we
the whole country.
have a more correct picture of'
The CHAIRMAN. As a matter of fact, Mr. Comptroller, is it not
true that the amount written off by the large national banks is far
in excess of the losses of a larger number of the smaller banks?
That is just a repetition of the question that Senator Norbeck asked
and which I think you have answered.
Mr. POLE. As to whether or not the small proportion of large
banks was not larger in the matter of deposits?
The CHAIRMAN. Yes; the losses written off of their books by the
larger banks in the large money centers were not far in excess of
banks?
the losses of the larger number of small '
Mr. POLE. Of course it is important, the losses in the banks in
the important centers, but it is true, of course, speaking from the
standpoint of national banks, that we have had only a relatively few
failures of national banks within the last 10 years. However, with
respect to question of losses a distinction must be made between
losses to depositors suffered through bank failures and losses written
off by going banks without affecting their solvency.
With respect to the latter class of losses figures are not available for
either country or city banks, but losses to depositors through the
failure of small country banks during the last 10 years are vastly in
excess of those to depositors in large city banks; in fact, the latter
will appear negligible by comparison.
The CHAIRMAN. What do you estimate, approximately, as the
number of bank failures since 1920?
Mr. POLE. In number?
The CHAIRMAN. Approximately the total number.
Mr. Poi. There have been, oh, say, roughly, 6,000.
The CHAIRMAN. Of all banks?
Mr. POLE. Of all banks; yes, sir.
The CHAIRMAN. I believe you said that in your judgment the
examination by the comptroller's office has a large influence in stopping failures of banks.
Mr. POLE. A very large influence, Senator; so much so that I have
prepared a statement showing precisely the number of banks which
have been saved from failure through the activities of the comptroller's office over a period of five years, and the number is very
impressive.
The CHAIRMAN. Will you file that statement for the record?
Mr. POLE. I shall be very glad to.
The CHAIRMAN. I do not mean naming the banks, but as to the
number of banks, with their resources, and so forth.
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Federal Reserve Bank of St. Louis
J. W. Pole — Page 4
/ 93/
t)
•
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
12
it
Mr. POLE. I shall be glad to do that.
Senator TOWNSEND. Will that show the number of national banks
and State banks?
Mr. POLE. The national banks only.
Senator TOWNSEND. The 6,000 are national banks?
Mr. POLE. No, sir; all banks.
Senator TOWNSEND. What proportion are national banks and what
proportion are State banks?
Mr. Pout. It is less than 1,000 national banks.
Senator TOWNSEND. And 5,000 State banks?
the
Mr. POLE. Five thousand State banks; yes, sir. We might put
exact number in the statement.
and
The number of banks saved through the efforts of this office
those
of
ive
exclus
years,
six
of
the examiners in the field for a period
accordance
banks saved by voluntary contribution or by assessment in deposits of
total
1,800;
$64,41
of
l
capita
total
with
559,
is
law,
with
$547,054,335; and total resources of $714,073,513.
, from
The total number of bank suspensions in the United States10-year
the
,
for
Board
e
Reserv
l
figures furnished by the Federa
ed,
period 1921-1930 was 6,968. Of this number, 797 were reopen al
nation
were
827
6,171,
of
total
leaving a balance of 6,171. Of this
banks and 230 were State member banks; 5,114 were nonmember
banks.
Bank suspensions, 1921-1930
All
banks
Suspended
Reopened
Total closed
•
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Federal Reserve Bank of St. Louis
State
State
National member
nonmembanks
banks her banks
6,968
797
925
98
257
27
5,786
6,171
827
230
5,114
672
The CHAIRMAN. Very well. In what measure have loans on securi
?
assets
bank
in
age
shrink
and
ties—security loans—caused losses
ly
Mr. POLE. I am satisfied that the shrinkage in securities, probab
figure.
tant
impor
an
more than the losses in security loans, would be
would ask
I have not the figures with me. I had no idea what you
me to-day.
be an
The CHAIRMAN. The shrinkage of securities may or may not
at
arrive
to
trying
am
I
What
ty
loans.
securi
of
aspect
inevitable
called
be
may
,
degree
large
in
is to what extent security loans which,
frozen assets, are responsible for bank difficulties.
of no instance
Mr. POLE. I think it can fairly be said that I know investments as
bank
or
ral
collate
of
in
value
where the shrinkage
for any
far as national banks are concerned, has been responsible
them.
bank failure or very, very few of
The CHAIRMAN. When a bank can not realize on its frozen assets,
what happens?
Mr. POLE. Those assets, Senator, are frequently not of the character which you describe.
The CHAIRMAN. Yes; but they frequently are.
Mr. POLE. To an extent—yes; to an extent.
George L. Harrison, Governor, FRB, N. Y.
Hearings — S. Res. 71
/1_3/
I
•
Senator NORBECK. In your opening remark, you made reference
to a very large number of bank failures in the last 10 years. To
what do you attribute that, especially?
Governor HARRISON. I should like to answer negatively first. I
think it is not attributable to one of the defects in our earlier banking
system which the Federal reserve act was primarily intended to remedy and that was an inflexible currency system. Prior to the inauguration of the Federal reserve act there were a great many bank
failures. Going back to the class I referred to in 1814, those failures were due principally, to a shortage of specie at the time it was
demanded. I think it was probably true that few, if any, banks that
have failed in the past 10 years have failed because of the fact that
the Federal reserve system was not prepared and able to provide
currency when needed on eligible paper.
Senator NORBECK. We have had more failures since the Federal
reserve act than before.
Governor HARRISON. Yes. I do not know whether we have had
more proportionately. I think the percentage of failures in the past
10 years has been about the same as in the period of 1893. But it
is no doubt true that the proportion of banks that have failed in
44
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Federal Reserve Bank of St. Louis
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
the past 10 years has increased during the past year to a point where,
in the last few months of the year, we had a greater number of
failures than ever before.
The CHAIRMAN. Suppose there had been no Federal reserve system
during the last 10 years. What would have happened?
Governor HARRISON. I think the number of failures that would
have occurred, had we not had the system, would have been far
greater than we have had, in the face of it.
The CHAIRMAN. When we speak of failures, we mean an actual
failure of a bank where it is thrown into the hands of a receiver.
But as a matter of fact, prior to the adoption of the Federal reserve
system, did we not have periodically a practical breakdown of the
entire banking system from one end of the country to the other ?
Governor HARRISON. Yes, sir.
The CHAIRMAN. So that banks could not function in a legal way
and were compelled to resort to expedients to avert a greater disaste
than that then upon the country?
Governor HARRISON. Quite right.
Senator NORBECK. Then you do not attribute the breakdown in
the banking structure in the country in the last 10 years to the
banking laws?
Governor HARRISON. Senator. I think that the Federal reserve
system during the war and postwar depression, performed service
which it is impossible for the country or the rest of the world to
measure, and had it not been for the Federal reserve system during
those periods, no one could imagine what might have happened.
Now, as to the determination of the causes of the failures of these
6.000 banks in the past 10 years. I answered you negatively first, not
as a complete answer, but to show that I do not think it was because
of the cause of the earlier failures—shortage of currency. It was not
that. It was due, in part, I think, to the changed economic set-up in
the whole country; due to the fact that. with the automobile and
improved roads, the smaller banks in some cases, with nominal capital, out in the small rural communities, no longer had any reason
really to exist. Their depositors welcomed the opportunity to get
into their automobiles and go to the larger centers where they could
nut their money.
_4
George L. Harrison — Page 2
/93/
imply that the money did go to
Senator NORBECK. But that would
the larger centers.
right.
Governor HARRISON. That is quite
it did not?
that
fact
a
not
it
Is
K.
BEC
NOR
Senator
like to check that definitely
uld
sho
I
but
Governor HARRISON. No;
in the statistics.
the centers. I am thinking of
Senator NORBECK. I am speaking of
in the Western States where the
the larger towns not in the East but uence in bringing the trade to the
automobile has been an immense infl speak of, but I think they are
centers. I recognize the influences you
-aot major but minor.
that there is no one cause
Governor HARRISON. I agree with you
failures.
that can be specified as the cause of the
e of the failures due to the
caus
n
mai
Senator NORBECK. Is not the
change in economic conditions?
Governor HARRISON. Probably so.
SYSTEMS
NATIONAL AND FEDERAL RESERVE BANKING
his \
inability to pay, or has the banker lost
Senator NORBECK. Is it s, so that he is less competent than in the
brains in the last 10 year
decade before?
the law, lie was authorized to make
Governor HARRISON. Under percentage of his capital and surplus
ain
certain loans up to a cert ing done that up to 8 or 10 years ago,
Hav
s.
omer
cust
ain
cert
to
nity in which he is located is suffering
he finds that the little connnuon following the great expansion that
from the postwar depressi 0; his customers in many cases either
occurred in 1919 and in 192 r loans at once or,as I think is probably
were not able to liquidate thei who had deposits, following the cycle
largely true, those customers d the deposits to other sections of the
that I have mentioned, removeand left the bank with the less liquid
country or to bigger centers awal of money takes place, the banker
assets, because when a withdr most liquid holdings, and what is left,
has to pay out of cash or his
ssarily mean it is not as sound ultiis less liquid. That does not nece
sits continue to go too rapidly,
mately, but it is slower. If his depo
not enough liquid assets to pay off
there comes a point where he has
bank must close.
the demand depositors and the age in the Northwest States has not
ink
shr
Senator NORBECK. The
also in the centers. There has
been in the small towns but the whole territory. I quite agree
been a shrinkage that included d economic conditions.
—
with you that_ _it is due to
_ _ change
I
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Federal Reserve Bank of St. Louis
45
J. H. Case, Chairman, FRB, N. Y.
Hearings — S. Res. 71
/93/
•
•
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Federal Reserve Bank of St. Louis
Mr. CASE. In talking recently with a retired officer of one of the
large Canadian banks—they have but 11 banks with hundreds of
branches—he referred to the fact that the western part of Canada—
the grain growing section—had substantially the same set of economic conditions and problems to deal with that we had experienced, but that, nevertheless, banking failures in Canada have been
almost negligible. The inference to be drawn from this statement
is that, under their system of branch banking, the large Canadian
banks with home offices in the eastern part of Canada have absorbed
the losses occurring in the western part of that country. That is
to say, the losses fall upon bank shareholders rather than upon
bank depositors.
Senator NORBECK. May I ask a question? I understand there
was a supplementary loaning agency by the Government to the farmers of the western Provinces?
Mr. CASE. In this country?
Senator NORBECK. No; to the farmers of the western part of
Canada.
Mr. CASE. Yes.
Senator NORBECK. Growing really out of the fact that the chain
banks, or the banks as organized there, did not want to handle that
kind of paper, and that the Government took substantial losses out
of this inflation; is that correct?
Mr. CASE. I can not answer that, Senator. I did not know that
was true.
Senator NORBECK. I have not much information on it, but I
have heard the story told so often in the Northwest.
Mr. CASE. That may be true, but it was through one of the retired
officials of one of the large Canadian banks that I learned that they
had the same economic conditions there as obtained in the West.
As a matter of fact, our record of bank failures over a period
of years compares most unfavorably with that of Canada and Great
Britain.
There have been during the past decade three major speculative
inflationary movements, each one of which has weakened the banking
institutions in the territory affected and has been responsible for a
number of failures. I refer (1) to the intensive speculation in farm
lands in the Middle West and in the Northwest during the war and
postwar inflationary period, (2) the unprecedented speculation in
Florida real estate which followed and spread throughout the country
and finally (3) the culmination of the bull stock market in the autumn of 1929, which adversely affected the general business of the
country.
These three movements have each in turn culminated as they inevitably must in a deflation resulting in falling values; so that during the past year, there has been the most drastic liquidation in values
of which we have any record in times of peace.
These are the conditions which in large measure are undoubtedly
responsible for the great number of bank closures.
Senator NORBECK. I would rather be disposed to question that
statement, that the Canadian Northwest had the same economic
problems as the Northwestern States in this country, and the answer
to it is that for a long period of.time better prices prevailed for farm
products in Canada than on this side due to the fact that the Government relieved some of the burden. But so much for that. I was
going to ask the witness about the speculation and the rise of land
values in the Northwest. Is it not a fact that taken on an average
the rise was about 100 per cent, that land values doubled, notwithstanding some reports here and there about some lands selling at
three or four hundred dollars an acre? I have seen the report frequently circulated that Iowa land went to $208, a little more than
double in value. Is it not a fact that that is what commodity prices
else?
want to, and individual land
. went
__ ..no
_.. higher ,than
_. anything
. _ .... . ,•
__ .
J. H. Case
Page 2
/91
1
-Iii-r.- CASE. May I answer that?
Senator NORBECK. Yes.
dity,
me, Senator, that if wheat, a commo
' Mr. CASE. It seems to to $3 a bushel, as the market value, and
jumped from $1 a bushel
$250—
advanced in price from $100.to $200., ornot underland simultaneously (inter
did
posing). Maybe the witness
Senator NORBECK
prices I did not necessarily mean agricul
dity
commo
/,
stand me. By
tural commodity prices.
Mr. CASE. No; but in any event it would be agricultural products
/ that would visibly affect the land values, it seems to me.
/
Senator NORBECK. Yes.
Mr. CASE. I maintain that, if wheat normally sells at 80 cents to
1
$1 per bushel, land will not go up, but that if wheat sells at two
if at
or three dollars land Values will go up. It seems to me that
\
d
values
inflate
the
at
land
the
on
money
loan
banks
the
that point
they are in for trouble.
Senator NORBECK. Why use the term "inflation" on the farms
which have increased 100 per cent, instead of using it on a locomotive that has increased 100 per cent, or an office building that
has increased 100 per cent, or railway equipment that has increased
proportionately? Why is one inflation and the other one not?
Mr. CASE. If you had Iowa land values charted, showing the aver$100
age value over 50 years, and if the average value was X, saycondiother
some
or
war
a
of
result
the
as
tly,
presen
and
per acre,
150
tion that puts commodities up, the land should go up 100 or
me,
to
seems
it
must,
lender
the
e
averag
r
50-yea
the
per cent over
recognize that value is certainly well above the average for a period
of years, and that he is running a risk in dealing in such values. ng
Senator NORBECK. I will admit that anyone who loans anythi
of
on a farm will run a risk, because we do not know the future as
on
an
of
inflati
tion
distinc
the
oned
questi
simply
I
ture.
agricul
red with other
to land Just because land rose in value as compa
commodities.
Mr. CASE. I think it is true, Senator, that a great many bank failures in that section, in the Chicago district, in Iowa, and in the
Northwest, and in the Minneapolis district, were; in the judgment
of the officials of the reserve banks of those districts, caused by the
banks loaning money on these higher land values, which did not stay
put, but dropped back again to normal value.
Senator NORBECK. But you speak of that as a criticism of the
I
banking methods particularly.
Mr. CASE. That, it seems to me, deals with a very fundamental
banking difficulty.
Senator NORBECK. Let me ask you what would have been the re-r
sult in other sections of the country if they had taken a simila
deflation in commodity and property values? Would not the banks
have blown up in the same way?
Mr. CASE. Probably; yes.
Senator NORBECK. The answer is really interesting. We have
been told that there is nothing the matter in the Northwest except
the lack of judgment and lack of brains.
Mr. CASE. As I said a few moments ago, in these few observations
I have been making it seems to me that new banks were chartered
too freely, perhaps beyond what the needs of the communities were,
and many of them had too .small a capital. Under these circum.
stances a high degree of skill is required in order to run a bank
successfully and avoid loans on overpriced lands and other products.
Senator NORBECK. Was not the same trouble with the northwestern banker two or three years ago the trouble with the eastern banker
for the last 10 years—his inability to see into the values of these
things?
I
I Mr. CASE. Yes; I think that is part of the present difficulty;
inability to correctly appraise real values and human nature being
/! I
what
_ that is one reason why we have so many failures.
___. it is,
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A. C. Miller, Federal Reserve Board
Hearings — S. Res. 71
/73,
.:.
Mr. MILLER. Mr. Chairman and gentlemen of tile committee: Your
committee has been occupying itself largely with a study of banking
conditions, I think, with an idea of finding what there is that makes
them go wrong.
Let me say very briefly, in order to indicate my general position
upon an inquiry of this kind, that bad banking conditions do not
usually generate themselves. They usually grow out of antecedent
disturbances either of an economic or a financial character. To say
that banking conditions are bad because management is bad, overlooks the fact, I think, that banking conditions are bad sometimes
when banking management is reasonably satisfactory. It is when a
considerable change in the general economic conditions under which
business is done and banking conducted takes place, that the hazards
of banking judgment are increased and the problems of management
particularly as they relate to the extension of credit, become more
difficult.
The crop of bank failures in 1930 reflects, I think, the disturbed
conditions that developed in the years 1927 to 1929, just as the great
crop of bank failures in the twenties, reflected the disturbed conditions
that developed acutely from 1919 to 1921.
123
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Albert H. Wiggin, Chairman, Chase Nat'l Bk., N. Y.
Hearings — S. Res. 71
- /
/73
The ACTING CHAIRMAN. Do you regard security loans as one of
the important causes of the recent bank failures? Statistics show
there have been 6,000 bank failures in 10 years, and an abnormal
number in 1930. What is the underlying trouble there, in your
opinion?
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
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Federal Reserve Bank of St. Louis
189
Mr. WIGGIN. I think the nonliquid position of many banks was
because of the larger proportion of their loans that were on securities.
The ACTING CHAIRMAN. That applies to the banks that have
failed, you think?
Mr. WIGGIN. I think you must distinguish between liquid securities
and unliquid securities, when you speak of slow loans or loans that
are not slow.
e
•
Edmund Platt, V. P., Marine Midland Corp.
Hearings — S. Res. 71
/ /
_
Senator N ORBECK. To what do you attribute so many failures in the
last 10 years, as compared with the previous 10 years?
Mr. PLATT. I think it goes back more or less in history. We had
one major panic in this country without many bank failures. That
was the panic of 1873. There were then very few State banks of
any kind, and the smallest national bank was capitalized at $50,000.
In the early nineties and late eighties, the Western States began
to charter banks of $5,000 and $10,000, and some Eastern States
$25,000. A lot of them went down in 1893. Two Comptrollers in
succession, Mr. Eckels and Mr. Charles G. Dawes, recommended
branch banking as a remedy. Mr. Dawes recommended it in towns
of 2,000 or less.
Senator NORBECK. Is it not a fact that most failures took place
in the section of the country where there was a deflation in the commodity prices of the country?
Mr. PLATT. Yes; but there were no failures just over the line in
Canada.
Senator NORBECK. But did not the United States Tariff Com- (
mission find that it costs just 42 cents a bushel more to raise a bushel
of wheat in the United States than in Canada? If we had had the
price advantage of Canada we would not have had an agricultural
depression.
Mr. PLATT. I do not know about that.
Senator NORBECK. The conditions are not similar.
Mr. PLATT. We had similar conditions and price reductions in
1920 and 1921 and that also obtained in Canada, but there were no
bank failures in Canada or only one (1922). There are no bank
failures now in Canada and there were 1,300 in 1930 in this country.
Senator NORBECK. We had our big drop about 1920 and the bank
failures came later.
Mr. PLATT. The prices dropped in 1920 and 1921.
Senator NORBECK. But our failures have been more recent.
Mr. PLATT. They came not long afterwards. Just about the time
the farmer was getting on his feet again his bank failed and tied
him up.
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220
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
I have seen some letters written about these bank failures that are
heart-rending. I remember one from. a Presbyterian minister telling
about the situation in Arkansas, about the hard times the farmers
had experienced and then after that and on top of all that, the banks
failed.
Senator NORBECK. I quite agree with you, Governor Platt, that
the bank failures have contributed greatly to the distress, but I
think you will agree with me that the inability of the farmers to pay
their notes really brought the bank failures.
Mr. PLATT. Yes, but if your banks had had a certain diversification, the failure of the crops or the drop in prices affecting a staple
crop in one neighborhood would not cause the bank to fail. It
would be absorbed somewhere else, just as a fire burning up a big
building in one town does not cause everything to fail in that town,
because the insurance company has its risks in hundreds of towns.
Senator NORBECK. That is a beautiful theory, but the amswer is
we did not have the failures in those countries until we had the
deflation.
Mr. PLATT. That is true, but to go back a little bit, after the panic
in 1907, California passed a new banking law that provided for
branch banking. They had just the same drop in prices in California,
but very few branch bank failures. -
1
Edmund Platt — Page 2
Senator NORBECK. is it not a fact that the'dilation hit California
long after the depression hit the Mississippi Valley?
Mr. PLATT. I do not know
Senator NORBECK. I think the agricultural deflation hit the
Northwest the hardest. I think it is well set out in the industrial
report of the commission of which Mr. Young is a member, showing
that it was the Northwestern States and not the West coast or the
East coast that was hard hit, showing that the farmer in Nebraska,
for instance, has to suffer a deflation of 80 per cent and in Pennsylvania
the farmers suffered only about an 8 or 10 per cent deflation.
Mr. PLATT. If we had had a proper banking system, the banks
need not have failed.
Senator NORBECK. But if you lend money secured on something
worth $80 and it goes down to $30, how can you prevent a failure?
Mr. PLATT. Because you have a bank in another neighborhood
that is making a profit that can absorb that loss. We have some
rather small branch banks in this country that have been running for
over 30 years, like The Tennessee Valley Bank of Decatur, Ala.
The president of that small branch bank system told me that,operating individually, some of his branches would have been closed absolutely long ago. He has only 15 branches and all operated practically within the Cotton Belt, but he has just enough diversification
and a sufficiently broad outlook so that he can keep going. They
started in the late nineties. They should be spread over a larger
territory, but they managed to get along. So, branch banking does
help.
Senator NORBECK. Do you think that any banking situation that
covered the agricultural States would prove an advantage?
Mr. PLATT. A combination of groups as they have in St. Paul and
Minneapolis would help.
Senator NORBECK. But if the commodity prices fall in the territory
served by any of these branches who will absorb the losses?
•
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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
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221
y
Mr. PLATT. There have been very few failures in your territor
in.
came
groups
big
the
this last year since
had
Senator NORBECK. Surely; we had some hard-shell banks thatwere
they
game
ative
a
conserv
playing
by
and
not lost much money
ity and
able to stand up and enjoy the confidence of the commun
what
"See
said,
and
them
of
some
bought
and
then the group came in
name two
to
you
ask
to
want
I
uty."
commur
your
for
done
have
we
their feet
banks in the Northwest that have been helped or put on
banks.
group
by these
enough
Mr. PLATT. I do not know the northwestern groups closely
helped
been
have
banks
some
know
I
but
n,
questio
that
to answer
the
since
st
Northwe
in
the
failures
and there have been very few
ed.
groups were organiz
stand
Senator NORBECK. They waited to see which banks would
ng
acquiri
After
them.
acquire
to
started
the test and then they
are."
we
how
strong
see
us;
those good banks they said, "Look at
d
Mr. PLATT. That is one objection to group banking as compare
is
it
more
and
cal
economi
as
quite
not
is
It
.
banking
with branch
r,
likely to take strong banks rather than the weak ones. Howeve
hened
the
have
strengt
they
because
n
situatio
the
helped
they have
strong banks, and at least sortie of the weaker ones also.
of
Senator NORBECK. I have never found anybody living outside
us
give
and
in
come
to
inclined
our State that was charitably enough
is
money and help us. I admit they can do it, but whether they will
another question.
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Federal Reserve Bank of St. Louis
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Edmund Platt — Page 3
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•
Mr. PLATT. You have had chain banks in your territory since
about 1900.
Senator NORBECK. No; we have not had chain banks.
Mr. PLATT. I have a study of chain banking made in the Northwest, made by Miss Hartrough for the University of Minnesota in
1924.
Senator NORBECK. In the Northwest, but not in South Dakota.
The ACTING CHAIRMAN. MT. Platt, suppose you give us a definition
that will distinguish between chain, group, and branch banking.
Mr. PLEATT. The Federal Reserve Board, in its bulletin reporting
on chain banking and group banking, does not make a distinction,
but I think there is a distinction. I think chain banking began in
the 1890's, in response more or less to the recommendation of two
Comptrollers of the Currency, Mr. Eckels and Mr. Dawes. They
recommended branch banking in the small towns, and these strings
of banks were purchased, without any central organization, and along
a little after 1900 there began to be holding companies organized,
mostly in the Northwest territory, around Minneapolis and St. Paul.
The ACTING CHAIRMAN. To hold the stocks?
Mr. PLATT. Yes • and those chain banks, on the whole, have stood
up pretty well. Some have failed but they have stood up better than
the unit banks. They were built up, I believe, in response to a real
economic need. Probably the idea of a great many of their originators, when they started them, was that they would convert them
into branches if they were allowed to, but they were not allowed to.
The ACTING CHAIRMAN. Most of them are not member banks?
Mr. PLATT. Most of them are not. There is a man named Petersen,
who has a chain of six or eight banks in North Dakota. I do not
think any of his banks have failed. I know he wrote me about 1923
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Federal Reserve Bank of St. Louis
asking if there was any way by which he could convert his banks into
branches.
Senator NORBECK. I hope Mr. Platt did not understand me to say
that the group bank was necessarily wicked because it was a group.
I am not saying that. I am simply questioning what the benefits will
be of the group banking system.
Mr. PLATT. It gives a chance for diversification as much as you
can do it through separately incoporated institutions. Converting
them into branches you would have the strength and greater diversification of the big institutions.
Senator NORBECK. Give us a fair price for our products and we
will build up good banks. I believe there was a statement that there
were less failures in Iowa for 50 years than in Massachusetts. So, if
the products of labor are sold at lower prices, then the banks are
hurt too—that is, if they have any loans out.
Mr. PLATT. If the banks go down that makes the situation
worse.
Senator NORBECK. I want to say that Governor Platt has been
very helpful while on the board and I do not want to be too critical.
I have no doubt Mr. Platt has the welfare of the whole country at
heart, and I think his testimony shows that. He and I just do not
share the same view as to the cause of bank failures in the Northwest. We had the same system in the previous decade as in the past,
but it was in the last decade we had the failures.
Mr. PLATT. I think Doctor Willis's compliation for a Senate
ommiteee made in 1926 for the 25 precedng years shows that we had
40 bank failures in the best of those years. That was the minimum
number,and there were few years when the failues didn't go over 100.
Senator NORBECK. But there are at least 40 people go wrong every
year. You can not prevent that in the banking business or any other
_business.
Mr. PLATT. We could to some extent, if we had larger units. I
think bank failures are due to two fundamental things. Back of the
whole thing is the free banking idea, which, carried to the extreme
I limit, means you can give a bank charter to a bunch of crooks and
r have a good bank if you keep them under strict enough suprvision.
7
B. W. Trafford, Vice Chairman, First National Bank of Boston
Hearings — S. Res. 71
f3/
. Mr. TRAFFORD. The examiners and the mangement.
The ACTING CHAIRMAN. Do you think those investments have been
,a significant cause of bank suspensions in the Northeast or in other
parts of the country?
Mr. TRAFFORD. Those investments?
The ACTING CHAIRMAN. Yes. You know there have been a great
many bank failures?
Mr. TRAFFORD. There have been very few in New England.
The ACTING CHAIRMAN. Something like 1,300 last year and 6,000
in 10 years.
Mr. TRAFFORD. There have been very few in New England—very
few I do not know this last year how many, but not over a half a
dozen, possibly.
Mr. WILLIS. What have been the causes of the failures there?
Mr. TRAFFORD. The two that I know about were just crooked
management; I think perhaps a couple more were unintelligent. But
there were only five or six altogether.
Mr. WILLIS. The security movement has had nothing to do with
1 the bank failures in your part of the country at all?
Mr. TRAFFORD. Not this last year. I think no national bank failed
in New England last year. I think not.
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Charles E. Mitchell, Chairman, National City Bank, N. y.
Hearings — S. Res. 71
1
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/Y7.3/
Senator WALccrrr. Yet this picture has developed in the last two
or three years in the Northwest and Southeast,—that we have
had 1,300 bank failures in the last year—we have had 6,000 in 10
years. Most of them have been small banks, practically all have
been nonmember banks, but there is something wrong, and we ought
to fix it in some way so that those banks can survive in those countries, which are to-day even mostly pioneer fields so they can develop normally with the natural benefit to the country, yet they are
not doing so. They are suffering to-day from the banking situation
in the Northwest and in the Southeast. Some groups have been put
together and are perhaps relieving matters by diversifying loans at
the season of special allowances,so it is not either all up or all down—
leveling the thing out; but it is not successful, as you know. What
have you in mind for that? I take it from what you just read you do
not want to start something that will stimulate the buying of small
banks, competing for these small banks and putting the price away
up out of reason. That would be disastrous, most decidedly. Have
you anything in mind on that? We would like your ideas on this
situation which is really serious.
Mr. MITCHELL. Of course, we must not let ourselves get confused
in the basic principles of banking, which is, to my notion, that the
depositor is the man who should first be considered. In this country
we are prone to think of the service to the borrower rather than to
the safety of the depositor. It has led us into a great deal of trouble.
It has led us into perhaps more bank failures than has been experienced in any country on the face of the earth, not only as to the
number but as to the liabilities involved. We must keep, therefore,
this principle of safety to the depositor foremost in mind. Unless
you can tell me that there is a way to bring the banks of the United
States into one system and especially into the Federal reserve system, I say that we are likely to have a continuance of bank failures
and that is going to bring in its trail disaster to community after
community, especially through our country districts.
Senator WALCOTT. You include in that statement, of course, your
State banks?
Mr. MITCHELL. Oh, State and national, and trust companies.
Senator NORBECK. By what system would you prevent repetition
of what happened to the Bank of the United States in New York?
Mr. MITCHELL.I think that is an isolated case. That is the first
big bank failure that we have had in a great many years. That is
distinctly a case of bad bank management and there is no way
that you can legislate against that.
Senator NORBECK. In other words, even when you get your branch
banks with your large units and your set-up, you are still liable to
have such a thing happen occasionally, are you not?
Rome C. Stephenson, Pres., American Bankers Asso.
Hearings — S. Res. 71
_
The AcTiNG CHAIRMAN. Now, in the first place, let me ask yoti\
if the American Bankers Association has taken any active interest
in the legislation that is pending?
Mr. STEPHENSON. Here?
The ACTING CHAIRMAN. Yes. I suppose you have a legislative
committee.
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Federal Reserve Bank of St. Louis
Mr. STEPHENSON. The American Bankers Association has a Federal legislative committee.
The ACTING CHAIRMAN. Yes; and they take quite an active interest,
do they?
Mr. STEPHENSON. Usually, they do. I do not know that the Federal legislative committee has taken very much activity in connection
with the pending legislation for the reason that the American Bankers Association has members from the national banks, the State
banks, the mutual saving banks, the trust companies, and private
banks, and it also has a great many unit banks, branch banks, chain
banks, and group banks, and it makes a very delicate situation for
the Federal legislative committee to take any action that might prejudice any of these various groups that belong to the American Bankers Association.
The ACTING CHAIRMAN. Do you know what percentage of your
member banks are national banks and that are members of the
Federal reserve?
Mr. STEPHENSON. That belong to the association?
The ACTING CHAIRMAN. Yes.
Mr. STEPHENSON. I think Mr. Mountjoy can give that figure.
,
Mr. MOUNTJOY. About 6,400.
The ACTING CHAIRMAN. Out of a total of how many members?
Mr. MOUNTJOY. Twenty thousand.
The ACTING CHAIRMAN. About a third?
Mr. STEPHENSON. Yes.
The ACTING CHAIRMAN. That means you have a tremendous influence in favor of State banks, naturally?
Mr. STEPHENSON. Yes, sir.
The ACTING CHAIRMAN. Let us discuss that phase of it for a
moment. You know, of course, the very bad record of bank failures
in past years—about 6,000 for 10 years and about 1,300 last year, and
most of them State banks, a large proportion of them outside of the
Federal reserve system. How far do you attribute the sore spots in
banking, or bad banking, if you please, to the troubles that we have
had in the last two years?
Mr. STEPHENSON. I think that a very large majority of the failures and closings of banks that we have had throughout the country
during the past 10 years has been attributable to the changes that
have been brought about through the building of hard-surfaced
roads and the transportation that has come through the automobile,
and that many of these closed banks have been in communities that
have likewise failed. For instance a bank would be located about 8
miles from the county seat. When they had a hard-surfaced road
leading from the smaller town to the county seat it would be possible to drive from that small town.to the county seat in 12 to 15
minutes, with the use of the automobile and the hard-surfaced roads,
and the farmer patrons of banks in the smaller communities would
go to the county seat. They would withdraw their deposits from the
small bank and take them to the county seat and that community
would fail. It would be absorbed by the larger town.
Mr. WiLms. How would you account.for the failures, for instance,
in a State like the State of West Virginia, which has few large towns,
and whose roads are—
1
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376
Rome C. Stephenson — Page 2
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
/Mr. STEPHENSON. I just want to complete my statement, Doctor
Willis. I have been told there are about 4,000 post offices that have
been closed in various small communities of the country, and in
many of these places the banks also closed.
Now, what is your question, Doctor Willis?
Mr. Wthus. How would you account for the high record of failures in rural States like West Virginia where there are few large
towns, and where the number of small banks is about as large as
ever while the failures, nevertheless, occurred without large transfer
of deposits?
Mr. STEPHENSON. In those regions there were possibly other reasons for it.
Mr. WILLIS. Such as
Mr. STEPHENSON. It might have been excessive loans on real
estate that depreciated in value, and it might have been their loans
to farmers, but I am not familiar with West Virginia.
Mr. Wm.'s. I used that only as an illustration.
Mr. STEPHENSON. But it is remarkable the large number of communities that have failed, and I get that information from a magazine article prepared by John Y. Beatty, the editor of the Bankers
Monthly, published by Rand & McNally. He compared the number
of communities that failed with the number of failed banks, and
in a great many of those communities where the post offices were
closed the bank failed also.
-Senator NORBECK. Did he say at that time whether there had been
an increase in deposits at the centers?
Mr. STEPHENSON. He did not say that.
Senator NORBECK. In other words, he did not indicate or attempt
to prove where the money went?
Mr. STEPHENSQN. No.
Senator NORBECK. Simply left the small communities?
Mr. STEPHENSON. Yes; left the small communities, and I have
observed in the community in which I live a number of banks in
those smaller communities, located within 15 or 20 minutes of South
Bend, being closed because of the fact a great many of their depositors draw their money out and go to the center where they have the
liard-surfaced roads.
Senator NORBECK. Admitting that is a factor, how would you
explain, for instance, the failures in North and South Dakota, where
it is shown that the shrinkage is in the total deposits rather than
due to transfer from the smaller to the large communities?
Mr. STEPHENSON. I think the trouble in South Dakota was on
account of the shrinkage there in the value of real estate and the
fact that the banks in those two States had made a great many loans
on farm lands and to farmers, which loans they were unable to meet
by reason of the failure of crops in those two States and the general
depression in the price of commodities.
Senator NORBECK. In the price of the commodities produced in
those States?
Mr. STEPHENSON. Yes, sir; and I think another contributing cause
to the failure of the banks in North and South Dakota was the
guarantee of deposits that they had in those States that caused
bankers who had been conservative prior to the enactment of the
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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
•
377
guarantee of deposits law to become much more liberal in their loans
and do things in connection with the banking business that were not
conservative, but they felt they should do in order to hold the
business.
Senator NORBECK. The proof of that might be gotten at by comparison with States where they did not have the guaranteed
deposits, might it not?
Mr. STEPHENSON. Yes.
Senator NORBECK. Has anyone attempted to bring out the figures
to prove that?
Mr. STEPHENSON. I think not, but I have talked with bankers in
North Dakota who have told me some of their experiences. For
instance, a banker had been in business for 25 years and had been
quite successful and was conservative. When the guarantee of
deposits law was enacted and new banks started in the community,
the new banks would go to the depositors of the old banks and
offer to make a commitment on loans of double the amount that
they had procured at the old banks, and they would reduce the rate
of interest on those loans, say. from 8 to 6 per cent, and then they
would also offer to pay a higher rate of interest on daily balances
of the customer.
Senator NORBECK. Did not exactly the same thing take place on
the east side of the river in Minnesota, where they have no guarantee of deposits law?
MT. STEPHENSON. I do not know.
Senator NORBECK. In other words, there was an increase of values
f commodities and the banks in that section began to increase
their loans.
Mr. STEPHENSON. I suppose they did. But I talked with a banker
at La Moure, N. Dak., and he attributed his failure largely to the
guarantee of deposits law.
Senator NORBECK. Did he say who asked for the guaranty of
deposits law?
Mr. STEPHENSON. NO.
Senator NORBECK. He did not say his group went to the legislature
and got it?
Mr. STEPHENSON. NO.
Senator NORBECK. And then they inserted a proviso that made it
a guaranty in name only, and went out and advertised that the State
was guaranteeing the deposits, which it was not really?
Mr. STEPHENSON. Well, after they had the experience, they blamed
it on the guaranty of deposits law.
Senator NORBECK. Surely. They always do that.
The AcrEvo CHAIRMAN. Was there any liability on the part of the
State?
Senator NORBECK. It was a trivial guaranty, but many bankers
took advantage of the law and advertised that the State was guaranteeing the deposits. In South Dakota they had a much more substantial fund behind the guaranty, but it was not substantial enough.
Mr. STEPHENSON. Senator Norbeck, after the guaranty of deposits
law was passed there were a great many more banks established.
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Senator NORBECK. But is not that also true of Minnesota where
there was no guaranty of deposits law? And in Iowa, also?
Mr. STEPHENSON. I have not been in those States. I just had an
opportunity to talk with some bankers in North Dakota.
Senator NORBECK. Well, the records are available. You know
there was an inflation in the number of banks that spread out all
over the States—not in the States that had a guaranty law only but
in all States?
Mr. STEPHENSON. That is correct.
Mr. WiLms. The farmer goes to the neighboring town, you say,
because it is easier for him to do that with automobile transportation.
He would not do that unless he thought the bank in the larger town
was stronger?
Mr. STEPHENSON. I think this is what happens: The farmer who
formerly patronized the small stores in the village, when he got the
hard-surface roads and found he could get to the larger town within
one-fourth of the time it used to take him to drive by horse, began
to do his trading in the larger place and naturally, going there to
trade, he would also take his banking business there.
Mr. WILLIS. Did it mean that the bankers in those places were
more liberal or considerate?
Mr. STEPHENSON. I do not think so, but it became much more convenient to do his banking business in the larger place.
Mr. WILLIS. I do not see how it would be more convenient.
Mr. STEPHENSON. They enjoy traveling—driving—to the larger
places where they could get a larger supply or a larger assortment
,of goods.
Mr. STEPHENSON. Yes. Judge Paton, the general counsel of the
American Bankers' Association, calls my attention to a, report that
was made by the economic policy commission at Cleveland, at the
Cleveland convention, in September, 1930, which I think will be
of considerable interest and may aid the committee to have this
report in, upon the subject of failed banks, and if you have no
objection, I shall be glad to read this to you.
The ACTING CHAIRMAN. We will be glad to have you do that.
Mr. STEPHENSON (reading):
The problem of bank failures has also been considered by the commission.
This Problem, unfortunately, ilt1S again been brought very much to the fore
this year after we thought we had reason to believe there had been a turn
for the better.
Official records show that in the year ended June 30, there were 758 bank
suspensions with deposit liabiliteg of $353,500,000. In point of numbers this
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381
is the highest mortality in any year since the war except 1924, when there
were 915 suspensions, and in 1927, when there were 831. In point of liabilities it was the highest, even exceeding the $297,900,000 total for 1924, and
$266,600,000 for 1927.
Following 1927 there was an encouraging drop in failures, there being but
484 in the year ending June 30, 1928, with liabilities of $158,700,000, and 551
in the year ending June 30, 1929, with $182,300,000 liabilities. The monthly
record for the year since then, ending June 30 last, shows marked rise both
in numbers and deposits, as follows:
Number
•
July, 1929
August
September
October
November
December
January, 1930
89
17
39
43
69
50
97
Number
Deposits
$70,400.000
7,900,000
10,200,000
14, MO,000
24,600,000
15,500,000
30,100,000
February
March, 1930
April
May
June
Total
Deposits
85 $33, 290,000
23, 700,000
75
95 34,300,000
52 18,600,000
71,000,000
67
758
353,500,000
During the last 10 years about 5,700 banks have suspended, mostly in the
,000—or
agricultural districts, tying up aggregate deposits of almost $2,000,000
000.
$1,931,000,
exact,
to be more
Senator NORBECK. During how long a time?
Mr. STEPHENSON. Ten years.
The bank-failure problem is chiefly a small rural bank problem.
Senator NORBECK. Whose report is that you are reading? ComMr. STEPHENSON. This is the report of the Economic Policy
mission.
Senator NORBECK. To the American Bankers' Association?
Mr. STEPHENSON. To the American Bankers' Association; yes, sir.
Senator NORBECK. And that last statement—will you read that
again?
Mr. STEPHENSON (reading):
bank problem.
The bank-failure problem is chiefly a small rural
•
Senator NORBECK. Well, that means, at least, it is chiefly a rural
problem?
Mr. STEPHENSON. Yes.
Senator NORBECK. And chiefly a problem of the small banks in
rural communities, is that what it means?
Mr. STEPHENSON. Yes.
Senator NORBECK. Well, I have no disagreement with that conclusion.
Mr. STEPHENSON (reading):
Official studies covering a recent 8-year period show that more than fourfifths of all the banks in the United States are situated in small towns with
average capital of about $44,000, and it is among these small banks that
most of the failures have occurred. Seventy-one per cent of the suspended
88
banks, both National and State, were capitalized below $50,000 each and
occurred
per cent under $100,000, but by far the largest number of failures
ng 63 per cent
among banks having capital of $25,000 or less, these constituti
populations
of the failures. Over 40 per cent were situated in places having and 1,000
less than 500 persons; 20 per cent failed in towns with between 500
population;
Senator NORBECK. Are you going to throw any light on why they
limit this report to a 10-year period?
Mr. STEPHENSON. That is about the time when they began to have
the failures. Before that they did not have the failures so much. •
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Senator NORBECK. Before that we did not have the failures in the
•ural communities?
Mr. STEPHENSON. No. [Continues reading:]
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Twenty per cent in towns of from 1,000 to 2,500, and 12 per cent occurred in
towns from 2,500 to 10,000 population. In short, about 92 per cent of the
failures were in places having less than 10,000 population.
The failures in the present period of increases, which are general although
most acute in the agricultural States, again emphasizes that the situation
presents preponderantly a small-bank and small-town problem.
In 1927 at the Houston convention of the association the economic policy
commission presented an exhaustive report on the question of bank failures
and their causes in which its main conclusions in summary were as follows:
(1) Adverse conditions precipitated numerous failures of financially weak
and unskillfully managed banks.
(2) An excessive number of banks is the most potent single cause of failure.
(3) The situation can he corrected in part by increased capital requirements
and more completely by the limitation of new charters to the needs of the
community for additional banks.
(4) In view of the heavy legal and moral responsibilities of bank direciors,
closer supervision by them is desirable in their own interest and would serve to
correct much that leads to insolvency.
(5) While additional restrictive legislation covering loans and investments
Is not favored, the more immediate enforcement of existing statutes is approved.
(6) The clearing-house examination system has been in general highly advantageous and its further growth is to be anticipated.
(7) As a plan feasible for immediate and general adoption, the organization
of local regional associations of banks for the purpose of supporting and securing the more effective use of the existing system of examinations is strongly
recommended.
We believe those conclusions are still applicable. Moreover, there is another
economic factor which aggravates the problems of the small country bank to a
greater degree than ever before and therefore calls for special emphasis at
this time. That is the constant shift of business from the smaller to the larger
centers, thus leaving many country banks without sufficient economic support
and making more difficult than ever the struggle of these banks to show sufficient
earnings to keep them in a sound and healthy condition.
It is axiomatic that unless a bank is profitable it is not safe for itself and
It is not safe for its community. A bank that is making satisfactory earnings can absorb the inevitable losses that occur in normal business. A hank
wtth inadequate earnings can not meet these normal contingencies.
The ACTING CHAIRMAN. What factors enter into that other than
'the one you described—the hard-surfaced roads and the accessibility of the large communities? There must be very fundamental
factors governing that, I should think. You spoke, for instance,
of inflated land values being a factor.
Mr. STEPHENSON. I happen to know something about—
The ACTING CHAIRMAN. Would we have had these wholesale
failures of rural banks if commodity prices had stayed up? In
other words, does not the land value depend largely on commodity
values?
Mr. STEPHENSON. I think if the value of real estate had remained
up and commodity prices also, we would not have had the serious
trouble we did have, but in some communities—take, for instance,
Florida—there were a number of banks that failed and the confidence of the public was severely shaken and the result was that in
that State a great deal of the money was drawn out of the banks
anu went into safe-deposit boxes. I talked with a number of bankers
in Florida and after their land values went down, they were unable,
one season, to ship their fruit out of that State and there was a sort
of shaking of confidence and the money was withdrawn, and that
was one of the causes of the failure of a great many of the banks
there. Of course, it resulted from the depreciation in the value .of
real estate and depreciation in the prices for which their commodities
sold.
Rome C. Stephenson, Pres., American Bankers Asso.
Hearings — S. Res'. 71
--gc_,-------.----, /,
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The AcrING CHAIRMAN. Is there anything that we can do here?
One of the witnesses said that it is the lax laws governing State
banks, putting too much of a temptation on the national banks. Take
the affiliates, for instance, which have been abused. The abuse largely
comes because of the competition of State banks, which can lend
money more freely and with insufficient collateral, perhaps. How
can we stop that without making the banking system of the United
States too rigid? We all agree that it should be kept flexible as in
England. How can we, without making it too flexible, prevent the
teriffic expansions, such as occurred in Florida, and occurred in some
parts of the Middle West, following the war? Some,of course, have
occurred in New York City, brought on by the expansion of the stock
market. How can that be done? If we could check that in some way,
would not we materially help prevent the recurrence of a panic? 1
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Mr. STEPHENSON. There are two elements that I think would be
helpful one would be to require banks to have a larger capital and
not allow banks to open until they had a fair, adequate capital for
the needs of the community.
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The Amigo CHAIRMAN. Of course, the rural community is in a
class by itself with reference to banking. That is one thing certain,
of course.
Mr. STEPHENSON. Yes.
The ACTING CHAIRMAN. And the rural community is seriously
handicapped on that account?
Mr. STEPHENSON. Yes. I want to give an illustration. The
county seat of Fulton County, in my State, is Rochester, and 15
miles away is the village of Kewanna. Plymouth is the county
seat of Marshall, and Argos is a village about 8 miles away from
Plymouth. Before they had the hard-surfaced roads, both of those
towns had a fine business. They had two banks in each of them
and they had operated for years and made money and paid dividends and the towns were both in very fine agricultural communities.
When they got these fine hard-surfaced roads between Kewanna and
Rochester and Argos and Plymouth, the citizens in the locality of
Argos transferred their business to Plymouth and the people in and
around Kewanna transferred their business to Rochester. The
result was that all four banks have been compelled to close, and they
have been trying, for the past two years, to get sonic one to start a
banking business in those two towns, but it is believed, with their
fine roads and accessibility to the county seats, that banks in those
places could not live.
The ACTING CHAIRMAN. Would you give, as an additional reason
for it, the decrease in the price of agricultural coimuodities?
Mr. STEPHENSON. Yes; the farmers who had borrowed money from
those banks, on account of the reduction in the prices of their commodities, many of them have not been able to pay their notes and
the business of the banks for the last few years has not been
profitable.
f - - Senator NORBECK. There -Avis an interesting statement in regard to
( bank failures in 1928 and 1929. I believe you said there were about
1 $150,000,000 for each of those two years.
Mr. STEPHENSON (reading):
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Following 1927 there was an encouraging drop in failures, there being
hut 454
in the year ending June 30, 1928, with liabilities of
$158,700,000, and 551 in the
year ending June 30, 1929, with $182,300,000 liabilities.
Senator NORBECK. Then, we have had two bank failures this year
that, taken together, brought greater losses than all the bank failures
in the United States for the two years you mentioned?
Mr. STEPHENSON. I think SO.
Senator NORBECK. The so-called Bank of the United States, with
$200,000,000, and $450,000,000 in the failure shortly afterwards in
Philadelphia.
Mr. STEPHENSON. Yes; the Bankers Trust Co.
Mr. WILLIS. That makes it a city problem as well as a rural
problem?
Mr. STEPHENSON. Yes.
Oscar Tells, Chairman, First National Bank, Birmingham, Ala.
Hearings — S. Res. 71
The CHAIRMAN. Has there been a disproportionate number of
failures among southern banks as contrasted with banks in other
sections of the country?
Mr. WELLS. I rather think there has been.
The CHAIRMAN. Why?
Mr. WELLS. I think that is primarily true, due to the fact that
a great many southern banks in the agricultural sections especially,
had relied solely upon seasonal liquidation for liquidness among
their assets; and when that fell down this last year they were not
able to go on.
The IAIRMAN. On account of the drought?
Mr. WELLS. Well, drought and the entire set of circumstances surrounding the production and marketing of cotton, which was sold,
of course, very much lower than the amount of money invested in
the crop by the producer, plus the carry-over of other years.
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Prof. Marcus Nadler, of N.Y. Univ.
Hearings — S. Res. 71
/9.3
Professor NADLER. Mr. Chairman, if you will permit me, I hav
prepared a brief statement covering some of the more important
points.
I have divided my analysis into two parts—bank failures and
security loans.
Aside from factors mentioned by other witnesses, such as lack
of diversification, improvement in transportation facilities, smallness of capital, bank failures are caused by lack of liquidity—
resulting partly from too large loans on securities and mortgages
and the holding of less liquid investments. This situation is particularly dangerous in times of falling commodity prices, security
prices, and a slow real-estate market. Security loans I intend to
take up later. The liquidity of small banks and of savings banks
would greatly increase if there were a central mortgage bank for
urban real estate which could take mortgages held by banks and
savings banks, and on the basis of these issue its own bonds. Thi
would create a ready market for urban mortgages and would i
times of stress enable the banks, commercial as well as savings
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to convert their mortgages into cash. Such an institution, in order\\
to accommodate savings banks, might also be authorized to discount
for the latter prime securities as well as mortgages.
In other words, it seems to me that the establishment of a mortgage bank for urban real estate would help greatly the small banks. \
Secondly, I feel, Mr. Chairman, that bank failures are, to a large
extent, caused by lack of responsibility of directors and officers. A
law which would hold bank directors and officers of a bank a priori
responsible for bank failures would, it seems to me, result in more
conservative banking.
Another thing, Mr. Chairman, is that the double liability clause
attached to bank stocks has in recent years lost a great deal of its
effectiveness. At the present a large part of these stocks is held
either by affiliates or by holding companies, and when these banks
fail the holding company fails or the affiliate companies fail, and the
double liability clause becomes practically worthless. A law forcing
corporations directly or indirectly interested in the management of
the bank or closely affiliated with the band, holding the stocks of
such a bank, to set up a reserve against their double liability would
remedy the situation. I am firmly convinced that any holding company or affiliate which holds the stock of its own bank should set up
a reserve bank specified by the Comptroller of the Currency against
this double liability.
Another remedy would be the segregation of assets. Bank failures
are particularly disastrous to savings depositors. Segregation of
assets and investments of the savings deposits into securities or assets
approved for savings banks would protect savings depositors. Distinction, however, should be made between, first, actual time deposits and, second, savings or thrift accounts such as are evidenced
by savings pass books. In my opinion, only the latter should be
segregated. To include all kinds of time deposits may injure legitimate bank business.
H. Pushae Williams, Chairman of the
Executive Committee of the N.Y. Tie & Mortgage Co.
Hearings — S. Res. 71
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The ACTING CHAIRMAN. Why.' did the real-estate panic in Florida
in 1926 and 1927 result in so many bank failures in spite of and
in view of the number of limitations on real-estate transactions?
Mr. WILLIAMS. On account of the deposits. One bank in particular—and I think that is the Bank of Bay Biscayne—had $66,000,000 in deposits, and when the slump came everybody withdrew
their deposits. They were very careful not to go into the real-estate
loans and careful not to take real-estate mortgages, but their liquid
assets were quickly absorbed by the withdrawal of funds.
Senator TOWNSEND. Was not the fact that they had a great many
chain banks down there responsible for the great number of failures?
Mr. WILLIAMS. I do not know whether a chain bank would make
any difference. The people were just drawing out their accounts
everywhere. If they were separate-unit banks, the accounts would
have been withdrawn anyway.
Col. Allan M. Pope, Executive Vice Pres. of
First National Old Colony Corporation
Hearings — S. Fes. 71
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I understand that I am expected to touch upon the subject of
so-called lombard loans, or loans by a central bank against securities
other than Government bonds, acceptances, and commercial paper as
, collateral. I am under the impression that this matter might well
be carefully considered, particularly as a means by which in this
country a Federal reserve bank might, under conditions of stress,
make a loan to a bank unable to provide rediscountable paper and
then at a rate several per cent above the rediscount rate. It would
seem that in normal times there would be no necessity for such loans
as, for example, are made under certain conditions by the Bank
N
of England. I believe an examination would show that in recent
'months some bank failures would have been legitimately averted had
it been possible to have recourse to this method. In case lombard
loans should be authorized, a provision requiring the Federal
Reserve Board to pass on the merits of each case might provide
a proper safeguard.
1
J. Cameron Thomson, V. P., Northwest Bancorporation, Minneapolis
Hearings — S. Res. 71
/93/
Mr. THomsoN. Mr. Chairman, the two corporations, the Northwest
Bancorporation and the First Bank Stock Corporation, represent,
in their key banks, the oldest and the largest banks in the northwestern territory. It has been our feeling that we have met a situation that was peculiar to our territory, and, in the main, as far as
the Northwest Bancorporation is concerned, what I say will be our
experience in meeting that situation. If that is of value to your
committee, we are very glad to give it, and we appreciate the opportunity of coming here.
I do not want to duplicate what was said in the House hearings,
but I want to give just two or three basic facts as to the background
in our territory which resulted in the formation of the Northwest
Bancorporation. You gentlemen realize that, in our territory, the
ninth Federal reserve district particularly, we have had over 20 per
cent of the number of bank failures in the last 10 years and over
12 per cent in amount involved.
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Senator TOWNSEND. Of the total amount?
Mr. THomsoN. Yes—in both cases, more than our share of bank
failures. Those failures occurred mainly in banks of under $25,000
capital and, of course, in banks in towns or cities of less than 10,000
population.
There has been a lack of confidence in our banking situation, and
one illustration has been the fact that the increase in postal savings
deposits in the last 10 years in the four States, Minnesota, North
Dakota, South Dakota, and Montana was in excess of $18,000,000,
or more than the gain in postal savings deposits in the whole United
States outside those States.
Taking a particular case, Milbank, S. Dak. The Milbank postal
savings deposits had been going up. We started a bank there,
People had confidence in the institution we put in, and money started
flowing back again to that bank.
The reasons for the bank failures have been pretty well stated,
and two officials of the Federal Reserve Bank of Minneapolis have
investigated the situation very thoroughly and have recently published a booklet on the subject. In 1920 there was and even to-day
we still have, an overbanked condition in that territory. The four
States—Minnesota, South Dakota, North Dakota, and Montana—had
one bank to approximately every 1,200 people in 1920, while New
England had one bank to every 7,200 people. To-day those four
States have one bank to approximately every 2,200 people—far more
banks in proportion to population than other sections of the country
with more- wealth than we have. They had a very large percentage
of small banks, with small capital in small towns.
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/ Senator BULKLEY. Do you know your per capita wealth?
/ Mr. THOMSON. I can give it to you.
Senator BIILKLEY. That would show what your banking resource,
would be.
Mr. THOMSON. I have the total deposits and the per capita wealth
in my files. May I give this to you a little later
Senator &ILKLEY. There is no hurry. I should like to compare
them with some of the Eastern States.
Mr. THOMSON. The per capita individual deposits in 10 States,
roughly, in our territory, were, in 1930, $265 as compared with $411
per capita in the United States as a whole. As compared with
1920, we had $320 per capita deposits and, in the United States as
a whole,$306. There has been a tremendous change.
Senator TOWNSEND. $265 to $411; is that it
Mr. THOMSON. That is right. On the other hand, taking the per
capita savings deposits as of June 30, 1930, we had in our section
$156 per capita and the United States as a whole had $232.
In postal savings we had $3.41 per capita as compared with $1.42
for the United States.
The CHAIRMAN. What is that again?
Mr. THOMSON. We had $3.41 as compared with $1.42 for the
United States as a whole.
Not only did we have an overbanked condition but we probably
suffered more from changes that have been going on in the banking
business than some other sections. The entrance of Government
agencies into the mortgage business, of course, affected those banks
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relatively more than in other sections. Ours was a new territory
being developed, with new settlers and more mortgages were made
and those banks, in many cases, got a good portion of their earnings
from mortgages and other business incidental to mortgages. The
Government entering into that business took away some of the profits.
Those banks lost the exchange, and the exchange was,a relatively
greater factor among the smaller banks than in other sections of the
country. The cost of collection in the ninth Federal reserve district has been higher than in most sections of the country.
The CHAIRMAN. It has been so low in all of them, however, they
could not compute the cost in Washington.
Mr. THomsoic. The Federal reserve official survey calls attention
to the fact that inexperience and lack of training among the officers
of these banks, and particularly their inability to sense the trend of
changing economic conditions, were vital factors in the situation.
The CHAIRMAN. Did not undercapitalization have a great deal to
do with most of your failures out there?
Mr. THomsoisr. Unquestionably; because in the midst of a changing
condition, if there had been a larger capital requirement, they would
not have been organized in the first place; if there had been a larger
capital requirement with fewer banks, they would have been in a
better position to withstand the losses necessarily incident to that
changing condition.
We have also suffered from an overproduction of our basic agricultural commodities, which has resulted in a tremendous drop in
income.
c
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/- Mr. THomsorr. I should like to talk with you about the dairy busi/ness, but I think you want me to get through and get out.
1
The CHAIRMAN. You have not given us any trouble so far.
Mr. THOMSON. Along with that situation, or rather as a result of
it, individual deposits in the banks of the four States, Minnesota,
North Dakota, South Dakota, and Montana, decreased in the 10-year
period from $1,443,000,000 to $1,151,000,000.
Senator NORBECK. What decreased?
Mr. THOMSON. The individual deposits in the four States.
Senator NORBECH. And the figures are what?
Mr. THOMSON. Decreased from $1,443,000,000 to $1,151,000,000, a
decrease of $292,000,000, or 20 per cent, while in the United States
as a whole the individual deposits increased from $32,000,000,000 to
$52,000,000,000, or an increase of 62 per cent.
As reflecting what those banks had to go through, other real
estate, representing the accumulations of slow assets, increased from
June, 1918, when there was $9,000,000, to $45,000,000 in September,
1925, and in March, 1930, they stood at $20,000,000.
Senator TOWNSEND. You mean by other real estate" realty held
by banks?
Mr. THOMSON. Accumulated as the result of having to take over
real estate which had been acquired as result of unpaid loans or represented direct investments by the banks.
Those are the results of the change in that territory from a pioneer country to a more settled agricultural country, restricted immigration, and this changing economic condition, and also, to some
extent, to a change in the transportation methods which interfered
with the progress of the small towns. It was that situation and
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a very strong feeling on the part of our own institution, the Northwestern National Bank of Minneapolis, that made us decide that
the banks themselves in that territory should do something to right
the situation and provide a more stabilized banking system.
I should just like to quote an outside statement on that point.
This is entitled "Causes of Bank Failures in the Northwestern
States," by Curtis L. Mosher, assistant Federal reserve agent in the
ninth district, and The Problems of Small Banks in that territory
by F. M. Bailey, assistant Federal reserve agent. They state that:
The recent and rapid development of the group form of banking was undoubtedly greatly accelerated by the epidemic of bank failures herein described, but group banking or some other development of similar character
would undoubtedly have resulted from the necessity of creating, in the Northwest, stronger, safer, and more dependable institutions than many of the banks
which formerly existed.
That investigation was made independently and represents the
information that came to the Federal reserve bank in Minneapolis,
and that is their judgment,that something like this had to come.
It was our conviction that the banks that represented the business
interests of that territory had the responsibility for trying to meet
that situation.
41.
J. Cameron Thomson — Page 4
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Now, along with that, as Mr. Decker pointed out in the House
hearings, some of the banks in that section had offers to sell out.to
eastern interests. The trust business was developing as our section
increased in wealth, but people were not disposed, even though they
wanted trust facilities, to put their trust funds in institutions when
they could not feel reasonably secure in their belief in their safety
and permanency. Those institutions were generally small. They
faced the problem of investing the large proportion of their funds
in bonds and securities. Generally speaking, they did not have the
information or the facilities to enable them to invest in that type
of security as safely as they should have been able to.
There was a growing demand on the part of our own customers
and on the part of national institutions operating in that territory
to do business along regional lines, particularly because of the many
bank failures in that section.
We also had seen many of our industries in our own States going
east for financing, and we felt that we should put ourselves in a
position to finance more of those industries and we had in mind
that if we could set up some system of banking that would provide
the benefits of a research bureau—if you want to put it that way—
a centralized supervising group, so that these banks could keep better
in touch with the trend of the times, that would provide for an exchange of ideas and for better methods of operation, that would
enable these banks, out of their common experience, to determine
on how they would make more money—if we could do that, that
we would be doing a constructive thing for that territory.- I say we
wanted to help those banks make more money, because a bank that
can not make money certainly can not last. If it can not make
money, it has no right to be in business; and with the fluctuations
in that territory unless banks can make money to take care of losses
they can not remain in business.
J. Cameron Thomson — Page 4
9,3/
Senator NORBECK. I am going to ask you to put that comparison
in the record—the comparison of the ninth Federal reserve district
with the whole country as to banking capital compared with population—because it will clear that matter up. The point I am making
is this: That small, scattered communities may need a number of
small banks. whereas a large community may need only one or two
big banks. and you can not prove the overabundance of banks by
numbers but also you must go into the capital invested.
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Now, speaking of this condition in the Northwest2 I notice you
have limited yourself to the last 10 years in your testimony. What
was the bank situation in the 10 previous years?
Mr. THomsoN. Taking the 10 previous years, Senator, of course
the deposits had incivased. I did not give those figures
Senator NORBECK. What was the general banking condition in the
period 1910 to 1920?
Mr. THomsoN. Well, part of that time it was fiir, a part of the
time good, and part of the time not so good.
Senator NoimEcK. How many failures IS you have in that period
as compared with the last period ?
Mr. THomsoN. I can give you them, but, I do not recall now.
Senator NORBECK. I recall. I recall that most of the failures
happened after 1920.
Mr. THomsoN. I have not the figures, Senator.
Senator NonsEcx. Is na this the fact: That the general banking
situation for 20 or 30 years preceding the agricultural deflation in
1920 was pretty good in the Northwest; that the average bank was
solvent; that you would take the draft of the average bank without
suspicion ?
Mr. THomsoN. People IS ; yes. There is no question about that.
Senator NORBECK. This condition that you are speaking about is a
new condition that has come on in the last 10 years?
Mr. THomsoN. I think that is true; but part of it is due to a condition that originated before that.
Senator NORBECK. You have not submitthd any figures yet to prove
your point about the overbanking situation. You are speaking
about the number of banks and not their size. There may be less
bank capital per 100,000 population in the Northwest than anywhere
else for all I know and any member of this committee knows this
morning. But you are ping to put that in the record—the ninth
Federal reserve district as compared with the rest of the country.
NOW,then, do you attribute this economic condition to bad banking?
Mr. THomsoN. No; I was very careful not to say that.
'Senator NORBECK. I know you IS na say it. It was just inferred.
Mr. THomsoN. No• I did not imply that.
Senator NoRBEcK. 'Maybe you did not intentionally.
Mr. THomsoN. I made the frank statement that there were a number of factors, including changed economic conditions and the overbanked condition, which is generally conceded by the banking superintendents in our territory, and other factors that resulted in that
situation.
Senator NORBECK. Suppose, for the sake of argument, that we
admit the country was overbanked. Can you tell me any line
in the West that is not overdone ? Are there too many stores or
hotels?
Mr. THomsoN. It would be hard to made a general statement that
all lines of business have had the proportion of failures that banks
have.
Senator NoRBEcK. IS it not a fact the mercantile business is also
I'll.''...rchant has trouble in making a profit ?
Mr. THOMSON. I am perfectly willing to take your own statement
on that. I do not want 0 make general statements about all these
lines of business.
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Elmer E. Adams, Prez., First Nat. Bank of Fergus Falls, Minn.
Hearings - S. Res. 71
727.----4 /93 /
ea short statement here which I think will give
Mr. ADAMS. I havall the suggestions I have to make.
I reside at Fergus Falls, Otter Tail County, Minn. Fergus Falls is ,
a city of about 7,000 and is the county seat of Otter Tail County. '
Otter Tail County is a representative agricultural county of Minnesota. The county is entirely given up to agriculture and the income
of the people residing there is almost wholly from the sale of farm
products, principally milk, poultry, hogs, livestock, cattle, and sheep.
Almost no grain is marketed at the elevators, being fed on the farms.
It is, perhaps, as prosperous as any agricultural county in the State. '
It had a steady growth, and farm values increased rather slowly
until the invasion of land speculators from the South between 1915
and 1920.
The First National Bank of Fergus Falls, of which I have been
president for 17 years, is the oldest national bank between the Twin
Cities and the Pacific coast. It has been in continuous operation for
I
59 years, under the same name, not even the preposition being
I
changed. During the time it has been in operation more than 50
banks have been started in the territory which it serves. There are
now about 30 banks in the territory. In some of the small villages
there have been three banks operating at the same time and there
are several villages of less than 500 people which now have two
banks. It was unquestionably a serious error when the National
Government reduced the necessary capital from $50,000 to $25,000
for a national bank. Until recently, State banks with a capital of
$10,000 were permitted, but the law has been changed so it is now
necessary to have $20,000 capital, unless the securities commission
can be convinced that a smaller capital is adequate.
In the past eight years nine banks have failed in our county. No
national bank has failed. While the failure of these nine banks was
due in part to unwise loans during the land-boom period, there
was dishonesty in nearly every one, and 10 officials of the banks
which failed in the Fergus Falls area were sent to the penitentiary.
It may be interesting to know that 85 bank officials and employees
were sentenced to the penitentiary during the incumbency of superintendent A. J. Veigel, who has just retired as commissioner of
banks after 10 years of service. Practically every one of these
little banks which failed was in the farm-land game. For their
profits they took second and third mortgages, and these second and
/third mortgages drifted into the bank, and when they once had
/ this paper on their hands they thought it was necessary to make
' advances to help the occupants of the land carry on. Sometimes
they needed more money to pay interest and other times to buy
additional machinery or twine with which to bind their grain, and
, the banks, in trying to save what they already had loaned, followed
\
s
up.
, A crop failure or an improper diversion of the proceeds of the
rops soon put loans of this character into the frozen class.
, These small banks not only borrowed when they ought not have
'done so, but they had no secondary reserve of any kind which could
be cashed when people wanted their deposits. If their stockholders
had been substantial men of the community who had had any funds
with which to engage in the banking business, there would have been
some chance of relief, but about the first intimation the dierctors
and stockholders had of the condition of their bank was when they
were called upon to mortgage their own property and raise funds
in hopes that the bank might be saved.
I do not believe it is any exaggeration to say that in 90 per
cent of the country banks the directors have no knowledge of the
condition of their banks. Recently there have been many lawsuits
in which directors have been sued, not only for receiving funds in
their institutions after they were insolvent, but for their failure to
use proper diligence in guarding the funds which were attached to
the institution through their good names.
Elmer E. Adams, Page 2
/
During the time when these banks have been failing in our section, conditions in institutions in the same territory have apparently
been very prosperous. I am president of two State banks in villages adjacent to the county seat. The territory which they serve
is practically the same as where the banks have failed. These banks
started with a capital of $10,000. The Bank at Underwood has built
up a surplus of $20,000 and undivided profits of $10,000, and during
all the time has paid good dividends. The bank at Dalton has earned
a surplus of $10,000 and $5,000 in undivided profits and never missed
a dividend. In spite of the fact that these two banks adequately
serve the community, charters were granted in both places and
farmers' State banks were started. Underwood is a village of 300
people and Dalton a village of 150, and these two towns are within
12 miles of the county seat, so it is perfectly apparent that by granting these additional charters the field is overfilled.
While a large number of the banks started in the Northwest in
the last 15 years were started by farmers who wished to engage in
the banking business, a great many were started by holding companies operating out of the large cities. These banks operated from
a central point and were no more successful than those operated
by the farmers. For a while their earnings were large, due to the
making of farm loans which were sold for the commission. Many
small banks were broken in the Northwest by being compelled to
c_arry the paper furnished from the central office.
This committee may be interested in knowing the effect which the
/ development of the group banks has had upon the unit or homeowned banks. The situation in Fergus Falls is a representative ease.
There are four banks in the city, two natitonal and two State. One
of the national banks is owned by the Northwestern group. The
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other three are owned by local stockholders. There is a group bank
at Rothsay, 20 miles to the north, at Wahpeton, N. Dak., 29 miles
to the northwest, at Fargo and Moorhead. 30 miles to the northwest,
and at Alexandria. 50 miles to the south. I do not think that there
has been any change in the business in the banks of Fergus Falls
due to the acquirin! of a local bank by a group, and there has been
very little growth due to new business. If the local banks have lost
to the hain banks, or the chain bank has lost to the others, it is
negligible.
When the holding companies first invaded local territory and
advertised their large resources, the home-owned banks were more
or less disturbed, but. there is fully as much advantage in the fact
that a bank is home owned and home controlled as there is in being;
connected with an institution with its large resources owned elsewhere.
My conclusion is that no unit bank which is properly conducted
need fear the presence of a group-owned bank. If the authorities,
State and national, will not grant charters to the groups to enter
loc.alities already amply supplied, there is no reason why the localowned bank can not succeed, if it is managed properly.
The two types of banks have joined the groups in the Northwest.
In many places there were good banks operated by men who had
long been in the service and they were glad to turn their banks over
to a responsible group and be relieved of the responsibility of these
trying times. There is another type, where the banks have become
involved and were unable to put themselves in proper condition, and
they were very glad to avail themselves of the opportunity to be
taken over.
I.
Elmer E. Adams — Page 3
-727
/
It has been surprising that the failure of so many banks has not
caused a more widespread distrust. An open run on the banks of
the Northwest has been very rare. The shrinkage in deposits has
been due to evaporation and lack of earning power of the people
of the community. It is perhaps true that in some instances the
banks of the groups have drawn some savings deposits from near-by
points, but the main cause of the decrease in deposits has been due
to the decline in the prices of products and the constant outgo of
funds for farm machinery, automobiles, radios, and similar things
which have been a constant drain on the communities.
There are a large number of excess money banks in the territory
northwest of the Twin Cities. The.banks with which I am connected
have always been heavy buyers of outside paper in order to keep
their funds invested. Only once or twice in a half century has it
been necessary for our bank to borrow, either from the Federal
reserve bank or from our correspondent banks, and then only for_j
a very brief period.
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C. H. March, Federal Trade Commission
Hearings — S. Res. 71
717
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/r 3 7
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Mr. MARCH. Well, I am a little bit like Mr. Bremer. I got into
the banking business largely to save a bank. I was interested in a
great many banks before, but lately I have been interested to save
a bank, and the reason of the failures and closings of most banks
is the failure of the communities.
Senator NORBECK. In other words, the change in economic conditions was responsible for much of it?
Mr. MARCH. Yes. The banks I have been interested in have been
in the farming communities, and of course when the deflation came
in and the farmer failed, the bank could not collect its money, and
that is what caused the closing of most of the banks. Had it not been
for that I do not think you would have had much occasion for these
two chain bank systems.
Senator NORBECK. But you attribute the failure of the banks—
Mr. MARCH. I attribute the failure to the condition of the agriculof
tural country. For instance, a farmer would bring in 100 bushels
in
bring
will
he
Now
1912.
wheat and buy a binder here in 1910 and
earn
to
ability
farmer's
the
fact,
of
matter
over 300 bushels. As a
these
has been reduced so greatly that it has caused the closing of worth
be
would
they
and
cows
10
banks. A farmer would have
$1,000 and they dropped down so they were worth $40, and of course
the banks could not collect their loans.
Senator NORBECK. It was not only the drop in the price oftofarm
had buy.
commodities it was an increase in everything the farmer
he
everything
and
up
went
buy
to
had
he
g
Mr. MARCH. Everythin
had to sell went down. That was really the reason for the closing
of the banks.
in
Senator NORBECK. Otherwise you feel most of the small banks
that section would have gone on ?
Mr. MARCH. I think with very few exceptions. I have lived in
central Minnesota, one of the best agricultural communities in the
country, and if it had not been for the deflation of the farmers
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Senator NORBECK. There would not have been any bank trouble?
Mr. MARCH. That is all and had it not been for the bank trouble
we would not—
Senator NORBECK. We would not have an argument over whether
it should be group, chain, or branch banking?
Mr. MARCH. Not at all. That is what caused these chains and
groups to come into existence. Since we went into the Northwestern
Corporation our local directors have handled that bank just the same
as they handled it before, and it has been very satisfactory.
Senator NORBECK. You consider the present way of handling these
banks through the group as a pretty safe and satisfactory way for the
community in which the banks are located?
Mr. MARCH. I think SO.
Hearings - S. Fes. 71
Appendix
4_0 o../
/73/)
See Memorandum on Country Banking
(Furnished to Committee by
Robert Warren, New York City)
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Hearings — S. Fes. 71
Appendix
"The Federal Reserve System"
Report of Banking and Currency Committee (1929)
of the Chamber of Commerce of the United States.
sk,
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VIII. RELATIONSHIPS WITH MEMBER BANKS
(In an auxiliary statement upon The Rediscount Operations of the Reserve
Banks, No. I, and another auxiliary statement upon Membership of the Reserve
System, No. VII, some of the matters referred to in this section are considered
more fully.)
While the establishment of the reserve banks has enormously improved our
banking system as a whole, it has accomplished little in the way a reducing
the number of bank failures. There has been a discreditably large number
of member as well as nonmember bank failures in the recent past. These
failures are in part a result of the inflationary methods of war finance, for
which the reserve banks were not responsible, and in part the outcome of
the acute agricultural depression which seems to have been due fundamentally
to its overdevelopment and maladjustment throughout the world. The large
number of failures is also to be attributed to an excessive number of banks
in the agricultural sections of the country—many of them of little financial
strength and managed by unskilled officers. The ability of management to
avoid failure is evidenced by the fact that conservatively operated banks,
situated in rural communities of strong banking competition, succeeded in
weathering the storm developed by the inflation.
As between member and nonmember banks, the only essential change
affected by the establishment of the Federal reserve system was to increase
the borrowing power of the member banks. Limitations on the types of assets
available for rediscount at reserve banks have not served to confine borrowings
within safe limits. They have simply served to transfer to the reserve banks
a portion of the more liquid assets of the borrowing banks. Unless the added
loans made by the member bank are as good as the paper discounted at the
reserve bank, the position of the borrowing bank is obviously changed for
the worse. Proper consideration of the interests of the depositors of member
banks places upon the reserve banks responsibility for taking account of the
general condition and character of the management of member banks, as
well as the situation in the locality in which the bank is operating, when
extending any appreciable accommodation by way of rediscount.
There are difficulties to be encountered in the execution of such a policy.
The member bank ordinarily requests reserve credit in order to restore its
reserve balance which has been depleted as a result of all its operations and
the use its depositors are making of their balances. The reserve bank is
the principal channel through which checks drawn on its members are
presented for payment. These clearing operations deplete the mienibers'
reserves. To make up such deficiencies, the reserve bank is inclined, naturally,
when a member presents good paper, to grant the accommodation requested.
The reserve banks can not, without notice, establish new and rigid practices
in the extension of credit to member banks. On the other hand, if it is
made clear to all members that the character of their management and their
general condition will be the primary factors in the extension of accommodation, member banks will conduct their affairs with reference to these requirements. By this means the reserve banks can come to exert a steady and
powerful influence in the direction of the maintenance of sound banking
practices on the part of member banks.
REDISCOUNTING PAPER OF A FAILING BANK
Most bank failures are the outcome of unsound banking policies followed for
months and even years. There is ample time in most instances for corrective
measures to be effectively applied and it is believed that the reserve banks are
in position to exert a large influence in this direction as an incident of their
rediscounting relations with borrowing banks.
Another difficulty of basing rediscount advances upon the condition of the
applying bank has grown out of this country's limited experience in the field
of central banking. Undoubtedly too much has been expected of the reserve
banks with regard to servicing distressed banks in emergency situations.
When an emergency is acute and general, it will no doubt be incumbent upon
the reserve banks to offer their credit more liberally. But member banks in
their relations with reserve banks should come to understand that the avoidance of a strained condition is much more important normally than the
alleviation of strain after the situation has become acute. In so far as the
reserve banks have been obliged to resort to restrictive measures in order to
maintain and improve member bank solvency, their activities should command
support from their members. If permitted thus to operate, the reserve banks
can come to exert a steady and powerful influence in the direction of the
maintenance of sound banking practices on the part of member banks.
It is gratifying to note that increasing attention is being given to this important aspect of reserve-bank operations by all of the reserve banks.
This committee concludes that the granting of rediscount accommodations
by reserve banks,should depend upon the general condition of member banks
and the effect of granting the rediscount upon the safety of depositors as well
as upon the character of the paper which the applying bank tenders.
Hearings — S. Res. 71
Appendix
Part IV — Security Affiliates
2.— 17
/93
Activities of affiliates in supporting a bank's own stock or in homing
( real estate have both been the source of substantial loss in individual
' cases. Taken as a whole, however, it would appear that the security _
affiliates of the banks studied in connection with the committee's
questionnaire ordinarily engaged in such activities to a moderate
extent only. It is well to remember, however, that it was preoisoly
this type of activity, and especially that first mentioned, which brought
on the disastrous collapse of the Bank of United States in New
York in 1930, and contributed to several large bank failures elsewhere.
The bank-merger movement of the last few years has at times resulted
in specially large commitments in a hank's own stock, as efforts are
made to advance the price of the stock of a bank in order to make it
more attractive in an exchange for shares of another institution.
Also, certain mergers have involved commitments by the absorbing
• institution that shares of the bank being absorbed would be purchased
by the security affiliate of the former if desired, and such arrange-
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ments have at times resulted in the affiliate acquiring quite large
blocks of the bank's shares.
—.
Leo T. Crowley, Chairman of the Board, Federal Deposit Insurance Corporation
Hearings — S. 1715 and H. R. 76/7
April, 1955.
Future- losses: In the past, the number, timing, and geographic
concentrations of bank suspensions have been chiefly due to funda- ""7"--
I
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BANKING ACT OF 1935
mental weaknesses in banking structure and the course of economic
events. Suspension of individual banks within the areas affected has
reflected, in the main, the quality of bank management. In the
future, the magnitude of losses which will result from bank failures
will also depend upon the trend of economic events, the changes
which may occur in the structure and functions of the commercial
banking system, the caliber of the individual bank management, the
extent to which the system is reinsured against defalcations, an
the quality of the supervision exercised over these banking inst.tutions.
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Benjamin M. Anderson, Jr., Economist, Chase National Bank
of the City of New York, Riverdale, N. Y.
Hearings — S. 1715 and H. R. 7617
•
May, 1955.
Mr. ANDERSON. I was jst going to gi've you some figures that I
jthink might not be readily available to you with reference to real., estate loans and bank failures, because I am aware that testimony
has been presented that suggests that statistics do not show any
connection between bank failures and real-estate loans, and I wanted
to give you what little evidence there is available on that point. I
know as a banker—and I have been watching this thing as a banker I
since 1918—that a great multitude of banks have got into trouble
from too large real-estate loans. I never saw a bank in trouble from /
having too much liquid stuff.
The figures that have been referred to apparently are figures for
the whole country, and figures by States and Federal Reserve districts showing how much real-estate paper there was in the banks
and how many failures there were. The figures do not mean very
much, because they do not make the contrast within a State a Federal Reserve district, or within the country between the failed banks
and the successful banks as to the percentage of real estate. That
is the real test. But that has been worked out for the State of
Florida in a publication of the University of Florida called "Forewarnings of Bank Failure ", by Harward B. Dolbeare and Merle 0.
Barnd, published by the University of Florida in June 1931. It
covers the period from 1922 to 1928. That document shows that
during that 7-year period the average percentage of total resources
invested in real estate was 5.8 percent for the failed banks and 2.6
percent for the successful banks.
The. difference between the failed and successful banks also is
shown in the relation of their real-estate holdings to their net worth.
In the successful banks the real estate was approximately one-fourth
the net worth. In the failed banks the amount of real estate at all
times was nearly 50 percent of net worth.
The Reserve Bank of Minneapolis, in a study published in September 1930,of the causes of bank failures in the Northwestern States,
by Curtis L. Mosher, Assistant Federal Reserve Agent, analyzing the
factors in the failures of banks, on page 19, says [reading]:
Of all the factors involved, the most important was the collapse of land
values following the collapse of agricultural commodity prices, because so great
a proportion of the paper hold by banks was collectible only in proportion to the
true land and farm products values behind it.
A study made of bank failures in Arkansas by Messrs. Fred L.
Garlock and B. M. Gile, published by the Agricultural Experiment
Station of the University of Arkansas, at Fayetteville, in March
1935, pages 74-75, says [reading]:
Bank failures and also less serious difficulties of Arkansas banks during the
depression appear to have been due mainly to large withdrawals of deposits and
to excessive holdings of unliquid assets.
And they say that "banks held nearly as large a voluthe of slow
assets in 1929 as in later years, hence inadequate liquidity during the
depression was due mainly to inadequate liquidity before the depression. With proper enforcement of the suggested liquidity require-
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BANKING ACT OF 1935
(ments, banks would not have entered the depression in a frozen
condition."
R. M. Hanes, Watchovia Bk. & Tr. Co., Winston—Salem, N. C.
Hearings — S. 4115
March 1932
Senator GLA:,s. What caused the failure of the 200 banks
-....=map
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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
Mr. HANES. I think public hysteria to a great extent, sir. A great
many very good banks, that should be going to-day, closed because
of the hysteria. Depositors became frightened, went on to the banks,
and asked for their money, and the banks could not liquidate their
investment holdings fast enough to pay them.
Senator GLASS. They were largely frozen?
Mr. HANES. Yes, sir; largely frozen.
R. S. Hecht, Pres., Hibernia Bk. & Tr. Co., New Orleans
Hearings — S. 4115
March 1932
. „
Senator BARKLEY. I want to ask this question, which is probably
a question broader than the scope of this bill, but this man .seems
to be a very intelligent banker, if not above the average intelligence
even for bankers.
Mr. HECHT. I do not know if that is a slam or a compliment,
Senator.
Senator BARKLEY. It is intended as a compliment. I am very
much concerned—of course we all are—about a permanent solution
of this banking question, not looking with any degree of pride
more than anybody else, perhaps, to the fact that last year twentythree hundred and some odd American banks failed; whereas in
no other country in the world, or in all of them combined, were
there that many failures. So that there is something fundamentally
wrong with our banking system. While the larger number of bank
failures in that year can be attributed to the depression, in normal
times when we delude ourselves into the belief that we are prosperous, there are entirely too many bank failures.
Have you thought out a remedy for that situation that is permanent? Would you he willing to suggest, if you have, what we can
do to prevent that situation from existing in this country?
Mr. HECHT. Senator, I am not going to be conceited enough to
believe that I have any remedy for that very deep-seated problem,
but I do not mind expressing at least some general views on the
subject. I think the bank-failure record is a most unfortunate one
for the last two years, but it has been due to abnormal conditions.
So, let us in answering your question come back to what you yourself have pointed out, that even in normal times we have a good
many bank failures.
I would only say this: That I think that if you analyze the bank
failure record in normal times you will find that, while the number
has grown, it is usually among very small units; and my opinion is
that the tendency is going to have to be by an evolution of a process
of the concentration into, not great, big units of having a dozen banks
in this country like they have in Canada, which I am very much opposed to, but at least the concentration of these extremely small
units, which can not under existing economic conditions be on a
profitable basis; and a bank that is not profitable is sooner or later
going to fail. Therefore, if we can gradually eliminate the very
small unit by combinations, mergers, or other means,I think we shall
go a long way toward at least improving materially the bank failure
record of this country. Proper supervision over State and national
institutions, of course, must also play -a very important part in that.
S
•
1
1
/ Senator WAGNER. I just want to ask one question. Mr. Hecht. you
stated previously that in your own State you had an unusual record
in the number of banks closed. In the city of New Orleans, I under) I stood you to say, there were none that failed.
Mr. HECHT. None over 20 years.
Senator WAGNER. In the whole State during this period of de'\pression there were how many?
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Federal Reserve Bank of St. Louis
1
R. S. Hecht — Page 2
March 1932
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
249
Mr. HECHT. What would you call the period of depression?
Twelve months, or shall we go back further?
Senator WAGNER. Two years.'
Mr. HECHT. In two years I should estimate there were probably
not over 30. Maybe less, but I think 30 would be an outside figure.
Senator WAGNER. How does that compare with other States?
Mr. HECHT. Very favorably.
Senator WAGNER. Do you attribute that to the fact that you have
not been hit as severely by the depression in your State?
Mr. HECHT. No.
Senator WAGNER. Or is it better supervision?
Mr. HECHT. I think our agricultural situation has been fully as
bad as it has been anywhere else with cotton and sugar and rice
having been at such low levels, but I think our bank supervision
on the whole has been very satisfactory and our record of failures
in our State over a long period of years has compared very favorably
with other States.
•
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Federal Reserve Bank of St. Louis
Leo. T. Crowley, Chairman of the Board,
Federal Deposit Insurance Corporation
Hearings — H. R. 5357
Mr. CROWLEY. The charts which I will later file show, by years\
from 1864 to 1934, the percentage of national and other commercial \
kinks suspending and the ratio of deposits in suspended banks to ;
dkposits in active banks. The ratio of deposits in suspended banks
to total deposits in all active banks is smaller for national than for \
other commercial institutions.
In other words, the loss from 1864 to 1934 was considerably less
in the national system than it was in the State system.
Our estimates indicate that about 1 billion dollars of the 9 billion
dollars which was on deposit in commercial banks that failed during
the 70-year period were secured by pledge of collateral or otherwise.
Of the remainder, some 6 billion dollars were in accounts of less
than $5,000 or constituted the first $5,000 of large accounts. In
other words, 6 billion dollars were within the $5,000 limit. Two
billion dollars represents the volume of these deposits which were in
accounts with balances above $5,000. The estimates of the amount
of funds representing balances in excess of $5,000 were made on the
basis of figures showing deposits classified by size of accounts in
national banks in 1918, in member banks of the Federal Reserve
System as of May 13, 1933, and in all insured commercial banks
as of October 1, 1934.
For every $100 of deposits in the entire commercial banking system, about 32 cents a year was lost. Of this figure, it is estimated
that 24 cents represents losses to depositors with balances not in
excess of $5,000, while the remaining 8 cents represents losses to
dejositors having balances in excess of $5,000. For every $100 of
d4posits in the national banking system, 21 cents per year was lost
a against 42 cents per $100 per year in the State system. The
following table summarizes the estimates of losses to depositors in
suspended national and other commercial banks during the 70 years
,ndirig June 30. 1934.
Losxes to depositors in suspended banks, July 1, 1864-June 30, 1934, 3 crisis
periods contrasted with the remaining years, all commercial banks
[Federal Deposit Insurance Corporation, Division of Research and Statistics]
14 years
70 years, during 3 Remaining 56
1864-1934
crisis
years
periods I
Deposits in suspended banks (millions of dollars)
Secured
Unsecured under $5,000
Unsecured over $5,000
Estimated losses (millions of dollars)
Unsecured deposits under $5,000
Unsecured deposits over $5,000
Average loss per year for each $100 of deposits in active banks
Unsecured deposits under $5,090
Unsecured deposits over $.5,000
$8, 778
1,033
5, 762
1,983
3,113
2,301
812
.32
.24
.08
$6,084
716
3, 738
1,630
2,269
1,578
691
1.17
.82
.36
$2,(,91
317
2.024
353
844
723
121
.11
.0
.02
Includes figures for banks suspending during period July 1, 1930, to Mar. 15, 1933, which subsequently
reopene,i.
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Federal Reserve Bank of St. Louis
1
Leo. T. Crowley — Page 2
/934—
Mr. CROWLEY. The experience of the past 70 years indicates that
to repay losses suffered by all depositors in our suspended commercial
banks, an assessment of 33 cents per $100 of total deposits, or onethird of 1 percent of total deposits in all open commercial banks,
would have been necessary. Excluding the losses incurred during
the three depression periods-1873-78, 1892-97, and 1931-34—and
confining ourselves to losses occurring during the balance of the
70 years, an assessment of one-eighth of 1 percent would have been
necessary.
In the past, the number, timing, and geographic concentrations of
bank suspensions have been chiefly due to fundamental weaknesses in
banking structure and the course of economic events. Suspension
of individual banks within the areas affected has reflected, in the
main, the quality of bank management. In the future, the magnitude of losses which will result from bank failures will also depend
upon the trend of economic events, the changes which may occur
in the structure and functions of the commercial banking system,
the caliber of the individual bank management, the extent to which
the system is reinsured against defalcations, and the quality of the
supervision exercised over these banking institutions.
Of course, the future trend of economic events cannot be forecast.
Changing tendencies are now apparent in the structure and functions of commercial banking. On the one hand, the drastic reduction
in the number of banks during the past 14 years has greatly
relieved the overbanked condition in many communities. On the
other hand, new financial agencies, serving specialized needs, have
been created, and will compete, to some extent, with commercial
banks. The types of credit which may be extended by commercial
banks may be subject to varying degrees of risk.
•
BANKING ACT OF 1935
I
31
The CHAIRMAN. So we have had five bank failures other than
those due to defalcations since the effective date of the Deposit Insurance Corporation Act?
Mr. CROWLEY. Let me say this: There are three banks that I
think will pay 100 cents on the dollar.
The CHAIRMAN. How many failed insured banks will not pay
100 cents on the dollar and were not closed on account of defalcations?
Mr. CROWLEY. There are four. For example, we have a little
bank
with $40,000 deposits, which is so small that they put it in
liquidation because they could not make any money.
The CHAIRMAN. Did you have any actual loss in that?
Mr. CROWLEY. Yes• I think we may have a small loss.
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Leo. T. Crowley - Page 3
7 Mr. WILLIAMS. Now, during that period from 1922 to 1932 there
/ was the failure of some 11,000 or.12,000 banks, was there not?
Mr. CROWLEY. That is right.
Mr. WILLIAMS. Of all kinds and characters, in all sections of the
/
country, I take it?
Mr. CROWLEY. More of them, Mr. Congressman, in the Northwest.
Your early failures first came I think, in South Dakota, and then
in northern Iowa—the whole Middle Western country.
Mr. WILLIAMS. There were, of course, a number of causes for that.
Is it your opinion that we were overbanked ; that we had entirely
too many of them?
Mr. CROWLEY. Yes; we had too many banks, Mr. Congressman,
that could not make a sufficient return on their investments or could
not set up reserves to take care of their losses. In other words, a
bank that has a $6,000 gross income,from which it must pay its overhead and set up its reserves for losses, it remains very difficult for
it, if it has a $2,000 or $3,000 loss in any particular year, to take it
currently.
Mr. WILLIAMS. That was one thing; that there were too many
banks.
Mr. CROWLEY. And also later, from 1930 on, our banks suffered
terribly by bond depreciation and defaults.
Mr. WILLIAMS. It was due to another reason, to the fact that they
had invested their money in securities of different kinds at inflated
values?
Mr. CROWLEY. That was a contributing factor to the banking
trouble and, of course, your economic situation.
Mr. WILLIAMS. Was it not due to the fact that there had been
rather loose supervisions on the part of the authorities of the State
and Government?
Mr. CROWLEY. You have in this country, under the State system,
48 different types of supervision. It is very difficult to have State
supervision that will be as efficient as where it is a long way removed
from local pressure.
Mr. WILLIAMS. And there were other contributing causes to the
enormous number of failures that we had during that time?
cause, Mr. ConMr. CROWLEY. I think that the large contributing cause
Middle i
gTessman, was your economic collapse. For instance, in
West, when your banking trouble started in 1921, that was the begin- I
ning of your agricultural trouble. You can say that as your agricultural trouble became more severe, your bank failures increased
very materially. Furthermore, they were fropn up in farm and
chattel mortgages and also in bonds that had depreciated to a point
0-
•
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Federal Reserve Bank of St. Louis
I
where they could not sell them without taking a severe loss, and
they had nothing to charge their losses to.
Mr. WILLIAMS. It is the hope and the intention now to eliminate
a great deal of that, is it not? This very act itself tries to furnish
a market for long-term rediscount paper
Mr. CROWLEY. That is correct.
Mr. WILLIAMS. And to avoid that situation in the future, and also
by having supervisory control, regulatory control over these various
institutions by your examinations and your reports, it is the hope
to eliminate many of the bad practices that have existed before, is
it not?
Mr. CROWLEY. That is right.
Mr. WILLIAMS. And, of course, it is also the intention further to
prevent the establishment of any more banks where they are not
needed?
Mr. CROWLEY. That is correct.
Mr. WILLIAMS. And by means of all of those things, you hope to
avoid the recurrence of this condition which has come upon us and
caused so many failures among these banks in the past?
Mr. CROWLEY. That is correct.
//
COLORADO BANKERS ASSOCIATION
Banking Research Survey
with special reference to failures, causes of failures, competition,
and an analysis of revenue, expenses and profits of Colorado banks
By
JOSEPH M. WHALLEY
Bureau of Business and Government Research
University of Colorado
for the
COLORADO BANKERS' ASSOCIATION
in cooperation with the
BANK STUDY COMMISSION
BUSINESS BULLETIN NUMBER THIRTY-FIVE
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Federal Reserve Bank of St. Louis
Boulder, Colorado, May, 1937
BANK STUDY COMMISSION
Colorado Bankers' Association
Ramon B. Handy, Chairman
Cashier, First National Bank, Loveland
John H. Bloedorn
President, The Farmers State Bank, Fort Morgan
Wm. I. Howbert
President, First National Bank, Colorado Springs
Harold Kountze
President, Colorado National Bank, Denver
Harry B. Mendenhall
President, The Rocky Ford National Bank, Rocky Ford
Melvin Springer
President, The Colorado Bank & Trust Co., Delta
BANK STUDY COMMISSION
Bureau of Business and Government Research
University of Colorado
Elmore Petersen, Chairman
Dean, School of Business
Don C. Sowers
Director, Bureau of Business and Government Research
Edison H. Cramer
Assistant Secretary, Bureau of Business and Government Research
Fred R. Niehaus
Assistant Professor of Finance, School of Business
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Federal Reserve Bank of St. Louis
Table of Contents
Part I
Page
1. Bank Failures in Colorado_
2. Reasons for Bank Failures
3. Competition with Colorado Banks_
9
Part II
4. Revenue, Expenses, and Profits of Colorado Banks in 1936___ 13
5. Revenue, Expenses, and Profits of Colorado Banks, 193132
1936, inclusive
6. Comparison of Colorado and Georgia Banks, 1931-1935, in34
clusive
Appendix
Questionnaire forms used in survey_
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Federal Reserve Bank of St. Louis
35
Foreword
Colorado Bankers, recognizing the importance and value of the information gained as
a result of a study of the New York State Banking Structure, initiated by the Bankers
Association of that State in 1934, and, encouraged by the Association of Reserve City
Bankers, authorized the inauguration of a similar project at the State Convention held
in Glenwood Springs, in June, 1936. Similar studies have been started in practically
every state. Pursuant to action taken by the Convention, the President of the Colorado
Bankers Association was authorized "to appoint a carefully selected Commission composed
of both national and state bankers from large, medium-sized, and small institutions, to
have charge of the promotion of a continuing study and to publish the results of same;
and that such funds as may be required for an efficient prosecution of the program be
provided by the State Association."
President Claude L. Stout appointed the following men to serve as members of the
Commission:
RAMON B. HANDY, Chairman
Cashier, First National Bank, Loveland
JOHN H. BLOEDORN
President, Farmers State Bank, Fort Morgan
WM. I. HOWBERT
President, First National Bank, Colorado Springs
HAROLD KOUNTZE
President, Colorado National Bank, Denver
HARRY B. MENDENHALL
President, Rocky Ford National Bank, Rocky Ford
MELVIN SPRINGER
President, Colorado Bank & Trust Company, Delta
The Committee realized the need for the services of men who possessed training
and experience in research work and who had a broad and detached point of view
relative to banking problems. With this in mind, the assistance of the Bureau of Business
and Government Research of the University of Colorado was enlisted. The work of Dean
Elmore Peterson and his Staff has been invaluable. Mr. J. M. Whalley is the statistician
responsible for collecting, tabulating and summarizing the data and information. The
Individual members of the Commission extend their sincere thanks to these men for
their valuable services and for the fine spirit of cooperation displayed. Their attitude
has made this project a pleasant task.
The results of the survey were based largely on information and figures obtained
from questionnaires received from the individual banks and from data made available
by supervisory authorities. Great care was taken to hide the identity of the banks and
preserve the confidential nature of the material submitted.
No specific recommendations for changing banking practice or the banking structure
in Colorado are contained in this report. The study was devoted entirely to analyzing
and summarizing certain phases of the banking experience of this area. It is hoped
that out of the combined thought and experience of all Colorado bankers some worth-while
suggestions for the improvement of banking may result. When and if these suggestions
are made, they should come from the whole body of bankers and represent their free
and considered opinions.
This report is submitted with the hope that it will be interesting and of value in the
progress of banking practice and stability. Every effort should be made to improve the
system and to convince the public of the active concern of bankers in building a better
structure. These studies should be carried forward to the point where definite recommendations can be made and acted upon for the improvement of banking in this State.
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Federal Reserve Bank of St. Louis
—Ramon B. Handy, Chairman
Bank Study Commission
Colorado Bankers Association.
BANK FAILURES AND COMPETITION
PART I
Bank Failures and Competition in Colorado
Bank Failures in Colorado
The result of bank failures in Colorado for the years 1919 to 1935 inclusive, classified as to state and national banks by years, size of communities where failures occurred, distribution of failed banks according to capital stock, total number of banks,
both state and national, and percentage failed annually, is the basis for the following
discussion.
Years in which Bank Failures Occurred in Colorado
Table 1 shows the bank failures by years for state banks, national banks, and the
total of state and national banks. The years in which the largest number of state
banks failed, and the number of failures were: 1921, eleven failures; 1923, seventeen
failures; 1926, fourteen failures; 1931, ten failures; and, 1932, twenty-four failures. The
years in which the largest number of national banks failed and the number of failures
were: 1925, six failures; 1926, five failures; 1931, seven failures; 1932, six failures;
and, 1933, eleven failures. As regards total bank failures, both state and national, the
years in which the largest number of failures and the number of failures were: 1921,
eleven failures; 1923, seventeen failures; 1925, thirteen failures; 1926, nineteen failures; 1931, seventeen failures; 1932, thirty failures; and, 1933, fourteen failures.
Table 2 shows by years, the total number of banks in operation, the number failed,
the per cent failed, the average number of banks, average bank failures, and average
percentage failed for the period 1919 to 1935 inclusive.
The years which had greater than the average failure of 3.60 banks, and the percentage failed in those years are: 1923, 4.45 per cent; 1925, 3.77 per cent; 1926, 5.74 per
cent; 1931, 6.46 per cent; 1932, 12.60 per cent; and 1933, 6.86 per cent.
TABLE 1
Bank Failures in Colorado 1919-1935 Inclusive
Year
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
Total
State Bank
Failures
0
4
11
8
17
3
7
14
2
8
4
8
10
24
3
0
0
123
National Bank
Failures
0
0
0
1
0
3
6
5
0
0
1
1
7
6
11
3
0
44
State and National Bank Failures
0
4
11
9
17
6
13
19
2
8
5
9
17
30
14
3
0
167
Source: Reports of Colorado State Bank Commissioner and Comptroller of the Currency.
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Federal Reserve Bank of St. Louis
IN COLORADO
TABLE 2
Number of Banks and Percentage Failed by Years from 1919-1935 Inclusive
Number of Banks at
Beginning of Year
377
395
411
398
382
362
345
331
308
298
288
278
263
238
204
183
174
Year
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
Number of Banks
Failed
0
4
11
9
17
6
13
19
2
8
5
9
17
30
14
3
0
Per Cent Failed
Annually
0
1.01
2.68
2.26
4.45
1.66
3.77
5.74
.65
2.68
1.74
3.24
6.46
12.60
6.86
1.64
0
Total
167
Average
307.94
11.1
3.60
The years showing the greatest per cent of failures were 1931, 1932, and 1933, or
6.46 per cent, 12.60 per cent, and 6.86 per cent respectively, a total of 25.92 per cent of
all bank failures from 1919 to 1935.
Decrease in Total Number of Banks in Colorado for the Periods 1921 to 1929,
1929 to 1935 and 1921 to 1935
Table 3 shows the decrease in number of banks for the periods 1921 to 1929, 1929 to
1935, and 1921 to 1935. The decrease in number of banks from 1921 to 1929 was 123, or
29.93 per cent. The decrease from 1929 to 1935 was 114, or 39.58 per cent. While the decrease for the period 1921 to 1935 was 237, or 57.66 per cent.
These figures show that for the period 1921 to 1929 the decrease in number of
banks was 29.93 per cent of all the banks in operation at the beginning of the period
in 1921. That the period of depression from 1929 to 1935 accounted for a reduction of 39.58
per cent of all the banks in operation at the beginning of the period in 1929.
The total reduction in number of banks for the period 1921 to 1935 was 57.66 per cent
of all banks in operation at the beginning of the period in 1921.
TABLE 3
Decrease in Total Number of Banks in Colorado for the Periods
1921 to 1929 and 1929 to 1935
Year
1921
1929
1935
Total
Total Number of Banks
At Beginning of Year
411
288
174
Decrease in Number of Banks
Percentage Decrease
Over Previous Period
123
114
237
29.93
39.58
57.66
Size of Communities Where Bank Failures Occurred
Table 4 shows the number of banks failed by size of communities, and the percentage
of the failures occurring in each classification for state banks, national banks, and both
state and national banks for the period 1919 to 1935 inclusive. The state banks show the
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Federal Reserve Bank of St. Louis
6
BANK FAILURES AND COMPETITION
greatest percentage failed in communities under 500 population, or 45.53 per cent. While
the three classifications, under 2,000 population show 76.43 per cent of all state bank failures during this period.
The population group showing the greatest percentage of national bank failures was
1,000 to 2,000 which had 27.27 per cent. The three classifications under 2,000 population
show 56.81 per cent of all national bank failures.
Total figures for both state and national bank failures show the greatest percentage
of bank failures in towns under 500, or 35.93 per cent. The three classifications of banks
under 2,000 population show 71.26 per cent of all bank failures during this period.
The results of table 4 can be briefly summarized as follows: The highest percentage
of state bank failures by groups as classified was in towns under 500 population, national
bank failures in towns of 1,000 to 2,000 population, and total state and national bank
failures in towns under 500 population.
Towns under 2,000 population had the largest percentage of failures in all groupings;
state, national, and total state and national. They were as follows: 76.43, 56.81, and
71.26 respectively.
This survey would lead to substantiate the belief that banking institutions in small
communities are more liable to fail than the banks in the larger cities and towns in Colorado.
TABLE 4
Size of Communities Where Bank Failures Occurred, 1919-1935 Inclusive
State and
National Bank
National Bank
State Bank
Failures
Failures
Failures
Population
Pct. of
Pct.
of
Pct. of
No. Total
No. Total
No. Total
35.93
60
9.09
4
45.53
56
Under 500
14.37
24
20.45
9
12.20
15
500-1000
20.96
35
27.27
12
18.70
23
1000-2000
9.59
16
18.18
8
6.50
8
2000-5000
7.18
12
11.37
5
5.69
7
5,000-10,000
3.59
6
6.82
3
2.44
3
10,000,15,000
8.38
14
6.82
3
8.94
11
15,000
Over
--167 100.00
100.00
44
100.00
123
Total
Currency
Source: Reports of Colorado State Bank Commissioner and Comptroller of the
Distribution of State and National Banks in Colorado by Population Groups
For the Years 1927 and 1935
occurred
The previous discussion regarding size of communities where bank failures
were in
in Colorado shows rather conclusively that the great majority of such failures
population.
2,000
under
towns
operation
The purpose of this discussion is to show how many of the total banks in
in Colorado in 1927 and 1935 were in towns classified by population groups.
The year 1927 is used because the total number of banks in 1927, 308, is the average
it is the
number of banks in operation for the period 1919 to 1935. 1935 is used because
banks which
last year in the period under consideration and represents the number of
successfully withstood the effects of the depression to that date.
The population group showing the greatest percentage of banks is under 500 which
and 24.14 for the years 1927 and 1935 respectively. The group 500-1,000 has 16.23
31.50
has
and 1935 respecand 14.94, and the group 1,000 to 2,000, 17.86 and 19.54 per cent in 1927
tively.
and
The population groups under 2,000 have a percentage of total banks of 65.59
58.62 for the years 1927 and 1935 respectively.
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Federal Reserve Bank of St. Louis
IN COLORADO
7
To compare bank failures by population groups with the number of banks in operation in 1927 by population groups we find the following: The greatest percentage of
total bank failures from 1919 to 1935 occurred in towns under 500 population, or 35.93
while this same group had 31.50 per cent of all banks in 1927. The three classifications of
banks under 2,000 population had 71.26 per cent of the total bank failures from 1919
to 1935, while 65.59 per cent of all banks in Colorado were in these groupings in 1927.
The trend for the years 1927 to 1935 was away from the smaller communities to the
larger towns and cities as shown in Table 5. This table shows the population groups affected as follows for the years 1927 and 1935: under 500 the number of banks decreased
7.36 per cent, 500-1,000 the number decreased 1.29 per cent, 1,000-2,000 the number increased 1.68 per cent, 2,000-5,000 the number increased .60 per cent, 5,000-10,000 the number increased 1.25 per cent, 10,000-15,000 the number increased 2.28 per cent, and over
15,000 the number increased 2.84 per cent. This result can no doubt be attributed to the
fact that during this period the greater number of failures occurred in the smaller communities.
TABLE 5
National and State Banks in Colorado by Population Groups for the Years
1927 and 1935
1927
Population Group
Under 500
500-1000
1000-2000
2000-5000
5000-10,000
10,000-15,000
Over 15,000
Total
Number
of Banks
97
50
55
30
2S
16
32
308
Percentage
of Total
31.50
16.23
17.86
9.74
9.09
5.19
10.39
100.00
1935
Number
Percentage
of Banks
of Total
42
24.14
26
14.94
34
19.54
18
10.34
18
10.34
13
7.47
23
13.23
174
100.00
Capital Stock of Failed Banks in Colorado
Table 6 shows the failed banks in Colorado classified according to size of capital
stock. This table is also grouped as to state banks, national banks, and total state and national banks. The largest percentage of failures among state banks in Colorado occurred
among the $10,000 classification, or 33.33. The four classifications under $25,000-$50,000
capitalization accounted for 71.54 per cent of all state bank failures. The largest percentage of failures among national banks occurred in the $25,000 classification, or 38.63.
For national banks $25,000 is the smallest capitalization permitted. The two classifications under $50,000 accounted for 72.72 per cent of all national bank failures. The largest
percentage of failures among the total state and national banks was divided between
the classifications $10,000 and $25,000-$50,000, each of which had 24.55 per cent. The
four classifications under $25,000-$50,000 capitalization accounted for 62.87 per cent of
all state and national bank failures.
To summarize, the results of Table 6 indicate that banks with smaller capital stock
had the highest percentage of failures during the period 1919 to 1935 inclusive. Using
$25,000 capitalization as the dividing line for state banks and total state and national
banks, the results are: state banks 71.54 per cent, and total state and national banks 62.87
per cent of all failures were in the four classifications under $25,000-$50,000 capitalization.
Using $50,000 capitalization as the dividing line for national banks the results are: 72.72
per cent of all failures were under $50,000 capitalization.
Reasons for Bank Failures in Colorado
The Colorado Bankers' Association in conjunction with the Bureau of Business and
Government Research of the University of Colorado conducted a survey pertaining to bank
failures in Colorado during the period 1925 to 1935 inclusive.
The information for this survey was obtained through the use of questionnaires sent
to bankers and leading business men in towns where bank failures had occurred. Twenty-
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Federal Reserve Bank of St. Louis
8
BANK FAILURES AND COMPETITION
TABLE 6
Inclusive
Distribution of Failed Banks According to Capital Stock 1919-1935State
and
National Bank
National Bank
State Bank
Failures
Failures
Failures
Pct. of
Pct. of
Pct. of
No. Total
No. Total
No. Total
24.55
41
0
0
41
33.33
10,000
10.78
18
0
0
14.63
18
15,000
3.59
6
0
0
4.88
6
20,000
23.95
40
38.63
17
18.70
23
25,000
24.55
41
34.09
15
21.14
26
25,000-50,000
8.38
14
6
13.64
6.50
8
50,000-100,000
4.19
7
13.64
6
.82
1
100,000-250,000
0
0
0
0
0
0
250,000
Over
—
100.00
167
100.00
44
123 100.00
Total
of Currency
ler
and
Comptrol
ioner
Commiss
Bank
State
Colorado
of
Reports
Source:
Capital Stock
men were asked
two reasons were listed for bank failures, and the bankers and business
thought of greatest
to check those reasons, in the order of their importance, which they
importance in causing bank failures in their particular communities.
men.
Forty-seven questionnaires were returned by bankers and sixty-one by business
men for bank failures were
The leading reasons assigned by both bankers and business
c conditions,
incompetent management, dishonesty in management, uncontrollable economi
ties.
communi
and too many banks in their
bank failures
Table 7 shows incompetency in management. to be the leading cause of
listed it as
g,
of
all
reportin
cent
per
48.9
or
bankers,
hree
Twenty-t
bankers.
listed by the
ty in management was
the primary cause. Six bankers, or 12.8 per cent, stated dishones
per cent, stated too many banks
the primary cause of bank failures; five bankers, or 10.6
or 6.4 per cent, listed unconbankers,
three
and
;
failures
bank
as the primary cause of
quite evenly among
trollable economic conditions first. The remaining returns were divided
to merit comment.
small
too
are
and
naire,
question
the
on
listed
reasons
other
the eighteen
returns as rebankers
the
with
closely
very
checked
men
The returns from business
failures. Incompetency
gards the importance assigned to various reasons causing bank
by business men, as sixteen,
in management was by far the outstanding reason checked
of failures. Nine business
cause
primary
the
as
it
or 26.2 per cent, of this group listed
ns; seven, or 11.7 per cent,
men, or 14.7 per cent, listed uncontrollable economic conditio
excessive farm loans; and
listed dishonesty in management; five, or 8.2 per cent, listed
mortgage loans as prichattel
e
excessiv
and
three, or 4.9 per cent, listed too many banks
ties.
communi
their
in
failures
bank
for
causes
mary
men were in fairly
As the primary cause of bank failures, the bankers and business
namely, incompetency in manclose agreement as regards the four reasons listed above;
economic conditions, and too many
agement, dishonesty in management, uncontrollable
However, considerable differences
e.
availabl
business
banks in the community for the
other reasons for failures. The
of opinion are found between the groups as regards some
a good many of them listed
as
t,
importan
were
loans
e
excessiv
that
business men felt
regards their order of imas
etc.,
third,
second,
mostly
these reasons on their returns,
classes as follows: farm loans, real
portance. The excessive loans were listed in four
d loans.
estate loans, chattel mortgage loans and unsecure
e loans, unsecured loans, and farm
The business men thought excessive chattel mortgag
listed unsecured loans of most importbankers
the
while
ce,
importan
most
of
were
loans
of this group, but they were negligible
ance in this group. A few bankers selected others
In number.
were not in very close agreement on the
The two groups, bankers and business men,
considered this much more importbankers
The
state.
question of too many banks in the
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Federal Reserve Bank of St. Louis
IN COLORADO
9
ant than did the business men, giving it almost two and a half times as great importance
as the latter group.
TABLE 7
Reasons for Banks Failures in Colorado, 1925 to 1935 Inclusive
Order of Importance of Reasons for Failures.
Bankers and Business Men
II
I
III
IV
V
Bus.
Bus.
Bus.
Bus.
Bus.
Bkrs Men Bkrs Men Bkrs Men Bkrs Men Bkrs Men
23 16
4 5
3 1
0 2
Incompetent Management
0 1
6 7
0 1
3 5
1 0
Dishonesty in Management
1 0
3 9
6 6
7 3
2 2
1 3
Uncontrollable Economic Cond._
5 1
8
4
5 3
2 0
Too Many Banks
3 1
3
2 8
1 6
1 6
Excessive Chattel Mortgage Loans 1
0 3
4 7
0 2
4 3
4 7
Excessive Unsecured Loans
2 1
0 5
0 2
0 4
1 4
2 1
Excessive Farm Loans
0 0
1 2
2 2
3 0
0 2
Excessive Real Estate Loans
1 2
0 2
0 0
Insufficient Capitalization
4 0
0 1
3 0
1 1
0 0
2 0
1 0
Cut-Throat Competition
1 1
0 3
1 1
Other Business Failures
0 0
0 2
0 2
4 1
3 6
3
1 2
1
Inadequate Liquidity
0 1
0 0
0 0
0 1
0 2
Stock Market Speculation
0 0
0 4
2 5
0 4
2 0
Inadequate Bank Examination
0 1
1 0
1 1
0 0
Excessive Government Regulation 0 1
0 1
0 2
3 1
22 0
Loans to Bank Officials
5 3
Loans to Relations of Bank Offi0 0
0 1
1 0
1 3
1 0
cials
0 0
1 2
1
2
2 2
Too much money in Bank Bldg._- 1 0
2 0
3 2
1
1
0 1
1 1
Slump in Bond Prices
Unjustified Loss of Confidence by
1 1
0 1
3
1
2
0 1
1
Depositors
0 0
0 0
0 0
0 0
0 0
Decreased Demands for Loans
3 0
1
2
0 1
2 7
Bank Officials in Outside Business 1 0
1
2
3 0
1
0
0 1
2 0
Other Causes
Competition of Outside Banks with Colorado Banks
The Colorado Bankers' Association in conjunction with the Bureau of Business and
Government Research of the University of Colorado also conducted a survey pertaining
to competition of outside banks with banks located in Colorado.
The information for this survey was received from questionnaires sent in by ninetyeight bankers throughout the state.
The result of this questionnaire as tabulated in Table 8 shows very conclusively that
In the opinion of the bankers there is little competition to Colorado banks from banks
outside the state. Of the ninety-eight sending in their opinions, seventy-six, or 77.5 per
cent, stated there was no competition whatever.
The questionnaire listed six reasons for competition from outside banks and the
bankers were asked to indicate, in the order of their importance, which of the reasons
listed caused the greatest competition. Of the twenty-two bankers indicating that competition from outside banks existed, seventeen, or 77.3 per cent, listed lower rates on loans of
primary importance; three, or 13.6 per cent, stated larger size loans required was the
primary reason and one, or 4.5 per cent, stated that active solicitation by outside representatives and other causes was of primary importance.
In stating secondary reasons for competition nine bankers indicated active solicitation
by outside representatives, two indicated lower rates on loans and two indicated larger
size loans required.
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Federal Reserve Bank of St. Louis
BANK FAILURES AND COMPETITION
10
TABLE 8
Competition with Colorado Banks from Banks Outside the State
Order of Importance of Reasons
For Competition
V
IV
III
II
I
0
0
0
2
17
Lower Rate on Loans
0
0
9
1
1
Active Solicitation by Outside Representatives
0
0
4
2
3
Larger Size Loans Required
0
1
0
0
0
Official Connection with Outside Banks
1
0
1
0
0
Habit and/or Custom
0
2
0
0
Chains and Others with Headquarters outside of Colorado 0
0
0
0
1
1
Other Causes
0
0
0
0
76
No Competition
apparently
is
banks
with
banks
Colorado
outside
from
competition
The problem of
of little consequence to the majority of bankers in this state. The chief sources of competition in the order of their importance seems to be lower rates being offered on loans,
active solicitation by outside representatives and larger size loans required.
Reasons for Competition with Colorado Banks from
Banks Outside the State
Competition of Federal Lending Agencies with Colorado Banks
The committee on banking studies of the American Bankers' Association circulated
a questionnaire among Colorado bankers to ascertain the extent of competition the federal
lending agencies are giving the banks in Colorado.
The questionnaire listed five federal lending agencies as follows: federal land banks,
land bank commissioner, production credit association, banks for cooperatives, and federal savings and loan associations. Two questions were asked in regard to each lending
agency: Are these agencies in competition with your bank? Are these agencies of sufficient importance to warrant a detailed study of operations in your county?
Table 9 shows the results of ninety questionnaires returned by Colorado bankers to the
Colorado Bankers' Association. As regards competition among the various types of lending
agencies, the bankers answered as follows: federal land banks—thirty bankers, or 33.33
per cent, stated competition existed, forty-seven, or 52.22 per cent, stated no competition
existed, and thirteen, or 14.45 per cent, were non-committal; land bank commissioner—
twenty-one bankers, or 23.33 per cent, stated competition existed, fifty-three, or 58.89
per cent, stated no competition existed, while sixteen, or 17.78 per cent were noncommittal; production credit associations—seventy-eight bankers, or 86.67 per cent,
stated that competition existed, ten, or 11.11 per cent, stated no competition, while two,
or 2.22 per cent, were non-committal; banks for cooperatives—thirteen bankers, or 14.45
per cent, stated that competition existed, fifty-seven, or 63.33 per cent, stated no competition, while twenty,or 22.22 per cent, were non-committal; federal saving and loan
associations—twenty-eight bankers, or 31.11 per cent, stated competition existed, fortyfive or 50.00 per cent stated no competition, while seventeen, or 18.89 per cent were
non-committal.
The greater percentage of bankers in Colorado thought there was no competition from
federal lending agencies except the production credit association. The percentages stating
for
no competition, excluding production credit association, ranged from 50.00 per cent
federal savings and loan associations to 63.33 per cent for bank cooperatives. Production
credit association was considered a competitive factor by 86.67 per cent of the Colorado
bankers.
Regarding the question of the competition being of sufficient importance to warrant
a detailed study in the county in which the bank is located the following results were
shown: federal land banks—twelve bankers, or 13.33 per cent, answered yes, fifty-two,
l;
or 57.78 per cent, answered no, and twenty-six or 28.89 per cent, were non-committa
or
yes,
fifty-four,
answered
cent,
per
13.33
or
bankers,
r—twelve
commissione
land bank
60.00 per cent, answered no, while twenty-four, or 26.67 per cent, were non-committal;
yes, fortyproduction credit association—thirty-five bankers, or 38.89 per cent, answered
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Federal Reserve Bank of St. Louis
TABLE 9
Questionnaire Results on Competition of Government Lending Agencies With Colorado Banks
Yes
Type of Federal
Lending Agency
Pct of
No. Total
Ans.
Recd.
Federal Land Bank
30 33.33
Land Bank Commissioner_21 23.33
Production Credit Assoc.__78 86.67
Banks for Cooperatives
13 14.45
Fed Saving & Loan Assoc._ 28 31.11
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Federal Reserve Bank of St. Louis
No
Pct of
No. Total
Ans.
Recd.
47 52.22
53 58.89
10 11.11
57 63.33
45 50.00
Non-Committal
Pet of
No. Total
Ans.
Recd.
13 14.45
16 17.78
2
2.22
20 22.22
17 18.89
Total
• Pct of
No. Total
Ans.
Recd.
90 100.00
90 100.00
90 100.00
90 100.00
90 100.00
Are Federal Lending Agencies of Sufficient
Importance to Warrant Detailed Study?
Yes
Pet of
No. Total
Ans.
Recd.
12 13.33
12 13.33
35 38.89
14 15.56
12 13.33
No
Pet of
No. Total
Ans.
Recd.
52 57.78
54 60.00
42 46.66
56 62.22
54 60.00
Non-Committal
Pct of
No. Total
Ans.
Recd.
26 28.89
24 26.67
13 14.45
20 22.22
24 26.77
Total
Pet of
No. Total
Ans.
Recd.
90 100.00
90 100.00
90 100.00
90 100.00
90 100.00
OGYM0703 Ni
Are Federal Agencies in Competition with
Colorado Banks?
12
BA A-K FAILURES AND COMPETITION IN COLORADO
two or 46.66 per cent, answered no, while thirteen, or 14.45 per cent, were non-committal;
banks for cooperatives—fourteen bankers, or 15.56 per cent, answered yes, fifty-six, or
62.22 per cent answered no, while twenty, or 22.22 per cent, were non-committal; federal
savings and loan association—twelve bankers, or 13.33 per cent, answered yes, fifty-four,
or 60.00 per cetit, answered no, while twenty-four, or 26.77 per cent, were non-committal.
The greater percentage of bankers thought the federal lending agencies were not of
sufficient importance to warrant a detailed study of conditions in their counties. The
highest percentage was for investigation of the production credit association which had
38.89 per cent. The other types of federal lending agencies had percentages ranging from
13.33 per cent for federal land banks, land bank commissioners, and federal savings
and loan associations to 15.56 per cent for banks for cooperatives.
The extent of competition to Colorado bankers from federal lending agencies is apparently not of serious proportions judging from the results obtained from this questionnaire. The production credit association being the only agency which received a
majority of the affirmative answers on competition. However, more bankers stated
that competition from production credit association was not of sufficient importance
to merit a detailed study than stated it was of sufficient importance to merit such a study.
The conclusions drawn from this study on banking competition are that the bankers
In Colorado are meeting with very little competition from banks outside Colorado, but are
meeting more competition from federal lending agencies. However, the competition from
the latter source, while more pronounced than from the former, is not of a serious
nature and does not warrant detailed investigation.
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Federal Reserve Bank of St. Louis
PART II
How Profitable Is
Your Bank?
Revenue, Expenses, and Profits of
Colorado Banks in 1936
Compare Your Revenue and Expense Figures with
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Federal Reserve Bank of St. Louis
Those of Other Banks of Similar Size
REVENUES,EXPENSES, AND PROFITS
14
Introduction
Every banker knows whether his bank's business is increasing year by year or
falling behind. This information is easily obtained from his own books. But in addition
to the information furnished by his own accounts, each banker should be able to make
comparisons with other banks of similar size in approximately the same geographical
location. The purpose of this study is to provide the bankers of Colorado a yardstick by
which they can measure the efficiency of their banks with other banks doing a similar
business.
This study is based upon sixty-five confidential reports received from Colorado
banks. These sixty-five banks have combined resources of over $272,000,000 and represent about 74 per cent of the banking resources of the state. Their resources ranged from
$87,000 to over $68,000,000.
The individual reports were classified into four groups as follows:
Total Resources less than $400,000.
I
Group
Total Resources between $400,000 and $1,000,000.
Group II
Total Resources between $1,000,000 and $5,000,000.
Group III
Total Resources over $5,000,000.
Group IV
For all tables showing sources and distribution of revenue, the percentages are based
upon total revenue.
The percentages given are not simple arithmetic averages. Hence, the word "typical"
or "representative" is used in referring to them. These typical figures are the arithmetic
average of the group with extremely small and extremely large figures left out of the calculation. They are, therefore, more nearly typical than the ordinary average because
any abnormally small or large figure is automatically excluded from consideration.
Since the division of banks into groups makes no distinction between banks owning
their quarters and banks renting their quarters it is expedient in using the occupancy expense figures to deduct those items not applicable to your bank from the total occupancy
expense figure. This is necessary because figures for occupancy expense for the two
types of institutions are not comparable.
REVENUE AND EXPENSES
CHART I
40
,
•
o
aa___ -.1.1..
mum
.-111Ninge
ONE HUNDRED DOLLARS
OF BANK REVENUE
SOURCE
ip
L___ Igar
Valium
wiliousanta
21,'
:TA me
milE L____Arre
drum
,,x: .11g:.
ip
iltrAT
IONE
nr,L.
,Milne
AM
AltA,
alifru•L__ WI
lama
.
'IP
1
1'....inzi
.
irrhrest on
L••/1.11
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Federal Reserve Bank of St. Louis
VOW
lival0
Mkt
Intro-tot on
3.."1"th's
,
ti
trr
C7R
FVF9.1
Exchanyo onl
Co)
5o.v.ce
Profit from
Ch./. Chary. Soles
Bard< Builel.n, Ilutelleneous
Rentolt
OF COLORADO BANKS IN 1936
15
Chart I shows the sources of one hundred dollars of bank income. It is based upon
all sixty-five of the reports used in this study. The average resources of these sixtyfive banks are $4,195,045. The average net worth is $328,007. The average gross revenue
Is $128,989. Average gross revenue is then 39.32 per cent of average net worth. The
average gross revenue as a percentage of average net worth in 1929 and 1930 was 54.01
and 52.16 respectively.
CHART II
ONE HUNDRED DOLLARS
OF BANK REVENUE
DIST RBUTION
30_
20
/0
Inierest
Paid
Solar
General
Occupancy
Ex pen.5e
Expenst
Exp.nse
Tares
Net
Prof t
Charge -tYfs
Chart II shows the distribution of one hundred dollars of bank income. It is based
upon all sixty-five reports used in this study. The average net worth of the sixty-five
banks is $328,007. The average net profit is $40,734. On the average, therefore, the sixtyfive banks made a net profit of 12.42 per cent of their net worth. In the studies of 1929
and 1930 the percentage of profit on net worth was 10.00 and 8.19, respectively.
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Federal Reserve Bank of St. Louis
REVENUES,EXPENSES,AND PROFITS
it;
TABLE 10
Revenue Percentages for All Banks. Total Resources Equal 100 Per Cent
1936
65
Number of banks
2.35
Interest and discount on loans
Interest and dividends on securities .84
.16
Exchange and collection charges
.44
Service charges
.27
Profit from sales of securities
.05
Miscellaneous Revenue
.18
Bank building rentals
.10
Real estate rentals
__
Interest on bank accounts
.05
Departmental revenue
4.44
Total gross revenue
Typical Figures
1930
60
5.00
.99
.08
.16
.10
.25
.17
-.26
.10
7.11
1929
58
4.92
.97
.07
.12
.12
.15
.20
__
.26
.06
6.87
-1936-Lowest
Highest
--.23
4.68
.12
2.58
.03
.67
.10
1.20
.01
1.44
.01
.80
.01
.65
.01
.34
__
.01
.29
1.03
6.47
Table 10 compares the typical percentage figures for sources of revenue of 65 banks
for 1936 with 60 banks for 1930 and 58 banks for 1929. This table is the only one in this
study which shows the revenue figures as a percentage of total resources. This is done for
purposes of comparison with the former studies made by the Bureau which used total
resources as a base. This study uses total revenue as a base.
Table 11 shows the sources of revenue for the 65 banks in this study based upon total
revenue as 100 per cent.
Table 12 shows the distribution of income for 65 banks in 1936, 60 banks in 1930,
and 58 banks in 1929. The percentage figures are based upon total revenue.
Table 10 shows that in 1936 a smaller gross revenue, in relation to total resources, was
made than in 1930 and 1929. Table 12 shows, however, that a larger percentage of this
revenue was saved as a profit and that the return on net worth increased from 10.00 and
8.19 per cent in 1929 and 1930, respectively, to 10.21 per cent in 1936. Practically all of
this increase in profit was a result of less interest paid and more recoveries made.
TABLE 11
Revenue Percentages for All Banks. Total Revenue Equals 100 Per Cent
Number of Banks
Interest and discount on loans
Interest and dividends on securities_
Exchange and collection charges
Service charges
Profit from sale of securities
Miscellaneous revenue
Bank building rentals
Real estate rentals
Departmental revenue
Total gross revenue
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Federal Reserve Bank of St. Louis
1936
Typical Figures
Lowest
Highest
65
5.93
90.12
51.69
.05
54.39
18.43
.88
14.14
3.76
2.49
24.82
10.26
.24
17.46
6.17
.01
18.97
1.26
.30
14.99
4.10
.14
7.23
2.91
.07
10.11
1.42
100.00
OF COLORADO BANKS IN 1936
17
TABLE 12
Expense Percentages for All Banks. Total Revenue Equals 100 Per Cent
Number of banks
Interest paid:
Other banks
Demand deposits
Time deposits
Borrowed money
Total interest paid
Salaries:
Board fees
Executives
Employees
Total salaries
Occupancy expense:
Heat, light, and water
Depreciation, building
Depreciation, furniture and fixtures
Repairs and maintenance
Rent
Total occupancy expense
General expense:
Stationery, printing, and supplies
Insurance and bonds
Dues, donations and subscriptions
Postage
Audits and examinations
Legal
Telephone and telegraph
Freight and express
Miscellaneous
Total general expense
Advertising
Taxes:
Income
General property
Total taxes
Total operating expense
Banking profit
Add: Recoveries from prior charge-offs
Deduct: Losses charged off
Net profit
Return on net worth
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Federal Reserve Bank of St. Louis
1936
65
Typical Figures
1930
1929
60
58
-1936Highest
Lowest
__
10.29
.11
1.21
3.47
16.59
2.13
.22
2.98
17.73
2.71
__
31.07
4.10
-.92
.01
10.40
23.40
23.64
31.07
.92
.69
16.28
11.42
--28.39
.42
16.71
11.61
-28.74
.74
18.24
9.16
4.60
35.79
36.88
.20
6.71
.05
28.14
45.90
14.87
.86
1.71
2.01
.92
4.32
.51
1.91
1.27
.66
.71
2.28
.88
.82
3.25
12.94
18.99
6.06
10.46
.10
.10
.46
.15
.01
9.82
4.35
4.69
2.49
2.70
.35
1.47
.81
.43
.51
.08
3.03
-11.87
2.45
1.55
.51
1.02
.57
.47
.47
.10
3.27
2.52
1.80
.46
1.02
.57
.50
.48
.13
1.95
5.36
15.02
2.49
4.35
2.39
4.86
1.72
.76
13.85
.94
.84
.03
.46
.15
.01
.21
.02
.14
10.41
9.43
.75
1.00
1.09
4.35
.04
7.63
5.62
20.56
.07
2.13
1.11
6.24
7.35
7.94
7.63
20.56
2.61
68.58
31.42
8.70
15.05
25.07
10.21
75.84
24.16
3.58
13.47
14.27
8.19
74.62
25.38
4.06
10.93
18.51
10.00
102.73
67.33
104.44
133.22
55.77
36.93
32.67
-2.73
.03
.08
1.08
.33
REVENUES,EXPENSES,AND PROFITS
IS
TABLE 13
Revenue Percentages by Groups According to Total Resources
Total Revenue Equals 100 Per Cent
Number of banks
Interest and discount on loans
Interest and dividends on securities
Exchange and collection charges
Service charges
Profit from sale of securities
Miscellaneous revenue
Bank building rentals
Real estate rentals
Departmental revenue:
Safe deposit
Trust
Other departments
Total departmental revenue
Total gross revenue
Group I
17
54.93
11.39
6.79
8.97
6.93
.73
4.52
4.81
Group II
22
55.68
18.68
3.60
10.99
4.10
1.37
2.55
1.63
Group III
17
49.42
19.79
3.20
10.88
5.83
1.98
4.36
2.45
Group IV
0
33.75
34.70
1.07
4.68
9.02
.75
5.12
2.86
.93
1.40
1.66
.43
2.35
4.20
1.50
.93
1.40
2.09
8.05
100.00
100.00
100.00
100.00
Table 13 shows the typical percentages for sources of revenue for the four groups
of banks classified on the basis of total resources. These percentages are based upon
total revenue. Service charge receipts are largest in the medium sized groups and lowest
in the largest banks. Departmental revenue is much more important to the larger than
to the smaller banks. The smaller banks derive a much greater percentage of their
total revenue from loans than do the largest banks while the largest banks derive much
more revenue from securities.
Table 14 shows the distribution of gross revenue for these same groups of banks.
worth than did the largest,
The smallest banks made a slightly higher return on net
the others in this reabove
far
were
brackets
middle
the
in
banks
the
while
banks
IV made the poorspect, making approximately double the return on net worth. Group
est showing in regard to return on net worth, having a return of 6.29 per cent. This
was the result of relatively larger interest payments and losses charged off.
In using the figures for occupancy expense it is advisable to deduct from the total
occupancy expense figure the typical rent figure if you own your banking quarters.
If the banking quarters are rented, deduct from the total occupancy expense figure
the depreciation on building and such other occupancy expense figures not applicable
to banks renting their quarters. This is necessary due to the fact that in this study
no distinction was made between banks owning their quarters and banks renting their
quarters.
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Federal Reserve Bank of St. Louis
OF COLORADO BANKS IN 1936
19
TABLE 14
Expense Percentages by Groups According to Total Resources
Total Revenue Equals 100 Per Cent
Number of banks
Interest paid:
Time deposits
Borrowed money
Group I
17
Group II
22
Group III
17
Group IV
9
9.10
11.05
10.60
15.90
9.10
11.05
10.60
15.90
Salaries
Board fees
Executives _
Bank employees
Other departments
.94
19.10
8.40
1.02
17.51
10.58
.64
13.39
12.84
.24
9.60
15.37
1.51
Total salaries
28.44
29.11
26.87
26.72
1.50
2.48
2.73
1.06
2.70
.75
1.51
1.35
.80
4.32
.71
1.31
2.01
1.14
4.01
.30
-1.00
.60
5.79
10.47
8.73
9.18
7.69
2.76
3.01
.38
1.93
1.14
.47
.64
.11
2.06
2.34
2.79
.27
1.67
.83
.29
.48
.07
2.92
2.47
2.34
.37
1.24
.48
.42
.49
.06
3.19
2.27
2.24
1.06
.75
.39
.41
.35
.02
4.20
12.50
11.66
11.06
11.69
.68
.95
.80
.55
.54
9.14
1.05
6.40
1.49
5.06
1.99
5.74
9.68
7.45
6.55
7.73
70.87
29.13
11.19
90.75
19.57
6.77
68.95
31.05
7.72
9.70
29.07
12.05
65.06
34.94
10.17
17.83
27.28
13.62
70.28
29.72
10.79
25.63
14.88
6.29
Total interest paid
Occupancy expense:
Heat, light and water
Depreciation, building
Depreciation, furniture and fixtures
Repairs and maintenance
Rent
Total occupancy expense
General expense:
Stationery, printing and supplies
Insurance and bonds
Dues, contributions, and subscriptions
Postage
Audits and examinations
Legal
Telephone and telegraph
Freight and express
Miscellaneous
Total general expense
Advertising
Taxes:
Income
General property
Total taxes
Total operating expense
Banking profit
Add: Recoveries from prior charge offs
Deduct: Losses charged off
Net profit
Return on net worth
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Federal Reserve Bank of St. Louis
REVENUES,EXPENSES, AND PROFITS
TABLE 15
Revenue Percentages for Group
(Resources Less Than $400,000)
Total Revenue Equals 100 Per Cent
Number of banks
Interest and discount on loans
Interest and dividends on securities
Exchange and collection charges
Service charges
Profit from sale of securities
Miscellaneous revenue
Bank building rentals
Real estate rentals
Departmental revenue:
Safe deposit
Trust
Total departmental revenue
Total gross revenue
Typical
17
54.93
11.39
6.79
8.97
6.93
.73
4.52
4.81
Better
Than
Average
Revenue
8
49.03
17.00
6.47
8.17
7.91
.25
5.28
5.14
Better
Than
Typical
Profit
9
51.31
17.65
7.06
10.36
7.82
.19
5.26
.93
.75
.35
.93
.75
.35
100.00
100.00
100.00
seventeen
Table 15 shows the typical percentages for sources of revenue for the
eight banks in this group that
banks in Group I, together with the figures for the
banks that had better than typical
had better than average gross revenue and the nine
gross revenue had a typical
net profit. The eight banks which had better than average
with 19.57 for the group
as
compared
revenue
of
gross
per
cent
21.70
of
net profit figure
net profit. The sources
as a whole. Five of these eight banks had better than typical
the typical profit were
than
better
had
that
I
in
Group
banks
nine
the
of
of revenue
nine banks should be taken
analyzed and are given in Table 15. The figures for these
the nine most successful banks
as a standard of comparison as they show the operation of
in this group.
for
Table 16 shows the distribution of the gross revenue both for the group and
on of the two columns
the nine banks having better than typical profit. A comparis
charged off.
shows the chief difference is found in salaries, taxes, and losses
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Federal Reserve Bank of St. Louis
OF COLORADO BANKS IN 1936
21
TABLE 16
Expense Percentages for Group I
(Resources Less Than $400,000)
Total Revenue Equals 100 Per Cent
Typical
17
Better
Than
Typical
Profit
9
9.10
7.76
9.10
7.76
.94
19.10
8.40
.93
18.79
6.05
Total salaries
Occupancy expense:
Heat, light, and water
Depreciation, building
Depreciation, furniture and fixtures
Repairs and maintenance
Rent
28.44
25.70
1.50
2.48
2.73
1.06
2.70
1.65
1.59
2.45
1.68
3.68
Total occupancy expense
General expense:
Stationery, printing and supplies
Insurance and bonds
Dues, donations and subscriptions
10.47
11.05
2.76
3.01
.38
1.93
1.14
.47
2.63
2.69
.27
1.82
1.20
.75
.54
.10
1.87
Number of banks
Interest paid:
Time deposits
Borrowed money
Total interest paid
Salaries:
Board fees
Executives
Bank employees
Other departments
Postage
Audits and examinations
Legal
Telephone and telegraph
Freight and express
Miscellaneous
Total general expense
Advertising
Taxes:
Income
General property
Total taxes
Total operating expense
Banking profit
Add: Recoveries from prior charge offs
Deduct: Losses charged off
Net profit
Return on net worth
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Federal Reserve Bank of St. Louis
64
11
2.06
12.50
.68
11.87
.54
9.14
.47
5.63
.66
9.68
6.10
70.87
29.13
11.19
20.75
19.57
6.77
63.14
36.36
7.69
18.75
25.80
10.38
REVENUES,EXPENSES,AND PROFITS
TABLE 17
Revenue Percentages for Group II
(Resources $400,000 to $1,000,000)
Total Revenue Equals 100 Per Cent
Number of banks
Interest and discount on loans
Interest and dividends on securities
Exchange and collection charges
Service charges
Profit from sale of securities
Miscellaneous revenue
Bank building rentals
Real estate rentals
Departmental revenue:
Safe deposit
Trust
Total departmental revenue
Total gross revenue
Typical
22
55.68
18.68
3.60
10.99
4.10
1.37
2.55
1.63
Better
Than
Average
Revenue
12
56.57
17.34
3.13
11.22
6.02
1.15
2.29
1.38
Better
Than
Typical
Profit
13
48.36
22.09
3.17
11.29
8.41
1.30
2.61
1.62
1.40
.90
1.15
1.40
.90
1.15
100.00
100.00
100.00
Table 17 shows the typical percentages for the sources of revenue for the twentytwo banks in Group II, together with the typical figures for the twelve banks that had
better than average gross revenue and thirteen banks that had better than typical net
profit. The twelve banks that had better than averge gross revenue had a typical net
profit figure of 32.51 per cent of gross revenue as compared with 29.07 for the group
as a whole. Ten of these twelve banks had better than typical net profit.
Table 18 shows the distribution of the gross revenue both for the group and for the
thirteen banks having better than typical net profit. A comparison of the two columns
shows the chief difference is found in salaries, recoveries, and losses charged off.
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Federal Reserve Bank of St. Louis
23
OF COLORADO RANKS IN .1936
TABLE 18
Expense Percentages for Group II
(Resources $400,000 to $1,000,000)
Total Revenue Equals 100 per cent
Number of banks
Interest paid:
Time deposits
Borrowed money
Typical
22
Better
Than
Typical
Profit
13
11.05
10.44
11.05
10.44
1.02
17.51
10.58
1.21
15.58
10.80
29.11
27.65
.75
1.51
1.35
.80
4.32
.70
1.26
.96
.91
3.60
8.73
7.43
2.34
2.79
.27
1.67
.83
.29
.48
.07
2.92
2.39
2.86
.30
1.50
.74
.38
.50
.07
2.94
11.66
.95
11.68
.80
1.05
6.40
.95
5.79
Total taxes -----------------------------------------------------7.45
6.74
68.95
31.05
7.72
9.70
29.07
12.05
64.74
35.20
8.71
10.63
33.34
15.33
Total interest paid
Salaries:
Board fees
Executives
Bank employees
Other departments
Total salaries
Occupancy expense:
Heat, light, and water
Depreciation, building
Depreciation, furniture and fixtures
Repairs and maintenance
Rent
Total occupancy expense
General expense:
Stationery, printing and supplies
Insurance and bonds
Dues, donations and subscriptions
Postage
Audits and examinations
Legal
Telephone and telegraph
Freight and express
Miscellaneous
Total general expense
Advertising
Taxes:
Income
General property
Total operating expense
Banking profit
Add: Recoveries from prior charge offs
Deduct: Losses charged off
Net profit
Return on net worth
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Federal Reserve Bank of St. Louis
REVENUES,EXPENSES,AND PROFITS
*2 I
TABLE 19
Revenue Percentages for Group III
(Resources $1,000,000 to $5,000,000)
Total Revenue Equals 100 per cent
Number of banks
Interest and discount on loans
Interest and dividends on securities
Exchange and collection charges
Service charges
Profit from sale of securities
Miscellaneous revenue
Bank building rentals
Real estate rentals
Departmental revenue:
Safe deposit
Trust
Total departmental revenue
Total gross revenue
Typical
17
49.42
19.79
3.20
10.88
5.83
1.98
4.36
2.45
Better
Than
Average
Revenue
8
51.75
18.53
2.58
12.15
5.19
1.15
4.91
1.56
Better
Than
Typical
Profit
S
42.95
20.28
3.21
13.19
10.82
3.07
4.43
1.66
.43
1.72
.46
2.05
2.09
2.18
2.05
100.00
100.00
100.00
of revenue for the seventeen
Table 19 shows the typical percentages for sources
eight
banks in this group that
the
for
figures
the
banks in Group III, together with
typical
had better than average gross revenue and the eight banks that had better than
typical
a
gross
had
average
revenue
than
better
had
which
banks
eight
net profit. The
net profit figure of 28.42 per cent of gross revenue as compared with 27.28 for the group
as a whole. Four of these eight banks had better than typical net profit.
for
Table 20 shows the distribution of the gross revenue both for the group and
columns
the eight banks having better than typical net profit. A comparison of the two
off.
shows the chief difference is found in interest paid. recoveries, and losses charged
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Federal Reserve Bank of St. Louis
25
OF COLORADO BANKS IN 1936
TABLE 20
Expense Percentages for Group III
(Resources $1,000,000 to $5,000,000)
Total Revenue Equals 100 per cent
Number of banks
Interest paid:
'rime deposits
Borrowed money
Typical
17
Better
Than
Typical
Profit
10.60
7.50
Total interest paid
Salaries:
Board fees
Executives
Bank employees
Other departments
10.60
7.50
.64
13.39
12.84
.58
14.43
12.20
Total salaries
Occupancy expense:
Heat, light, and water
Depreciation, building
Depreciation, furniture and fixtures
Repairs and maintenance
Rent
26.87
27.21
71
1.31
2.01
1.14
4.01
.66
1.98
1.20
5.33
Total occupancy expense
General expense:
Stationery, printing, and supplies
Insurance and bonds
Dues, donations, and subscriptions
9.18
9.17
2.47
2.34
.37
1.24
.48
.42
.49
.06
3.19
2.33
2.06
.30
1.13
.53
.39
.63
.09
3.54
11.06
.80
11.00
.87
1.49
5.06
2.02
4.19
6.55
6.21
65.06
34.94
10.17
17.83
27.28
13.62
61.96
38.04
4.75
3.70
39.09
20.85
Postage
Audits and examinations
Legal
Telephone and telegraph
Freight and express
Miscellaneous
Total general expense
Advertising
Taxes:
Income
General property
Total taxes
Total operating expense
Banking profit
Add: Recoveries from prior charge offs
Deduct: Losses charged off
Net profit
Return on net worth
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Federal Reserve Bank of St. Louis
REVENUES,EXPENSES,AND PROFITS
TABLE 21
Revenue Percentages for Group IV
(Resources More Than $5,000,000)
Total Revenue Equals 100 per cent
Number of banks
Interest and discount on loans
Interest and dividends on securities
Exchange and collection charges
Service charges
Profit from sale of securities
Miscellaneous revenue
Bank building rentals
Real estate rentals
Departmental revenue:
Safe deposit
Trust
Other departments
Total departmental revenue
Total gross revenue
Typical
9
33.75
34.70
1.07
4.68
9.02
.75
5.12
2.86
2.35
4.20
1.50
8.05
100.00
Table 21 shows the typical percentages for sources of revenue for nine banks in
Group IV. This group is not analyzed into groups showing those banks which had better
than average gross revenue and better than typical net profit. The method of reporting
used by banks in Group IV made such an analysis impossible. Table 22 shows the distribution of the gross revenue for banks in Group IV.
GROSS REVENUE AND NET PROFIT
From an analysis of the foregoing tableS the fact that gross revenue or total
Income has a direct relationship to net profits is borne out. There were twenty-eight
banks which had better than average gross revenue for their groups. Nineteen of the
twenty-eight banks having better than average gross revenue for their groups also had
better than typical profit.
An analysis of the individual reports shows that the twenty-eight banks that had
better than average gross revenue had a typical net profit of 29.37 per cent as compared with 25.07 per cent for all sixty-five banks reporting. Likewise, these twentyeight banks with better than average gross revenue showed a return on net worth of 13.85
per cent as compared with 10.21 per cent for all sixty-five banks reporting.
A break-down of this analysis by groups shows the same direct relationship of
gross revenue to net profits. Group I, banks under $400,000 total resources, had eight
banks reporting better than average gross revenue, five of which had better than
typical net profit. An analysis of individual reports in Group I shows that the eight
banks having better than average gross revenue had a typical net profit of 21.70 per
cent as compared with 19.57 per cent for all seventeen banks reporting. Likewise, these
eight banks showed a return on net worth of 9.45 per cent as compared with 6.77 per
cent for the seventeen banks reporting.
Group II, banks with total resources from $400,000 to $1,000,000, had twelve banks
with better than average gross revenue, four of which showed better than typical net
profit. An analysis of individual reports in Group II shows that the twelve banks
having better than average gross revenue had a typical net profit of 32.51 per cent as
compared with 29.07 per cent for all twenty-two banks reporting. Likewise, these ten
banks showed a return on net worth of 14.31 per cent as compared with 12.05 per cent
for the twenty-two banks reporting.
Group III, banks with total resources from $1,000.000 to $5,000,000, had eight banks
with better than average gross revenue, four of which showed better than typical net
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Federal Reserve Bank of St. Louis
JIM
27
OF COLORADO BANKS IN 1936
TABLE 22
Expense Percentages for Group IV
(Resources More Than $5,000,000)
Total Revenue Equals 100 per cent
Number of banks
Typical
9
interest paid:
Time deposits
Borrowed money
Total interest paid
Salaries:
Board fees
Executives
Bank employees
Other departments
Total salaries
Occupancy expense:
Heat, light and water
Depreciation, building
Depreciation, furniture and fixtures
Repairs and maintenance
Rent
Total occupancy expense
General expense:
Stationery, printing, and supplies
Insurance and bonds
Dues, donations, and subscriptions
_________________________
Postage ______________________________
Audits and examinations
Legal
Telephone and telegraph
Freight and express
Miscellaneous
Total general expense
Advertising
Taxes:
Income
General property
Total taxes
Total operating expense
Banking profit
Add: Recoveries from prior charge-offs
Deduct: Losses charged off
Net profit
Return on net worth
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Federal Reserve Bank of St. Louis
15.90
15.90
24
9.60
15.37
1.51
26.72
.30
1.00
.60
5.79
7.69
2.27
2.24
1.06
.75
.39
.41
.35
.02
4.20
11.69
.55
1.99
5.74
7.73
70.28
29.72
10.79
25.63
14.88
6.29
REVENUES,EXPENSES,AND PROFITS
28
that the eight banks
profit. An analysis of individual reports in Group III shows
of 28.42 per cent as
having better than average gross revenue had a typical net profit
, these eight
g.
Likewise
reportin
banks
n
seventee
all
for
cent
per
27.28
with
compared
per cent
13.62
with
d
as
compare
cent
per
17.07
banks showed a return on net worth of
for the seventeen banks reporting.
of gross
Group IV, banks with total resources over $5,000,000, had no such analysis
and exearnings
g
the
reportin
of
method
the
to
revenue and net profits. This is due
penses used by the banks in this group.
DEPOSITS
worth, what
Table 23 is designed to help answer the question: Given a certain net
and also the
given
are
1936
for
groups,
by
figures,
typical
The
?
deposits
the
be
should
of condition
highest and lowest figures. These figures are derived from the statement
survey.
the
to
ting
submitted by each of the banks contribu
undivided
As used in this study net worth is the total of capital stock, surplus and
bank.
by
the
held
deposits
total
include
profits, while deposits
TABLE 23
Net Worth to Total Deposits
Expressed as Times, Net Worth Is Contained in Total Deposits
Lowest
Typical
Highest
Group I
4.23
7.09
9.66
Group II
4.47
8.86
16.40
Group IV
6.00
10.78
23.96
Group IV
7.48
12.27
16.39
SERVICE CHARGES FOR BANKS
Need for Service Charges and Their Calculation
has grown from the realiThe practice of making service charges on small accounts
a loss to the institutions.
at
banks
the
by
handled
being
were
accounts
zation that these
not
are
earning a profit for the
they
that
shows
An analysis of these small accounts
to the bank handling such business.
loss
a
causing
actually
are
contrary
the
on
bank, but
to making a charge against the acTo remedy this situation the banks have resorted
handling this business.
of
expense
the
meeting
in
aid
will
which
counts
arriving at the service charges is
An analysis of the accounts for the purpose of
namely, individual accounts and
groups,
two
usually made by dividing accounts into
individual accounts have practhe
because
made
is
division
This
.
business accounts
business accounts, however.
The
them.
against
drawn
checks
except
tically no activities
on other banks and
s
checks
numerou
deposits
in addition to drawing checks, usually
the individual depositor.
by
d
demande
ly
ordinari
not
services
al
addition
require
month is determined and the
In the case of individual accounts the balance for the
, metered schedule is then applied
checks paid during the month are counted. A uniform
is compensated for by the balances
and those accounts having greater activity than
of services. The amount of this
cost
the
cover
maintained are charged an amount to
amount of activity of the account.
the
and
balance
the
of
size
the
upon
depends
charge
are analyzed individually each
In the case of business accounts, the accounts
such accounts may be taken
of
ents
requirem
month in order that all extra service
accounts are determined and from
the
from
earnings
possible
The
ation.
consider
into
this is deducted the cost of the service rendered.
bank is entitled to a return for
Service charges are justified on the basis that a
operation plus a fair return on the
of
costs
the
cover
will
which
rendered
services
the
ses set their prices for merchandise
investment in the business. Other business enterpri
the owner a return on his investgive
and
n
at a figure to cover all costs of operatio
to continue to render the community the
are
they
if
likewise
do
must
banks
The
ment.
to handle business at a loss and
service expected of them. They cannot be expected
ty they serve.
communi
the
to
service
continue to give vital and efficient
Analysis of Accounts in Connection with Service Charges
banks are to charge the
The analysis of accounts by the banks is a necessity if the
. To intelligently
accounts
such
handling
of
expense
customers a fair amount to cover the
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Federal Reserve Bank of St. Louis
OF COLORADO BANKS IN 1936
29
set the service charge the bankers should know: what can be earned from the funds
the depositor leaves with the bank, how much each customer has on deposit, how much
service the depositor requires, and how much it costs to render this service. When the
banker has such information he is able to set up a definite standard of measure, and
determine for each account whether the balances maintained are sufficient to compensate for the services required.
In the questionnaire sent out regarding income and expenses of banks the following question was asked in regard to service charges: Do you analyze accounts?
The result of such inquiry is as follows: of the sixty-five returns, fifty, or 76.9 per
cent, stated they did analyze accounts, thirteen, or 20.0 per cent, stated they did not
analyze accounts, and two, or 3.1 per cent, were non-committal.
SERVICE CHARGE SCHEDULES
Each of the sixty-five banks used in this study reported that they make service
charges for accounts below a certain minimum balance. The reports for 1929 showed
only thirty-four out of sixty-one and 1930 showed fifty out of sixty banks making such
service charges.
The basis for such service charges is, as a general rule, to make a flat charge
per month on a certain minimum balance allowing a specified number of checks to be
drawn against this balance. Additional checks drawn in excess of the minimum balance allowed are charged on a flat rate per check.
Twenty-seven, or 47.4 per cent, of the fifty-seven banks sending in service charge
schedules gave as a basis for the charge a monthly basic charge of fifty cents on a
minimum balance of $50.00. From five to ten checks are allowed on the above charge
with twelve banks making an allowance of five items, the fifteen other banks ranging
from five to ten items. The charge for items over the minimum number allowed
ranges from 3c to Sc per item, with the 3c charge predominating. Ten banks, or 17.5
per cent, gave as a basis for service charges one check for each ten dollars minimum
balance with no basic monthly charge. Any checks drawn over the minimum number
allowed are charged on a flat per item basis. This group charges 3c per item for all
checks drawn over the minimum allowed.
Nine banks, or 15.8 per cent, used as a service charge basis a minimum balance
of $100.00 with basic monthly charges of 50c and $1.00. Five banks use 50c as a basic
charge while four banks use $1.00. Five of these nine banks allowed ten checks to be
drawn on the basic charge, three allowed fifteen checks, one allowed six checks, and one
allowed any number desired. The charge for checks drawn in excess of the number
allowed was 3c by four banks, 4c by four banks while one bank did not specify the
charge made.
The remaining eleven banks, or 19.3 per cent, use numerous variations of the
above charges. Some use the same minimum balances and vary the basic charges or
use the same basic charges and vary the minimum balances. The number of checks
allowed on these basic charges vary from six to fifteen with ten predominating. The
charge per item for checks drawn in excess of the number allowed vary from 2c to Sc
with the 5c charge predominating.
IMPORTANCE OF SERVICE CHARGES AS A SOURCE OF REVENUE
Service charges have become a very important item of bank income as shown
by the typical figures for the four groups in the following table:
Typical Figures for Bank Service Charges*
Group IV
Group HI
All Banks
Group H
Group I
Year
4.68
10.88
10.26
10.99
8.97
1936
* Total Revenue Equals 100 per cent.
Group I derived 8.97 per cent of total revenue from service charges, Group II, 10.99
per cent, Group III, 10.88, and Group IV, 4.68 per cent. The typical figure for all sixtyfive banks shows 10.26 per cent of total revenue coming from service charges.
In the order of importance as a source of revenue service charges rank third in
Groups I, II, and III being exceeded by interest and discount on loans and interest and
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Federal Reserve Bank of St. Louis
TABLE 24
Percentage of Gross Earnings Paid Out in Taxes by States-Comptroller of the Currency-For National Banks
(In thousands of dollars)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Year Ended June 30, 1933
Taxes Per Cent
Gross Earnings
3.27
159
$
$ 4,856
5.49
186
3,386
7.23
195
2,698
2.73
1,352
49,543
4.77
105
2,202
5.08
636
12,525
2.61
4,818
184,645
4.79
1,642
34,308
3.74
3,844
102,878
3.20
32
1,000
5.40
460
8,519
4.68
621
13,273
6.05
368
6,079
6.18
158
2,555
8.72
141
1,617
7.87
739
9,388
3.32
216
6.506
3.61
259
7.165
13.21
323
2,444
7.46
356
4.771
8.31
2,819
33,901
5.60
148
2,629
6.75
529
7,835
6.44
707
10,981
6.40
1,937
30,244
8.53
921
10,793
12.00
6,209
51,857
4.47
1,181
26,442
3.04
500
16,424
Year Ended June 30, 1935
Taxes Per Cent
Gross Earnings
4.13
$ 193
$ 4,67F
6.41
203
3,166
7.43
187
2,517
4.35
1,721
39,567
4.22
124
2,938
6.15
667
. 10,841
5.16
7,314
141,594
5.58
1,578
28,300
4.40
4,182
94,949
4.56
43
942
5.10
486
9,537
5.32
674
12,656
4.65
272
5,843
5.75
185
3,216
7.44
134
1,800
6.94
612
8,823
3.85
248
6,447
3.93
285
7,246
10.39
255
2,455
8.54
675
7,901
7.87
2,761
35.078
4.88
167
3,422
6.69
518
7,748
6.80
780
11,462
6.40
1,999
31,248
8.75
924
10,563
5.17
3,282
63,481
5.03
718
14,265
3.16
438
13,868
REVENUES,EXPENSES,AND PROFITS
Year Ended June 30, 1927
Taxes Per Cent
Gross Earnings
4.21
$ 358
$ 8,504
Maine
5.81
247
4,251
New Hampshire
7.90
300
3,798
Vermont
3.18
2,159
67,905
Massachusetts
4.98
131
2,925
Rhode Island
6.24
898
14,389
Connecticut
4.77
12,543
262,757
New York
4.28
2,088
48,834
New Jersey
4.82
7,380
Pennsylvania .._ 153,137
4.50
58
1.288
Delaware
6.15
928
15,081
Maryland
6.21
1,203
19,365
Virginia
7.53
792
10,517
West Virginia
5.93
615
10,373
North Carolina
7.53
528
7,012
South Carolina
7.49
835
11,149
George
5.37
897
16,701
Florida
8.43
869
10,304
Alabama
8.83
481
5.447
Mississippi
8.23
579
7,033
Louisiana
7.61
4.073
53,462
Texas
4.29
240
5,592
Arkansas
6.93
1,008
14,528
Kentucky
6.88
927
13,482
Tennessee
6.92
3,296
47,612
Ohio
8.47
1,864
21,999
Indiana
7.44
5,831
78,420
Illinois
6.54
1,884
28,814
Michigan
4.71
1,038
22,039
Wisconsin
1,801
896
3,067
247
153
552
1,133
239
142
974
105
1,120
1,107
521
2,964
192
177
74
92
Total U. S.__1,242,262
70,304
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Federal Reserve Bank of St. Louis
5.63
4.95
10.40
4.43
3.73
4.64
8.61
5.25
5.83
6.82
6.00
4.87
6.39
4.68
4.13
6.09
6.40
7.06
5.74
23,222
7,420
15,779
3,121
2,764
8,663
7,968
3,137
1,845
8,871
1,264
13,410
10,606
7,612
103,009
1,055
1,965
498
1,004
1,355
295
883
127
72
379
450
215
96
747
107
382
209
232
3,144
45
36
26
168
5.83
3.98
5.60
4.07
2.60
4.37
5.65
6.85
5.20
8.42
8.46
2.85
1.97
3.05
3.05
4.26
1.83
5.22
16.73
22,315
6,769
13,732
2,389
2,192
8,040
7,182
2,558
1,574
7,744
1,310
13,475
10,213
7,302
97,723
1.168
2,323
644
1,261
1.573
204
782
115
84
378
394
218
99
667
92
412
274
346
4,100
54
46
25
141
7.05
3.01
5.70
4.81
3.83
4.70
5.49
8.52
6.29
8.61
7.02
3.06
2.68
4.74
4.19
4.62
1.98
3.88
11.81
9F61 NI KTINVEI OCIVU0703 JO
30,904
18,104
29,471
5,569
4,101
11,902
13,154
4,553
2,436
14,282
1,749
23,014
17,314
11,131
71.694
3,151
2,765
1,048
1,604
Minnesota
Iowa
Missouri
North Dakota
South Dakota
Nebraska
Kansas
Montana
Wyoming
Colorado
New Mexico
Oklahoma
Washington
Oregon
California
Idaho
Utah
Nevada
Arizona
REVENUES,EXPENSES,AND PROFITS
32
importance in Group IV, being
dividends on securities. Service charges are fifth in
dividends on securities, profit
exceeded by interest and discount on loans, interest and
rentals.
g
buildin
bank
and
from sale of securities,
as a group, service charges
As regards its importance among the sixty-five banks
and interest and dividends
loans
on
t
discoun
and
interest
d
by
exceede
being
rank third,
.
on securities as sources of bank revenue
BANK TAXES
paid out in taxes by national
Table 24 shows the percentage of gross earnings
1935.
and
1933,
1927,
years
banks by states for the
age of gross revenue paid
Colorado's rank among the states in respect to percent
sixth in 1933, and third in 1935.
1927,
in
th
sixteen
was
banks
l
nationa
by
taxes
for
out
than Colorado in 1935 were Arizona,
The three states having a higher percentage
8.75
respectively, as compared with 8.61
and
Mississippi, and Indiana, with 11.81, 10.39,
states in 1935 was 5.65 per cent.
ght
forty-ei
the
for
average
The
o.
Colorad
for
the percentage of gross revenue paid
The states in close proximity to Colorado and
6.29; Kansas, 5.49; Nebraska, 4.70;
g,
Wyomin
:
in taxes for 1935 are shown as follows
and Arizona, 11.81. The average for
1.98;
Utah,
7.02;
Mexico,
New
3.06;
ma,
Oklaho
compared with 8.61 per cent for Colorado.
the above seven states is 5.76 per cent as
are paying a much higher percentage
This table shows that Colorado national banks
the union and also a much higher perin
states
most
than
taxes
for
e
revenu
of gross
for all states in 1935 was 5.65 per cent and
centage than neighboring states. The average
cent, while Colorado national banks paid
for the seven neighboring states 5.76 per
These figures show that Colorado national
8.61 per cent of gross revenue for taxes.
of their gross revenue for taxes than did
more
cent
per
fifty
mately
banks paid approxi
and for the neighboring states.
whole
a
the average states both for the nation as
REVENUE AND EXPENSES FOR COLORADO BANKS
1931-1936 Inclusive
expenses of all Colorado banks for the years
The following statistics of revenue and
that the bankers might trace the trend in
order
in
ed
is
present
ve
inclusi
1931 to 1936
period intervening between 1930 and 1936,
the
for
sources and distribution of revenue
ed.
publish
were
studies
cost
detailed
which
the years in
tion of revenue for all Colorado banks for
Table 25 shows the sources and distribu
percentages used are based upon total revenue as
the years 1931 to 1936 inclusive. The
100 per cent.
t on loans declined steadily until
Analysis of Table 25 shows that interest and discoun
nce.
Interest and dividends on seimporta
former
its
d
regaine
nearly
1935, but in 1936
d considerably from former
decline
1936
in
but
1935,
curities steadily increased until
they have become of considerable
until
year
each
ed
increas
have
charges
years. Service
revenue has remained relatively constant
importance as a source of bank revenue. Other
period.
during the
place in the item of interest paid which
The greatest reduction in expenses has taken
interest paid in 1936 being approximately onethe
period,
this
during
y
steadil
d
decline
s and wages showed a steady increase as does
third the amount paid in 1931. Salarie
constant during this period.
ly
relative
d
other expenses. Taxes remaine
1931 to 1935, but dropped nearly to their
from
greatly
ed
increas
ies
recover
Total
1936.
1932 level in the year
per cent in 1931 to 15.05 per cent in
Total losses charged off decreased from 23.60
from 1933 and 1934 which had 60.51
e
decreas
rable
conside
a
showed
1936. However, 1936
the most important item in this
was
loans
on
and 62.66 per cent respectively. Losses
whole.
a
as
period
group for the
period. The years 1932, 1933, and
Net profits fluctuated considerably during this
10.56 per cent respectively, while 1931, 1935,
and
29.05,
5.45,
of
deficit
a
showed
1934
and 25.07 per cent respectively.
and 1936 showed a profit of 2.41, 24.58,
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Federal Reserve Bank of St. Louis
OF COLORADO BANKS IN 1936
TABLE 25
Inclusive
Revenue and Expenses of All Colorado Banks, 1931-1936
Total Revenue Equals 100 Per Cent
1931
1932
1933
1934
1935
19361:
53.76
27.49
.58
18.17
-100.00
49.36
32.74
1.67
16.23
45.84
37.75
2.82
13.59
39.84
40.15
5.38
14.63
38.51
38.20
7.53
15.76
51.69
18.43
10.26
19.62
100.00
100.00
100.00
100.00
100.00
31.01
25.78
8.05
14.32
30.36
27.60
9.55
15.45
26.78
29.37
9.40
18.75
19.16
29.80
8.90
21.21
16.30
30.56
8.63
19.59
10.40
28.39
7.35
22.44
79.16
82.96
84.30
79.07
75.08
68.5k
20.84
17.04
15.70
20.93
24.92
31.42
Add:
Recoveries from prior charge-offs
Loans
Securities
Other recoveries
2.88
1.93
.36
2.31
3.24
.93
5.39
6.67
3.67
7.58
17.40
6.19
6.15
29.08
1.80
Total recoveries
5.17
6.48
15.73
31.17
37.03
13.00
8.73
1.87
15.10
11.10
2.77
-28.97
34.62
22.26
3.63
30.76
24.83
7.07
16.94
16.67
3.76
60.51
62.66
37.37
15.05
25.07
Revenue:
Interest and discount on loans
Interest and dividends on securities
Service charges
Other revenue
Total gross revenue
Expense:
Interest paid
Salaries and wages
Taxes
Other expense
Total expense
Banking profit
Deduct:
Losses charged off
Loans
Securities
Other losses
Total losses
23.60
Net profit before dividends
Dividends paid
2.41
8.60
5.45*
6.37
29.08*
3.43
10.56*
6.86
24.58
9.57
Net to undivided profits
6.19*
11.82*
32.51*
17.42*
15.01
*Deficit
65 banks used in detailed analysis for 1936.
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Federal Reserve Bank of St. Louis
8.70
C,3
COLORADO AND GEORGIA BANKS
TABLE 26
Comparison of Colorado and Georgia Banks - Total Revenue Equals 100 Per Cent
Revenue:
1931
Georgia
Colo.
61.2
53.8
Interest and Discount on Loans
21.4
Interest and Dividends on Securities_ 27.5
___
.6
Service Charges
17.4
18.1
Other Revenue
1932
Georgia
Colo.
58.3
49.4
23.9
32.7
1.7
___
17.8
16.2
1933
Coio.
Georgia
54.9
45.8
37.8
24.1
2.8
2.4
13.6
18.6
1934
Georgia
Colo.
52.8
39.8
40.2
23.9
2.7
5.4
20.6
14.6
1935
Colo. Georgia
53.2
38.5
38.2
20.5
3.4
7.5
15.8
22.9
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
31.0
25.8
8.1
14.3
29.8
22.9
7.9
15.2
30.4
27.6
9.5
15.5
30.9
22.5
9.0
19.6
26.8
29.4
9.4
18.7
25.2
23.1
8.4
18.3
19.2
29.8
8.9
21.2
18.1
24.0
7.8
19.2
16.3
30.6
8.6
19.6
15.0
25.6
8.2
21.0
Total Expense
Banking Profit
Add:
Recoveries from Prior Charge-Offs
Deduct:
Losses Charge Off
Loans
Securities
Other Losses
79.2
20.8
75.8
24.2
83.0
17.0
82.0
18.0
81.3
15.7
75.0
24.0
79.1
20.9
69.1
30.9
75.1
24.9
69.8
30.2
5.2
3.8
6.5
3.8
15.7
10.3
31.2
12.8
37.0
17.8
13.0
8.7
1.9
12.6
7.9
4.6
15.1
11.1
2.8
15.0
9.2
6.2
34.6
22.3
3.6
29.1
14.6
20.1
30.8
24.8
7.1
25.4
9.5
12.4
16.9
16.7
3.8
10.8
7.9
5.3
Total Losses
Net Profit before Dividends_
Dividends Paid
Net to Undivided Profits
* Deficit
23.6
2.4
8.6
6.2*
25.1
2.9
14.7
11.8*
29.0
5.5*
6.7
11.9*
30.4
8.6*
12.9
21.5*
60.5
29.1*
3.4
32.5*
63.8
28.5*
8.7
37.2*
62.7
10.6*
6.9
17.5*
47.3
3.6*
13.3
16.9*
37.4
24.5
9.6
14.9
24.0
24.0
15.4
8.6
Total Gross Revenue
Expense:
Interest Paid
Salaries and Wages
Taxes
Other Expense
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Federal Reserve Bank of St. Louis
REVENUES,EXPENSES,AND PROFITS OF COLORADO BANKS IN 1936
The Georgia Bankers' Association conducted a survey of revenue and expenses of
Georgia banks for the period 1926 to 1935 inclusive. Table 26 compares the findings of
this survey with Colorado banks for the years 1931 to 1935 inclusive.
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Federal Reserve Bank of St. Louis
APPENDIX
APPENDIX
QUESTIONNAIRE ON BANK FAILURES
from
THE COLORADO BANKERS' ASSOCIATION
in Cooperation with
THE BUREAU OF BUSINESS AND GOVERNMENT RESEARCH
University of Colorado
Boulder, Colorado
bank failures in your
From 1925 to 1935 inclusive there were
community, which
your
of
that
and
city or town. From your own point of view
failures? Please
bank
of the following causes would you assign for these
rank the causes in order of their importance; that is, 1, 2, 3, 4, etc. You may
number as many causes as you think were important.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
Incompetent management
Insufficient capitalization
Dishonesty in management
Cut-throat competition
Uncontrollable economic conditions
Other business failures
Too many banks in community for business available
Excessive farm loans
Excessive real estate loans
Excessive chattel mortgage loans
Excessive unsecured loans
Inadequate liquidity
Involvement in stock market speculation
Inadequate bank examination
Excessive governmental regulation
Loans to bank officials
Loans to relatives of bank officials
Too much money tied up in bank building
Slump in bond prices
Unjustified loss of confidence by depositors
Decreased demand for bank loans by local business men
Bank officials engaged in outside business
Other causes
Please write in
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Federal Reserve Bank of St. Louis
APPENDIX
37
QUESTIONNAIRE ON BANK COMPETITION
from
THE COLORADO BANKERS' ASSOCIATION
in Cooperation with
THE BUREAU OF BUSINESS AND GOVERNMENT RESEARCH
University of Colorado
Boulder, Colorado
Does the competition of banks outside of Colorado cut in on you for the
business of making loans to local customers?
Yes
No_
If such competition exists, which of the following causes may be back
of it? Please rank the causes in order of their importance; that is, 1, 2, 3, 4, etc.
You may number as many causes as you think important.
1. Lower rates on loans
2. Active solicitation by outside representatives
3. Larger size loans required
4. Official connections with outside banks
5. Habit and/or custom
6. Chains, branch houses, and other
business firms with central
headquarters outside Colorado
7. Other causes
Please write in _
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Federal Reserve Bank of St. Louis
QUESTIONNAIRE
from
COLORADO BANKERS' ASSOCIATION
in cooperation with
BUREAU OF BUSINESS AND GOVERNMENT RESEARCH
University of Colorado
INCOME-Interest and Discount on Loans
Interest and Dividends on Securities
Exchange and Collection Charges
Service Charges
Profit from Sales of Securities
Miscellaneous Income
Bank Building Rentals
Real Estate Rentals
Income Other Departments:
Safe Deposit
Trust
Other Departments
Total Income Other Departments
TOTAL GROSS INCOME
OPERATING EXPENSES—
Interest Paid
Time Deposits
Borrowed Money
Total Interest Paid
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Federal Reserve Bank of St. Louis
IlaNffd-JV
STATEMENT OF INCOME AND EXPENSE
For Twelve Months Ended December 31, 1936
Salaries
Board Fees
Executives
Bank Employees_
Other Departments
Total Salaries
Rent
Light, Heat, and Water
Advertising
Taxes
Income
General Property
Total Taxes
Depreciation
Building
Furniture and Fixtures
Total Depreciation_
Stationery, Printing and Supplies
Repairs and Maintenance
Insurance and Bonds
Dues, Contributions, and Subscriptions
Postage
Audits and Examinations
Legal Expense
Telephone and A eiegraph_
Freight and Express
Miscellaneous
TOTAL OPERATING EXPENSE
OPERATING PROFIT
Add: Recoveries from Prior C ha rge-of Is
Deduct: Losses Charged Off
NET PROFIT
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Federal Reserve Bank of St. Louis
$
$
$
$
$
$
$
$
$
$
$
$
-
UNIVERSITY OF ARKANSAS
COLLEGE OF AGRICULTURE
Agricultural Experiment Station
Main Station, University; with Cotton Branch Station, Lee County
Rice Branch Station, Arkansas County; Fruit and
Truck Branch Station, Hempstead County
Bank Failures in Arkansas
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Federal Reserve Bank of St. Louis
FRED L. GARLOCK and B. M. GILE
BULLETIN NO. 315
C. 0. BRANNEN, Acting Director
FAYETTEVILLE, ARKANSAS
March, 1935
CHARTS
PAGE
Distribution of Bank Failures in Arkansas, 1930 to
1932, Inclusive, by Counties
Figure 2. Cash Income of Farmers, Value of Farm Real Estate,
and Bank Deposits in Arkansas, 1924 to 1932, inclusive
Figure 3. Principal Assets and Liabilities of an Arkansas Bank,
1918 to 1931, inclusive
Figure 4. Ratio of Cash Resources to Deposits
Figure 5. Ratio of Cash Resources and Net United States Securities to Deposits
Figure 6. Ratio of Borrowed Money to Deposits
Figure 7. Ratio of Loans and "Other Stocks and Bonds" to
Deposits
Figure 8. Total Deposits, Annual Averages Expressed as Percentages of Average Deposits of Banks in 1928-1929
Figure 9. Total Loans, Annual Averages Expressed as Percent.
ages of the Average Loans in 1928-1929
Figure 10. Ratio of Loans Criticized by Examiners to Total Loans
at Summer Peak Each Year, 1928-1932
Figure 11. Measures of Liquidity of Loans at Summer Peak Each
Year, 1929-1932
Figure 12. Quality of Loans in a Strong Bank and a Weak Bank
Figure 13. Loans to Finance Cotton Production
Figure 14. Loans for the Purchase or Improvement of Farm Real
Estate and for Refinancing Indebtedness
Figure 15. Leans to Business and Manufacturing Firms
Figure 16. Miscellaneous Types of Loans
Figure 17. Types of Loans in a Surviving Bank and a Closed Bank
Figure 18. Ratio of Net United States Securities and Other
Stocks and Bonds to Deposits
Figure 19. Classification of Assets and Liabilities to Show the
Condition of a Bank
Figure 20. Condition of a Surviving Bank and a Closed Bank
Figure 21. Condition of a Surviving Bank and a Closed Bank
Figure 22. Condition of a Surviving Bank and a Closed Bank
Figure 23. Condition of a Surviving Bank and a Closed Bank
Figure 24. Condition of Two Closed Banks
Figure 25. Condition of Two Reorganized Banks
Figure 26. Earnings, Expenses, and Losses per $100 of Deposits
Figure 27. Demand and Time Deposits, Annual Averages Expressed as Percentages of Average Demand or Time
Deposits in 1928-1929
Figure 28. Relation of Slow Assets to Time Deposits and Capital
Funds in 1929
Figure 1.
4
7
8
10
12
14
14
16
16
18
19
20
24
26
28
30
32
34
45
47
48
49
50
52
53
60
64
65
Arkansas Agricultural Experiment Station
In Cooperation with the United States Department of Agriculture
Bureau of Agricultural Economics
Division of Agricultural Finance
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
FRED L. GARLOCK
Bureau of Agricultural Economics
United States Department of Agriculture
and
B. M. GILE
Department of Rural Economics and Sociology
College of Agriculture, University of Arkansas
CONTENTS
Difficulties Brought by the Drought of 1930 and the Depression
Reserve Policies of Closed and Surviving Banks
Loans of Closed and Surviving Banks
Investments of Closed and Surviving Banks
Conditions of Banks and Effects of Depression
Earnings, Expenses, and Profits of Closed and Surviving Banks
Protective Measures for the Future
Summary and Conclusions
Appendices
.
Page
6
10
17
35
44
59
64
74
76
Arkansas, like most other states in which agriculture is a
dominant industry, has had serious banking difficulties ever since
the depression of 1920-21. From 1921 to 1930 there were 95 bank
failures in Arkansas, involving deposits of $27,661,000. The most
serious difficulties, however, arose in 1930 when the gradually
evolving depression of recent years was combined with a devastating drought. That year 134 Arkansas banks with deposits of
$41,471,000 were forced to close. Failures then diminished during the next 2 years. There were 57 failures involving deposits
of $11,744,000 in 1931 and 13 failures involving deposits of
$925,000 in 1932. A total of 204 banks, with deposits of about
$54,000,000, closed during the 3 years following 19291.
These figures have added significance when it is realized that
on June 30, 1929, there were in Arkansas only 420 banks with deposits of slightly less than $200,000.0002. Although banking difficulties were general throughout the United States after 1929,
Arkansas had more than a proportionate share of bank failures.
This is revealed by a comparison of closed and operating banks in
Arkansas and neighboring states (Table 1). The distribution of
failures by counties in Arkansas is shown in Figure 1.
A serious condition develops when large numbers of banks
fail, not only because depositors and other creditors suffer heavy
losses but also because the disruption of banking service has a
paralyzing effect on nearly all forms of economic activity. Even
though the purchasing power represented by the deposits of closed
banks may not all be lost, much of it is immobilized for a long
period so that it can not be used. Moreover, those who rely upon
the banks for credit accommodation find themselves in an extremely restricted position. It becomes more difficult for all
'Revised figures of Federal Reserve Board.
2Annual report of the Comptroller of the Currency for 1929.
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Federal Reserve Bank of St. Louis
4
ARKANSAS EXPERIMENT STATION BULLETIN 315
TABLE 1.
COMPARISON OF BANK FAILURES IN ARKANSAS AND IN OTHER NEAR-BY
STATES DURING THE PERIOD 1930 TO 1932, INCLUSIVE
Banks closed 1930 to
1932, inclusive,
Banks operating
June 30, 19202
Percentage closed
State
Number
Deposits
Number
1,000
dollars
1,000
dollars
,
Per cent
Deposits
Per cent
•
420
1,325
490
334
226
1,353
649
1,077
846
1,328
1,801
54,140
54,751
38,936
50,310
15,509
69,710
16,079
25,841
45,396
192,843
364,139
204
305
88
127
31
155
78
150
206
442
572
Arkansas
Missouri
Tennessee
Mississippi
Louisiana
Texas
Oklahoma
Kansas
Nebraska
Iowa
Illinois
Number
Deposits
49
23
18
38
14
11
12
14
24
33
32
21,S61
1,210,060
437,270
221,901
432,771
1,155,794
470,389
442,857
438,403
873,423
4,031,385
25
5
9
23
4
6
3
6
10
22
9
'Revised figures supplied by Federal Reserve Board.
=Compiled from Annual Report of the Comptroller of the Currency for 1929.
DISTRIBUTION OF BANK FAILURES IN ARKANSAS, 1930 TO 1932, INCLUSIVE, BY
COUNTIES
92
91
Worm,
GeOle
•
.
•00•Ir
•
••••00t.
1•11
•
4.1•0
311
11•00,01,9
•
•
•
,19,110•09 •
•
•
•
Nno, o
C•0911
•
Sr •••••09
1.
311
(oh dot represents
one Donk failure
,r•
41
fluAtoo
•
•
SOUPS:.
COWNIN •
13
CIIICO
DIVISION Of •IINIf OVERATION5
90
03
01•011710.1.9 OF
during the period, 1929 to 1932, inFigure 1. Bank failures were numerous 7 counties had no failures: CrawOnly
clusive, in nearly all parts of the state. Stone, and Washington. Counties having
ford, Desha, Hot Spring, Lee, Nevada,
Boone, Chicot, Clay, Hempstead, Lawrence.
more than 5 failures were Benton.
Mississippi, and White.
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
5
classes of the population to pay their obligations and carry on
business transactions. The combined effects of the 1930 drought,
the depression, and the bank failures were to create a condition
of industrial and business stagnation and financial insolvency
which is without parallel in the experience of recent generations.
Recognizing the unusual severity of banking conditions in
Arkansas, several members of the Arkansas Bankers Association
asked the Arkansas Agricultural Experiment Station and the Federal Bureau of Agricultural Economics to study the causes of banking difficulties in Arkansas and to suggest steps which might be
taken to prevent a possible repetition of such difficulties in the
future. The invitation to make this study was accepted by these
two organizations because it was thought that many of the problems involved were those of agricultural finance. At a later date
the Executive Council of the Arkansas Bankers Association passed
a formal resolution sponsoring the study. The gathering of data
was begun in the late fall of 19323.
The general plan of the study was to compare over a considerable period of time the operating policies and financial conditions
of banks which survived the depression with those of banks which
were closed in 1930, 1931, and 1932. Special emphasis has been
placed on reserve, loan, and investment policies. Since it was not
possible to include all banks in the study, 15 open banks were
chosen to represent the surviving banks, and 13 closed banks were
chosen from the receiverships. The banks were selected with reference to geographical location, types of agriculture, financial
condition, and operating policy, the plan being to have each group
of banks represent a wide variety of conditions and policies.
Data on the banks were obtained from all available sources,
including the banks, supervisory authorities, receivers, and, in
some cases, private individuals who had knowledge of the banks'
dealings. From the books of the banks, data were obtained on
the principal balance sheet items, such as loans, deposits, reserves,
and the like, as far back as 1918 whenever the records covered
that long a period. Also a large sample of the individual loans
of 12 banks was taken and the loans were traced back in the liability ledgers to dates of origin. Information on the condition of
the borrowers was obtained from financial statements on file and
from bank officers and receivers. In addition, itemized lists of
'Full responsibility for the accuracy of data and for the validity of conclusions
presented herein rests with the authors and their respective institutions. The study
could not have been made, however, without the generous support and assistance of
many other persons and organizations. Among these are the individual bankers and
receivers of banks in Arkansas who opened their books for inspection, the Arkansas
Bankers Association, the State Banking Department of Arkansas. the Federal Reserve
Bank of St. Louis, the Chief National Bank Examiner of the St. Louis district. the
Comptroller of the Currency, and the Federal Reserve Board.
The authors express their appreciation of the helpful comment and criticism
given by R. G. Dickinson, formerly Deputy-Commissioner of Banking in Arkansas,
and Norman J. Wall and V. N. Valgren of the Bureau of Agricultural Economics.
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6
ARKANSAS EXPERIMENT STATION BULLETIN 315
the investments were made. These data were supplemented by
examiners' reports, call statements, and statements of income and
expense.
As field work extended until mid-summer 1933, it has not
been possible to analyze all of the material that was collected.
Sufficient progress has been made, however, to indicate clearly the
most important causes of banking difficulty in Arkansas; and in
order to make this information available at an early date, the
present report has been prepared4. The effort at this time is to
direct attention to certain features of bank management that
caused the failure of many banks and threatened the failure of
others.
DIFFICULTIES BROUGHT BY THE DROUGHT OF 1930 AND BY THE
DEPRESSION
In many respects it may be claimed truthfully that the
drought of 1930 and the depression were responsible for most of
the bank failures in Arkansas since 1929. Drastic changes in the
incomes and in the financial condition of the patrons of banks
caused deposits to decline and impaired the quality of bank assets, thus placing the banks under an unusually heavy strain.
Some indication of the extent of these changes is afforded by
Figure 2, which shows the movement of farm income, farm real
estate values, and bank deposits in Arkansas from 1924 to and including 1932.
To understand how the banks were affected by the declines
in these items following 1929, it will be well to note how the banking business is conducted. The deposits of a bank, as is generally
known, are its principal stock in trade. Excepting ordinary seasonal changes, an increase of deposits usually permits increase in
loans and investments, and a decline of deposits requires that
loans and investments be reduced in volume. Under ordinary
circumstances it is not difficult to increase the loans if funds are
available for lending, as there usually are borrowers who wish to
expand operations. Even in the most favorable times, however,
it is difficult to reduce loans far below the point that would be
reached as a result of ordinary seasonal liquidation. Borrowers
seldom make provision for paying more than their seasonal loans,
so that often the only way they can make additional payments is
to sell properties or chattels which are needed in their businesses
or on their farms.
For this reason prudent bankers do not lend all that they
might on the basis of their deposits, but keep always at hand for
4An earlier report, Bulletin No. 298 of the Arkansas Agricultural Experiment
Station entitled "General Indicators of the Condition of Arkansas Banks," was issued
in May, 1934.
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
CASH INCOME OF FARMERS, VALUE OF FARM REAL ESTATE, AND BANK DEPOSITS
IN ARKANSAS, 1924 TO 1932, INCLUSIVE
INDEX NUMBERS. AVERAGE. 1928-1929.t00
PERCENT
11
Value of*Inn real estate
as of March /each yow-
H
1
100
90
Bank deposits as1 of
June 30 each year
80
70
60
Cosh Income as of calendar year for
hvestock and crop year for crops
50
MD IMO MI. 111%,
•
40
30
4
1924
1925
U.S. DEPARTMENT OF AGRICULTURE
1926
1927
1928
1929
1930
1931
1932
1933
BUREAU OF AGRICULTURAL ECONOMICS
Figure 2. Farmers' incomes fell drastically after 1929, reducing the value of
farm real estate and contributing to the sharp decline in the deposits of banks.
protection against withdrawals of deposits a substantial amount
of cash, cash balances at other banks, and investments such as
commercial paper, acceptances, call loans, and marketable bonds
which can be converted quickly into cash. In addition to the protection afforded by these items, it usually is possible for banks to
borrow substantial amounts from their city correspondents, or, if
they are members of the Federal Reserve System, from federal
reserve banks. A deposit decline may be met, therefore, by paying out cash that is on hand, calling in cash balances, selling investments, collecting loans, or borrowing from other banks. If
the deposit decline is large, all of these methods may be used.
The deposit withdrawals which accompanied the drought and
the depression were not of ordinary size. Only in 1920-21 had
there been deposit withdrawals approaching the extent of the
tremendous declines that were sustained by the banks in 1930,
1931, and 1932. Not only was this true, but it became unusually
difficult to liquidate the loans and the investments; in some cases,
even the cash balances that were carried at other banks became
unavailable. The drought of 1930 drastically reduced crop yields,
and prices dropped in all years from 1929 through 1932 so that
collections from many types of loans sank to very low levels. In
the fall of 1930 the American Exchange Bank at Little Rock failed,
and this tied up the funds of numerous banks that carried bal-
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
8
ances at this bank. Moreover, since the American Exchange
Bank was the principal unit of a large chain of banks, its failure
carried other members of the chain down with it, thus tying up
the balances of additional banks. Other bank failures had similar effects. To make matters still worse, the bond market fell
rapidly after the middle of 1931, values declining to the point that
banks often could not sell bonds without heavy losses.
Thus the depression brought two sets of conditions, either of
which would have placed the banks in an extremely difficult position. On the one hand, deposits fell rapidly so that it became
necessary for the banks to liquidate a large volume of assets, and,
on the other hand, liquidation became increasingly difficult because of the decline in the prices of commodities, real estate, and
other properties, the reduction in business activity, and growing
stringency in financial centers. Each bank failure made the public more doubtful of banks, increased withdrawals of deposits, redoubled efforts by bankers to collect loans, destroyed purchasing
power and debt-paying power, and in other ways made the situation more burdensome both for the banks and for the general
public.
The position of the banks is most clearly visualized by reference to an individual bank. Figure 3 shows for the period 1918
PRINCIPAL ASSETS AND LIABILITIES OF AN ARKANSAS BANK, 1918 TO 1931, INCLUSIVE
_
Dopos ts
4,„....• Loons
%
1
%
1
%U.
%
SCALE OMITTED
1
%
..
%
t
...
I
Cosh ono' cosh Items p/us
net US socurinos
.........,money
_]....„,___N____
nom.
,slochs one bonds
:
1.._ .
-/.
4.'
1
•t Al4
•
111111111/11
1
1
1..1.111
I
28
/A' .I....]
30
I. Lt. L.1.1
32
'34
OF Aomumumm. gamows
Figure 3. Deposit withdrawals from this bank were extremely large in both
the depression of 1920-21 and the depression following 1929. The bank survived
the earlier depression, due mainly to its large holdings of cash and United States
banks and to make
securities, and to its ability to borrow large amounts from other
with liquid assets when
a drastic liquidation of loans. It was not so well fortified get
so
much assistance
the more recent depression set in and it was not able to
from other banks as during the earlier depression. The bank was closed late in
asset.
available
its
of
exhaustion
the
of
1931 because
1918
'20
72
'24
'26
IDURCAU
US
MINT OF At...cumAt
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
9
to 1931, inclusive, the principal assets and liabilities of a bank
which was closed late in 1931. The name of the bank and the
actual amounts of the various items are omitted to conceal the
identity of the bank, but the items are drawn in exact relation to
each other. Only two points a year are plotted in the period preceding 1927, these points being connected by straight lines, but
beginning with January 1927, the condition of the bank is shown
as of the first business day of each month.
At the end of 1929, this bank had the largest volume of deposits it had had since early in 1920. It had a large volume of cash,
cash items, and United States securities, and it was not indebted to
other banks. During the next 2 years, however, it sustained an
almost uninterrupted drain of deposits which, despite extensive
borrowing from other banks and a substantial liquidation of loans,
reduced its cash funds and United States securities nearly to the
point of total exhaustion. When the bank finally closed about the
end of 1931, little remained that could be converted into ready
cash. The liquid loans had been collected, and the "other stocks and
bonds" were badly depreciated. Moreover, nearly all of the "other
stocks and bonds" and the loans had been pledged as collateral to
various creditors so that amounts which might be realized from
their sale or collection were not available to the bank. The bank
was closed because it had virtually nothing with which to conduct
business.
For those who are interested in historical comparisons, it will
be worthwhile to point out several differences in the bank's condition during the two severe depressions of 1920-21 and 1930-32.
Withdrawals of deposits were large in both of these depressions.
in 1920-21, however, the bank was better fortified with cash and
United States securities and had much better success in collecting
its loans than during 1930 and 1931. Moreover, in the earlier
depression the bank was able to borrow from other banks at the
end of 1920 an amount equal to 66 per cent of the deposits, whereas at the end of 1930 its borrowings from other banks amounted
to only 44 per cent of the deposits. There is evidence, as is shown
later in Figure 6, that the borrowing power of many banks was
greatly reduced between 1920-21 and 1930-31.
Despite the obvious importance of the drought and the depression as causes of bank failures, however, approximately half
the banks of Arkansas that were operating in 1929 remained open
through this period of great difficulty. It is worthwhile, therefore, to compare the policies of, and the difficulties faced by the
successful and the unsuccessful banks. Many intangible factors,
which can not be treated adequately by statistical devices, enter
into the picture, but the factors which can be described statistically
are sufficient to indicate why some banks failed and others re-
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
10
mained open. As noted earlier, data from 15 banks that remained open at the end of 1932 and from 13 banks that closed
during 1930, 1931, or 1932 are used to make these comparisons.
RESERVE POLICIES OF CLOSED AND SURVIVING BANKS
One of the principal reasons for the failure of many banks
was that they entered the depression with inadequate cash reserves. As shown in Figure 4, the cash resources5 of closed banks
were smaller than those of surviving banks, not only just before
the recent depression but throughout the entire period following
1919. With money borrowed from other banks deducted from
the cash resources, as shown in the lower part of the chart, the net
RATIO OF CAS II RESOURCES To DEPOSITS
PERCENT
INCLUDING BORROWED MONEY
35
Banks re/770inIng open
1: ugh /932
40 ..... 000.0
:
44isiie
,
25
el.
....•
•••• •,,,..
,
+
--L—
'
O....
'f............. Banks closed clur,ng
,nom
1930,1934 o,/'932
......
_
_
15
••••
EXCLUDING BORROWED MONEY
\\
Banks rem°, ing open
enrough 1932
30
20
dip
NOT
•S.
10
10
V
\\,,,„. Books c/osee/during
/930, l93/,or/932
-20
US
I
1
1918
'20
AAAAA MINT Of AGRICULTURE
22
'24
26
'28
'30
'32
'34
BUREAU Of AGRICULTURAL ECONOMICS
Figure 4. For many years before the depression, banks which survived
banks which were closed
through 1932 had carried larger cash reserves than had
by banks often include
during 1930. 1931, or 1932. The cash reserves reported
deducted from the
money
borrowed
With
banks.
money borrowed from other
carried reserves which were
cash reserves reported by the banks, surviving banks
banks.
closed
usually at least a third greater than those of
items.
'Vasil in vault, balances due from banks, and collection
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
11
cash resources of closed banks were far smaller than those of surviving banks.
It is not always necessary for banks to carry large cash reserves. Banks may be in sound condition with relatively low
cash reserves, provided they hold a substantial volume of other
liquid, or quickly available, assets. Owing to the broad stable
market for United States securities, many bankers regard these
securities as a part of their reserves and they sometimes group
such securities with cash resources in their published statements
of condition. Inclusion of United States securities with cash resources, as in Figure 5, shows closed banks to have been in even
weaker position, as compared with surviving banks, than was indicated by cash resources alone. During most of the period after
1921, surviving banks held cash resources and United States securities equal to more than a third of their deposits, whereas these
items in closed banks were seldom a sixth of the deposits, after
deduction of amounts owed to other banks.
At this point it may be well to digress briefly and explain
how the charts are constructed. The ratios plotted are annual
averages for closed and surviving banks, median averages being
used to prevent exceptionally large or small ratios from exerting
undue influence on the average for a group of banks". Ratios for
individual banks are not shown here because they would complicate the charts unnecessarily, but the distribution of these ratios
is described in an earlier publication7. It should also be explained
that some of the United States securities actually held by the
banks were deducted before preparing Figure 5. Securities pledged by national banks to protect circulating notes are not available for the payment of depositors, hence they were deducted
to place national banks on equal footing with state banks which
do not issue circulating notes, and securities borrowed from customers also were deducted because they presumably were not
available for the payment of depositors.
In discussing the reserves of surviving and closed banks, emphasis has been placed on the showing of net reserves, after deduction of money borrowed from other banks, rather than on the
showing of gross reserves before deduction of borrowed money.
It is important to make this distinction, as banks sometimes report
cash resources and United States securities in very creditable
volume when they owe large amounts on short-time notes to other
banks. As the lending banks usually obtain collateral which assures that their claims will have precedence over the claims of
°The median average for a group of banks divides the ratios for individual banks
into two nearly equal groups, about half the ratios being above, and about half being
below, the median average ratio.
7"General Indicators of the Condition of Arkansas Banks" by B. M. Gilc and Fred
L. Garlock, Arkansas Agricultural Experiment Station Bulletin No. 298.
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
12
TO DEPOSITS
RATIO OF CASH RESOURCES AND NET UNITED STATES SECURITIES
PERCENT
INCLUDING BORROWED MONEY
45
Books /"./7/0/O/O9 open
through 1932
40
•
•
•
35
•
•
30
sS•
•
•
25
1.••
'20
es.
•
Banks closed during
1930, /93/,or 1932
11111111111111111111111111111
'26
'24
20
1918
••
'22
sake
••
'30
28
'32
'34
50
EXCLUDING BORROWED MONEY
45
Books remaining open
through 1932
40
35
30
25
20
•
4.1 =MOO
I5
I •
4
.
•
•
••
•
I
t
•
%VI
I0
Banks closed during
1930,/93/,or 1932
5
0
1918
'20
'22
'24
'26
'28
'30
'32
'34
SUPICAU OF F.OlOCULTuPtAl CCONO.F.CS
U S DEPARTMENT OF AGRICulTuat
throughout
Figure 5. United States securities could be sold at or near par a part of
as
most of the depression and they consequently were often regarded
the depression, surthe reserve funds. As a rule, during the decade preceding
in amounts
viving banks had cash resources and net United States securities
those of banks that closed
which, relative to the deposits, were far greater than
in 1930, 1931, or 1932.
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
13
depositors, it is best to deduct borrowed money from the reserves
in analyzing the ability of banks to pay their depositors.
As may be seen in Figure 6, surviving banks in recent years
have borrowed little from other banks whereas the closed banks
had substantial indebtedness to other banks in every year covered
by the study. In 1918 and 1919 there was no appreciable difference in the borrowing policies of the two groups of banks, but
once out of debt, following the depression of 1920-21, most of the
surviving banks arranged to confine their borrowing to very
small amounts for short periods of time. Although many of the
surviving banks were forced to incur some indebtedness during the
recent depression, the average indebtedness was not large. Most
of the closed banks, in contrast, borrowed every year and became
heavily indebted to other banks during the recent depression. Use
of the liquid assets of closed banks to pay the banks from which
they had borrowed so extensively is one reason depositors have
received such small dividends from receiverships.
An explanation of the low reserves and extensive borrowing
of the closed banks is found in the ratio of loans and investments
to deposits (Figure 7). The loans and investments of closed
banks became seriously out of proportion to the deposits during
the depression of 1920-21 and never were reduced to a conservative level. As a result only a small part of the resources of closed
banks could be held as a reserve, except as they borrowed funds
from other banks. Surviving banks did not become so over-extended during the earlier depression, and, as conditions permitted,
they adjusted their loans and investments to levels which would
allow them to maintain adequate reserves without borrowing from
other banks. Anticipating later sections of the analysis, it may
be pointed out that the open banks managed to survive the recent
depression because in favorable times they had maintained large
reserves of quickly available assets and had used their borrowing
power sparingly. The failure of banks in the closed group may
be ascribed in large measure to their violation of these precautions.
Why some bankers have operated their institutions with narrow margins of liquid assets and why they have borrowed so heavily from other banks year after year are questions with many
answers. A common answer is that to render satisfactory service
to the local community a bank must use nearly all of its own resources and often must borrow additional funds from other banks
for making advances to local farmers and merchants. Otherwise,
according to this version, the bank would not serve its community
adequately and would lose business to its competitors.
It is not possible to determine exactly how much truth there
is in these contentions. Surviving banks were not nearly so prone
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
14
RATIO OF BORROWED MONEY TO DEPOSITS
PERCENT
25
Banks closet/ during
/930.1931,0,1932
20
'5
10
!• •
si
Banks remaining open
through /932
5
0
1918
'22
'20
'24
'26
'28
'30
'32
'34
euREAu Vf AGRICULTURAL ECOPKATKE
U.S INEPARTmENT Of AGMCuLTURE
Figure 6. Throughout the entire period. 1918 to 1930, inclusive, banks which
closed in 1930, 1911, or 1932 were indebted more heavily to other banks than were
banks which survived the depression. Surviving banks as a rule borrowed little
or nothing except in times of depression. Most of the closed banks, however,
were indebted to other banks in each year covered by the study.
RATIO OF LOANS AND "OTHER STOCKS AND BONDS" TO DEPOSITS
PERCENT
Banks closed during
" /930,1931,0,1932
,0„..****
130
I
120
I
%
i
‘
•
1 10
100
fts.
_4
90
80
Banks nernaininf open
through 1932
70
60
1918
'20
S DEPARTMENT Of AGRICULTURE
'22
'24
'26
'28
'30
'32
'34
Run. O AGRICULTUIW. LCONOMICS
Figure 7. Hanks that were closed in 1930, 1931, or 1932 had substantially
larger loans and investments in relation to the deposits than was the case with
banks which survived the depression. This was the principal reason for the
smaller ratio of cash resources and net United States securities to deposits found
in closed banks.
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
15
to borrow money from other institutions as were the banks that
closed, yet, as shown in Figure 8, they had a much better rate of
growth than the closed banks during most of the period covered by
the study. This indicates that banks need not borrow heavily
from other institutions in order to increase their business, though
admittedly a growing bank has less need than a bank whose business is declining to borrow in order to hold its patronage. Moreover, it will be shown later that the closed banks used no larger
proportions of their assets to finance the current productive operations of their communities than did the surviving banks. In so
far as financing the current productive operations of its community may be regarded as the primary loan function of a commercial
bank, it is not evident that the over-extended condition of the
closed banks produced a more adequate loan service than surviving banks were able to render without becoming over-extended.
There does not appear to be much truth in the contention that
banks must violate safe banking principles in order to render adequate service, hold their patronage, or have a satisfactory rate of
growth.
Another contention is that many of the banks sustained such
a loss in volume of business and such a "freezing" of loans in the
depression of 1920-21 that they never again were able to get in
good condition. Figure 8 shows that the banks which closed in
1930, 1931, and 1932 sustained a greater loss of deposits in the
depression of 1920-21 than was the case with banks in the surviving group, and that, although their deposits rose more rapidly during the next 2 or 3 years, the closed banks did not gain deposits
after 1924 as rapidly as the surviving banks. It can hardly be
doubted that the surviving banks operated under conditions which
were more conducive to developing a sound condition during the
decade 1920 to 1930 than was true of the closed banks, for increasing deposits, if properly handled, will cure many ills.
Banks which later were to close, however, made poor use of
their opportunities, particularly after 1924. For a time after the
depression of 1920-21, they liquidated loans (Figure 9), which
improved their condition, as evidenced by the ratios in Figures 4,
5, and 7. About the year 1924, however, they began increasing
their loans in spite of the fact that they were still over-expanded
in comparison to the surviving group. Their condition continued
to improve moderately until 1927 as a result of increasing deposits but after that date the loan expansion was greater than the
increase of deposits. A large sample of the loans carried by
closed banks into 1929 from earlier years showed that more than
70 per cent originated after 1924.
This evidence suggests that the managements of banks that
later were to close could have put their institutions in much bet-
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
16
TOTAL DEPOSITS, ANNUAL AVERAGES EXPRESSED AS PERCENTAGES OF AVERAGE DEPOSITS OF BANKS IN 1928-1929
PERCENT
I
I
Banks closed during
1930./931, or /932 es
\
1 10
I
100
•
•
•
90
•
•
80
70
Bonk.,Porno/fling,Awn
through /932
60
50
40
1918
US
'20
'22
'26
'24
'28
'30
'32
'34
BUREAU OF AGRICULTURAL cco....cs
NICHT OF AGRICULTURE
Figure S. The deposits of banks which were closed during the depression did
not increase so much as the deposits of surviving banks during the period 1924 to
1928, inclusive. The greater increase of deposits in surviving banks made it easier for these banks to improve their liquidity than was the case with banks which
later closed.
TOTAL LOANS, ANNUAL AVERAGES EXPRESSED AS PERCENTAGES OF THE AVERAGE
LOANS IN 1928-1929
PERCENT
I
Banks closed during /930,1934orI932 .....\
1 I0
Ihs
.
"P
100
I
I
8
90
I
I
I
80
I
I
I
I70
in .
8
.„......•
•
•
mo .m Rb
F/A
•
•Os
60
Bonks remaining open throu h 1932
50
40
1918
U S DEPARFINENT OF
'20
AGRICULTURE
'22
'24
'26
'28
'30
'32
'34
BUREAU OF AGRICULTURAL ECONOMICS
Figure 9. Despite the fact that their deposits did not increase so much as the
deposits of surviving banks, closed banks increased their loans more rapidly than
did surviving banks from 1924 to 1928.
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Federal Reserve Bank of St. Louis
it&
BANK FAILURES IN ARKANSAS
17
ter condition than they did, especially between 1924 and 1930.
When deposits increase, conditions are usually favorable to the
collection of loans. Perhaps it is more accurate to say that loans
are most easily collected at such times, for the impulse to expand
loans may be strong. Had the managements of the closed banks
been less free in lending and had they made better use of their
opportunity to collect loans during the favorable years between
1924 and 1930, there is little reason to doubt that the later histories of these banks would have been substantially different. It
does not seem reasonable to ascribe their failure largely to that
earlier depression.
LOANS OF CLOSED AND SURVIVING BANKS
A second important reason for the failure of many banks was
that their loans were of inferior quality. Bank loans are usually
judged by two standards: First, by their ultimate collectibility
or their "goodness"; and, second, by the quickness with which
they can be converted into cash, or their liquidity. A loan may be
safe as far as its ultimate collectibility is concerned, but collection
within a short time may be impossible. Such a loan might be
described as "good but slow." To be in what is commonly known
as a "sound condition," banks must have not only safe loans, but
also a substantial volume of loans that can be collected or otherwise converted into cash within a short period.
The reports of bank examiners are the best source of data
on the safety or goodness of bank loans. Several classifications
of loans are made by examiners, but the most important of these
for our present purpose contains loans which are designated "slow,
doubtful, or worthless." Loans classified as worthless ordinarily are considered to be absolute losses. Doubtful loans are expected to produce large losses but, under favorable conditions,
might possibly be paid. Loans classified as slow are considered
likely to produce substantial losses, but are of better quality than
doubtful and worthless loans. During the period covered by this
study, examiners seldom placed loans which were regarded as
good, even though they were slow, in the slow classification. Thus
the loans designated as slow, doubtful, or worthless are those
which examiners considered to be of questionable value.
Surviving banks entered the depression with much better
loans than were possessed by banks which later were to close
(Figure 10). When loans were at their summer peaks in 1928,
1929, and 1930, only about 15 per cent of the loans of surviving
banks, as compared with 35 to 40 per cent of the loans of closed
banks, were under criticism by examiners as slow, doubtful, or
worthless. If loans criticized by examiners for reasons other than
an impairment of value are included, omitting, however, loans that
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
18
RATIO OF LOANS CRITICIZED BY EXAMINERS TO TOTAL LOANS AT SUMMER PEAR
EACH YEAR, 1928-1932
PERCENT
SLOW. DOUBTFUL.AND
WORTHLESS LOANS
ALL CRITICIZED LOANS
60
8o"ks closed o' rmg
/930 1931, or 932
50
40
mom
al•
NO.
30
20
\\Books rerno,n/ng open
through 1932
I0
0
1928
'29
'30
LI 5 0(0001 0(5T OF AGRICULTURE
'31
'32
'33
1928
'29
'30
'31
'32
'33
'34
BUREAu OF AGRICULTURAL ECONOMICS
Figure 10. Closed banks entered the depression with a much larger proportion
of their loans under criticism by examiners than did banks which survived th,
depression. Even in 1932 the proportion of criticized loans in surviving banks
was lower than the proportion in closed banks had been in 1928 and 1929.
were merely past due and those that merely exceeded statutory
limitations as to size, the criticized loans of surviving banks were
about 25 per cent and those of closed banks nearly 50 per cent of
total loans. The proportion of loans criticized by examiners increased as the depression wore on, but the loans of surviving
banks at their worst were better than the loans of closed banks
had been before the depression. A considerable part of the percentage increase in criticized loans during the depression was due
to liquidation of the best loans, although falling values undermined the security for many loans and examiners became somewhat more strict in their classifications.
The most inclusive data on the liquidity of loans available in
official records are the figures on commercial paper, brokers'
loans, and local paper eligible for rediscount which are submitted
by member banks in their call reports to the federal reserve banks.
Average holdings of these types of paper in relation to total loans,
as reported by seven surviving banks and four closed banks, are
shown in the left-hand section of Figure 11. In the right-hand
section of the figure are estimates of the average holdings of all
liquid loans for six surviving banks and six closed banks, the estimate being based mainly on records of individual loans obtained
from the banks, adjusted according to the showing of other data
which are described in a later section of the report. The attempt
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
19
was to include all commercial paper, brokers' loans, loans secured
by adjusted service certificates, and such other loans as would
ordinarily be liquidated by borrowers from income received in
the course of a year.
It seems safe to say that even in 1929, which was a favorable year, not more than an average of 50 per cent of the loans of
surviving banks and 35 to 40 per cent of the loans of closed banks
could be converted quickly into cash by collection, sale, or discounting. The proportion of liquid loans fell as the drought of
1930 and the depression made collections more difficult and
brought demands by depositors which absorbed the more liquid
assets. It should be pointed out that although the loans of surviving banks were generally more liquid than those of closed
banks, this was not always the case. One of the more liquid banks
was forced to close because it had a deposit decline, between 1929
and 1932, of about 70 per cent. Few of the surviving banks could
have withstood such withdrawals.
The extent of differences in the quality of loans held by
banks is illustrated by Figure 12, which compares the loans of the
strongest bank with the loans of the weakest bank covered by the
study. In 1929, nearly 70 per cent of the loans of the strong
bank were liquid and only about 1 per cent was criticized by examiners as doubtful or worthless. The weak bank had about 23
MEASURES OF LIQUIDITY OF LOANS AT SI'MMER PEAK EACH YEAR, 1929-1932
PERCENT
70
RATIO OF COMMERCIAL PAPER, BROKERS
LOANS. AND LOCAL LOANS ELIGIBLE FOR
RATIO OF LIQUID LOANS
TO TOTAL LOANS AT SUMMER PEAK
( ESTIMATED FROM SAMPLE LOANS
AND OTHER DATA)
DISCOUNT AT FEDERAL RESERVE BANKS
TO TOTAL LOANS AT SUMMER PEAK
60
Berths remain,no 000n
Ihrough 1932
50
40
30
20
1.1.7Ms twroi
Bonk, dosed &inn?
/930. /93/. or /932
10
0
1929
'30
U S DePARTIAtNT OF AGRoCuLTUNI
31
'32
'33
1929
'30
'31
'32
'33
'34
SUAILAU OF AGMCULTuRAL ECONOrmCS
Figure 11. The two measures of liquidity shown in this chart cover different
groups of banks and in other ways also are not strictly comparable. It may
safely be concluded, however, that not more than 50 per cent of the loans of surviving banks and not more than 40 per cent of the loans of closed banks were
liquid in 1929 and 1930. The proportion of loans that was liquid declined as the
depression developed, owing largely to the collection of liquid loans and to the
curtailment of new loans.
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Federal Reserve Bank of St. Louis
CZ>
QUALITY OF LOANS IN A STRONG BANK AND A WEAK BANK
WEAK BANK
STRONG BANK
100
Liquid /oans
75
...
Slow loans nOt
criticized by
examiners
—t-
S/ow loans
go
50
criticized by
examine',
Doubtful
•and worthless
loons
25
•:•:
+
+ + .:+ dicsizateetd_tjhAtiiiiiiiii
+ +++++++fekli
+:
.
"
"+T++++++++
iittitigh:Ita
i
1929
1930
1931
1932
1929
1930
i931
BUREAU
US DEPARTMENT Of AGRiCuLTURE
1932
or aoolcutsurAt. cc0,40...cs
its loans liquid, and only a small proportion
Figure lie. The strong bank entered the depression with nearly 70 per cent of
25 per cent of the loans were liquid and
criticized by examiners as slow, doubtful, or worthless. In the weak bank less than
for reorganization in the last quarter of 1930
most of the others were under criticism by examiners. The weak bank was closed
and was reopened with its loans still in very had condition.
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
AVERAGE TOTAL LOANS FOR 1929'100
PERCENT
BANK FAILURES IN ARKANSAS
21
or 24 per cent of its loans under criticism as doubtful or worthless and a large additional amount criticized by examiners as slow.
Only slightly more than 20 per cent of its loans were liquid. Because of their liquidity, the strong bank was able to reduce its
loans about 50 per cent by the end of 1932, which enabled the bank
to meet all demands of depositors without difficulty. The weak
bank, in contrast, was almost drained of liquid loans by the fall of
1930 and had to close. It later was reorganized on a very hazardous basis and succeeded in remaining open until the banking holiday of 1933.
These are exceptional cases, the strong bank having unusually
liquid, secure loans and the weak bank having exceptionally unliquid, insecure loans. As a rule, the banks did not have a large
volume of loans under criticism by examiners as doubtful and
worthless. Many banks, however, were heavily burdened with
unliquid loans and a substantial portion of these was designated
slow by examiners, indicating not only that they were unliquid,
but also that their security was questioned. Excessive holdings
of unliquid loans, as will be shown later, was one of the most important causes of bank failures. It also seems certain, from the
losses sustained in receiverships and from the large volume of
loans designated slow by examiners even in favorable times, that
a substantial part of bank financing has been conducted on very
narrow margins of safety.
As was stated earlier, one of the sources of information used
in estimating the volume of liquid loans was a sample of the loans
of 12 banks. On each borrower included in the sample, data were
obtained which showed the maximum and minimum amounts owed
each season. From these data it was possible to calculate the
liquidation of loans within given periods, thus providing a basis
for classifying loans according to their liquidity. It was hoped
that factors governing the safety of loans could also be analyzed,
and to that end an attempt was made to obtain data on the borrowers' financial circumstances. The latter data, however, were
unsatisfactory in numerous respects and analysis has not yet revealed whether they will yield significant results. Although at the
present time it is possible to compare loans only according to their
liquidity, this comparison reveals significant differences in the loan
policies of banks.
For reasons which need not be explained here, the sample
loans are known not to be thoroughly representative of all the
loans held by the banks, hence in estimating the volume of liquid
loans, the showing of the sample loans has been adjusted to conform to other known facts. In all cases it was necessary to give
the banks credit for more liquid loans than the sample showed.
The following data on the liquidity of loans, however, are taken
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
22
from the sample alone and should be interpreted as understating
the liquidity of all loans. It is believed, nevertheless, that they
accurately reflect differences in the liquidity of various types of
loans.
The sample loans indicate that the purpose for which a loan
is used has an important bearing on its liquidity (Table 2). Percentage payments on loans used for producing crops or for carrying on current business operations were greater, as a rule, than
payments on any other types of local loans. Commercial paper,
loans for personal uses, and loans to buy or hold cotton also ranked
high in liquidity. The most unliquid loans were those used to refinance indebtedness, to buy or improve real estate, and to furnish
businesses with permanent capital. As the percentages given in
the table refer to actual cash collections within the first year
after the loans were made, the full extent of the liquidity of loans
is not always shown. More could have been collected on many of
the loans had the banks tried to collect. This was notably the case
with commercial paper and loans on cotton.
The data reflect, moreover, the collection records of incompetent bankers as well as the records of capable bankers. Some
bankers collected each year nearly all of the loans which were
made for the more liquid purposes, whereas others collected only a
small fraction even in favorable years, such as 1929. An intangible factor which is hard to prove statistically but which is obvious
from a careful study of banking operations is that the liquidity
of loans may depend as much on collection policy as on original
TABLE 2.
PERCENTAGE CASH COLLECTIONS WITHIN FIRST YEAR ON SAMPLE LOANS
MADE DURING 1929, 1930, AND 1931, CLASSIFIED AS TO PITRPOSE OR
NATURE OF LOANS
Purpose or nature of loan
Percentage collections on loans
made during
1929
1930
1931
Per cent
Per cent
Per cent
Commercial paper owned
Produce crops
Conduct current business operations
Buy or hold cotton
Personal uses
Buy stocks or bonds
Pay debts, and interest
Buy or improve farm real estate
Buy or improve non-farm real estate
Buy real estate from bank
Furnish permanent capital for business
Miscellaneous and unknown
67
85
74
26
35
57
11
14
9
36
10
29
88
64
81
57
51
7
13
31
18
18
3
46
0
go
94
I no
9s
26
:15
4
No loans
No loans
100
65
All loans
59
59
70
'Refers to debts held by others than the bank; does not include renewals of bank's
own loans. Interest, however, includes interest on bank's own loans.
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
23
loan policy. Numerous loans included in the sample that apparently could have been collected at various times without harm to
the borrowers were allowed to go unpaid until they became not
only difficult to collect but doubtful or worthless.
A further point worthy of mention is that the liquidity of
loans depends not only on the purposes for which the loans were
made and on the collection policies of bankers but also on the size
of the loans in relation to the borrowers' incomes and assets. A
loan of $300 to a small tenant farmer to be used in producing his
crop might be perfectly safe and liquid whereas a loan of $1,000
might be both unsafe and unliquid. Likewise a loan of $5,000 to
a borrower of small income for buying a tract of real estate would
probably be unliquid, even if adequately secured, whereas the
same loan to a borrower of large income might easily be paid
within a few months. Notwithstanding the many factors which
influence collections on loans, however, advances used to finance
current productive operations are generally much more liquid than
advances used for fixed capital purposes or for refinancing.
These relationships are more clearly visualized when seen in
connection with individual loans than when presented as compilations of data such as Table 2. For this reason series of individual lines of credit are shown in Figures 13 to 16. A further reason for describing these lines of credit is to illustrate how loans
were classified. As country bank records seldom contain any information on the purposes of loans, information was obtained by
inquiring of bankers, receivers, and occasionally borrowers as to
the purposes of loans and by studying the behavior of the borrowers' lines of credit.
Figure 13 shows three series of loans which are classified as
being used for the production of crops8. In the upper section is
a series of loans used by a large planter to finance his tenants and
provide supplies needed for making a cotton crop. Each spring
and summer this planter borrowed a substantial amount for these
purposes, and each fall he paid his loans in ful18. The middle section shows advances to a small tenant for supplies and living expenses, these advances also being paid in full each fal18. In the
lower section are similar loans to another small tenant, who always paid in full until prevented from doing so by the drought of
1930. His 1931 advance was nearly all paid out, but he was not
able to reduce the amount carried over from 1930.
The above loans were classified as crop production loans,
'These figures do not show the exact shape of the loan curves, but they do show
the highest and lowest points reached by the loans each year and they indicate the
seasons within which the loans were highest or lowest. A further point should also
be made clear. The loan curve for any given borrower shows his total indebtedness
to the bank and not the amounts of individual items making up that total.
'The figures end either with the date at which the bank which made the loan failed
or the date at which the bank was visited by the authors. Both of these loans were
paid in full within a few months after the dates indicated by the last points plotted.
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
24
LOANS TO FINANCE COTTON PRODUCTION
DOLLARS
THOUSAN DS
1
LOANS TO LARGE PLANTER
25
20
I5
1
10
5
0
DOLLARS
,.
1-1
..1-1-1..
LOANS TO SMALL TENANT
400
300
200
AA
100
,.t..1.,t.,
0
Li.
LOANS TO SMALL TENANT
400
300
200
100
-1-1-1..
0
JAN
JULY
JAN
1925
SD
MINT OF
acmcucrunt
JULY
1926
JAN.
JULY
1927
JAN.
JULY
1928
JAN
JULY
1929
JAN. JULY
1930
JAN. JULY
1931
JAN.
JULY
1932
JAN. JULY
JAN
1933
DUNEAu OF AGNICULTuNAL CCONOsNCS
Figure 13. These series of loans to individual borrowers illustrate the quick
turn-over of loans to finance the production of cotton. Loans usually are obtained
during the spring and summer months and are liquidated during the fall months.
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
25
partly because the bankers said that the funds were used for making crops and partly because the behavior of the loans indicated
that this probably was the case. Other types of loans, such as
many of those illustrated by Figures 14 to 16 inclusive, indicate
by their behavior that they were not used for crop production purposes, but the uses to which they were put could only be learned
by inquiry of borrowers or bankers. For example, it was apparent that the loan represented by the upper section of Figure 14
was not a crop production loan, as it showed none of the characteristics of such loans. Inquiry revealed that this was a first mortgage loan made as part of the purchase price of a farm. As the
loan was paid in full over a period of years, it appears to have
been a "good" loan, but it lacked the quality of liquidity which is
so clearly manifested by the crop loans.
Less clear cut in purpose than the loan just described is the
loan represented by the middle section of Figure 14. Advances
prior to 1926 are classified as being used for unknown purposes
as it was not possible to get definite information about them. It
was learned, however, that most of the advance in 1926 was to
equip a rice farm, but that part of it had been used for production
expenses. Temporary increases in the summers of subsequent
years also were used for crop production. In classifying the loans,
therefore, a division was made between the parts of the advances
which seemed to be used for crop production, and the part which
was used for the longer time purpose of equipping the rice farm.
The lower section of Figure 14 shows the movement of a line
of credit advanced to a corporation that owned and operated several farms. The gradual growth of the line before 1928 occurred
while the corporation was expanding its land holdings and equipment, and this part was classified as being used for the purchase
and improvement of real estate. In 1928, the bank took over a
large first mortgage which had been held by another party. This
part of the loan was classified as being used to pay debts. The
entire line of credit was extremely unliquid.
Just as the liquidity of loans to farmers and planters differs
according to the use made of the loans, so also are there great differences in the liquidity of loans used for various purposes by
business firms. Figure 15 illustrates some of these differences.
The upper section shows a series of loans to a trader for carrying
on current business operations. Although this borrower was
heavily indebted to the bank on numerous occasions, his advances
were always very liquid because they were used to finance specific
trading operations. An unliquid type of loan is represented by
the middle section of Figure 15. The borrower was a retail merchant who had obtained a large part of the capital needed for
carrying his stock of merchandise and his accounts receivable
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
26
LOANS FOR THE PURCHASE OR IMPROVEMENT OF FARM REAL ESTATE AND FOR REFINANCING INDEBTEDNESS
DOLLARS
I
I
I
PURCHASE FARM
THOUSANDS
8
6
2
ui..1.,h, 1.11111 LI
0
1
i
"Iiiittin
PURCHASE EQUIPMENT ON FARM,I926
5
4
3
2
0
i
H1
I
PURCHASE AND IMPROVE REAL ESTATE AND REFINANCE INDEBTEDNESS
1
50
40
30
20
IO
,1“1"1..i.. ithiliiIii tiltalialii
0
JAN. JULY
1922
DEPAIITILIENT
JAN. JOU/
1923
AGNiCULTURE
Figure 14.
JAM. JULY
1924
JAN. JULY
1925
olitittlai tilltittiii
JAN. JULY
1928
JAM. JULY
1927
11111111h lalilidia ahlhail 11.11111"
JAN. JULY
1928
JAN. JULY
1929
JAN. JULY
1930
1.1111.011
JAN. JULY JAM. JULY JAM.
1931
1932
SUMIAU OcAGrnCULTUAL ECONOLoCS
The slow turn-over and non-seasonal character of loans for the
purchase and improvement of real estate and for the refinancing of indebtedness
are revealed by the above individual lines of credit.
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
27
from the bank. This loan was classified as an advance of permanent capital. Another unliquid loan is shown in the lower section of Figure 15. It was used to construct an operating plant.
Many other types of loans were found in the banks, a few of
which are illustrated in Figure 16. The upper section represents advances to a cotton buyer. These were liquid in so far as
they were secure, but unfortunately the loans of 1929 and 1930
were made on a very narrow margin of security so that a heavy
loss was sustained on the amount owing when the bank closed in
1930. A combination of loans to purchase cotton, cover operating
losses, and finance the production of crops is shown in the middle
section of Figure 16. Owing to lack of specific information, advances prior to 1925 were classified as being used for unknown
purposes, but increases during the summers of 1925 and later
years were classified as crop production loans. Most of this line
was unliquid and it produced a heavy loss. The lower section of
Figure 16 also shows a line of credit, most of which was not classified as to purpose, although such information as could be obtained
indicated that it probably grew out of land transfer prior to 1920.
Increase of the loan after 1922 was due to accumulations of interest which the borrower could not pay. This loan also produced
a heavy loss and for years before the depression it had been extremely unliquid.
The normal liquidating period for most types of Arkansas
bank loans is fall and winter, when the crops are harvested and
marketed. In these seasons farmers settle their advances from
banks, merchants, and others, thus placing lenders in position to
liquidate their own indebtedness. Usually the loans of Arkansas
banks rise from a low point in late winter to a peak in the summer
and early fall, from which point they again decline to the seasonal
low in late winter. This movement sometimes is offset by makTABLE 3. PERCENTAGE CASH COLLECTIONS WITHIN FIRST YEAR ON SAMPLE LOANS
OUTSTANDING AT SUMMER PEAKS IN 1929, 1930, AND 1931 ACCORDING
l'O DATE OF ORIGIN
Origin date of loans
New loans (loans made within current
crop-producing season)'
Carryover loans (loans made prior to
current crop producing season)
Percentaze collections on loans outstanding at summer peak in
1929
1930
Per cent
Per cent
I
1931
Per cent
53
58
56
12
11
21
'Current loans outstanding in summer of 1929 include only those made during
spring and summer of 1929. For 1930 and 1931. the current loans include loans made
during the fall of the preceding year and the spring and summer of the current year.
Payments on current loans during the lending season have been deducted from the
volume of loans made to compute the volume of loans outstanding at the summer
peaks.
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
28
LOANS TO BUSINESS .k ND MANUFACTUR I NG FIRMS
DOLLARS
ruousANos
FINANCE CURRENT BUSINESS OPERATIONS
45
40
35
30
25
20
15
I0
5
ALL
PERMANENT CAPITAL FOR BUSINESS
20
I5
I0
5
..1„1..i..
0
,111111“ .111.11.11.1.1111.111”11-1-1-“
1 1111
L1 1/
111.•11&lki
CONSTRUCT OPERATING PLANT
20
5
10
5
0
..1..1..1..
JAN. JULY
1922
.111111111
JAN. JULY JAN. JULY
JAN JULY
JAN. JULY
'24
'25
'26
23
.
U S DEPARTMENT OF AGRICULTURE
1.1111111.1 1.11,1“111 .11111tAlii
till
JULY
/
,
JAN. JUL
'27
'28
JAW
Joku.
'29
.11.11.V
'30
JAW
JULY
'31
JAN. JULY
'32
BUREAU OF AGRICULTURAL ECONOMICS
Figure 15. Loans to finance current business or trading operations are much
more liquid than those used to supply business firms with permanent capital or
to construct fixed capital equipment.
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Federal Reserve Bank of St. Louis
29
BANK FAILURES IN ARKANSAS
ing loans to buy or hold cotton or by purchasing commercial paper
during the fall and winter months. As a rule, however, the seasonal movement of loans prevails as described.
Collections on loans that have been carried far past the normal liquidating period generally are much smaller than on those
which are approaching the season of normal liquidation. This
tendency is shown by Table 3, which compares percentage payments within the following year on loans made during the current
crop-producing season with payments on loans which have remained unpaid through one or more normal liquidating periods.
In each of the years for which data are shown, the new or current
loans were much more liquid than carry-over loans.
In part this showing is the natural result of the method used
by the authors in crediting payments on loans. Many lines of
credit, like some of those shown above, were composed of several
loans for different purposes. Payments were not credited to the
particular note on which the payment was applied but on the inTABLE 4. PERCENTAGES OF SAMPLE CARRYOVER LOANS AT THE END OF 1928, AND
SAMPLE NEW LOANS MADE IN 1929, 1930, AND 1931 THAT WERE USED
FOR VARIOUS PURPOSES
Purpose or nature of loans
More liquid loans:
Commercial paper owned
Produce crops
('onduct current business
operations
Buy or hold cotton
Personal uses
Sub-total
Less liquid loans:
Buy stocks or bonds
Pay debts' and interest
Buy or improve farm real
estate
Buy or improve non-farm
real estate
Buy re:11 estate from bank
Furnish permanent capital
for business
Sub-total
Miscellaneous and unknown
Total
Carryover'.
from 1928
and earlier
1929
1930
1931
Per cent
Per cent
Per cent
Per cent
1.17
3.61
9.71
22.31
7.60
27.80
8.46
21.87
6.14
5.51
.64
24.85
17.64
1.70
25.14
8.96
.65
16.89
23.16
2.70
17.07
76.21
70.15
73.08
.90
13.87
4.96
5.26
2.86
3.15
11.40
6.15
13.18
1.50
4.08
.85
11.18
3.71
5.06
1.69
2.53
.15
.00
.00
20.81
.76
2.51
1.13
63.65
19.23
15.28
19.53
19.28
4.56
14.57
7.39
100.00
100.00
100.00
100.00
Loans made during
'Carryover loans classified as of beginning of 1929.
'Refers to debts held by others than banks; does not include renewals of banks'
own loans. Interest, however, includes interest on banks' own loans.
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
3()
MISCELLANEOUS TYPES OE LOANS
DOLLARS
I
I
FINANCE COTTON BUYER
THOuSANDS
POO
150
100
50
iiIiillilii tilnliiIIL uliiilli 1,1,,InIn
11111111 iduialti LLLIIiLI
0
FINANCE PRODUCTION OF CROPS, PURCHASE
OF COTTON, AND OTHER PURPOSES
1-
30
20
10
,iliiii, ll
0
Iiliiiiii 111111illii iiillillill 11111111111 ilillillill
11111ii Ill/111110 11111111ln iilliiiilli LIIIIILLL
PURPOSE ( PROBABLY LOSSES AND PERMANENT
CAPITAL) AND INTEREST ACCUMULATION
UNKNOWN
30
20
"
.00.
10
0
JAN
JULY
JAN
1922
S D
JuLY
'23
MINT OF AGRICULTURE
JAM
JULY
'24
JAN
JULY
'25
JAN
JULY
'26
JAN
An, JAN
'27
JULY
'28
JAN
JlAY
'29
JAN
JULY
'30
JAN
J. ANLY
'31
'32
ELAM! OF AGRICULTURAL ECONOMICS
Figure 16. The banks made loans for a wide variety of puri,,,st.s. only a few
of which are illustrated by the individual lines of credit shown in this and preceding figures. Many of the loans were extremely unliquid, and some of them
produced large losses.
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
31
debtedness most recently contracted. Thus, in the case of a
farmer who had a loan of long standing representing a part of the
purchase price of his farm and who had also a recently obtained
seasonal loan for producing his crop, it was assumed that any payment would first be applied to the seasonal loan. If the payment
was larger than would be required to liquidate the seasonal loan,
the balance was applied to the older outstanding indebtedness.
This procedure is considered justifiable as the seasonal loan was
made for the express purpose of producing a crop, and the proceeds of the crop would normally be used to pay the seasonal loan.
In many cases, however, borrowers had only one loan outstanding
at the time payment was made, so that there was no question as
to how payments should be credited.
The principal reason for the greater liquidity of new loans is
revealed by Table 4, which compares the purposes of loans carried
into 1929 from earlier years with the purposes of loans made during 1929, 1930, and 1931. Carryover loans consisted mainly of
advances made originally for purposes that could hardly be expected to provide funds for quick liquidation, such as refinancing
indebtedness, buying or improving real estate, and furnishing
businesses with permanent capital. The new loans, in contrast,
were mainly to finance current productive operations, such as producing and marketing crops and carrying on current business operations. Operations of this type produce in a short time the
funds needed for liquidating credits which have been used to
finance them.
The data presented above on the liquidity and purposes of
loans are taken directly from the sample of loans from 12 banks.
There were substantial differences in the loans of various banks
and, as noted earlier, the sample understates the actual liquidity
of loans. An example of these differences is shown in Figure 17
which compares the nature and purposes of the loans of two banks
as reconstructed from sample loans and other available datal°.
The bank in the left-hand panel of each figure is a small institution which still survives, whereas the bank in the right-hand panel
closed near the end of 1931. The latter was located in a sizable
place and had resources several times greater than those of the
surviving bank. To facilitate comparisons, the average loans of
both banks in 1929 were taken as 100 per cent and readings on
specific dates were plotted in proportion to this base.
As shown in Figure 17, the surviving bank in 1929 and 1930
was less burdened with carryover loans than was the closed bank,
but its carryover increased between 1930 and 1931 until both
banks were about equally burdened. Liquidation on carryover
wThe classifications of loans shown in Figure 17 are estimates based largely on
sample loan data rather than exact classifications based on complete loan data.
Appendix A describes the method of estimate.
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
32
TYPES OF LOAN •.; I N A SCRXIVINO BANK AND A CLOSED BANK
AVERAGE LOANS IN 1929.100
1
PERCENT OF
AVERAGE
LOANS IN 1929
1
1E— —1--
VOLUME OF NEW AND CARRYOVER LOANS
CLOSED BANK
OPEN BANK
100
8C
CARRYOVER LOANS MADE SINCE 1928
60
CARRYOVER LOANS MADE IN 1927 AND 928
\\
L\
,
40
CARRYOV ' LOANS MADE IN1925 AND 926
20
CARRYOVER LOANS MADE BEFORE 1925
. ..
.
.....................................
.....................................
............
..................
.
0
JAM
JULY
J•1.
1929
JULY
1930
20
JAN
JULY
Ji1.10
1931
JULY
1932
.0,11
JULY
JA
JAN
JULY
JULY
1931
1930
1929
JULY
JAN
1932
11
PURPOSE OF NEW AND CARRYOVER LOANS
CLOSED BANK
OPEN BANK
‘`.
100
—
N
NEW
80
LOANS
LOAN
NEW LOANS
60
40
AR RYOVE
AR RYOV
CARRYOVER
LOANS
V A
V,/,
LOANS
LOANS
20
MAA
MAY
MAY
SI VI'
Sf PT
JULY
OCT
1931
1930
1929
1932
1931
1930
1929
Topay debts ond mferest. buy ancbmprove no/WO*and copotobr.&dup.,
LSIUnknown purposes
CIFor persona/ uses OM/ for current bus,ress operabons =reprOduC• crops
u
U(PARTAMOIT
AwtocIATWIC
AUALAU
AONCuLTumAL CCONONCS
Figure 17. The bank which remained open through 1932 was less burdened
in 1929 and 1930 with carryover loans than was the bank which closed late in 1931.
Both banks, however, had a large proportion of carryover loans, many of which
dated back several years. In the main, carryover loans had been made originally
for operations with a slow turn-over. New loans were used much more largely
for current productive purposes. had the banks not been so burdened with slow
loans in 1929, it seems unlikely that they would have been harmed seriously by
the drought of 1930 or by the depression.
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
33
loans was relatively small in both banks, while a large proportion of the new loans was paid each year. Although the
drought of 1930 and the depression resulted in an unusually large
carryover of loans in 1931, most of the slow loans even then had
been held by the banks since 1928 and earlier. There is little evidence that the solvency of the banks would have been endangered
by the depression had the banks not been so heavily burdened with
slow loans before the depression began.
Owing largely to differences in their location, the small surviving bank held mainly agricultural paper, whereas the closed
bank held mainly business paper and loans on urban properties.
Except in 1930, the surviving bank's new loans were used almost
entirely for the producing of crops, but each year the closed bank
made a substantial volume of loans for the purchase or improvement of real estate and for refinancing indebtedness. The closed
banks also made loans for crop production, but, of the more liquid
types of loans, those to finance current business operations were
most important. Carryover loans of both banks, as far as their
purposes could be ascertained, appeared to consist mainly of advances for the purchase and improvement of real estate and for
the refinancing of indebtedness. Effects of the drought of 1930
are revealed by the considerable increase in loans for crop production among the carryover loans.
In a later section a more complete statement of the conditions
of these banks will be given. At this point it will suffice to observe that both banks had a substantial part of their loan resources tied up in slow advances at the beginning of the depression and that the frozen condition which developed during the
depression resulted more from the collection of liquid types of
advances than from an actual "freezing" of loans. As deposits
declined, the proceeds of liquid loans were used largely to pay depositors, so that the banks were reduced nearer and nearer to the
level of the unliquid loans. The closed bank, at the time of failure, had virtually no liquid loans remaining; and, although the
fact is not evident from Figure 17, all of the 1932 loans of the
open bank were made with money borrowed from other banks.
The data considered in this section indicate that loans to
finance current productive operations, such as growing and marketing crops and conducting current business operations, had a
high degree of liquidity even during the drought and the depression. Loans to purchase or improve real estate, to furnish business firms with permanent capital, or to refinance debts, were
relatively unliquid, not only during the depression but also in favorable years such as 1929. As a rule the banks that failed during 1930, 1931, and 1932 were much more heavily involved with
the slower types of loans than were banks which survived the depression.
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Federal Reserve Bank of St. Louis
V
RATIO OF NET UNITED STATES SECURITIES AND OTHER STOCKS AND BONDS TO DEPOSITS
PERCENT
20
15
/
/
10
/
/
5
0
1918
'20
'22
'24
'26
'28 '30 '32 1918
. Net U.S securities
i
'20
'22
'24
'26
'28
'30
'32
Other stocks and bonds
Figure IS. Surviving banks had larger holdings of securit ies. in relation to their deposits, than did closed banks in all
years following 1922. Throughout this period closed banks he Id mainly "other stocks and bonds," whereas during most of
the period United States securities were the principal form of investment for surviving banks.
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
BANKS CLOSED IN 1930.
1931.0R 1932
BANKS REMAINING OPEN
THROUGH 1932
25
BANK FAILURES IN ARKANSAS
35
INVESTMENTS OF CLOSED AND SURVIVING BANKS
Depreciation of securities is cited frequently as an important cause of country bank failures. Numerous securities for
which there were relatively broad, active markets dropped to such
low price levels during the depression that they could not be sold
except at heavy losses and, even if they were not sold, depreciation created "paper" losses which sometimes threatened the solvency of banks. Many of the local bonds and warrants, which
never had enjoyed a wide market, became virtually unsalable at
any price. Thus securities often became frozen assets as truly as
did uncollectible advances to individual borrowers. Review of
the evidence, however, does not indicate that the depreciation of
securities was a major cause of bank failures in Arkansas.
In order to give perspective in studying the securities held by
Arkansas banks, the average relation of the book value of bonds,
warrants, and stocks to the deposits during each year since 1917
is shown for both surviving and closed banks in Figure 18. In
this comparison, United States securities borrowed from customers or used to secure the circulating note of national banks are
omitted, as such securities were not available for the payment of
depositors. Prior to 1923, investments were of about equal importance to the two groups of banks, but thereafter surviving
banks had substantially larger investments, relative to the deposits, than did banks which were to close during the depression.
Despite an increasing ratio of investments to deposits, following
1926, the volume of securities carried into the depression by closed
banks was hardly sufficient to cause their failure, even though
the securities fell drastically in price. Until 1930 the securities
available for the payment of depositors in surviving banks usually
consisted mainly of United States securities, but those in closed
banks consisted mainly of other types in all years following 1920.
A more detailed and more inclusive classification of the investment accounts of the banks during recent years is given in
Table 5. This table was made up from data shown in examiners'
reports, and it covers all securities without deduction of bonds
borrowed or those pledged to secure circulating notes. United
States securities are here also shown to have been the principal
form of investment of surviving banks. Local bonds and warrants
were next in importance". Banks in the closed group invested
mainly in local bonds and warrants, their principal other investments being in United States securities and obligations of the
"The local bonds and warrants were chiefly obligations of school, drainage, paving, and improvement districts, and of counties and municipalities in Arkansas, which
seldom had a broad market. Arkansas banks held few municipal bonds except those
issued by Arkansas cities and towns. Arkansas municipals, as noted above, were
classified as local bonds and warrants. Most of the remaining municipals were classified as out-of-state bonds and warrants. A few which were issued to finance municipal utilities, however, were classified as utilities.
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Federal Reserve Bank of St. Louis
iv...
Type of securities
United States securities'
Federal land bank bonds
Foreign bonds
Industrial and utility bonds
Railroad bonds
State of Arkansas bonds
Local bonds and warrants
Miscellaneous out-of-state
bonds and warrants
Stocks
Total
Surviving
banks
Per cent
44.0
6.5
3.8
2.8
.8
40.1
Closed
banks
Per cent
Per cent
26.7
1.4
.4
3.4
1.9
60.3
56.2
7.2
5.2
2.8
.4
26.2
1.8
.2
4.2
1.7
1.R
100.0
100.0
100.0
Closed
banks
Surviving
banks
Per cent
Per cent
1sZ
1Vou
lUZo
.LZo
Surviving
banks
Closed
banks
Surviving
banks
Per cent
Per cent
Closed
banks
Surviving
banks
Surviving
banks
Per cent
Per cent
Per cent
24.7
2.0
.2
5.7
2.4
19.4
42.4
45.3
.7
8.0
10.5
4.3
1.8
28.0
21.3
1.4
1.8
6.5
2.5
19.6
44.4
3.1
1.3
1.4
.1
2.2
1.0
1.2
.2
1.5
1.0
.7
.4
.9
.9
100.0
100.0
100.0
100.0
100.0
100.0
100.0
20.6
2.2
.3
2.5
9.1
60.9
'Includes all United States Securities held by the banks, without deduction of pledged securities.
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Federal Reserve Bank of St. Louis
39.2
14.2
5.4
9.2
5.2
3.7
21.3
53.3
.6
9.8
7.1
3.8
1.0
22.9
43.2
13.8
6.4
9.1
4.3
3.0
19.1
ARKANSAS EXPERIMENT STATION BULLETIN 315
TARLE 5. INVESTMENTS OF ARKANSAS BANKS, 1927 TO 1932, INCLUSIVE
(Percentages of par value of total investments represented by various types of investments)
BANK FAILURES IN ARKANSAS
37
TABLE 6. GRADE AND MARKETABILITY OF ALL SECURITIES HELD BY ARKANSAS
BANKS IN 1930
(Percentages of par value of total bonds, warrants, and stocks)
Grade and marketability of securities
High grade, readily marketable bonds,
Low grade, readily marketable bonds'
Unrated bonds, warrants and stocks with mainly
a local or restricted market'
Total
Surviving
banks
Closed
banks
Per cent
Per cent
62.8
50.5
7.8
2.6
29.4
46.9
100.0
100.0
'Includes United States securities, federal land bank bonds, bonds of the state of
Arkansas, and industrial, utility, railroad, and foreign bonds rated high grade or
above.
'Includes industrial, utility, railroad, and foreign bonds rated below high grade.
'Includes mainly bonds and warrants issued by political subdivisions of Arkansas
and adjoining states. Stocks also are included but these were mainly local issues.
state of Arkansas. Industrial, utility, railroad, and foreign bonds,
most of which were listed on the security markets, constituted
from about 12 to 23 per cent of the investments of surviving
banks at various dates, but were less important in the closed
banks. Stocks were not held in large amount by banks in either
group.
Owing to the large amounts of unrated securities in the portfolios of Arkansas banks, it is difficult to appraise the qualities of
the investments. Results of a rough and not very satisfactory
method of classifying the securities are shown in Table 612. It
appears that about 70 per cent of the securities of surviving banks,
as compared with 53 per cent for closed banks, had relatively
broad, active markets; and that about 63 per cent of the securities of surviving banks, as compared with 50 per cent for closed
banks, could be identified from market ratings as high grade or
better. The apparent superiority of the investments of surviving
banks is due mainly to the fact that these banks held relatively
large amounts of United States securities. Were it possible to
obtain reliable data on the grade and marketability of local bonds
and warrants, the above data might be altered appreciably.
It is interesting that, according to ratings given in 1930 by
various commercial rating agencies, the closed banks held a more
highly rated class of industrial, utility, railroad, and foreign bonds
than was held by the surviving banks (Table 7). Of these bonds,
which in 1930 constituted 23 per cent of the securities held by
surviving banks and 11 per cent of those held by closed banks,
"The bonds held in 1930 are taken for this classification in order to show what
kind of bonds were carried into the depression and how they were rated at that time.
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Federal Reserve Bank of St. Louis
•••
..••••1111.-
38
ARKANSAS EXPERIMENT STATION BULLETIN 315
TABLE 7. RATINGS OF INDUSTRIAL„ UTILITY, RAILROAD, AND FOREIGN BONDS HELD
BY ARKANSAS BANKS IN 1930
(Percentages of par value of all such bonds with various ratings)
Rating of bonds in 1930
Highest grade
Very high grade
High grade
Good
Fair
Speculative
Poor
Unclassified
Total
Surviving
banks
Closed
banks
Per cent
Per cent
13.0
26.7
26.0
20.5
10.9
.2
0.0
2.7
43.7
21.5
10.7
12.2
5.5
.7
0.0
5.7
100.0
100.0
about 75 per cent of those held by closed banks, but only about
65 per cent of those held by surviving banks, were rated high
grade or better.
Appraised as to earning capacity, as far as earning capacity
can be judged by interest rates, there was little difference in the
bonds and warrants held by surviving and closed banks in 1930.
The weighted average interest rate on all bonds and warrants
held by surviving banks was 4.46 per cent as compared with 4.64
per cent for closed banks (Table 8). On bonds and warrants
other than United States securities the weighted average interest
rates were 5.31 for surviving banks and 5.12 for closed banks.
Weighted average rates were lowest on United States securities
and highest on foreign bonds. As interest rates to some extent
TABLE 8. WEIGHTED AVERAGE INTEREST RATES ON BONDS AND WARRANTS HELD
BY ARKANSAS BANKS IN 1930
Type of security
Surviving
banks
Closed
banks
Per cent
Per cent
United States securities
Federal land bank bonds
Foreign bonds
Industrial and utility bonds
Railroad bonds
State of Arkansas bonds
Local bonds and warrants
Miscellaneous out-of-state bonds and warrants
3.48
4.26
6.04
5.32
4.60
4.76
5.25
5.44
3.06
4.60
4.98
5.15
4.64
4.50
5.58
4.82
All bonds and warrants
4.46
4.64
All bonds and warrants (excluding United States
securities)
5.31
5.12
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
39
TABLE 9. MATURITIES' OF BONDS AND WARRANTS HELD BY ARKANSAS BANKS IN
1930
(Percentages of par value of total bonds and warrants having various maturity
dates)
Dates due
Past due and demand
1930-31
1932-33
1934-35
1936-40
1941-50
1951 and later
Undesignated
Total
Surviving
banks
Closed
banks
Per cent
Per cent
0.0
13.2
9.6
4.4
17.5
34.4
17.2
3.7
1.7
16.6
6.0
4.7
18.5
31.4
7.8
13.3
100.0
100.0
'Dates when bonds are callable .were not considered in making th s tabulation.
reflect the market appraisal of the safety of securities, the data
in Table 8 tend to support the conclusion reached earlier that it
was the larger proportion of United States securities held by surviving banks which made their bond and warrant lists superior
to those of closed banks'.
Nearly seven-eighths of the bonds and warrants held by the
banks in 1930 had maturities of more than one year (Table 9),
hence such liquidity as the investments possessed was derived
mainly from the possibility of sale. Most listed securities and
some of the local bonds and warrants had been readily marketable before the depression, and bankers came to regard such see., a reserve of earning assets
curities as a secondary reserve
which could be converted quickly into cash if need arose. When
the demand for investments weakened during the depression and
particularly when numerous banks sought to dispose of securities,
however, many of the bonds and warrants dropped so low in price
and encountered such restricted markets that they became badly
frozen assets with large loss ratios. Only a few securities, mainly the direct obligations of the United States government, were
sufficiently maintained in price and marketability to serve satisfactorily as secondary reserves.
The extent to which the securities held by Arkansas banks
had depreciated by the summer of 1932 is suggested, but not revealed in full, by Table 10. The data in this table indicate the
discount from par value shown by examiners on the securities
held by the surviving banks at examination dates during the late
IsYields would give a more accurate measurement than interest rates of both the
earning capacity and the quality of bonds and warrants. Difficulties in obtaining accurate data as to the purchase price of securities. however, were so great as
to discourage an attempt to further refine the data.
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Federal Reserve Bank of St. Louis
40
ARKANSAS EXPERIMENT STATION BULLETIN 315
spring, summer, and early fall of 1932. Covering different dates
for the various surviving banks, the data reflect what might be
called an average discount during the summer of 1932, as market
quotations were lower at some dates than at others. It should be
pointed out, also, that discount from par value does not correspond
exactly with depreciation actually sustained by the banks, as the
securities were not always purchased at par. But, as prices above
par were paid for some of the securities and prices below par
were paid for others, it is not believed that there was much difference between market discount and the depreciation sustained
by the banks.
The discount on all securities held by the surviving banks in
1932, as reported by examiners, was about 14 per cent, but declines were unequally distributed among the various classes of securities. Fortunately, in view of their large amount, there was
little discount on United States securities which not only were
favored by investors but also were strongly supported by federal
reserve purchases. The largest decline was shown by foreign
bonds, which fell to about one-third of their par value. Railroad
bonds and industrial and utility bonds also dropped to low levels.
These large declines, however, affected only about 20 per cent of
the total securities held by the banks. On other classes of securities the declines were much less drastic but were nevertheless
sufficient to create substantial paper losses and to discourage the
banks from trying to sell the securities.
The discount reported by examiners on local bonds and warrants, miscellaneous out-of-state bonds, and stocks is of questionable accuracy. It was very difficult for examiners to obtain reliable quotations on many of these securities, and for want of
such information they often reported simply the values at which
TABLE 10. MARKET DISCOUNT FROM PAR VALUE OF SECURITIES HELD BY SURVIVING
ARKANSAS BANKS IN 1932
Discount indicated by
Type of security
Examiners'
reports
Books of
hanks
Proportion of
each type of
security to total
securities held
Per cent
Per cent
Per cent
United States securities
Federal land bank bonds
Foreign bonds
Industrial and utility bonds
Railroad bonds
State of Arkansas bonds
Local bonds and warrants
Miscellaneous out-of-state bonds
and warrants
Stocks
1.6
6.1
67.6
41.0
53.1
14.1
7.8
.1
2.8
19.5
6.4
9.9
2.7
2.8
39.2
14.2
7; .4
9.2
5.2
3.7
21.3
21.5
15.2
.1
14.8
.9
.9
All stocks and bonds
14.2
3.4
100.0
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Federal Reserve Bank of St. Louis
BANK FAILURES IN ARKANSAS
41
these securities were carried on the books of the banks. In an
attempt to obtain more accurate information on local bonds and
warrants, the authors sent a questionnaire to numerous banks and
firms in Arkansas which handled such securities with a request
for price quotations at various dates. Returns on the questionnaire gave quotations for 48 separate issues. As these showed
an average discount of about 35 per cent during the summer of
1932, it is believed that the 7.8 per cent discount on local bonds
and warrants reported by examiners is far too low. Discount reported by examiners for miscellaneous out-of-state bonds and
warrants and for stocks is open to similar question, as these also
were mainly small localized issues.
In different banks the total discount reported by examiners
in 1932 naturally varied in accordance with the types of securities that were held. Of the 15 surviving banks for which data
were obtained, only one bank had no depreciation from the book
value at which its securities were carried. The largest depreciation from book value for any of the banks was 32.1 per cent.
Liberal rulings by supervising authorities made it possible, as
shown in Table 10, for the securities to be carried on the books at
values which sometimes were far above market values, on the
theory that securities were undervalued in the markets. Had the
depreciation from book value been charged off in 1932, one of the
15 surviving banks covered by the study would have had its entire capital, surplus, and profits wiped out, two would have had a
capital impairment of about 10 per cent, and in others the chargeoff would have varied from nothing to as high as 97 per cent of
the surplus and profits.
Since the banks had to charge off only a small part of the
depreciation on securities which were not sold, the securities were
not a source of great difficulty except as there was need to sell
them or as they failed to produce income for the banks. No data
were collected on earnings from securities, but defaults were not
numerous and there is little reason to believe that earnings were
seriously impaired by the depression. The liquidity of many securities undoubtedly was impaired, as it was impracticable for the
banks to sell badly depreciated bonds. But the seriousness of this
development may easily be exaggerated. Most of the United
States securities were at or near par except during a brief period
about the beginning of 1932, and it seems improbable that bankers
ever had placed much reliance on the salability of local bonds and
warrants, local stocks, and miscellaneous out-of-state securities.
In so far as the difficulties of banks arose from unexpected
developments in their security holdings, the chief source of trouble
was the depreciation of the so called readily marketable securities
of railroads, industrial and utility corporations, and foreign gov-
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Federal Reserve Bank of St. Louis
42
ARKANSAS EXPERIMENT STATION BULLETIN 315
TABLE 11. AVERAGE MARKET VALUES' DURING 1932. OF LISTED INDUSTRIAL, UTILITY, RAILROAD, AND FOREIGN BONDS HELD BY ARKANSAS BANKS IN
1930, ACCORDING TO RATINGS OF BONDS IN 1930 BY COMMERCIAL RATING AGENCIES
1 tit ting of bonds
Number
of issues
Range of averMedian average age value from
value=
highest to
lowest
Percentage of par Percentage of par
Highest grade
28
81
103 - 21
Very high grade
36
59
102 - 32
High grade
30
51
93 - 7
Good
18
32
69 - 10
Fair
7
39
49- 8
'The average value of a bond during 1932 was calculated by averaging the highest
and lowest values quoted for the bond in the market during 1932.
=Approximately half the bonds had average values above, and approximately half
had average values below, the median average value.
ernments. These, as pointed out above, dropped precipitously in
price and to a very large extent failed to justify the confidence
which had been placed in them as a form of secondary reserves.
Nor was this due solely to the grade of the securities that were
held by Arkansas banks. The median average price during 1932
on industrial, utility, railroad, and foreign bonds that were rated
as of the highest grade in 1930 was 81 per cent of par (Table 11).
Very high grade bonds were quoted at an average of 59 per cent
of par in 1932; high grade bonds at 51 per cent of par. Approximately half of the good and fair bonds lost at least two-thirds of
their value. Of the bonds rated in 1930 as of highest grade, half
TABLE 12. SECURITIES PLEDGED BY ARKANSAS BANKS
(Percentages of par value of all securities of each type)
Type of securities
Surviving banks
Closed banks
1930
193-0
1932
Per cent
Per cent
Per cent
United States securities
Federal land bank bonds
Foreign bonds
Industrial and utility bonds
Railroad bonds
State of Arkansas bonds
Local bonds and warrants
Miscellaneous out-of-state bonds
and warrants
Stocks
63.5
69.4
13.0
34.6
.0
5.9
46.4
65.7
11.5
.0
4.1
.0
22.4
2.2
79.5
.0
2.4
3.2
1.7
49.4
37.0
75.0
.0
18.1
.o
11.8
.0
All stocks and bonds
39.9
31.5
41.5
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Federal Reserve Bank of St. Louis
43
BANK FAILURES IN ARKANSAS
depreciated more than 19 per cent and some lost more than threefourths of their value during 1932. Obviously, such securities,
even many of the highest grade, proved very disappointing as a
form of secondary reserve.
Many of the bonds held by Arkansas banks were not available for sale to meet general deposit claims, as they were pledged
to secure special creditors of the banks (Table 12). Even bonds
that were badly depreciated in price or that were not widely
marketable could serve usefully in this capacity, although naturally they were not often accepted as security at par value. It is
noteworthy that United States securities, which often are regarded as a part of the reserve funds, were used mainly to secure
special creditors and hence could be used to only a small extent
for paying the types of claims that were possessed by most depositors. Failure to reveal this fact in the published statements
often created a false impression of the protection afforded to the
general run of depositors. The purposes for which bonds were
pledged are shown in Table 13. Closed banks pledged bonds more
largely to secure money borrowed from other banks than was the
case with surviving banks which pledged their bonds mainly to
secure public and trust funds.
Considering all factors it does not appear that many Arkansas banks were seriously affected before the end of 1932 by the
depreciation of securities. Under liberal rulings by supervising
cfficials, it was not necessary to charge off much of the depreciation on bonds not in default. Although it became impracticable
to sell badly depreciated bonds, this was not a great handicap as
many of such bonds were not available for sale, being pledged
to special creditors. Furthermore, the volume of bonds held by
Arkansas banks was not large in comparison with the deposit
liabilities. Most of the banks which failed to survive the depression closed late in 1930 and early in 1931 before the bond market
TABLE 13. PURPOSES FOR WHICH SECURITIES WERE PLEDGED BY ARKANSAS BANKS
(Percentages of par value of total pledged securities)
Surviving banks
Purpose
For borrowed money
(includes borrowed bonds)
For public funds
For trust funds
For postal savings deposits
For circulating notes
For all purposes
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Federal Reserve Bank of St. Louis
Closed banks
1930
1930
1932
Per cent
Per cent
Per cent
37.1
8.4
19.5
6.1
28.9
2.7
43.2
24.5
3.0
26.6
9.5
36.1
12.6
21.6
20.2
100.0
100.0
100.0
44
ARKANSAS EXPERIMENT STATION BULLETIN 315
became badly depressed, hence their difficulties must be ascribed
mainly to causes other than depreciation of securities.
CONDITIONS OF BANKS AND EFFECTS OF THE DEPRESSION
Banks fail for a variety of reasons, and it is seldom possible
to point to any one condition, such as inadequate reserves, unliquid loans, depreciated securities, or deposit withdrawals, as the
sole or controlling cause of failure. More often several of these
conditions appear in combination. This makes it desirable to describe changes in the conditions of banks in such manner as to
show the joint effect of the several factors involved. With such
a purpose in mind, Figures 20 to 25 were prepared. They show
both the assets and the liabilities of six banks which closed during
the depression, of four banks which survived the depression and
are now operating on an unrestricted basis, and of two banks
which were reorganized and thereafter survived to the banking
holiday early in 1933.
These figures appear complicated at first glance, hence a
brief description may be needed. Under accounting procedure
the total assets of a bank are always equal to the total liabilities,
so that the sum representing total assets or total liabilities may be
divided either on the basis of assets or on the basis of liabilities.
Figure 19 shows for one of the banks (1) a classification of the
assets, (2) a classification of the liabilities, and (3) the classification of liabilities superimposed on the classification of assets.
The third panel is the form used in describing coincidentally both
the assets and the liabilities of the banks.
A word also is needed in reference to the order in which
various classes of assets and liabilities appear. From top to bottom the assets appear in the order of their liquidity. Thus cash
and United States securities combined are at the top, because of
their immediate availability, while estimated losses, including
doubtful and worthless loans and bond depreciation, are lowest
in the scale, with real estate next to lowest. Liabilities were
listed in the order of their priority of claim". At the top is borrowed money (bills payable and rediscounts)a, in the middle are
deposits, and lowest in the scale are the capital funds, including
capital stock, surplus, profits, and, sometimes, a few other liabilities of small amount.
Two sets of items have been excluded entirely from this classification. Borrowed bonds have been deducted from both the
"Secured deposits and securities pledged for their payment
classification. If shown, the secured deposits would occupy aare not shown in this
position just below
borrowed money.
"Bills payable and rediscounts are almost invariably secured
in such manner that
they may be regarded as having first claim upon the liquid
assets of a bank.
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Federal Reserve Bank of St. Louis
CLAS,IFICATION OF ASSETS AND LIABILITIES TO
Snow
TIIE CONDITION OF A BANK
AVERAGE TOTAL ASSETS OR TOTAL LIA8IL1T1ES FOR 1929.100
--1
--7
ASSETS
ASSETS AND LIABILITIES
LIABILITIES
100
Cash and net U 5
securities
0
Liquid loans
Securities-wide markets
75
eaSecurities-bra/markets
129
5/ow loons not
criticized by
examiners
Borrowed
money
Stow loans
951 criticized by
examiners
DEPOSITS
Rea/ estate and
judgments
Deposits
MI Losses
Capita/ funds
and other
liabilities
CAPITAL FUNDS AND
OTHER LIABILITIES
1929
U S DEPARI,EPFT OF AGRICULTUF.
1930
1931
1929'
1930
1931
1929
1930
1931
eU.F.AU OF AGMCULTUPAL CC050WCS
s the kinds of assets held by the bank; liabilities are shown in the center panel. SuperFigure 19. The right-hand panel
imposing the asset panel upon the liability panel, as in the right-hand panel, both the assets and liabilities are described coincidentally. The asset protection for the deposits may be determined within a small margin of error by noting the types of assets
in the area not covered by borrowed money.
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Federal Reserve Bank of St. Louis
SVSNV)IIIV NI SallirIIVd }INVH
PERCENT
46
ARKANSAS EXPERIMENT STATION BULLETIN 315
assets and the liabilities to simplify the figures, and national bank
notes, with a corresponding amount of United States securities,
have been deducted to place national banks on equal footing with
state banks. These omissions are justified by the major purpose
of the classifications, which is to show the types of assets that
were available for the payment of depositors.
The authors have had to rely largely upon their own judgment in classifying the loans, particularly in determining the
volume of liquid loans. Neither official records nor the private
records of the banks contain a complete grouping of liquid loans.
Examination reports frequently show the volume of commercial
paper, brokers' loans, and loans on adjusted service certificates,
and the call reports of federal reserve members contain data on
commercial paper, brokers' loans, and loans eligible for rediscount
at federal reserve banks. These data were used in classifying
the loans, but main reliance was placed in the sample records of
individual loans obtained from the banks.
As noted earlier the liquidating qualities of various types of
loans differed greatly. By studying the composition and liquidity of the sample loans, which varied from about 25 per cent to
85 per cent of total loans in different banks, and by making adjustments based on data from examination reports and call reports and on the action of the total loans, estimates were made
of the volume of liquid loansi". There is room for considerable
error in this method, but it is believed that the estimates do not
understate the volume of loans that could be collected within a
12-month period without forced sale of the capital assets of borrowers.
The remaining classifications which involve the loans are
based more largely on examiners' reports. From one examination
report each year the amount of doubtful and worthless loans was
copied, and estimates were made of the amounts of loans which
examiners would have designated as "doubtful and worthless"
on intervening dates. The same method was followed in determining the amount of loans designated "slow" by examiners.
Loans classified as slow by the authors but not designated slow
by examiners were taken as the difference between all loans and
the loans placed in the classes which have been described; i. e.,
liquid loans and loans classified by examiners as slow, doubtful, or
worthless. No question need occur because the amount of loans
classified as slow often exceeds by a considerable margin the
amount of loans which examiners designated as slow. It appears
to be customary for examiners to reserve the slow classification
for loans whose "goodness" is somewhat in question but which
,6A more extended statement of the method used in computing the volume of
liquid loans is given in Appendix B.
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Federal Reserve Bank of St. Louis
CONDITION OF A SURVIVING BANK AND A CI.OSED BANK
AVERAGE TOTAL ASSETS OR TOTAL UABILITIES FOR 1929 •100
BANK A
100
,
1 Cash ond net US
Securities
10 Liquid loons
ED Securities- wide markets
f22 Securities- local markets
S/ow loons not
75
'
Borrowed
money
crihcized
examiners
50
Deposits
Slow loons
- Incrit,clzed by
examiners
Rea/estate and
jUoqinet7ts
°epos,ts
Losses
25
+.
1929
1930
U S DEPARTMENT Or 4G.CULTU.E
1931
1932
1929
++++.
1930
.1
1931
Capitol funds
and other
1;06/11fieS
1932
13,E.0
Figure O. The surviving bank (A) entered the depression with more than 80 per cent of its deposits protected by liquid
assets and all of its deposits protected by good assets. Only 45 per cent of the deposits of the closed bank (B) were protected by
liquid assets at the beginning of 1929 and this proportion rapidly declined to virtually zero as deposit withdrawals took place.
When the bank closed, more than half of the assets protecting the deposits were under severe criticism by examiners.
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Federal Reserve Bank of St. Louis
SVSNV)IIIV NI SHIlarIIV.3 3INVEI
BANK B
(cLosEo 1930)
(SURVIVING)
10s.
00
CONDITION OF A SURVIVING BANK AND A CLOSED BANK
AVERAGE TOTAL
ASSETS OR
TOTAL 0.491071ES FOR 1929 .100
BANK D
CLOSED 1930
100
Cash and net U S.
securthes
C:1 Liquid loans
1
ITISecurities -wide markets
75
,
1Za Securities -loos/markets
Sloe,loans not
crihcaed by
Borrowel
money
examiners
50
59
Slow loans
criticized by
in
Rea/ estate and
,
exammers
25
ju...
Deposits
grnents
El Losses
Capita/funds
and other
liabilities
0
1929
u S
1931
1932
SUFEAU OF AGRICULTURAL ECONOMICS
Figure I. Bank C (surviving) also entered the depression with more than 80 per cent of its deposits protected by liquid
assets and all of its deposits protected by good assets. Its condition had changed substantially by the end of 1932 but even then
there were liquid assets sufficient to pay nearly half of the deposits. Most of the assets protecting the remaining deposits, however, were under severe criticism by examiners. Bank D (closed) never had more than 42 per cent of its deposits protected by
liquid assets in 1929. and this proportion fell to zero in 1930. Its condition was very similar to that of Bank B (closed) in Figure 20.
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN
BANK C
SURVIVING
CAS
CONDITION OF A SURV1v NG BANK AND A CLOSED BANK
,
00
AVERAGE TOTAL ASS( TS OR TOTAL LIABILITIES FOR 1929
PERCENT
BANK F
CLOSED ,930
BANK E
SURVIV.NG
100
o Cash and net US.
securities
CJ Liquid loons
I
CD Securities-wide markets
75
Securities-/oca/markets
Slow loons no,
cr,ficized by
examiners
50
Sorrowed
money
Slow loons
cr/hclzed by
examiners
estate and
151 Real
judgments
Deposits
MI Losses
Capital funds
.'and other
both/it/es
0
S O(PAIIITIACHT Of AGAICOLTURC
1929
1930
1931
1932
BuREAu Or AGR,CuLTuR, ECO,
,
C CS
Figure 22. Bank E (surviving) had liquid assets sufficient to pay about 65 per cent of its deposits in 1929. This high order
of liquidity was needed in the fall of 1930 and again in the fall of 1931, when heavy runs by depositors occurred. The demands
of depositors were met without difficulty. Bank F, whose asset coverage for the deposits averaged 57 per cent liquid during 1929,
was closed in 1930 partly because of large deposit withdrawals and partly because its capital, surplus, and profits were entirely
wiped out by losses.
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Federal Reserve Bank of St. Louis
S
25
CONDITION OF A SURVIVING BANK AND A CLOSED BANK
AVERAGE TOTAL ASSETS OR TOTAL LIABILITIES FOR 1929.100
BANK G
BANK H
SURVIVING
CLOSED 1931
100
Cash and net U.S.'
securities
CD Liquid /asps
[13 Securities-wide markets
75
122 Securities-/oral markets
Slow loons not
CM criticized by
examiners
Borrowed
money —
S/ow loans
lEcriticized by
examiners
50
Real estate and
judgments
Losses
•
Deposits
25
++4. ++++++++++
0
+41::+1.4.+4.4.
Capita/funds
arta'other
liabilities
1929
S DEPART...PO Os ACAKULTUNC
1930
1931
1932
1929
1930
1931
1932
MACAU 0
,AGRICULTURAL ECOMOhfiCS
Figure 23. The banks described here are the banks whose loans were classified as to origin and purpose in Figure 17. The
assets covering the deposits of Bank G (surviving) averaged 58 per cent liquid in 1929, whereas those of Bank H (closed) averaged
50 per cent liquid. The latter bank was closed because of the exhaustion of its liquid assets through deposit withdrawals. Had
Bank G been subject to withdrawals of equal magnitude, it could not have survived.
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
PERCENT
BANK FAILURES IN ARKANSAS
51
are not defective enough to be called doubtful or worthless. Under
other headings not included in the present groupings, examiners
frequently draw attention to the slowness of other loans by such
designations as "capital loan" or "continuous."
Little need be said concerning the other classifications of assets. The amounts of cash resources and United States securities
were merely copied from the banks' own statements of condition,
and the same was true of real estate and judgments, which are
entered with no adjustment for depreciation. In classifying the
securities use was again made of one examination report per year,
values for intervening dates being estimated from values shown
on the books of banks. Depreciation on securities was taken as
the difference between book values and the market values ascribed
to the securities. The item "Losses" includes doubtful and worthless loans and depreciation on securities.
Bearing these points in mind, we may now consider the
cases of several individual banks. Figures 20 and 21 show the
condition of a bank which survives to the present time and
the condition of a bank which closed during the depression. The
banks have been reduced to a common size by taking the average
value of the total assets in 1929 as 100 in each case and plotting
the values of individual items as percentages of this base.
Both of the closed banks shown here suffered greater deposit
withdrawals than the surviving banks with which they are paired,
although they were less able to withstand such withdrawals.
Whereas in 1929 the surviving banks had large holdings of cash
funds, United States securities, and liquid loans, the liquid assets
of the closed banks were small and, in addition, the closed banks
were heavy borrowers from other banks. When they failed it
would have required an amount equal to all their cash resources,
United States securities, and liquid loans to pay off the correspondent banks, leaving only unliquid, and to a large extent, insecure assets, for the protection of depositors.
Although the closed banks suffered large withdrawals of deposits, their failure was no more due to deposit withdrawals than
to their unliquid conditions. Had they been as liquid as the surviving banks they could have withstood the drain of deposits. An
illustration of the manner in which runs can be met by a bank with
large holdings of liquid assets is afforded by the surviving bank
shown in Figure 22. Deposit withdrawals from this bank in the
latter part of 1930 were as severe as those suffered by the closed
banks which have just been described. They were met by temporary borrowing, by collection of liquid loans, by sale of United
States securities, and by drawing upon balances carried at other
banks. In most cases it appears that city correspondents and
the Federal Reserve Bank of St. Louis were willing to assist coun-
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Federal Reserve Bank of St. Louis
CONDITION OF
Two
CLOSED BANKS
AVERAGE TOTAL ASSETS OR TOTAL LIAMILITIES MR 1929.100
BANK I
BANK J
CLOSED 1931
CLOSED 1930
100
Cosh and net U.S.
securities
Borrowed
money
1:::1 Liquid loans
CD Securities-wide markets
75
Securities-local markets
Slow loans not
criticized by
examiners
Slow loons
50
Borrowed
Money
Deposits
OS criticized by
examiners
Real estate and
judgments
Deposits
•
25
Losses
• •
0
• Capitol funds
and other
habihties
1929
.1
,
11•76.00 0
,
I.CUL
,
, AG
LIK
1930
1931
1932
Capitalfunds
and other
929
1930
1931
1932
CW AGMCULTuSIAL ICO.Ow CS
Figure 24. Bank I illustrates how a bank may create an appearance of great liquidity by borrowing from other banks without actually being in very liquid condition. In September, 1929, the liquid assets of this bank were more than equal to the total deposits, but actually only 37 per cent of the deposits were protected by liquid assets as most of the liquid assets were pledged to
secure the borrowed money. This bank had been financing cotton speculators heavily on "overdraft" and had to borrow large
amounts from other banks to support these overdrafts. Reasons for the closing of Bank J are not entirely clear. The bank was
not in position to withstand large withdrawals, however, and as many banks were sustaining runs in the fall of 1930, it is possible
that the directors closed the bank to avoid sustaining further withdrawals.
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
PERCENT
CONDITION OF Two REORGANIZED BANKS
AVERAGE TOTAL ASSETS OR TOTAL LIABILITIES FOR 1929.100
PERCENT
BANK K
BANK L
SURVIVED.AFTER REORGANIZATION.
To BANK NOUDAY 1933
SVSNVNIIV NI SallirlIVd NNVEI
100
SURVIVED.AFTER REORGANIZATION,
TO BANK HOLIDAY 933
and net U.S
En Coshsecurities
CO Liquid loans
Securities -wde markets
75
Ea Securities-loco/mark'',
Sloe,loans not
criticized by
examiners
5/ow loons
50
in criticized by
examine,
Rea/ estate and
judgments
I. Losses
25
1931
1932
BUREAU 09AGRICuLtuotAL Eco.ou.c$
MEN,0
,AGM•Cuivu,
U S DEPAII,
Figure 25. Bank K merged with another bank late in 1931, but did not noticeaoly improve its condition by this measure.
was speedily reMore than 60 per cent of the deposits of the bank were protected by liquid assets in 1929, but this proportion
Bank L closed in
duced in the next two years as a result of deposit withdrawals and an unusually large increase of slow assets.
volume of liquid
small
a
1930 and was reopened after several large depositors had subrogated their claims. With large losses and
assets, this bank both after and before reorganization was in an exceedingly weak, if not insolvent. condition.
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Federal Reserve Bank of St. Louis
CA2
54
ARKANSAS EXPERIMENT STATION BULLETIN 315
try banks with loans to the full amount of the latter's liquid assets.
Notwithstanding the emphasis which has been placed on the
unliquid condition of the closed banks, it remains true that deposit withdrawals frequently turned the balance causing banks to
fail. An illustration of this point is found in Figure 23, which
shows the conditions of two banks that were of about equal liquidity in 1929 and early 1930. Deposit withdrawals exhausted the
liquid resources of the closed bank as early as February 1931
(except the portion held by virtue of borrowing), but a temporary increase of deposits in the summer of 1931 allowed the bank
to continue until the end of the year, when further declines forced
it to close. The surviving bank would have suffered a similar
fate had its deposits fallen to the same extent as those of the
closed bank, as it was no better prepared to meet withdrawals.
Several of the banks sustained heavy losses before the end of
1932, but deposit withdrawals were so often a complicating factor
that it is uncertain whether any of the banks were closed mainly
because of losses. Bank F, shown in Figure 22, had losses recognized at the time of failure to be equal to its entire capital, surplus,
and profits. These must have influenced the directors in voting
to close the bank. However, deposits were falling rapidly, and
it is not unlikely that the directors were equally influenced by this
factor. Bank L, shown in Figure 25, was operated for several
years with its capital almost wiped out by losses. It was not
closed, however, until deposit withdrawals had nearly exhausted
the liquid assets, late in 1930. It was then reorganized on a
basis scarcely more secure than prevailed before failure. By borrowing heavily from other banks and by lending virtually nothing,
it was able to remain open until the banking holiday early in 1933.
These cases have been described mainly to show how histories
of the banks may be read from the figures. Our interest in this
study, however, centers more in general conclusions that can be
given broad application than in the experience of individual banks.
Readers who are interested in the histories of the remaining banks
may learn numerous details by studying the figures.
One of the most conspicuous facts disclosed by the data is
that many of the closed banks were not prepared at the beginning
of the depression for serious reverses such as would result naturally from crop shortages or falling prices. Their liquid assets
were pitifully small, a large proportion of the assets was of questionable value as evidenced by examiners' criticisms, and the
banks were heavily indebted to other banks. Over-loaded with
slow assets, they had no means of meeting extensive withdrawals
of deposits even with the aid of city correspondents, for the latter
were not disposed to take over the slow assets. Their only hope
of survival lay in a continuation of favorable times and in the re-
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BANK FAILURES IN ARKANSAS
55
tention of their deposits. Some of the banks that remained open
were in no better condition they survived only because they did
not suffer large withdrawals. But most of the surviving banks
had entered the depression in much better condition than was common among the closed banks and could have met greater withdrawals of deposits than actually occurred.
Passing now to the effects of the 1930 drought and the depression, it is apparent that the so called "frozen" condition of
banks arose more from the payment of liquid assets to depositors
than from any "freezing" or solidifying of the assets. The volume of losses, real estate, and slow loans increased during the depression, and market conditions rendered many of the securities
unsalable. In only a few of the banks, however, was the increase
in slow assets as great as the decrease in liquid assets. Closed
banks often had nearly as large a volume of frozen assets at the
beginning of the depression as when they failed. The main
cause of difficulty was the exhaustion of liquid assets in paying
depositors. At the time they failed many of the closed banks had
virtually no liquid assets over and above the amounts required to
settle with correspondent banks. But this was due only in small
measure to an increase in the volume of slow assets.
It is possible that this showing reflects a bias arising from
the method of classifying the loans. The attempt was to limit
the classification "liquid loans" to commercial paper, brokers'
loans, loans on adjusted service certificates, and such additional
loans as were normally self-liquidating from the current income
of the borrower. Loans for the production of crops or for conducting current business operations, if not obviously excessive in
amount, were placed in this class. Banks often, however, held
other loans, such as well-secured farm mortgage loans, which
ordinarily could be refinanced through a federal land bank or some
other financial institution ; but if it appeared that these could be
paid by the borrower only gradually over a course of years they
were placed among the slow loans. The market for such loans
became narrowly restricted during the depression. Had loans
of this type been considered liquid in more favorable times, it is
probable that the freezing of assets during the depression would
appear more extensive than is shown in the figures.
The authors believe that the conditions of banks may be most
accurately appraised if virtually all assets whose liquidity grows
out of the possibility of sale are regarded as slow and unliquid.
In a time of depression, when banks need to realize upon them,
such assets are likely either to become unsalable or to lose so much
in value that it becomes impracticable to sell them. For this reason securities, even bonds dealt in currently on the exchanges, are
placed below liquid loans in order of liquidity. An exception,
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ARKANSAS EXPERIMENT STATION BULLETIN 315
however, has been made in the case of United States securities,
because the excellent credit of the federal government together
with strong support of the markets for federal securities, kept
these securities in a class by themselves during the depression.
It is also believed that most loans whose liquidity rests on the
possibility of selling the capital assets of the borrower should be
classified as unliquid. Banks make many short-dated loans which
are used for long-term purposes or which are so large in amount
that there is no reasonable expectation of their being repaid out
of the borrowers' incomes, except gradually over a long period.
Such loans may be well secured, and, as the maturities of the notes
are short, they may appear to be liquid. Actually, however, full
payment within any short period, even within years in many
cases, can only be made by realizing on the security or by finding
other lenders who will take over the loans. Neither of these alternative methods of collection, however, proves very effective in
a time of depression, for country banks hold mainly real estate
as security for such loans, and the markets for real estate and
real estate loans become narrowly restricted. Efforts to collect
such loans quickly are seldom successful, and they not only result
in hardship and injustice to borrowers but have contributed materially to the destruction of property values.
There is a vast difference between these loans and the types
of loans that have been classified as liquid. One of the banks
shown in this series held a substantial volume of commercial paper
and brokers' loans, but in most of the banks the loans classified as
liquid were used mainly to finance the production and marketing
of crops and the conducting of current business operations. Small
loans used for various other purposes were often included, as well
as loans on adjusted service certificates, but these represented
only a small proportion of the liquid loans. The high percentage
of collections on loans classified as liquid, even during periods of
drought and depression, has been demonstrated in an earlier section, and there is corroborating evidence in the experience of the
federal intermediate credit banks of the liquidity of loans for the
production of crops. Collection of most of the types of loans
which are classified as liquid takes place at frequent intervals
and largely as a matter of routine, for borrowers usually can pay
these obligations with current income. Moreover, most borrowers
expect to pay their temporary or seasonal loans so that collection
by the banks rarely works an injustice.
The method of classifying loans which has been used in this
study not only separates the types of loans that have proved to
be most liquid during the depression, but also indicates quite
clearly the types of financing in which the banks have been engaged. As shown in an earlier section, carryover loans, which
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BANK FAILURES IN ARKANSAS
57
include most of the slow loans, appear to have been used mainly for
long-term purposes, such as buying or improving real estate, refinancing indebtedness, or capitalizing businesses. In classifying
the loans, nearly all loans which were used for such purposes were
designated slow, exceptions occurring only in the case of amounts
which borrowers appeared able to pay out of current income.
Thus the volume of slow loans affords a rough indication of the
volume of long-term financing conducted by the banks. Liquid
loans, as noted above, were used largely to finance current productive operations.
Inasmuch as banks are commonly thought to be engaged primarily in supplying credit for carrying on the current productive
operations of their communities, it is significant that a relatively
small part of the resources of banks shown in this series was
devoted to such purposes. In most of the banks, even in 1929,
not more than 25 per cent of the resources were in the form of
liquid loans, and in the few banks where this volume was exceeded,
a large part of the excess was represented by commercial paper,
brokers' loans, or loans to buy or hold cotton. Little, if any, more
than a quarter of the resources of banks was used to finance crop
production or the current operations of business firms. Judging
by the composition of the assets, many banks were primarily investment institutions rather than institutions dealing in current
agricultural and commercial credits.
There are various reasons why banks used so small a proportion of their assets in financing the current productive operations
of their communities. Some bankers have taken pride in holding
relatively few loans for crop production on the grounds that such
loans are more hazardous and less liquid than other typos of loans
that are available to the banks. This study does not support that
view, but bankers who have held such a view would naturally restrict their advances for crop production. Some bankers have
preferred relatively few large loans that were liquidated slowly
to many small loans that were liquidated rapidly, because the
large slow loans were thought to provide a more constant income
and involve less work and expense for the banks. This attitude
also would react against loans for crop production, because such
loans are usually small, and, in a large percentage of cases, are
paid out within a short time.
It appears likely, also, that an important reason for the small
volume of loans used to finance current productive or operating
requirements was lack of greater demand for this type of loan
from responsible borrowers. Owing to the small number and the
frequently uncertain financial status of businesses in the communities which banks were serving, the demand for current business
loans from acceptable risks was often very small. Likewise,
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many farmers who might desire loans for crop production were
not regarded as acceptable risks. In addition, the banks often
had large accummulations of time and savings deposits which
probably gave them a lending power far in excess of what their
communities could absorb for use in current productive operations.
Whatever the explanation, nearly all of the bankers used most
of their funds for purposes other than current local financing.
It was the use made of the funds not employed in current local
financing which constituted the principal difference between surviving and closed banks. Surviving banks held large cash reserves and large amounts of United States securities but only a
small volume of slow loans. Closed banks held small cash reserves
and small amounts of United States securities, but were heavily
loaded down with slow loans. This difference led in turn to another difference which had an important bearing on the later
histories of the banks. With their large holdings of cash and
United States securities, the surviving banks could meet nearly
all seasonal requirements from their own resources so that they
were able to hold their borrowing power in reserve for protection
against emergencies. The closed banks, however, had so small a
volume of liquid assets that they customarily were forced to borrow heavily to meet seasonal needs, and they had little additional
borrowing power to fall back on when adverse conditions developed.
Although the banks entered the depression with a relatively
small part of their resources in the form of liquid loans, most of
the deposit withdrawals which occurred during the depression
were paid from the proceeds of such loans. Slow loans could not
be collected in sufficient amount to meet a large volume of withdrawals and the banks hardly dared take the losses involved in
selling badly depreciated securities. Moreover, a considerable
part of the securities, including most of the United States securities, was pledged to special creditors and hence was unavailable
for the payment of general claims such as were possessed by the
majority of depositors. As bankers desired to maintain cash reserves at high levels, liquid loans were used as far as possible to
meet deposit withdrawals; and in most banks depositors were paid
mainly from the proceeds of such loans.
This policy was forced on the banks by the large volume of
their unavailable assets and by uncertainty as to the volume of
funds their depositors would demand. It may be justified, therefore, from the standpoints of both depositors and the banks themselves. From the standpoint of those who relied on the banks for
credit, however, the result was extremely unfortunate, as drastic
reduction of the liquid loans, which were mainly new loans for
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BANK FAILURES IN ARKANSAS
current operating purposes, meant that the customary credit supply of borrowers was almost entirely cut off. Notwithstanding
the praise many bankers deserve for meeting the demands of depositors and maintaining solvency during the depression, it must
be recognized that the banks generally failed to provide their communities with a dependable source of credit. From this failure
on the part of surviving banks, as well as from the failure of
closed banks to meet the needs of either depositors or borrowers,
grew much of the need for supplementary credit measures by the
federal and state governments.
EARNINGS, EXPENSES, AND PROFITS OF CLOSED AND SURVIVING
BANKS
In view of the differences in their operating policies, it might
be expected that the closed banks would have earned greater
profits than the surviving banks in the period before the depression. Ever since the War, the closed banks had carried lower reserves of cash and United States securities, and had relied more
extensively on funds borrowed from other banks, than was common among the surviving banks. Local loans bore higher rates
of interest than reserve balances and United States securities,
and the more a bank borrowed from other institutions the more
presumably it could lend to its own patrons. For these reasons,
it would seem logical to expect the highest earnings, at least before losses were charged off, from the closed banks.
Gross earnings of the closed banks were higher than those
of surviving banks, but the surviving banks made the better showing with regard to net profits after adjustment for expenses and
losses (Table 14). Both operating expenses and losses were
greater in the closed banks, so much greater, in fact, that they
more than offset the higher gross earnings of the closed banks.
As a result, the surviving banks were able to pay larger dividends
TABLE 14. AVERAGE EARNINGS, EXPENSES, AND PROFITS PER $100 OF DEPOSITS DURING PERIOD 1923 TO 1929, INCLUSIVE
Item
(Iross earnings
(nwrating expenses
Net operating earnings
Losses charged off
Net earnings for distribution
Dividends
Additions to surplus and reserves
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Federal Reserve Bank of St. Louis
Surviving banks
Closed banks
Dollars
Dollars
7.78
5.38
2.40
.50
1.90
1.23
.67
8.72
6.47
2.25
.91
1.34
1.16
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ARKANSAS EXPERIMENT STATION BULLETIN 315
60
EARNINGS, EXPENSES, AND LOSSES PER $100 OF DEPOSITS
DOLLARS
I
1
GROSS EARNINGS
9
1---
Banks closed in
. /**-- 1930,19.34or1932
.......,.....mos
•
•
•
•
•••
I
I
o
8
7
Banks remoinIng open
through 1932
6
..------
--.....--------
8
OPERATING EXPENSES
7
0.
0•
•..
•
o
0.
•,,, .... ... .... ....
WO
6
I.
5
------
,-
7
NET LOSSES CHARGED OFF
1--
r"
•
•...•
•• ...•
e
...
0
—
e
e
e
.5
•
•
-F-
1
NET INCOME AVAILABLE FOR DISTRIBUTION
2
goo
1
%
•
NE.........
••• se
0
1923
S
'24
MENT Of AGRICuLTuRE
'25
'26
'27
'28
'29
'30
BUREAU Oi AGRICULTURAL ECONOMICS
Figure 26. Gross earnings of the closed banks were larger in relation to the
deposits than were the gross earnings of surviving banks. The larger operating
expenses and losses of closed banks, however, resulted in smaller net earnings
for distribution as dividends and as additions to surplus than was the case in
surviving banks.
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BANK FAILURES IN ARKANSAS
61
to their stockholders and to set aside larger amounts as surplus
for the protection of depositors.
The dollar amounts of earnings, expenses, and profits are
stated here in terms of the deposits; i. e., so many dollars per 100
dollars of deposits. Banks vary in size and some common measure
has to be used to put them on a comparable basis. The deposits
have been used for this purpose. Other bases, such as total assets or total earning assets, might have been used without changing the essential point brought out by the data; viz, that the surviving banks were operated more profitably than the closed banks.
Use of the deposits as a base, however, has the special advantage
of indicating costs and net profits of converting the principal
stock in trade (the deposits) into earning assets.
The data shown in Table 14 are simple averages for the 7
years, 1923 to 1929, inclusive. This period is probably long enough
to "iron out" differences of rapidly passing character, so that the
greater profitability of the surviving banks would appear to be
a normal result of differences in operating policy. In using the
simple averages, however, there is always danger that the results
will be weighted unduly by a few extreme cases. To serve as a
check upon this point, the position of the median average for each
group of banks was determined for each year as shown in Figure
26. These data justify Table 14, and indicate in addition that the
surviving banks had greater net earnings, not merely on the average over a period of several years but in virtually every year
covered by the study.
Available materials do not permit very thorough analysis
of the earnings and expenses of the banks, but Table 14 reveals
a few significant facts. In the period 1923 to 1929, inclusive,
banks which closed during the depression reported average gross
earnings of nearly $1.00 more per $100 of deposits than were reported by banks which remained open. The larger gross earnings
of banks in the closed group appear to have been due mainly to
the fact that they carried a greater volume of loans and a smaller
volume of investments and reserve balances in relation to the deposits than was common among the surviving banks. Loans
yielded a higher rate of earnings than did investments and reserve balances.
Other factors may also have been responsible for the higher
gross earnings of the closed banks. For example, one of the
closed banks financed several cotton buyers on a very speculative
basis, largely because of the income which it obtained from exchange on cotton drafts. During the 5 years 1925 to 1929, inclusive, the income from exchange was more than $70,000, but
the bank lost nearly double this amount on one of the cotton buyers
in 1929 and 1930. In this case high gross earnings were obtained
by taking long chances with the funds of depositors.
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ARKANSAS EXPERIMENT STATION BULLETIN 315
TABLE 15. CLASSIFICATION OF OPERATING EXPENSES PER $100 OF DEPOSITS DURING
PERIOD 1923 TO 1929, INCLUSIVE
Expense
Surviving banks
Closed banks
Dollars
Dollars
Salaries and wages
Interest on deposits
Interest on borrowed money
Taxes
Other expenses
1.96
1.87
.05
.51
.99
2.46
1.71
.45
.48
1.37
Total
5.38
6.47
The higher gross earnings of the closed banks, however, were
more than offset by their larger operating expenses, which, on the
average, were $6.47 per $100 of deposits as compared with $5.38
for the surviving banks (Table 15). Higher costs of doing business are revealed in three items, salaries and wages, interest on
borrowed money, and the so-called other expenses, which include
rent, heat, light, supplies, donations, and a miscellany of other
items. The interest on deposits and the taxes paid by closed banks
averaged lower than those paid by surviving banks.
In an earlier section it was pointed out that the closed banks
had been heavier borrowers than the open banks. This fact is
partly responsible for the higher income and is directly responsible for greater interest payments on borrowed money found in
closed banks. None of the data at hand reveals why salaries and
wages and other expenses were higher in the closed banks. The
surviving and closed banks were not greatly different in size or
location and there is no apparent reason why the costs of conducting business need have been substantially higher in the closed
banks. It is possible that the high level of costs in closed banks
reflects the same lack of conservatism which was indicated by
their loan and reserve policies.
Losses charged off were also higher in closed banks than in
surviving banks. The latter annually charged off about 50 cents
per $100 of deposits whereas closed banks charged off about 91
cents per $100 of deposits on account of losses. It is noteworthy
that at the end of the 7-year period to which these figures relate
the closed banks had accumulated losses on loans alone of approximately $4.45 per $100 of deposits as compared with losses of $2.34
in surviving banks. These losses had not yet been charged off.
it would have required both groups of banks nearly 5 years to
charge off these accumulated losses at the rate of retirement that
was followed in preceding years. If, however, all net operating
earnings were used for the retirement of these losses, it would
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BANK FAILURES IN ARKANSAS
have required surviving banks only one year as compared with 2
years for the closed banks.
Owing to larger losses and larger operating expenses, the
closed banks had smaller net earnings than the surviving banks.
The net earnings were used either to pay dividends or to strengthen the capital structures of the banks. Banks that remained
open paid average dividends of $1.23 per $100 of deposits which
was about two-thirds of their net earnings. Dividends of the
closed banks were about $1.16 per $100 of deposits or nearly seveneighths of their net earnings. These payments left additions to
surplus and reserves of approximately 67 cents for open banks
and 18 cents for closed banks.
In these figures there is additional proof that the closed banks
were operated less safely than the surviving banks, and it appears
that the over-extended condition of the closed banks was unprofitable even during favorable years. Only in 1928 did the closed
banks report net earnings as great as those of surviving banks,
and they could not have made such a favorable showing that year
TABLE 16. PERCENTAGES BY WIIICII DEPOSITS AVERAGED LOWER IN 1930, 1931,
AND 1932 THAN IN 19291
Classes of banks
I. Surviving banks known to
have had only light withdrawal from lack of confidence
Bank 1
Bank 2
Bank 3
II. Other surviving banks=
Bank 4
Bank 5
Bank 6
Bank 7
Bank 8
III. Closed banks known to have
had severe "fright" withdrawals
Bank 9
Bank 10
Bank 11
TV. Other closed banks=
Bank 12
Bank 13
Bank 14
Bank 15
Bank 16
Bank 17
Bank 18
1930
1931
1932
Per cent
Per cent
Per cent
.3
7.8
2.2
13.2
Increase
14.9
8.1
14.3
13.7
10.6
18.9
3o.6
15.2
33.1
27.5
9.2
26.5
31.8
20.4
35.3
16.2
26.0
58.1
24.9
25.7
30.2
8.4
Closed
59.4
44.8
Closed
Closed
Closed
4.1
17.3
16.3
Increase
Increase
10.5
13.4
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
_
'Omitted from the banks listed are five banks which were reorganized between
1929 and 1933, four banks on which data on deposits were incomplete, and one bank
which failed early in 1930.
=It is known that a few of these banks had severe temporary runs.
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ARKANSAS EXPERIMENT STATION BULLETIN 315
64
had they charged off accumulated bad paper. From both an immediate and a long-run point of view, the more conservative policies of the surviving banks proved to be more profitable to stockholders and better designed to protect the interests of depositors.
PROTECTIVE MEASURES FOR THE FUTURE
Several measures for protection against future banking difficulties are suggested by the foregoing analysis of the conditions of
banks. Although there have been other complicating factors,
banking difficulties in Arkansas have arisen mainly from an excessively great shrinkage of deposits and from the fact that many
banks entered the depression in an extremely unliquid condition.
To guard against these conditions in the future, it is suggested
that specific but reasonably liberal and flexible requirements pertaining to the liquidity of bank assets be enacted into law, and that
banks be encouraged, by law or otherwise, to promote use of deposit contracts which will place a part of their deposits on a more
permanent and a better secured basis.
Due largely to loss of confidence in banks, withdrawals of deposits during the depression were far greater than need have occurred. This is attested for the country at large by the immediate
DEMAND AND TIME DEPOSITS. ANNUAL AVERAGES EXPRESSED AS PERCENTAGES OF
AVERAGE DEMAND OR TIME DEPOSITS IN 1928-1929
INDEX NUMBERS (DEMAND OR TIME DEPOSITS,1928-1929.100)
PERCENT
BANKS REMAINING OPEN THROUGH 1932
BANKS CLOSED IN 1930.1931.0R 1932
f
120
l
I
Demand deposits ..,,,,_,
L•
I
110
##
•
0.1
100
90
—:—.•
$
•
le%
•A•i-*
•A$ f
•
... i
0
a
i
•
i
•
.
•
•s ,
II •
••
•
•
•
•
80
ft a •
i
70
60
50
--Time deposits
40
—
30
20
1918 '20
22
U S DCPARTMENT OF AGRICULTURE
'24
'26
'28
'30
1918
'20
'22
'24
'26
'28
'30
'32
BUREAU Of AGRICULTURAL ECOF.OFA.CS
Figure 27. Time deposits rose much more rapidly from 1919 to 1928 than did
demand deposits. Contrary to experierve during the depression of 1920-21, when
time deposits were resistant to the declines affecting demand deposits, time deposits declined during the recent depression in about the same proportion as the
demand deposits.
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BANK FAILURES IN ARKANSAS
RELATION OF SLOW ASSETS TO TIME DEPOSITS AND CAPITAL FUNDS IN 1929
SLOW
ASSETS
PERCENT
OF TOTAL
ASSETS
•
___
1
1
Banks remaining open
10 present,
,.., Banks remaining open
unfil banking holiday
'
n Banks closec/ during
1930, /93/. or 1932
80
I1
,
•
•
•
70
1:3
/
0
60
0
9,.
0,0
.6,
•
• —
•
,o
o
50
40
6,4
•
,
/•
30
•
20
p
•
;#
10
0
U S0
90
70
80
60
50
40
30
20
10
CAPITAL FUNDS AND TIME DEPOSITS, PERCENT OF TOTAL LIABILITIES
MUST Of AGRICULTURE
100
BUREAU Of AGRICULTURAL ECONOMICS
Figure 28. Most of the 12 banks whose conditions have been analyzed in
detail held in 1929 slow assets approximately equal in amount to the combined
sum of time deposits and capital funds. Notable exceptions to this practice were
two surviving banks which, although possessing relatively large capital funds and
time deposits, did not allow themselves to become proportionately burdened with
slow assets.
decrease of withdrawals and by the redeposit of currency when
public confidence was revived following the banking holiday early
in 1933. For Arkansas a rough indication of the importance of
fear, as contrasted with need, in causing deposits to decline may
be obtained from data shown in Table 16. It seems improbable
that, in the absence of fear, the deposits of many Arkansas banks
would have been depressed below the levels of 1929 more than 5
or 10 per cent in 1930, 15 or 20 per cent in 1931, and 30 or 35
per cent in 1932. At least a substantial part of the declines which
were much in excess of these estimates may reasonably be attributed to lack of confidence on the part of depositors.
A significant feature of the withdrawals was that time and
savings accounts had fully as great a percentage decline as the de-
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Federal Reserve Bank of St. Louis
ARKANSAS EXPERIMENT STATION BULLETIN 315
mand accounts (Figure 27). This contrasted with experience
during the earlier depression of 1920-21 when the time and savings accounts showed little tendency to decline. Apparently most
bankers regarded their time and savings deposits as a fund which
was not likely to be much reduced by withdrawals, for, as shown
in Figure 28, they had invested amounts approximately equal to
such deposits and the capital funds in exceedingly slow assets. Although some bankers were not prepared for large withdrawals
from any source, withdrawals by time and savings depositors
were particularly damaging to the banks because they were less
expected than withdrawals from demand accounts.
A large measure of protection to the banks against deposit
withdrawals is afforded by the new deposit insurance plan, as depositors now have confidence that they will not suffer loss even if
their banks fail. This plan protects, however, only against withdrawals arising from lack of confidence. It provides no protection against withdrawals arising from the need of depositors, except as the administration of the Federal Deposit Insurance Corporation may require banks whose deposits are insured to maintain sufficient liquidity to meet such withdrawals. If in some future time of difficulty, large numbers of banks fail because they
were unable to meet demands arising from the urgent needs of depositors, as occurred during the depression, they will place a
heavy burden on the insurance fund with possibly very serious
results to the banking structure of the country.
In order to insure uninterrupted banking service for the patrons of banks and to minimize the risks of sound, liquid banks
that participate in the insurance plan, it is thus desirable to find
some means of assuring that virtually all banks will be able to
meet the demands upon them arising from depositors' needs. This
might be accomplished, it is believed, by (1) requiring that all
banks measure up to certain minimum liquidity requirements,
which should be based on past experience with deposit withdrawals, and (2) by having banks alter the terms on which they accept
time and savings deposits.
There can be no doubt that many banks have been operated
with almost utter disregard for liquidity and that insufficient
liquidity has been a major cause of banking difficulties. Banking
laws, unfortunately, have done little more toward fixing requirements for liquidity than to stipulate minimum requirements for
cash reserves and to place some restrictions on the operations of
banks which are excessively indebted to other banks. These requirements have not been an effective check upon the activities of
incompetent bankers. Reasonably liberal statutory requirements
as to the liquidity of bank assets would assist supervisory officials
in their efforts to protect the public, and would help to maintain
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BANK FAILURES IN ARKANSAS
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banks in a strong financial condition, without unduly restricting
the activities of banks.
What should these requirements be? An answer to the question rests mainly on a decision as to the volume of deposit withdrawals that banks should be prepared to meet and on a decision
as to the types of assets which may be classified as liquid. In this
connection, moreover, the fact that banks have a financing service
to perform must be kept in mind. It would be regrettable if such
rigid requirements were formulated as to disrupt an urgently
needed and legitimate financial service by the banks.
When all depositors have a right to withdraw their funds upon demand or short notice, as is the case now except with restricted
deposits and some of the time certificates, neither bankers themselves nor anyone else can be certain what volume of funds depositors may demand. Much of the uncertainty of banking could
be eliminated if depositors who accumulate bank deposits either
as a reserve or as an investment could be induced to accept longer
term deposit contracts, such as are suggested at a later point. In
this event, it would be known that sudden withdrawals could be
restricted mainly to the demand deposits, and that liquidity requirements should be based principally on the volume of these
deposits.
Without such a safeguard the only clue to the volume of withdrawals against which banks should be protected is in the actual
experience of banks. As was noted earlier, it seems unlikely that
Arkansas banks would have suffered declines, over and above
seasonal declines, exceeding 30 or 35 per cent during the 3 years
ending with 1932, had depositors not become frightened. There
is a substantial basis for believing, therefore, that if all banks in
Arkansas at the beginning of the depression had possessed liquid
assets which equaled their rediscounts and bills payable and as
much as 50 per cent of their deposits, relatively few banks would
have been unable to maintain adequate cash reserves and meet the
demands upon them which arose from actual need on the part of
depositors.
Careful study of the banks whose assets and liabilities were
classified has so far disclosed no reason why liquidity requirements could not be placed higher than this without impairing the
ability of banks to render excellent financial service to their communities. Moreover, in spite of the fact that a 50 per cent requirement probably would be adequate for most banks that could
maintain the confidence of their patrons, it would be desirable to
have higher requirements for the superior protection afforded both
to depositors and to those who rely upon the banks for current
operating credits. Accordingly, it is suggested that Arkansas
banks be required to hold liquid assets equal to the total of their
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ARKANSAS EXPERIMENT STATION BULLETIN 315
bills payable and rediscounts and at least 60 per cent of their deposits. The 60 per cent requirement might be suspended temporarily for banks which were facing unusually heavy withdrawals;
and it might be lowered permanently if banks succeed in converting a substantial volume of their deposits into long-term certificates of deposit.
At first thought most bankers may regard a 60 per cent
liquidity requirement as unnecessarily high for the protection of
depositors and as unsuited to the needs of banks which serve the
credit requirements of farmers and local business men. Such an
attitude would result naturally from the common practice of measuring liquidity by the volume of cash and United States securities
held by the banks. For this reason it is desirable to emphasize a
point that has been explained in earlier sections; viz, that conservatively made loans for producing crops and for conducting
current business operations have proved highly liquid even during
the depression and should be included among the liquid assets until such time as they have run well past their normal liquidation
dates. Every bank which is rendering satisfactory service as a
financial institution has a substantial volume of such loans. Since,
under the plan proposed, these loans would be counted as liquid
assets, the liquidity requirement would not interfere in any way
with the making of loans for productive, self-liquidating purposes.
The term "liquid assets", it will be observed, is here given a
somewhat different meaning from that common in banking parlance. Cash,funds carried at approved reserve depositories, shortterm commercial paper, acceptances, loans on adjusted service certificates, well-margined brokers' loans in moderate amount, and
United States securities are considered liquid assets as is usually
the case. Securities other than direct obligations of the United
States, however, are not considered liquid, regardless of their rating, price quotation, or seeming marketability, unless they are
bonds of the highest standing maturing within one or two years.
Recent experience shows that little confidence can be placed in the
liquidity of securities in times of widespread depression, when
liquidity is most needed by the banks". On the other hand, conservatively made loans for producing crops or for conducting current business operations, and loans for other purposes also if they
appear easily collectible from the borrowers' annual income, are
17Throughout the study United States securities have been treated as liquid assets
whereas most other securities have been included among the unliquid assets of banks.
This distinction is based on the fact that United States securities were less subject to
depreciation and had a broader market during the depression than was the case with
other securities. It should not be forgotten, however, that following the World War
and, to a smaller extent, early in 1932 United States securities were quoted at a discount which substantially impaired their liquidity to banks. Federal reserve bank
purchases of United States securities were no small influence in their rise to par later
in 1932. At the present time both the Treasury and Federal reserve banks are in
excellent position to support the market for United States securities if need for support should arise.
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BANK FAILURES IN ARKANSAS
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included among the liquid assets. Such loans had an excellent
record of collections during the depression, and they can be rediscounted or used as collateral for borrowing at other banks in
case funds are needed before they can be collected.
Under this classification of liquid assets, a 60 per cent liquidity requirement would not restrict the ability of banks to finance
the current operating or production needs of farmers and business
men in their communities, except in cases where borrowers were
obviously being over-financed. It would restrict the making of
loans for long-term purposes and the purchase of securities other
than direct obligations of the United States government. Even
these assets, however, might be acquired in an amount equal to the
capital funds and about 40 per cent of the deposits, so that banks
would be able to do a substantial volume of long-term financing in
their communities. Banks certainly should not become more
deeply involved with slow assets than the suggested requirement
would permit, unless a substantial portion of the deposits is placed
on a more permanent basis. The main effect of the requirement
would be to place a check upon bankers who do not themselves
have the prudence to confine their slow assets within reasonably
safe limits. Accomplishing this would improve both the ultimate
safety and the immediate availability of the funds of depositors
and would make the banks a more dependable source of credit
for borrowers.
Although there are numerous differences among banks and in
the character of the communities which they serve, it is not believed that uniform liquidity requirements of the type recommended would operate unfairly or inflexibly. Under present operating practice banks have one characteristic in common—virtually all of their deposits are subject to withdrawal at relatively
short notice—and this requires that a large proportion of the
assets be reasonably liquid. Within the broad requirement here
suggested bankers would be free to adjust the proportions of various types of liquid assets in accordance with the needs and peculiarities of their patronage. They would be free to hold more
liquid assets than the requirement calls for if they desired. Moreover, they could select slow assets at their discretion, providing
they kept within required limitations. The requirement could
easily be amended if banks succeed in placing their time and savings deposits on a more permanent basis. In that case it would be
feasible to fix lower liquidity requirements for time and savings
deposits than for demand deposits.
In suggesting liquidity requirements, it has been recommended
that there be liquid assets to cover not only 60 per cent of the deposits, but, in addition, all of the bills payable and rediscounts.
The latter feature is important, as by borrowing heavily from
other banks it would be possible for banks to show liquid assets
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ARKANSAS EXPERIMENT STATION BULLETIN 315
equal to 60 per cent of the deposits without having more than a
very small part of the deposits actually protected by liquid assets.
For example, at one time in 1929 one of the banks included in this
study had liquid assets equal to 134 per cent of its deposits but
only 37 per cent of the deposits were actually protected by such
assets as most of the liquid assets were owed, and, at the same
time, pledged to other banks. To provide adequate protection for
depositors it is necessary to require that a large proportion of the
deposits be covered with liquid assets after making full provision
for the payment of amounts owed to other banks, because these
other banks usually obtain security for their advances which assures that they will have first claim on the liquid assets.
That it would be feasible to require that banks be at least 60
per cent liquid during favorable periods is indicated by the records
of the 12 banks whose assets and liabilities were classified in detail (Table 17). Three of the four banks which survived the
year 1932 without reorganization and one of the banks which was
reorganized were more than 60 per cent liquid throughout the
year 1929. Several of the banks which later were closed met the
60 per cent requirement on occasions. There can be no doubt that
in favorable times a 60 per cent liquidity requirement could easily
be met by well-managed banks and that many of the better-managed banks would be more than 60 per cent liquid.
The high mortality rate among banks with lower liquidity
ratios, moreover, gives reason for believing that at least 60 per
cent liquidity is needed by banks in favorable times to protect the
public during possible adverse periods. Four of the 12 banks included in Table 17 were more than 60 per cent liquid throughout
1929. Only one of these banks had serious difficulties during the
depression. Four of the remaining banks were never as much as
60 per cent liquid in 1929. All four of them failed in 1930. One,
however, after being reorganized, was able to survive to the bank
holiday of 1933, but was actually insolvent throughout the depression. The remaining four banks were 60 per cent liquid at times,
but were less liquid at other times, during 1929. Of these one
bank closed in 1930, two closed in 1931, and one managed to survive to the present time, although its liquidity ratio fell as low as
one per cent in 1932.
It would be feasible and desirable for supervisory officials to
relax requirements temporarily for banks which were having unusually heavy withdrawals or were experiencing unusual difficulty
in making collections. The proposal does not contemplate that
banks which have long records of excellent management, like
banks A, C, and E in Figures 20, 21, and 22, should be disciplined
because in a time of widespread distress like 1932 their liquidity
ratios fell below 60 per cent. As a rule, however, banks should
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BANK FAILURES IN ARKANSAS
1932
TABLE 17. RATIOS OF NET LIQUID ASSETS' TO DEPOSITS DURING 1929 AND
1932
1929
Classes of banks'
Highest
ratio
Per cent
Lowest
ratio
Average
ratio
Per cent
Per cent
Per cent
78
80
65
58
66
59
64
25
59
46
52
1
62
51
59
65
27
:18
17
0
21
13
Lowest
ratio
Average
ratio
Highest
ratio
Per cent
Per cent
I. Banks still surviving
Bank A
Bank C
Bank E
Bank G
8:3
83
66
68
Banks which, after
reorganization, survived to bank holiday of 1933
Bank K
Bank L
51
•P
Banks closed 1930 to
1932, inclusive
Bank B
Bank D
Bank F
Bank H
Bank I
Bank J
46
43
60
60
70
48
21
•):1
52
:16
37
4:3
76
79
62
38
31
32
57
5o
63
47
19
(Closed)
(Closed)
(Closed)
(Closed)
(Closed)
(Closed)
be cash, balances at other banks, net U. S. securi'Net liquid assets are taken to amount of such assets required to repay in full
the
ties, and liquid loans, minusbanks.
money borrowed from other
by letter to conform to the designations shown in
2The banks are designated
Figures 20 to 25.
face the prosbe required to maintain the prescribed liquidity or
supervisenable
would
This
ated.
liquid
and
pect of being closed
ively
effect
more
much
st
intere
public
the
t
protec
to
ls
ory officia
inan
warn
than
more
do
little
could
than in the past, when they
tely
defini
was
ution
his
instit
of
l
capita
the
until
competent banker
would make it
impaired18. The suggested liquidity requirements
endangering
were
which
utions
instit
tly
possible to close promp
e them
restor
to
taken
not
were
steps
if
tors
deposi
the interests of
to a sound and liquid condition.
It is recognized that some banks could not meet a 60 per cent
able
a
requirement for liquidity at the present time, so that reason
The
ity.
their
ve
liquid
impro
to
banks
period should be allowed for
eity
requir
fix
liquid
to
time
ent
excell
an
is
present, however,
g the next
durin
ry
recove
mic
econo
ntial
substa
is
there
If
ments.
for securities, and
few years, the rising deposits, increased prices
banks to meet
the
enable
should
loans
of
ibility
improved collect
ts will help
remen
the
requi
and
lty,
difficu
ut
witho
ts
remen
requi
the
ant
supply of
more
abund
their
ing
divert
to prevent banks from
of
recovery
crest
the
Once
uses.
id
unliqu
into
y
funds too largel
the
rements
make
to
requi
late
is reached, it will probably be too
d the discretionary powers of the Comptroller
"The Banking Act of 1933 increase
formal liquidity requirements.
of the Currency, but fixed no
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ARKANSAS EXPERIMENT STATION BULLETIN 315
effective, for, if past experience is any guide, many banks will
have used their increasing deposits to acquire unliquid assets. It
is easier to prevent an unsound condition from developing than to
correct such a condition after it has developed.
To further strengthen the ability of banks to meet depositors'
demands, it would be advisable to alter the terms on which banks
receive time and savings deposits. Under present contractual relationships there are three main classes of deposits: Demand deposits which are subject to withdrawal upon demand; savings deposits on which state banks in Arkansas may require not more
than 90 days' notice of intention to withdraw; and time certifiicates which may be payable on demand or at a specified date depending on how the certificates are drawn. In practice virtually
all of the deposits have been paid on demand, if a bank's condition
permitted, and even if a bank sought to restrict withdrawals by
requiring notice on savings deposits or by refusing to pay time
certificates before maturity, the time limits were so short that
these measures were not very effective. Moreover, since banks that
were in good condition paid their deposits upon demand, restrictive action of this kind was likely to destroy confidence and increase withdrawals by demand depositors. Banks, therefore, have
been bound by custom to pay virtually all of their deposits on demand despite the fact that the time and savings deposits were
contractually on a limited time basis.
The unliquid character of a considerable part of bank assets
does not justify the practice of having virtually all deposits payable on demand or short notice. Much of the banking difficulty in
the depression arose from the fact that the banks owed far greater
amounts, payable at short notice, than they had any means of
paying. Moreover, this condition was not entirely a matter of
poor management by bankers, as the lending power of banks before the depression greatly exceeded the volume of funds which
borrowers requested for use in self-liquidating transactions. In
the case of inland banks, such as those of Arkansas, the excess
lending power arose largely from the growth of time and savings
deposits after the World War (Figure 27). Although it is felt
that the liquidity of banks may be vastly improved by measures
such as those suggested above, the situation of the banks would be
made much more secure if a considerable part of the deposits was
put on a deferred-payment basis.
Obviously the right of demand depositors to withdraw their
funds at will can not be abridged without interfering with the
essential purpose which the demand deposits serve; i. e., that of
a medium of exchange. It would seem, however, that a large part
of the time and savings deposits could be put on a deferred-payment basis without impairing their usefulness and without work-
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BANK FAILURES IN ARKANSAS
73
ing an injustice to depositors providing existing depositors were
given opportunity to transfer their deposits to demand account.
Accordingly, it is suggested that banks (1) lengthen the minimum
periods for which time and savings deposits are accepted to one
year in the case of time certificates and 6 months in the case of
savings accounts; (2) refuse as a customary practice to pay any
time or savings deposits before date of maturity; and (3) strive to
develop the use of certificates of deposits with maturities of 2 or
3 years by offering preferential rates of interest on such deposits.
To make the time and savings deposits attractive and in recognition of their deferred availability, it would also be advisable
to segregate a special group of assets for their protection. These
assets need not be very liquid but they should be good; and banks
should not transfer assets from or to the protective fund without
express authority from the supervisory officials. Among time and
savings depositors is a vast group who would not be harmed in the
least by having payment of their deposits deferred and whose interests would be much better served than at present if they were
protected by a special fund of good assets. If payment of the
savings accounts and time certificates before maturity were refused as a customary practice, it would not be long until only
those who were willing to forego immediate payment, in exchange
for special protection and interest on their balances, would hold
time deposits.
Although the changes recommended would require a substantial revision of customary practice in Arkansas, the plan of segregating assets for the protection of time and savings depositors has
been used in other states and the Banking Act of 1933 limits the
right of members of the Federal Reserve System to pay time and
savings depositors on demand. Under this Act, member banks
are not permitted to pay time certificates before maturity and arc
forbidden to accept as savings deposits anything other than
"thrift" accounts. The intent of these provisions is clearly to
confine the time and savings deposits to funds which represent investments and thrift accumulations, and they should have the
effect of diminishing the volume of withdrawals from such accounts. The proposed plan is believed to be a more effective
method of accomplishing these same results.
This plan would constitute a limited restriction of payments
on deposits and would materially reduce the possibility of withdrawals. It would have the advantage of restricting payments
only on the balances of depositors who had voluntarily agreed tc
a restriction, and would thus leave depositors who were unable o!
unwilling to accept a deferred-payment deposit free to draw upoN
their funds at will. Combined with the plan for liquidity requirements, it should produce a situation under which banks could
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ARKANSAS EXPERIMENT STATION BULLETIN 315
meet all demands arising from the actual need of depositors, while
at the same time the banks would be protected against a considerable proportion of the withdrawals that have been such a demoralizing factor in recent years.
SUMMARY AND CONCLUSIONS
Bank failures and also less serious difficulties of Arkansas
banks during the depression appear to have been due mainly to
large withdrawals of deposits and to excessive holdings of unliquid assets. Many banks entered the depression in a badly
frozen condition, and with heavy debts to other banks incurred for
seasonal needs. This left them little reserve borrowing power and
virtually no unpledged liquid assets for meeting the deposit declines that resulted from the drought of 1930 and the depression.
The failure of these banks seriously impaired public confidence
with the result that deposit withdrawals from sound banks often
were far greater than general economic conditions would justify.
For reasons that are only partially disclosed by this study,
Arkansas had more difficulty with banks than did neighboring
states. In part this may be attributed to the drought of 1930,
which appears to have been more severe in Arkansas than in any
of the neighboring states. A further reason was the failure of a
large chain of banks which not only held a substantial portion of
the banking assets of the state but was highly regarded by the
public. With the failure of this chain public confidence in banks
suffered a terrific shock, and withdrawals of deposits assumed exceptionally large proportions. There doubtless were other contributing factors, but those mentioned are sufficient to account
for unusually difficult conditions in Arkansas.
Bankers can not be held responsible for the drought of 1930
nor for the depression, yet many of them can not be absolved of
responsibility for aggravating the effects of these disasters. History is replete with reverses of one kind and another, droughts,
floods, insect infestations, and depressions, and it is plainly the
duty of a banker to provide for his patrons a reasonable measure
of protection against the effects of such occurrences. As previously noted, many banks entered the depression in such precarious
condition that even the most generously disposed observer could
not credit their managements with providing reasonable safeguards against normal hazards of the business. The precarious
condition of such banks is attested by the fact that most of the
bank failures in Arkansas occurred during 1930, before the depression was far advanced. Why many bankers were so oblivious to
the hazards of their business is difficult to explain, as the severe
depression of 1920-21 was not many years past and Arkansas
bankers had had numerous experiences with variable crop yields.
Lessons of the past apparently having so little influence on
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BANK FAILURES IN ARKANSAS
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some bankers, it seems advisable to set up additional safeguards
to protect the public and also to protect bankers who manage their
institutions competently. The most important of the safeguards
which have been discussed is minimum liquidity requirements.
In fixing such requirements, loans made on a conservative basis
for producing crops and for conducting current business operations should be included as liquid assets. A second safeguard
which is suggested is the elimination of time and savings deposits
subject to withdrawal at short notice. Time funds may be handled much more safely on the basis of longer-term contracts not
payable before maturity. It would be desirable to segregate good
assets for the special protection of depositors who accept longterm contracts and to allow no transfers from this protective fund
except with the permission of supervisory officials.
Had measures such as these been in effect and been rigorously enforced prior to the depression, there is little reason to believe that Arkansas would have had many bank failures. Banks
held nearly as large a volume of slow assets in 1929 as in later
years, hence inadequate liquidity during the depression was due
mainly to inadequate liquidity before the depression. With proper
enforcement of the suggested liquidity requirements, banks would
not have entered the depression in a frozen condition. Time and
savings depositors have been quick to take fright and their withdrawals have added immeasurably to the difficulties of banks. A
large part of these withdrawals might have been prevented had
the time funds been on a long-term instead of a short-term contractual basis.
Viewing developments at large, it seems clear that banking
difficulties have resulted mainly from the failure of banks to
maintain a proper relationship between their quick assets and
their current liabilities. Too large a portion of the liabilities has
been payable on demand or at short notice; too small a part of the
assets has been convertible quickly into cash. The remedy is to
increase the proportion of liquid assets and decrease the proportion of liabilities payable at short notice. Banks can remain open
indefinitely during favorable times with their assets in precarious
relationship to their liabilities, but adverse conditions quickly destroy the slender margin of safety possessed by such institutions
and force them to close. The public interest will never be served
adequately until banks are ready at all times for emergencies; and
the best time to prepare for emergencies is during periods of recovery and prosperity.
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ARKANSAS EXPERIMENT STATION BULLETIN 315
APPENDIX
APPENDIX A
The method used in classifying the loans of banks according to date of
origin and purpose was as follows:
1. Sample loans of each bank were classified as to purpose and date of
origin.
The sample loans represented about 60 per cent of the volume of total
loans of the surviving bank in 1929, 74 per cent in 1930, 82 per cent in 1931,
and 80 per cent in 1932.
The sample loans of the closed bank included about 20 per cent of the
volume of total loans in 1929, 24 per cent in 1930, and 30 per cent in 1931.
2. The samples of loans, for 1932 in the case of the open bank and for
1931 in the case of the closed bank, were chosen with the purpose of obtaining
representatives of all classes of loans and borrowers for those years. Borrowers owing large amounts, however, were given more than proportional
representation, as it would have required an exceedingly large sample to give
proportional representation to borrowers of small amounts, and, at the same
time, to obtain examples of the various classes of larger loans.
For years preceding 1932 in the case of the open bank and 1931 in the
case of the closed bank, the sample consisted mainly of the indebtedness, if
any, of the borrowers described above, although a few additional loans were
selected each year to get examples of loans paid in full before 1932 and 1931,
respectively, in the case of the two banks.
3. From study of other sources of information, such as examiners' reports, call reports, and the movement of total loans as reflected by the balance
sheet, and from questioning the banker or receiver, it was possible to form a
reasonably accurate impression of the representativeness of the sample loans
for 1932 in the case of the open bank, and 1931 in the case of the closed bank.
The sample loans of the two banks described in Figure 17 appeared to be representative, but sample loans on some of the other banks whose loans were
analyzed appeared to give undue weight to carryover loans. In such cases
the volume of current loans in the sample was increased arbitrarily to a level
which, it seemed, would give such loans proportional representation.
4. For years earlier than the base years (1932 for the open banks and
1931 for the closed banks) the sample loans were not representative, as evidenced both by the fact that the percentage of total loans represented by the
sample was considerably less than the percentage during the base years, and
by the fact that sample loans did not change in volume from year to year in
exact conformity to the change in total loans of the banks.
The sample loans for these earlier years were therefore adjusted so that
the volume each year would bear the same relation to the volume in the base
years as was borne by the total loans of the bank. This required arbitrary
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BANK FAILURES IN ARKANSAS
77
increases in the volume of sample loans in nearly all of the years preceding
the base year.
part
5. In making this adjustment, a decision had to be reached as to the
the
of the increases that would be placed in the carryover classification and
obvious
It
seems
ation.
loan
classific
current
the
in
part that would be placed
heavily
that during these earlier years the sample loans in many cases were
e, all of the
overweighted by carryover loans. To be on the safe side, therefor
may give current
increases were credited to current loans. This procedure
d, in
loans credit for somewhat greater volume than they actually possesse
ng
the
banks
ty
of
describi
possibili
the
it
avoids
but
relation to carryover loans,
were.
as more burdened with carryover loans than they actually
in the manner
sample
loans
current
of
volume
the
adjusted
6. Having
sample loans for each
indicated above, the new computed volume of current
same proportion as the
year was divided among various purposes in the
This procedure
been
divided.
had
loans
sample
current
of
volume
original
loans of the sample
seemed warranted on the assumption that the current
purposes for which curafforded an approximately accurate description of the
entative character of the
The
unrepres
used.
were
banks
the
of
loans
rent
te this assumpsample in years preceding the base years would not invalida
that borrowers
the
fact
from
mainly
arose
ss
tativene
represen
tion, as lack of
of carryover loans with their
a
volume
large
too
d
combine
sample
In the
current loans.
purpose group was
The classification of carryover sample loans in each
retained as originally made.
by adding the com7. The computed volume of sample loans, obtained
r
of
loans, was then excarryove
volume
the
to
puted volume of current loans
to total loans
sample
d
loans
of
compute
ratio
the
by
ing
panded by multiply
of the bank.
APPENDIX B
the banks, the following
In computing the volume of liquid loans held by
method was used:
and pur1. The loans of each bank were classified as to date of origin
A.
x
Appendi
in
d
describe
pose as
was made by
2. A preliminary estimate of the volume of liquid loans
to represent:
including as liquid loans the paper shown by (1) above
service
(a) Commercial paper, broker's loans, and loans on adjusted
certificates.
opera(b) Current loans to produce crops, to conduct current business
for personal uses.
tions, and to buy or hold cotton, and current loans
(Not all of these loans were collected within a 12-month period, but this
to some extent, by payments
possible overstatement of liquid advances is offset,
on loans which were not classified as liquid.)
d
3. The preliminary estimate of liquid loans was then compare with:
and
eligible
loans
loans,
brokers'
paper,
ial
commerc
(a) The volume of
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Federal Reserve Bank of St. Louis
78
ARKANSAS EXPERIMENT STATION BULLETIN 315
for rediscount at federal reserve banks as shown by the call reports of member
banks.
(b) The volume of real estate loans and loans designated slow, doubtful, and worthless, and loans criticized for other reasons as shown in examiner's reports.
(c) The movements of total loans from season to season as shown by
balance sheets of the banks. (This is an informative item in banks whose
business is highly seasonal.)
4. In most cases the preliminary estimate of liquid loans was in harmony
with the showing of the data described in 3 above, and could be used without
adjustment. In a few cases, however, adjustments were made in the preliminary estimate when it seemed that the preliminary might not give the banks
sufficient credit for liquid loans. Recognizing the possibility of error in working from a sample, a conscious effort was made to err, if necessary, in crediting the banks with more, rather than less, liquid loans than they possessed.
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Federal Reserve Bank of St. Louis
NONTE17:[33MTEMP1
Issued aoy
OSCAR NELSON
AUDITOR ofPUBLIC ACCOUNTS
BANKING DEPARTMENT
State of Illinois
SPRINGFIELD, ILL., AUGUST 1, 1931
Vol. 7
READ THE REPORTS
We again urge that more attention be devoted to the
duplicate report returned after the examination of the bank.
It is incumbent upon the Officers of the institution to call
the attention of the Directors to the contents of the report and
request that each one individually familiarize himself with
the information contained therein. The purpose of returning
the duplicate report to the bank is to furnish the Directors
an opportunity to familiarize themselves with the facts concerning the bank which are set forth in a comprehensive form.
Failing to realize the importance to them of the information to be derived from the report, the Directors have delegated to the Cashier and the President the duty of considering
the same and formulating a reply to be returned to the Department. This is a mistake! In some cases Directors have
expressed their regret at having overlooked this opportunity.
Therefore, it is urged that when the report is received
from the Department showing the result of the examination
that the Directors be apprised of the matter and that due consideration be given to the items contained in the report regardless of the time necessary.
The report is not a circular letter but an individual resume of the findings of the Examiner in connection with the
examination of the bank in question.
Ii
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Federal Reserve Bank of St. Louis
NO. 5
REVIEW OF PAST SIX YEARS
Many requests have been received for a copy of the report of banking activities for the past six years, the pertinent
facts of which were given to the public through an interview
with the Auditor of Public Accounts recently. As the report
has not been put into printed form for distribution we quote
for the information of the inquirers as follows:
In January 1925, the date of assumption of office by the
present incumbent, there were 1403 State Banks doing business in Illinois. Since then 537 have suspended business and
179 others have procured new charters, making a net decrease
of 358 banks and leaving the present number-1045. Of the
537 which ceased doing business, 419 closed their doors during
the six-year period prior to January 1, 1931. Of the 419 referred to only 139, or approximately 35% have gone into Receivership; others relinquishing their charters through mergers, the purchase of their assets and liabilities by larger
banks, or by voluntary liquidation wherein the depositors
were paid in full.
In other words, in 65% of the cases of closed banks the
depositors lost nothing. The remaining 35% consisted of
small banks with small deposit liabilities and a sizeable rate
of dividend has already been distributed to the creditors.
Since January 1, 1931, 118 banks have suspended business up to and including June 30, 1931. Sixty-six of these
were in Cook County and 52 downstate. Of this number 17 in
Cook County and 39 downstate were liquidated voluntarily—
all depositors being paid in full.
The report further showed that 48 banks closed in villages of 1,000 population and only one closed in a town from
5,000 to 10,000 population, while none closed in towns from
10,000 to 20,000 population outside of Cook County.
One portion of the report lists the technical causes of bank
suspensions. Among those given for the six-year period are
heavy withdrawals 126; depleted cash reserve 101; death of
officer or defalcation 30 and robbery 1.
Total deposits of all State Banks closed from January
to June are listed at $85,023,000. Total resources are set at
$126,847,000. Of all the banks closing in that period, less than
25% were capitalized at more than $200,000.
The report includes a table prepared from data by the
Federal Reserve Bank of Chicago listing all banks, both State
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Federal Reserve Bank of St. Louis
and National, wIlich were closed in the Unit Statesfrom
1927 to the present. Nebraska heads the list with 316 closed
banks and Iowa is second with 259.
Illinois had 250 banks closed in the four and one-half
year period while Indiana, with hardly half of Illinois' population, had 217. Wisconsin is listed for 76 closed banks;
Michigan 79; Minnesota 187, and Missouri 224. Only 23 failures were marked against New York, but several of these
were banks with branches and one, the Bank of the United
States, was the largest closed.
In summing up, the Auditor of Public Accounts arrived
at three conclusions as follows:
1. That prior to 1925 the State had too many banks,
mainly because of post-war inflation of real estate and commodity values.
2. That in the six-year period up to January 1, 1931, the
oversupply was being reduced by an orderly process of mergers and voluntary liquidations, resulting in no loss whatever
to depositors, with a certain number of failures among smaller banks, resulting, however, in no great losses to depositors.
3. That bank failures since January 1st, in Cook County
at least, have been due almost entirely to a lack of confidence
by depositors, who if they had left their savings in the bank
vaults would have seen the institutions in many cases emerge
from the current depression as strong as ever.
St. Charles
Kane
Rock City
Stephenson
Chicago
Cook
St. Charles
Kane
Chicago
Cook
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Federal Reserve Bank of St. Louis
PERMITS ISSUED.
Date.
Reserve.
Surplus.
Capital.
State Bank of St,
20, 1931
July
210,000
$
40,000
$ 100,000 $
Charles
CHARTERS ISSUED.
50,000
Rock City Bank...
J. Ii. Graham,
President
J. F. Mougin,
Cashier
Sears-Community
200,000
State Bank ....
3401 Arthington
Street
J. Louis Kohn,
President
Michael Bolker,
Cashier
State Bank of St.
100,000
Charles
Lester J. Norris,
President
Paul C. Mellander, Cashier
Central Republic
Bank and Trust
..... 14,000,000
Company
208 South LaSalle
Street
Philip R. Clarke,
President
C. C. Ilaffner,
Jr., Cashier
5,000
2,500 July 3, 1931
20,000
10,000 July 3, 1931
40,000
210,000 July 20, 1931
10,000,000
4,000,000 July 25, 1931
CONSOLIDATED.
•
Community State Bank and Sears-Community State
Bank under title Sears-Community State Bank.... July 3, 1931
Central Trust Company of Illinois and Chicago Trust
Company under title Central Republic Bank and
Trust Company
July 25, 1931
Chicago
Cook
Chicago
Cook
Chicago
Chicago
Cook
Cook
CAPITAL STOCK INCREASED.
Chicago Trust Company From $3,000,000 to $3,100,000 July 25, 1931
Liberty Trust and Savings Bank
700,000 to 1,000,000 July 30, 1931
From
Hudson
McLean
DURATION EXTENDED.
Hudson State Bank
Charter extended 25 years from May 1, 1932
July 15, 1931
LIQUIDATED.
Farmers and Merchants State Bank of Bloomingdale
through Roselle State Bank
Rock City State Bank through Rock City Bank
Stewart State Bank through State Bank of St. Charles
Illinois State Bank of Evanston through Phillip
State Bank & Trust Company, Chicago
July 1, 1931
July 8, 1931
July 20, 1931
Bloomingdale..DuPage
Rock City
St. Charles
Evanston
Stephenson
Kane
Cook
Kane
Dundee
Cook
Chicago
Cook
Chicago
Spring Grove...McHenry
Chicago
Chicago
Chicago
Cook
Cook
Cook
Cook
Chicago
('ook
Chicago
(
'ook
Chicago
('ook
Chicago
('ook
Chicago
('ook
Chicago
Cook
Chicago
Cook
Chicago
Cook
Chicago
Cook
Chicago
Cook
Chicago
Elmwood Park.Cook
Kane
Dundee
Cook
Chicago
Cook
Chicago
Cook
Chicago
Cook
Chicago
Cook
Chicago
Cook
Cicero
Cook
Berwyn
Winnebago
Seward
Spring Grove...McHenry
Cook
Chicago
Cook
Glencoe
Cook
Chicago
Cook
Lyons
Cook
Chicago
Cook
Berwyn
Waukegan
Lake
Cook
Chicago
Chicago
Cook
Berwyn
Chicago
Chicago
Cook
Cook
Cook
CLOSED.
Dundee State Bank
Immel State Bank
The Roseland State Savings Bank
Spring Grove State Bank
RECEIVERS APPOINTED.
Fullerton State Bank-Walter P. Mack
Bryn Mawr State Bank-Irwin T. Gilruth
West Englewood Trust & Savings Bank-Irwin T
Gilruth
Stony Island State Savings Bank-Irwin T. Gilruth..
West Lawn Trust and Savings Bank-Irwin T. Gilruth
Armitage State Bank-Irwin T. Gilruth
Auburn Park Trust & Savings Bank-Irwin T. Gilruth
Brainerd State Bank-Irwin T. Gilruth
Chatham State Bank-Irwin T. Gilruth
Chicago Lawn State Bank-Irwin T. Gilruth
Elston State Bank-Irwin T. Gilruth
Ridge State Bank-Irwin T. Gilruth
West Highland State Bank-Irwin T. Gilruth
Sheridan Trust & Savings Bank-Ernest Ridgeway..
Elmwood Park State Bank-Einer S. Liljeberg....
Dundee State Bank-H. D. Hemmens
Lincoln State Bank of Chicago-John P. O'Brien....
West Town State Bank-Thomas B. Roberts
Immel State Bank-R, F. Gentzel
Diversey Trust and Savings Bank-Glen C. Hodges....
Second North-Western State Bank-Norman 0. Geyer
Mid-West State Bank--Arthur A. R. Nelson
Twelfth Street State Bank-Arthur A. R. Nelson....
Seward State Bank-Christ T. Wilhelm
Spring Grove State Bank-Frank B. McConnell
South Side Savings Bank & Trust Co.-John A. Carroll
Glencoe State Bank-Chicago Title & Trust Company
Noel State Bank-Henry S. Savage
Lyons State Bank-Francis Karel
Italian Trust & Savings Bank-Howard C. Holbrook..
Berwyn State Bank-George H. Anderson
Waukegan State Bank-Fred Brown Whitney
Cragin State Bank-Logan L. Mullins
Total
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Federal Reserve Bank of St. Louis
July
July
July
July
2, 1931
2, 1931
3, 1931
9, 1931
July 9, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 16, 1931
July 17, 1931
July 20, 1931
July 20, 1931
July 21, 1931
July 21, 1931
July 22, 1931
July 22, 1931
July 22, 1931
July 22, 1931
July 22, 1931
July 22, 1931
July 24, 1931
July 24, 1931
July 27, 1931
July 28, 1931
July 28, 1931
July 28, 1931
July 28, 1931
July 30, 1931
TRUST CERTIFICATES ISSUED.
Deposit.
Central Republic Bank and Trust Company $500,000 July 25, 1931
TRUST CERTIFICATES CANCELLED.
American State Bank of Berwyn
Chicago Trust Company
Central Trust Company of Illinois
RECAPITULATION.
State Banks in Chicago
State Banks in Cook County outside Chicago
State Banks in Illinois outside Cook County
.400.11 (62501-1,900)
July 29, 1931
July 9, 1931
July 25, 1931
July 25, 1931
114
68
858
1040
1!M1 I
I
I El
I 1=3 i
0
THE CHASE
ECONOMIC BULLETIN
Issued by
The Chase National Bank of the City of New York
No. 2
MAY 8, 1930
VOL. X.
_
,
fil
,
-
_
_
-, =_.- .
..1.".
BRANCH BANKING
THROUGHOUT
FEDERAL RESERVE DISTRICTS
By
BENJAMIN M. ANDERSON, JR.. PH. D.
Economist of The Chase National Bank of the City of New York
_
0 I
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Federal Reserve Bank of St. Louis
I = I
I E:3
I
70
The CHASE • • •
ECONOMIC
BULLETIN
ISSUED BY THE CHASE NATIONAL BANK
OF THE CITY OF NEW YORK
BRANCH BANKING
THROUGHOUT
FEDERAL RESERVE DISTRICTS
By
BENJAMIN M.
ANDERSON, JR., PH.D.
Economist of The Chase National Bank of the City of New York
No. 2
VOL. X
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Federal Reserve Bank of St. Louis
MAY 8, 1 9 3 0
CONTENTS
Page
A REVOLUTIONARY PROPOSAL
3
THE EXISTING CHAIN, GROUP AND BRANCH BANKING MOVEMENT LEAVES
OUT THE SMALL BANK
4
THE SIZE OF THE FAILED BANKS
5
THE CAUSES OF BANK FAILURES IN THE PAST NINE YEARS
6
DIVERSIFICATION OF RESOURCES THROUGH CORRESPONDENT BANKS
9
THE REMEDIES
10
STATE LINES AND LOCAL FINANCIAL INDEPENDENCE
12
LOCAL INDEPENDENCE AND CORRESPONDENT RELATIONS
13
PARITY OF STATE AND NATIONAL BANKS
14
A GRAVE PRACTICAL DANGER
14
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Federal Reserve Bank of St. Louis
CHASE ECONOMIC BULLETIN
BRANCH BANKING THROUGHOUT
FEDERAL RESERVE DISTRICTS*
by
BENJAMIN M. ANDERSON, JR., PH.D.,
Economist of THE CHASE NATIONAL BANK of the City of New York
A REVOLUTIONARY PROPOSAL
The Committee on Banking and Currency of the House of
Representatives at Washington has been holding a highly importa
nt
set of hearings on the subject of group, chain and branch banking
.
It is giving very special consideration to a proposal that the Nationa
l
Bank Act be amended so that National banks may have the power
to extend branches throughout "trade areas" which may overlap
State lines, which may be as wide as Federal Reserve districts,
and
which may even overlap Federal Reserve districts in cases where
a
city's "trade area" runs beyond a Federal Reserve district. Nationa
l
banks, under this plan, would be empowered to do this whethe
r
the States consent or not. National banks located in one State
could invade another State whose laws prohibit branches of banks
chartered elsewhere. The primary purpose of this proposal is
to
arrest the failures among small banks in country districts.
A
secondary purpose is to give the National bank charter such an
advantage over State bank charters that the National banking
system will grow at the expense of State banking systems. The
theory of "parity" between State and National banks is definitely
abandoned, and the purpose is to give National banks a definite and
great advantage over State banks.
The main emphasis is placed upon the arrest of bank failures
.
During the nine-year period June 30, 1920, to July 1, 1929,
about
five thousand banks, nearly all of them in agricultural communi
ties,
closed their doors and tied up deposits of approximately $1,500,
000,000. (The average of deposits is thus very small for
these
*An address delivered before the North Carolina Bankers
Pinehurst, North Carolina, on the morning of Thursday, May Association at
8, 1930.
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Federal Reserve Bank of St. Louis
3
4
CHASE ECONOMIC BULLETIN
failed banks, being only $300,000). The figures for the year
1929 show no decline in the rate of failures among these small
banks.
The proponents of this widespread extension of branch banking
outside the city of the head office apparently intend to make use of
the recent rapid developement of group and chain banking, by adopting legislation to permit the groups and chains to transform themselves into branch systems.
With much sympathy for the main purpose which lies behind
these proposals, sincere proposals made by able men who undoubtedly have the good of the country bank at heart and who undoubtedly have a great deal of knowledge of country bank conditions, I
am, none the less, obliged to disagree radically both as to their
diagnosis and as to their prescription. The causes of the failures
of small country banks are to be found in special circumstances which
have little to do with the general question of chain, group and branch
banking versus unit banking. And the remedy proposed would
touch and help very few of the existing country banks which are in
a weakened condition.
We do not need to make a revolution in the general banking
system of the United States because of conditions in small banks in
stricken agricultural regions. Other, much more moderate, proposals may be made which would be much more effective from the
standpoint of the goal aimed at.
THE EXISTING CHAIN, GROUP AND BRANCH BANKING
MOVEMENT LEAVES OUT THE SMALL BANK
At the end of 1929 there were in the United States 24,645 banks
and 3,547 branches, or a total of 28,192 banking offices. Of this
total of banking offices there were 6,353 banks and branches that
belonged to branch banking systems and chain or group banking
systems or to both. This leaves 21,839 banking institutions that
are definitely "independent unit banks". The overwhelming number
of our banks is thus outside of chain-bank, group-bank or branchbank systems. On the other hand, on the same date, the branch,
chain and group banking systems had total loans and investments
of approximately thirty billion dollars, leaving twenty-eight billion,
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Federal Reserve Bank of St. Louis
May 8, 1930
5
five hundred millions of loans and investments for the 22,000 independent unit banks.
This figure, thirty billion dollars, however, gives a very exaggerated picture of the extent to which the movement has gone. From
the standpoint of the question in hand, we may take out the many
billions represented by the great New York banks whose branches
are all within the city of New York or else in foreign countries,
and the bulk of whose loans and investments are in any case not
in branches but in the head offices. A similar reduction can be made
for a number of other important cities. Of the banks that belong
to chains or groups, but operate no branches, there were on this
date 1,984, with total loans and investments of $4,913,000,000, the
average of loans and investments being about $2,500,000. In addition, there were 119 banks, belonging to chains or groups, that operate
branches, with total loans and investments of $6,264,000,000, or an
average of $52,600,000 per bank.
These figures show the immense disparity in average size between the banks that have gone into chains and groups, and the
small country banks that have been failing, with average deposits
of $300,000. The existing chain and group bank movement is primarily a movement which is bringing relatively large banks together.
In exceptional cases, it is including some of the small banks which
the legislative proposals are designed to help. Even in these cases,
it is not taking in those that are weak and failing. I should not
know how to draw a constitutional legislative proposal which would
compel good bankers to absorb weak and failing banks! Further,
from the standpoint of what is administratively possible, the managers of a great group-bank system can contemplate with some
equanimity the absorption of sixty million dollars of banking resources in a dozen well organized banks in sizeable cities, when they
would very properly shrink from the task of taking over sixty
millions of banking resources scattered among two hundred banks
in very small towns.
THE SIZE OF THE FAILED BANKS
Over forty per cent of the failed banks were situated in towns
and villages having a population of less than 500 persons. Over
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Federal Reserve Bank of St. Louis
6
CHASE ECONOMIC BULLETIN
sixty per cent were in towns of 1,000 people or less. Eighty per
cent were in towns of 2,500 people or less. Ninety-two per cent of
the failures were in places having less than 10,000 people. Of the
remaining eight per cent of the failures, a high percentage was in
very small banks in larger places.
From the standpoint of capitalization, sixty-three per cent of the
failures were among banks having $25,000 capital or less. Seventyone per cent were in banks having less than $50,000 capital, and
eighty-eight per cent among banks having less than $100,000 capital.
During the past nine years there were no failures at all of banks
having capital of two millions or more, and there were only four
failures among banks having over one million capital.'
Practically, it may be said that for cities of 10,000 or more people, and that for banks with $100,000 capital or more, there has been
no problem of sufficient magnitude to justify extraordinary concern,
or to call for more than local attention.
Certainly there is nothing in the experience of the past nine years,
as revealed in the foregoing figures, to justify a legislative revolution in our banking situation, or to justify the creation of giant
branch-banking systems, with enormous capital, ranging over "trade
areas" which may equal or even exceed Federal Reserve districts in
size. Much more moderate measures would apparently be indicated.
THE CAUSES OF BANK FAILURES IN THE PAST
NINE YEARS
The first and foremost cause of the large number of bank failures since 1920 is the great boom in agricultural prices and land
values before 1920, the collapse of agricultural prices and land
values following 1920, and the adverse conditions in agricultural
communities which have since continued. The second great cause
is real estate speculation in the period since 1920,in certain important
sections of the country, notably Florida and some adjacent States.
This is strikingly evidenced by the geographical distribution of
the failures, which are largely centered in four Southeastern States,
namely, Florida (123 failures), Georgia (305 failures), South Caro'Branch, Chain and Group Banking, Hearings before the Committee on
Banking and Currency. H. R., 1930, Vol. I, Pt. 1, pages 11-12.
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Federal Reserve Bank of St. Louis
May 8, 1930
7
lina (191 failures), North Carolina (110 failures), and in a second
group of agricultural States, namely, Minnesota (378 failures),
Iowa (467 failures), Missouri (246 failures), North Dakota (411
failures), South Dakota (315 failures), Nebraska (307 failures),
Kansas (194 failures), Montana (191 failures), Oklahoma (227
failures), Texas (217 failures).
During this same period, all of New England had only twentysix failures. New York had only twelve failures, and Ohio had
only thirty-six. New Jersey had none at all. The failures were
concentrated, in other words, in the regions which had been most
affected by the agricultural boom and collapse, and by the real estate
speculation in Florida and adjacent States. This concentration of
the problem in special areas again would raise the question as to
whether Federal legislation, affecting banks all over the country, is
called for, or whether—in so far as the matter calls for banking
legislation at all—it is not a matter for the States most concerned,
with such concurrent legislation on the part of the Federal government as would permit National banks to have the same branchbanking rights that State institutions have in these States.
From the standpoint of the contrast between our unit-banking
system and the system of branch banking, it may be observed that
the same grave sequence of events, namely, the war, the boom of
1919-20 and the collapse of 1920-21, which undermined so many of
our small agricultural banks, also undermined great branch-banking
systems in many parts of the world. These include a great bank in
Denmark, a great bank in Canada with four hundred branches, the
Banque Industrielle de Chine in China, with its widespread branches
and its power of note issue, and the Banca di Sconto in Italy, with
branches spread all over that country. More recent troubles of
the same sort, deferred consequences of the same causes, have
occurred in Japan and Austria. An incomplete record shows, also,
for the United States, that 226 banks, with deposits of $102,000,000,
belonging to chain systems, failed during the period we are
considering.' And it is further to be observed that in all these
American agricultural States the great bulk of the unit banks,
measured in resources, survived the shock, and that in every State
the majority of the unit banks in number stood intact.
1 Hearings, Vol. I, Pt. 4, page 457.
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Federal Reserve Bank of St. Louis
8
CHASE ECONOMIC BULLETIN
The situation was very greatly aggravated in many of these
States by the excessive number of very small banks. "No community can possibly provide adequate resources, competent officers,
and experienced directors for one bank to every 750 of its inhabitants
as in North Dakota, or to 1,400 as in Iowa. And the situation in
these States was not exceptional; on the contrary, an excessive
number of banks have been established throughout those sections
of the country that are mainly devoted to agriculture."
New Jersey's total immunity from bank failures in the past
nine years is probably due in part to the fact that New Jersey's
banking authorities are not over-ready to grant charters to new
banks, unless there is real evidence that a new bank is needed, and
that the Federal Comptroller is influenced by the State policy when
granting National bank charters in that State.
The situation was complicated further for many small country
banks by the withdrawal of an important source of revenue which
they had formerly enjoyed, namely, the making of exchange charges
on checks drawn against them for which remittance was expected
in another place. Their checks, when presented over their counters,
they paid at par. But when they were expected to make remittance
to other places, they very generally made a liberal (and often
excessive) "exchange charge," which was an important source of
revenue. The Federal Reserve system of par collection of checks
has largely wiped out this source of revenue for very small banks.
Again, the institutions chartered by the Federal government for
making mortgage loans reduced an important source of revenue
which many of these small banks had, in acting as intermediary in
the making of mortgage loans.
At the same time these Federal farm loan agencies brought into
the agricultural communities an unaccustomed volume of funds
which were deposited with the local banks at high rates of interest,
and which the local banker felt obliged to re-employ at high rates of
interest. Many a small town banker, who was a good banker when
his loanable resources were somewhat less than the borrowing demands
of his good customers, and who could make good loans when he
could discriminate among competing borrowers, found himself to be
'Recent Economic Changes, Vol. II, page 695.
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Federal Reserve Bank of St. Louis
May 8, 1930
9
a very poor banker when he faced the unaccustomed problem of
employing surplus funds. He was not trained for that.
It may be added that the well meant efforts of the Federal government to improve the condition of agriculture by multiplying the
facilities of agricultural credit have had as their main result a great
and excessive increase in the mortgage debt of agriculture, without
a commensurate increase in the productiveness of agriculture, and
with a consequent narrowing of the margin of free income and the
percentage margin of equity in land, on the basis of which the
farmer could ask his banker for credit.
Very especially has the position of the very small bank in villages
been weakened by the coming of hard roads and automobiles,
which, in many places, have largely destroyed the usefulness of the
small local village, doing away with the local merchant, the local
mill, and the local church, as well as the local banker, making it possible for the people to do their business and seek their social life
in the county seat and nearby larger cities. Industrial consolidations,
moreover, even where leaving local factories in small places, have
very often taken away the banking business which the local factory
gave to the local banker, and concentrated it in larger places. The
growth of chain stores has had a similar effect. The very small
bank has had a difficult time in recent years, and the marvelous
thing is, not that so many have gone under, but rather that such an
enormous number have stood, and have even prospered, despite these
adverse tendencies.
DIVERSIFICATION OF RESOURCES THROUGH CORRESPONDENT BANKS
One cause assigned for the failures of many small banks is that
they have been unable to diversify their resources because located
in a one-crop district, whereas a great bank with branches stretching
over a whole Federal Reserve district could accomplish this diversification. It is true that many small banks have failed through
lack of diversification of their resources, but it is also true that the
majority of small banks in the same communities have survived because they have diversified their resources. They have accomplished
this diversification by means of their correspondent relations with
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Federal Reserve Bank of St. Louis
10
CHASE ECONOMIC BULLETIN
great banks in great cities. They have refrained from putting all
of their resources into local loans, and have placed part of them,
through their correspondent bank, into open market commercial
paper, or readily marketable bonds, or call loans on the Stock Exchange, or acceptances, and deposit balances with their correspondent
bank to build up a "borrowing equity." When times of stress have
come, they have thus had secondary reserves, and they have been
able to borrow from their correspondent banks sums needed to tide
them over seasonal needs and emergencies. Good banking and
diversification of banking resources is perfectly possible for a small
bank in a one-crop community. We do not need branch banking
either for the purpose of securing diversification or for the purpose
of bringing about a seasonal flow of funds from region to region.
The system of correspondent banking relations has accomplished this
for many decades, and good bankers everywhere know how to do it.
THE REMEDIES
I see nothing in all of this to call for a radical change in Federal laws regarding branch banking. The problems do not extend
throughout the United States. They are centered in particular
States. The problems do not relate to institutions of sufficient size
to be beyond the power of each State to deal with for itself.
Radical changes in the banking legislation of a good many States
are undoubtedly indicated. The minimum capital required for banking in many States is far too small. There ought to be sweeping
consolidation movements among the smallest banks in many States.
Many villages which now have two or three struggling banks
would be much better served by one strong bank. State legislation
giving the State banking authorities power to guide, and even to
compel this in their discretion, would be very desirable in certain
States.
A limited extension of branch banking by State law would probably help the situation in a good many States. The National Bank
Act should be amended so as to permit National banks to do in this
connection what the different States allow their State banks to do.
County-wide branch banking, branch banking in groups of counties, even, in some cases, State-wide branch banking, or branch bank-
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Federal Reserve Bank of St. Louis
May 8, 1930
11
ing centering about three or four main cities of the State, ought, in
certain States, to be permitted and encouraged. There may even be
one or two cases where a State will feel itself so much in need of
outside banking capital that it will welcome the branches of powerful banks whose head offices are in other States.
Mr. Platt, of the Federal Reserve Board, has made moderate proposals along the line of county-wide branch banking, having especially in mind the very small country banks, which deserve very careful study. Ambassador Charles G. Dawes, when Comptroller of the
Currency, in his Annual Report for the year 1898, recommended
that branch banking be authorized in communities of less than two
thousand inhabitants, since many of such communities were not able
to support independent banks. Many such villages would undoubtedly be better served by inexpensive offices of strong banks, whose
head offices are in nearby county seats than they are by their local
independent unit banks which are not making profits and which
must charge very high rates for the limited local loans they are able
to make.
It is probable that legislation along this line, authorizing banks
in larger cities to establish branches in outside communities with
ten thousand or less inhabitants, or even with five thousand or less,
would accomplish virtually everything, with respect to the prevention of small bank failures, that branch banking could in any case
accomplish. At the same time it would avoid the grave evils that
would come from the sudden revolution in our general banking
system, and from the destruction of local financial independence,
that the larger programme now under consideration would involve.
Further, such a limitation would concentrate upon the communities most in need of help the attention of the bankers who are in
favor of such developements, but who would be hunting bigger game
in larger cities if the whole field were thrown open. Such legislation ought to be drawn in such terms as will encourage the organizers
of branch-bank systems to take over the existing banks, and to discourage the starting of new branch offices in places where such
action would merely increase the difficulties of existing small banks.
Permission to establish such new branches, competing with existing
banks, ought not to be automatic, but should involve some "certifi-
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Federal Reserve Bank of St. Louis
12
CHASE ECONOMIC BULLETIN
cate of convenience and necessity", to be issued by the authorities
only after hearings.
But the problem differs greatly in different States. The different
State bankers' associations should take it up and they should carry
their proposed legislation to their State capitals, rather than to
Washington. The one piece of legislation needed at Washington
would seem to be that the National banks be allowed to have
branches in a given State on the same terms that the State banks
and trust companies in that State are allowed to have them.
STATE LINES AND LOCAL FINANCIAL INDEPENDENCE
We are moving much too fast and too far in the direction of
centralization. If an evil arises, we rush to Washington for a
remedy which, even if a good remedy for part of the country, is
often ill adapted to the special needs of other parts of the country,
and which, if a bad remedy, makes another nationwide evil. It is
far better that we should use the machinery of our forty-eight States
for social and economic experiments. If they work well, other
States may adopt them. If they work well in part, other States
may modify them in adopting them. If the new measures are good
for some States and bad for others, those that find them good may
use them. If the remedies are definitely bad, as guaranty of bank
deposits proved to be, we develope the fact by a relatively smallscale experiment, and the country as a whole is saved. There is,
for example, little danger of Federal legislation for the guaranty
of bank deposits, but I should not feel so sure of this if experience in Oklahoma and Nebraska and elsewhere had not already
given us an object lesson upon the point.
I should strongly oppose Federal legislation which would force
upon a State which was unwilling to accept it the branch-bank
system, and, above all, Federal legislation which would compel a
State to admit the branch of a bank chartered in another State
against its will and against its laws. Specialists in every field,
eager to bring about widespread adoption of their remedies and
reforms, are continually going to Congress to secure Congressional
legislation covering matters which are properly matters of State
concern. Congress is continually giving attention to matters which
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Federal Reserve Bank of St. Louis
May 8, 1930
13
ought to be handled piecemeal among the forty-eight States. Congress is overburdened with measures of this kind, and Washington
has grown topheavy with bureaus for administering such legislation.
We need the States. They are a vital part of our political
machinery. And we must be content to see them make mistakes
occasionally, as part of the price which we must pay for a proper
balance between centralization and local self-government. If the
choice were between an infallible Congress and fallible State legislatures, the issue might not be so clear, but Congress can also
make mistakes, and such mistakes are more serious than those made
in a single State. The banker is not merely a banker. He is also,
and first of all, a citizen. As a citizen, he may be permitted to attach
a higher importance to the preservation of the fundamentals of our
Federal system of government than to technical points in banking
legislation.
LOCAL INDEPENDENCE AND CORRESPONDENT
RELATIONS
I believe in the general system of local financial independence. I
am opposed to having the bankers of one city dominate the banking
of another city. I believe that this country ought to have in every
city several strong, independent financial institutions interested in
the local community, and dealing as principals with the banks of
other cities, rather than acting merely as their agents. I believe
that our system of correspondent banks gives us, in general, all the
financial interdependence that we need, and that the services which
the correspondent bank in a great city performs for the banker in a
smaller place make it unnecessary for him to have the elaborate facilities which a great bank has. The unit-banking system has gone
to extremes with us in many States. There are too many very small
banks. But correcting this excess of the system will leave our
American banking system, I believe, far better adapted to our needs
than the European system of a few great banks with a multitude of
branches, with all power centered in a few great financial centers.1
17'he Chase Economic Bulletin, Vol. IX, No. 5, "Bank Consolidations in
a Period of Speculation," discusses the comparative merits of the American
and European systems.
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Federal Reserve Bank of St. Louis
14
CHASE ECONOMIC BULLETIN
PARITY OF STATE AND NATIONAL BANKS
I cannot sympathize with the view that it is necessary to pass
unsound legislation for the purpose of giving such supremacy to the
National banking system over the State banking systems that banks
would be compelled to drop their State charters and take out National charters. It is now well demonstrated that the Federal
Reserve System does not depend for its success and growth upon
the growth of the National banking system. Virtually all of the
great State banks are members of the Federal Reserve System.
Seventy-five per cent of the commercial banks of the country, measured in volume of loans and investments, are members of the Federal
Reserve System. The Federal Reserve System can at any time dominate the money market, which is dependent on Federal Reserve
credit for a high percentage of its cash reserves. Through the
Federal Reserve System, Federal supervision extends to the great
bulk of the banking resources of the country at present.
The original purpose of the National banking system was to
supply a uniform bank note issue throughout the country, and to
make a market for the Civil War Government bond issues. With
the Federal Reserve Act and the Federal Reserve Note, the National
Bank Note has become a matter of relatively minor importance.
There is no need for artificial support of the Government bond
market. The National banking system is important, and it is desirable
to maintain it. It has helped set good banking standards throughout
the country. The Federal Comptroller's supervision and inspection
of banks is better than State supervision and inspection of banks in
many States—not in all. But the State banking systems are also
good systems, by and large. It is thoroughly undesirable that great
issues of banking policy should be settled as a mere incident to a
competition between the State and National banking systems.
A GRAVE PRACTICAL DANGER
The adoption of the proposed Federal legislation authorizing
National banks to establish branches throughout great "trade areas"
which may be as wide as Federal Reserve districts or even, in certain
cases, wider, would be like the firing of the starter's pistol at a race.
It would initiate one of the fiercest competitive struggles the country
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Federal Reserve Bank of St. Louis
May 8, 1930
13
has ever seen among the powerful banks in each of the districts for
supremacy throughout the district. Many hasty and ill considered
consolidations would be put through. Efficiency would suffer. A
great readjustment in the relations of banks and businesses would
be necessary. It would mean competitive bidding for the stocks
of the banks which would be absorbed into the great branch-bank
systems. It would mean an orgy of speculation in bank stocks. It
would bring into play the vigorous activity of promoters, not necessarily bankers or men with capacity in bank administration, who
would buy up or obtain options upon large numbers of banks with
a view to selling them to the competing great banks.
Those of us who believe that the primary business of a banker is
banking rather than bank-stock jobbing would not welcome a situation of this sort. Within recent months a great many conservative
bankers have been saying that they would dislike very much a competition of this sort, that they hope it will not be forced upon them,
but that if it is forced upon them, they will, of course, act to protect their positions. I should think that legislative restraint, rather
than legislative encouragement, would be called for by tendencies
like these.
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Federal Reserve Bank of St. Louis
The CHASE
ECONOMIC BULLETIN
VOLUME I
No. 1. THREE AND A HALF BILLION DOLLARS FLOATING DEBT
OF EUROPE TO PRIVATE CREDITORS IN AMERICA.—The
Basic Cause of Bank Expansion and "Tight Money" in the United
States—London's Position. (Edition exhausted.) October 5, 1920
No. 2. FACTORS OF SAFETY WHEN PRICES DROP.
(Edition exhausted.) December 15, 1920
No. 3. THE RETURN TO NORMAL.—The Abnormal Tendencies that
Produced the Crisis of 1920—The Extent to which the Crisis has
Corrected Unsound Tendencies—The Remaining Problems of Readjustment. (Edition exhausted.)
February 28, 1921
No. 4. PROCEDURE IN PAYING THE GERMAN INDEMNITY.
April 20, 1921
No. 5. THE GOLD AND REDISCOUNT POLICY OF THE FEDERAL
RESERVE BANKS. (Edition exhausted.)
July 20, 1921
VOLUME
II
No. 1. ARTIFICIAL STABILIZATION OF EXCHANGE CONDEMNED
—OUTLINE OF A FUNDAMENTAL SOLUTION.—A Memorial to the Next International Economic Conference. (Edition
exhausted.)
January 12, 1922
No. 2. GERMANY AND RUSSIA—A CHAPTER OF UNCERTAINTIES.
May 6, 1922
No. 3. CAPITALISM VERSUS SOCIALISM IN THE LIGHT OF THE
PRESENT WORLD ECONOMIC AND FINANCIAL SITUATION. (Edition exhausted.)
June 23, 1922
No. 4. AMERICA AND EUROPE—OUR INTEREST AND OUR POLICY. (Edition exhausted.)
August 31, 1922
No. 5. THE INTERALLIED DEBTS AS A BANKING PROBLEM.
November 11, 1922
VOLUME
III
No. 1. UNDERLYING FACTORS IN THE BUSINESS SITUATION.
March 27, 1923
No. 2. THE ENGLISH-SPEAKING WORLD AND THE CONTINENT
April 27, 1923
OF EUROPE.
No. 3. AGRICULTURAL CREDITS AND COOPERATIVE MARKETING. (Edition exhausted.)
August 10, 1923
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Federal Reserve Bank of St. Louis
No. 4. AGRICULTURE AND DAIRYING IN THE WORLD'S ECONOMIC EQUILIBRIUM.—An Interpretation of Some Agricultural Statistics. (Edition exhausted.)
October 4, 1923
No. 5. THE TARIFF IN AN UNBALANCED WORLD.
(Edition exhausted.) November 19, 1923
VOLUME IV
No. 1. THE REPORT OF THE DAWES COMMITTEE.
(Edition exhausted.)
April 28, 1924
No. 2. ARTIFICIAL PRICES A MENACE TO ECONOMIC STABILITY.—The Farmer's Problem and the Revised McNary-Haugen
May 5, 1924
Bill.
No. 3. CHEAP MONEY, GOLD, AND FEDERAL RESERVE BANK
August 4, 1924
POLICY.
No. 4. A BI-PARTISAN MYTH—FEDERAL RESERVE BANK "DEOctober 9, 1924
FLATION" OF THE FARMERS.
No. 5. THE WEAKEST POINT IN THE FARMER'S FINANCIAL.
POLICY.—Capitalizing Prosperity—Liquid Reserves for Agriculture—Some Dangers of Cheap Money.
October 23, 1924
VOLUME V
No. 1. THE GOLD STANDARD VERSUS "A MANAGED CURRENCY".
—With Some Observations on the Quantity Theory of Money.
March 23, 1925
(Edition exhausted.)
No. 2. STATE AND MUNICIPAL BORROWING IN RELATION TO
June 10, 1925
THE BUSINESS CYCLE.
No. 3. A WORLD AFRAID OF PRODUCTION.—The Interallied Debts,
Reparations, and High Protective Tariffs.
August 24, 1925
VOLUME VI
No. 1. GERMAN BUSINESS AND FINANCE UNDER THE DAWES
April 2, 1926
PLAN.
No. 2. STABILIZING THE FRANC.—The Financial Position of France—
The New Par for the Franc—Fallacies Impeding the Return to the
June 21, 1926
Gold Standard in Continental Europe.
No. 3. BANK MONEY AND THE CAPITAL SUPPLY. November 8, 1926
VOLUME VII
No. 1. THE PROGRESS OF FRENCH FINANCE.
February 18, 1927
No. 2. THE RELATION OF INTERNATIONAL DEBT PAYMENTS
April 8, 1927
TO DOMESTIC PURCHASING POWER.
No. 3. TYPES OF SOCIAL RADICALISM.
June 21, 1927
No. 4. SOME MAJOR FORCES IN THE INTERNATIONAL MONEY
October 29, 1927
MARKET.
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Federal Reserve Bank of St. Louis
VOLUME - VIII
No. 1. AN ANALYSIS OF THE MONEY MARKET.
No. 2. BANK EXPANSION VERSUS SAVINGS.
No. 3. THE AUTUMN MONEY MARKET.
June 4, 1928
June 25, 1928
September 27, 1928
No. 4. BROKERS' LOANS AND BANK CREDIT.—The Liquidation of
October 31, 1922
Loans Versus the Liquidation of Securities.
VOLUME IX
No. 1. TWO "NEW ERAS" COMPARED: 1896-1903 and 1921-1928.
February 11, 1929
No. 2. SOME SIDE LIGHTS ON THE MONEY SITUATION.
February 13, 1929
No. 3. COMMODITY PRICE STABILIZATION A FALSE GOAL OF
May 8, 1929
CENTRAL BANK POLICY.
No. 4. THE EFFECT ON EUROPE OF TIGHT MONEY IN
July 20, 1929
AMERICA.
No. 5. BANK CONSOLIDATIONS IN A PERIOD OF SPECULAOctober 12, 1929
TION.
No. 6. THE FINANCIAL SITUATION.—The Stock Market Crisis of
November 22, 1929
1929.
VOLUME X
No. 1. TWO ADDRESSES: I.—OUR EXPORT TRADE AND THE
INTERNATIONAL MONEY MARKET. II.—GOLD AND
March 14, 1930
GOODS.
No. 2. BRANCH BANKING THROUGHOUT FEDERAL RESERVE
May 8, 1930
DISTRICTS.
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Federal Reserve Bank of St. Louis
STATEMENT OF THE CONDMON OF
BANK
NATIONAL
THE CHASE
OF THE CITY OF NEW YORK
March 27, 1930
RESOURCES
$360,558,483.41
Cash and Due from Banks
800,609,535.09
Loans and Discounts
175,530,971.98
United States Government Securities
45,614,888.56
Other Securities
21,513,053.17
Real Estate
386,825.00
Redemption Fund—United States Treasurer
$86,60416.51
Customers' Acceptance Liability. . .
80,349,978.50
6,250,648.01
Less Amount in Portfolio
419,584.57
Other Assets
$1,484,983,320.28
LIABILITIES
$ 105,000,000.00
105,000,000.00
33,589,271.25
2,220,637.80
3,937,500.00
1,106,677,736.52
7,710,000.00
Capital
Surplus
Undivided Profits
Reserved for Taxes, Interest, etc.
Dividend Payable April 1, 1930
Deposits
Circulating Notes
Acceptances
$87,697,972.67
6,250,648.01
81,447,324.66
Acceptances, Bills, etc. Sold with Endorsement . . . . 39,370,484.16
30,365.89
Other Liabilities
$1,484,983,320.28
Less Amount in Portfolio
Each shareholder of The Chase National Bank is also the holder of a like number of shares of
Chase Securities Corporation; Capital, Surplus and Undivided Profits, December 31, 1929—
$101,216,619.54, are not included in the bank statement.
STATEMENT OF THE CONDITION OF
CHASE SECURITIES CORPORATION
December 31, 1929
RESOURCES
$ 7,136,976.33
28,754,717.93
75,603,974.05
$111,495,668.31
Cash
Bills and Accounts Receivable
Securities
LIABILITIES
Bills and Accounts Payable
$ 5,272,380.01
49,686.02
Suspense
Reserves
$ 1,000,000.00
General
Tax and Other Reserves. . . ... 2,644,482.74
1,312,500.00 4,956,982.74
Dividend Payable January 2, 1930. . .
Capital Stock
(5,250,000 Shares—no par value)
Surplus and Profits
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Federal Reserve Bank of St. Louis
$73,000,000.00
28 216,619.54 101,216,619.54
$111,495,668.31
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Federal Reserve Bank of St. Louis
LI
19331
I
HOUSE1184.
9
At the time when the Commission first met, eighteen
state banks had been closed, having deposit liabilities
which exceeded $80,000,000, the property of 200,000 depositors. 'Though this sum represented only a small
fractional part of the total deposits in the banks of
Massachusetts, it was sufficient to cause much distress
to the individuals thus deprived of the use of their
funds, and naturally there was felt by many among
them a keen anxiety for the safety and ultimate return of
their money. Comment became widespread to the effect
that expenses in the liquidation of state banks in Massachusetts were unnecessarily high, and that various features of the State's system for control of the closed institutions were, to say the least, ill advised. The fact
that this comment often originated in quarters having
little opportunity to gain any exact or complete information only increased the need of a searching and impartial examination of the whole situation to discover the
merits, lay bare the faults, and indicate means of improvement.
The Commission therefore began its inquiry with a
study of the law of liquidation. The Commissioner of
Banks, Arthur Guy, was summoned into conference, and
at the Commission's request a great mass of facts and
statistics was compiled, covering all phases of the Banking Department's operations in the liquidation of banks.
Fifteen executive sessions were held, during which both
the Commissioner of Banks and the general liquidation
cO unsel, Frederick D. Bonner, were constantly in attendance to be questioned, and the laws relating to
liquidation and the practices adopted in accord with
them were considered in all their major aspects, and
even in many of their minute details.
A public hearing was held at the State House on
Thursday, October 6, after adequate notice had been
given not only by publication and through the press,
but also by mang invitations to many persons especially interested, including the executive officers of the
Massachusetts Trust Company Association, the Savings
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Federal Reserve Bank of St. Louis
f
F
...THE COMMONWEALTH OF MASS.—Report of Special Coin. on Revision
of Laws relating to Trust Companies & Private Banks, and to
the Liquidation of Banks--Dec. 1932
HOUSE—No. 1184.
10
[Jan.
Banks Association and the Co-operative Bank League,
the president of the Mutual Savings Central Fund, Inc.,
the president of the Co-operative Central Bank, and
the liquidating agents of all the closed banks.
The situation confronting the Commonwealth when
the Commission opened its investigation may be briefly
described in main outline.
THE PRESENT EMERGENCY.
/ Owing largely to an utter collapse of all values in the
security markets and real estate, in some instances combined with unwise and reckless methods of management,
sixteen trust companies and two savings banks were
closed by the Commissioner in the period from March
19, 1931, to May 10, 1932. The closed institutions had
deposit liabilities aggregating $80,783,971, with a total
of nearly 300,000 deposit accounts, as the following table
shows:
Number of Deposit Accounts
(Approximate).
Amount of
Deposits.
Trust companies:
Commercial departments
Savings departments
Savings banks
Totals .
.
.
43,400
$18,256,577
223,700
53,330,393
27,000
9,197,001
294,100
00,783,971
Since more than one account often is opened by one
individual, the total number of accounts largely exceeds
the total number of individual depositors, which, though
not exactly known, is estimated at 200,000.
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Federal Reserve Bank of St. Louis
11
HOUSE — No. 1184.
19331
The banks of which the Commissioner took possession
were as follows:
of
Da o
Closing.
NAME OF BANK.
Number of
Deposit
Accounts
(Approximate).
Deposit
Liabilities.
$2,375,243
.
.
Mar. 19, 1931
13,400
•
.
.
.
Oct.
7, 1931
16,500
5,163,686
Highland Trust (of Somerville) .
.
.
.
Oct. 13, 1931
18,500
5,351,115
.
.
.
.
Oct. 13, 1931
7,000
1,500,170
Bancroft Trust (of Worcester) .
.
.
.
Dec. 15, 1931
17,500
5,505,241
Industrial Bank and Trust (of Boston)
Medford Trust
Revere Trust
.
.
Brockton Trust .
.
.
.
.
.
.
Inman Trust (of Cambridge)
.
.
.
.
Dec. 15, 1931
6,000
1,462,694
.
.
.
.
Dec. 15, 1931
12,000
3,075,120
8,874,243
Lawrence Trust .
.
.
.
.
.
.
Dec. 15, 1931
30,000
Salem Trust
.
.
.
.
.
.
.
Dec. 15, 1931
8,000
1,825,303
Lowell Trust
.
.
.
.
.
.
.
Dec. 16, 1931
6,000
3,197,742
Arlington Trust (of Lawrence) .
.
.
.
Dec. 17, 1931
12,500
6,508,099 1
.
.
Dec. 17, 1931
27,000
3,236,646
2,562,131
Plymouth County Trust (of Brockton)
Charlestown Trust
.
Haverhill Trust .
.
.
.
.
.
.
Dec. 21, 1931
13,500
.
.
.
.
.
Dec. 26, 1931
7,500
2,210,940
.
.
.
Feb. 2, 1932
21,000
5,397,179
.
.
.
Mar. 14, 1932
6,000
3,799,822
43,700
10,065,879
28,000
8,672,718
294,100
$80,783,971
Somerville Institution for Savings
Millbury Savings Bank
.
.
.
.
.
Apr. 25, 1932
Central Trust (of Cambridge) .
.
.
.
May 10, 1932
•
•
•
Exchange Trust (of Boston)
Totals .
.
.
•
•
-
-
1 Reopened October 20, 1932.
During most of the time since these banks were closed,
their assets have had to be liquidated on a falling market,
and, in the case of real estate, almost no market at all.
The difficulty and extent of the problem may be further
realized by considering the adverse effect that a forced
sale of real estate would necessarily have upon similar
real estate held under mortgage by going banks in the
same community. A forced liquidation under such circumstances could only result in depressing still further
the values of real estate in the locality, and this would
imperil the security of mortgages held by going banks.
There would be real danger that such a process, if pur-
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Federal Reserve Bank of St. Louis
12
HOUSE — No. 1184.
[Jan.
sued, would result only in further closings, and thus
in
still further aggravating the whole problem.
The volume of deposits in the closed banks, the large
amount of real estate held on mortgage or in possession
which must be liquidated, and the 200,000 or more
depositors, inhabitants of the Commonwealth, whose money
is tied up, create a public emergency and make it imperative to endeavor to answer the question, How are we
to
realize the largest possible amount for these depositors,
in the shortest possible time, at the least possible expens
e,
and with a minimum of damage to the existing banking
structure?
Part I.
LIQUIDATION.
PRESENT LAW AND ADMINISTRATION.
To achieve progress in solving this problem, it is necessary, first, to take account of the laws relating to
liquidation as they stand today, and of the system and methods of administering these laws which have thus far
been
developed.
Origin and History of the Law.
The present law of liquidation was enacted in 1910 as
the result of a study made at that time by a legislative
committee. As such, the law has continued in force
through twenty-two years with only minor changes,
which will hereafter be alluded to. Except for provisions
affecting private banks, the main body of the law of
liquidation is included in chapter 167 of the General
Laws.
Before the year 1910 the method of bank liquidation
practiced in this Commonwealth followed that of other
corporate receiverships, in that the liquidation was conducted by receivers appointed by, and under the supervision of, the Supreme Judicial Court, the only duty of
the Commissioner of Banks being the examination of
the receivers' accounts. The 1910 act, now incorporated
in chapter 167 of the General Laws, placed the process
of liquidation directly under the control and supervision
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Federal Reserve Bank of St. Louis
1
1933.]
HOUSE — No. 1184.
13
of the Commissioner of Banks, thus adopting in its essential terms the liquidation method prescribed for national
banks by the national banking act. This statement has
the sanction of the Supreme Judicial Court, which said
in the case of Commissioner of Banks v. Prudential Trust
Company, 242 Mass. 78:
Plainly, the national bank act as to dissolution and liquidation was
used as the model for our statute in this respect.
Through a period of ten years following adoption of
the liquidation statute enacted in 1910, no state bank
suffered failure in Massachusetts, so that the act lay
dormant upon the books. During the months from
August, 1920, to March, 1921, however, the Commissioner of Banks closed five trust companies, and their
liquidation proceeded under the new law. A special legislative commission, authorized by chapter 56 of the
Resolves of 1921, considered the law of liquidation, but
its report (House, No. 1262 of 1922) counseled against any
revision of the law in view of the fact that many questions arising from this statute were then pending before
the Supreme Court. Thus the liquidation law was kept
intact and received its first testing in Massachusetts.
During the years which ensued, while the liquidation of
these trust companies continued, numerous questions of
interpretation were carried to the Supreme Court and
there determined. Some eighty decisions were handed
down by the court. The cost of litigating these cases
comprised a major part of the total sum of $328,502 required for legal services in liquidating the banks then in
the possession of the Commissioner.
As a result, the Commonwealth has today a body of
liquidation law, the principles of which have been fully
interpreted and laid down by the Supreme Judicial Court,
and which therefore are thoroughly understood and accepted. With the existing law thus clearly established,
the Commissioner of Banks has had occasion to go to
the Supreme Court only twice during the past two years.
This means a substantial saving of both time and money
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which would otherwise be absorbed by the labor and
costs of litigation, at the expense of depositors in the
banks now closed.
While preserving the settled basis and main outline of
the liquidation law unchanged in any important respect,
the General Court recently has enacted various amendments designed either to remove flaws lately discovered
in the operation of the act itself, or to keep the law
abreast of conditions newly developed. These may be
cited as follows:
1. The law originally required one year to elapse before a final dividend could be declared in the liquidation
of a closed bank. By chapter 12 of the Acts of 1931, this
law was amended to provide for the payment of an earlier
dividend upon application of the Commissioner if the
Supreme Court should so order.
2. In the recent closings it became evident that the
law in regard to the sale of assets should be clarified.
The law apparently limited the Commissioner to a sale
for cash, and this requirement hampered the liquidation,
by making it impossible to accomplish sales in any of
the numerous cases when purchasers could be found who
were able and willing to put up part of the purchase price
and give a mortgage back, but could not pay the full
price in cash. Also, this limitation had the effect of reducing values in the community, by making it necessary
to sell real estate for a lower price than might have been
obtained for a sale part for cash with a mortgage back.
Accordingly, the law was amended by chapter 294 of the
Acts of 1932 to allow the Commissioner to take a mortgage back in the sale of real estate held by a closed bank.
3. Almost simultaneously with the creation of the Reconstruction Finance Corporation by the national government, and in order to permit the Massachusetts Commissioner of Banks to make use of its facilities, or of
other sources from which he could obtain cash to be
made available for depositors, chapter 122 of the Acts
of 1932 gave authority to the Commissioner to borrow
money "from such sources as he deems advisable" for
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the payment of dividends not to exceed 25 per cent of the
total amount payable to the creditors of a closed bank,
and to pledge and assign the assets of a closed bank for
that purpose. Although the Reconstruction Finance
Corporation has done useful service in this Commonwealth in divers important respects, several considerations have thus far deterred the Commissioner from any
extensive employment of its facilities for the aid of banks
in liquidation. The Corporation requires the pledge of a
high margin of collateral security to protect any loans
made by it. The cost of investigating and appraising
such collateral, together with the interest charged, militate against a general use of this method of raising money
for the purpose of paying a speedy dividend. The expense which would thus be caused to the depositors has
seemed in most cases excessive, when weighed in the
balance with the advantages of an early dividend. The
Reconstruction Finance Corporation has therefore been
approached only in the case of one or two banks whose
cash resources were so seriously depleted at the time of
closing that it was necessary to use nearly all of their
ready funds for the preservation of assets. In such cases,
loans from the Reconstruction Finance Corporation supplied the only available means of securing cash to pay
dividends.
On the other hand, the power given by chapter 122
has been of marked value to the Commissioner in permitting him to obtain loans from open banks on behalf
of closed banks, and also to borrow money from the
commercial department of a closed trust company in
order to hasten payment of dividends to the savings depositors. A loan of this latter sort, it should be noted,
can work no harm to the commercial depositor, because
the amount of the loan is amply secured and supported
by collateral, and no further dividend can be declared
in the savings department until such loan is fully repaid.
4. Chapter 217 of the Acts of 1932 was designed to
soften the hardships of depositors in closed savings banks
and savings departments of trust companies, and to pro-
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vide them a possible means of securing funds in advance
of a dividend received from liquidation. This act authorized borrowing upon a proof of claim up to 50 per cent
of the face value thereof, the certificate of proof of claim
to be pledged as collateral for the loan.
5. In consequence of certain court decisions rendered
under the law enacted in 1910, various changes were
made by. the last Legislature in regard to the law of
offset. Chapter 295 of the Acts of 1932 amended the
laws relating to trust companies (General Laws, chapter
172) (a) by providing that a person indebted to a trust
company in its commercial department should have the
right to set off his deposit in such department, whereas
prior to that legislation the right to apply such an offset
rested with the trust company; (b) by changing the law
which up to that time denied a depositor in the savings
department a right to set off his deposit against a debt
owed to that department; (c) by changing the law which
up to that time required an indebtedness to be matured
before set-off could be demanded; and (d) by allowing
set-off against a secured debt as well as against an unsecured debt.
Administration.
The administration of the liquidation law centers in
the Commissioner of Banks. Under section 26 he has
authority —
1. To appoint agents.
2. To authorize such agents to perform such duties as
he may deem proper.
3. To procure expert assistance and advice.
4. To retain such of the officers or employees of the
bank as he deems necessary.
Thus it will be seen that the law has left to the discretion of the Commissioner, and we think wisely, the
matter of determining the personnel required to administer the process of liquidation, and also the task of
defining the personnel's duties.
Under the present practice each liquidating agent is
given a power of attorney to sign for the Commissioner
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and in behalf of the closed banks all deeds, mortgages,
discharges, assignments, and many other miscellaneous
instruments and papers. This relieves the Commissioner of a tremendous burden which he should not be
required to bear, and which he is able to delegate to the
agents under the power given him by chapter 167 of the
General Laws. It should be said, however, that the interests of the depositors are thoroughly safeguarded, so
far as the disposition of assets is concerned, in that a
decree of the Supreme Court must be obtained upon
petition in any case where less than full value is paid for
the sale of an asset or in the compromise of a debt.
Each agent, moreover, must give bond to the Commissioner or to the Commonwealth for the faithful performance of his duties. Under sections 24, 25 and 26 of chapter 167, the Commissioner has authority, and exercises
it from time to time, to employ counsel in connection
with matters affecting closed banks. In practice, the
liquidating agents themselves have been required, in so
far as possible, to handle all legal matters of routine, and
only
the policy of the Department is to employ counsel
tion
in instances where the volume of legal work in connec
or
with any particular bank makes assistance imperative,
large
le,
examp
for
for the handling of specific cases, as,
stockholders' and directors' suits, which, if the agent
should handle them, would consume all his time in court,
making it impossible for him to deal with important
current matters at the bank.
Central Organization. — Under the broad powers given
to the Commissioner in connection with liquidation, there
has been set up in his office a central organization in the
interest of uniformity and economy, to control administration of the affairs of the closed banks. This is similar
to the office established in the national government under the Comptroller of the Currency, and was made
effective on June 1, 1932. This central organization consists of a supervisor of liquidations appointed on August
4, 1932, and an acting assistant supervisor, general liquidation counsel, two clerks, two circuit auditors and one
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HOUSE — No. 1184.
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stenographer. To meet the expenses of the organization
to date, an assessment has been made upon each closed
bank to the extent of one-thirtieth of one per cent of
the total assets as scheduled on the date of closing. This
method of assessment likewise follows the practice
adopted by the Comptroller of the Currency in the
liquidation of national banks.
The Commission is convinced that the creation of this
central organization has proved an eminently desirable
step of progress. It co-ordinates the work of the liquidating agents. In so far as possible it brings under the
control of one head many of the legal, financial and administrative problems which arise in the closed banks,
and in various other ways it simplifies and unifies the
work of handling a number of liquidations at the same
time. Thus it reduces the aggregate expense to the
depositors. In fact, the Commission gave considerable
thought to the possible desirability of making such an
organization permanent, through creating by legislation
a division of liquidation. The Commission decided
against this, however, since it is evident that the powers
of the Commissioner are now broad enough to set up
such an organization in times when special need exists
for its services, and since the Commission is confident
that the necessity for liquidating closed banks will never
be continuous in this Commonwealth.
Methods of Liquidation. — Section 24 of chapter 167
reads as follows:
Upon taking possession of the property and business of such bank,
the commissioner may collect moneys due to the bank, and do all
acts necessary to conserve its assets and business, and shall proceed
to liquidate its affairs as hereinafter provided. He shall collect all
debts due and claims belonging to it, and upon the order or decree
of the supreme judicial court, or any justice thereof, may sell or
compound all bad or doubtful debts, and on like order or decree may
sell all, or any part of, the real and personal property of the bank
on such terms as the court shall direct; and, in the name of such
bank, may take a mortgage on such real property from a bona fide
purchaser to secure the whole or a part of the purchase price, upon
such terms and for such periods as the court shall direct.
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This language, which is almost identical with that
used in the national banking act, has not been modified
by any subsequent Massachusetts act, with the single
exception that the 1932 legislation, as before mentioned,
authorized the Commissioner to take a mortgage back
upon the sale of real estate. The system thus established
seems to work well in practice, and the Commission has
received regarding it no criticism or substantial suggestions of change.
Before liquidation reaches the stage of sale of assets,
however, many problems arise in connection with the
conservation of assets for the benefit of depositors.
In the first place, it is to be noted that among the
assets of the eighteen closed banks of which the Commissioner took possession, there were, on October 1,
real estate mortgages in the face amount of $38,000,000,
and real estate in possession or in process of foreclosure
in the face amount of approximately $11,000,000, these
two items constituting the greatest single class among
all the assets of the closed banks. Obviously, depositors
must depend largely upon the results of the administration and disposition of this real estate for the return of
their money. It is also quite clear that under the conditions of the real estate market existing at the time of
this report the problem is rather one of administering
and operating real estate than one of sale. The Commissioner has adopted a policy of taking possession of
all income-producing properties, particularly commercial
and apartment properties, where there has been default.
On the other hand, in the case of home owners, this policy has been pursued only where prolonged default existed or where the owner has shown no disposition to
co-operate, in any degree, with the Commissioner's effort
to obtain recovery for the depositors. In each closed
bank having an amount of real estate in foreclosure or in
possession large enough to justify such a procedure, the
Commissioner has established a real estate department
and is managing the property for the benefit of the depositors. The Commission believes that this adminis-
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HOUSE — No. 1184.
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trative practice is working out satisfactorily, and sees no
reason for legislation to change it in any respect.
To handle the problems arising from the necessity of
disposing of stocks and bonds owned by the closed banks,
to the extent of $24,000,000 in book value, and many
millions more of securities held by these banks as collateral to loans, the Commissioner has devised a method
for centralizing the disposition and sale of such securities,
the plan being somewhat similar to a method employed
by the Comptroller of the Currency in the liquidation of
national banks. This practice the Commissioner has
been enabled to adopt under the broad powers with
which, as before explained, the Legislature long since
endowed him.
Fees and Other Expenses of Liquidation. — From the
several dates of closing to October 10, 1932, the Commissioner of Banks collected upon the assets of the
eighteen state banks in his possession the total sum of
$12,472,417.68. In the same period the total expenses
incurred in the liquidation of these banks' assets, comprising thousands of individual parcels of real estate and
a great variety of other property, was $615,427.52.
The expenses to October 10 were, therefore, only 4.93
per cent of the collections, and the Banking Department
is confident that this ratio will not rise materially higher
at any time in the future.
During the years from 1865 to 1931 the liquidation of
989 national banks was accomplished by the Comptroller
of the Currency, with total collections of some $395,000,000, at a total cost of nearly $27,000,000. The ratio
of expenses to collections, covering this long experiencerecord in the admittedly competent Federal management
of bank liquidation, was 6.78 per cent.
For the year ended October 31, 1931, the report of the
Comptroller covers 91 liquidations completed during that
year, with total collections of about $30,000,000 at a cost
of nearly $2,500,000. The liquidation of these national
banks took place, for the most part, under that same
general condition of falling values with which the Bank
Commissioner has recently had to contend in the con-
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duct of bank liquidation in Massachusetts. In this regard at least, a peculiarly effective basis for comparison
may therefore be found in these figures. The ratio of
total expenses in handling the 91 national banks whose
affairs were liquidated in 1931 was 8.37 per cent. That
ratio is nearly one and three-fourths times as high as the
ratio of expenses incurred under the direction of the
Massachusetts Commissioner in the liquidation of the
eighteen state banks recently in his possession.
These figures and numerous others, which will be found
set forth in Appendix A of this report prepared at the
request of the Special Commission, give strong basic evidence that the total average costs incurred by the Banking Department are not excessive.
The Commission has insisted, however, upon the compilation and careful examination of detailed summaries
of the expenses incurred in each of the banks now in the
possession of the Commissioner. The total cost of wages
and salaries in these institutions, during the time when
they were open, amounted to approximately $800,000
a year, distributed among 424 officers and employees.
While it is true, of course, that a larger staff is always
required to perform the operations of a going bank, still
it is significant that since these banks were closed the
number of their employees has been cut to only 178,
with an annual pay roll of less than $300,000.
Widespread statements to the contrary notwithstanding, the working forces engaged by the liquidating agents
have been recruited almost wholly from among old employees of the closed banks. The wage schedules have
been examined, and the Commission does not find the
pay roll excessive either in number or amount. The
Bank Commissioner has the power and authority under
the law to make all appointments of additional employees, and, accordingly, no assistants are engaged without his sanction and approval after an examination of
the need for their services. It would be impossible to
fix by legislation the precise number of employees to be
used in any bank liquidation.
In this Commonwealth, and during the terms of van-
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ous Bank Commissioners, the practice of appointing
lawyers and attorneys as liquidating agents has been
built up and very generally followed because of the vast
amount of legal work connected with liquidation. This
practice differs from the custom obtaining in the liquidation of national banks, for which a corps of more or
less expert receivers has been created who are paid on a
salaried basis, and who are subject to transfer from place
to place throughout the United States as need may require. The Federal system has found no means, however, to dispense with lawyers, and, still less, with the
necessity of paying them. Each national bank receiver
invariably has counsel assigned to assist him; and in
addition the Comptroller finds it necessary to maintain
at Washington a staff of attorneys permanently at work
upon legal problems arising in bank liquidation, the cost
of whose services is apportioned among the insolvent
national banks. In Massachusetts, on the other hand,
the liquidating agent of a state bank may and often does
do all his own legal work.
Several basic conditions make any extensive change of
the Commonwealth's practice difficult, if not impossible,
to accomplish. In the first place, the record of the last
twenty or more years, since the enactment of the liquidation statute, shows that bank closings in Massachusetts have occurred only at long intervals covering at
least ten years, whereas, taking the United States as a
whole, national bank closings occur in one section or
another almost continuously. Consequently, it is possible under the Federal government to build up a corps
of trained liquidators, whereas this is not feasible in
Massachusetts. In the second place, trained bank men
of caliber adequate to handle the intricate problems of
liquidation are seldom found available when need is most
pressing, their services usually being pre-empted by the
banking institutions in which they are already employed.
Finally, questions arising in a liquidation necessarily require legal knowledge and often the promptest sort of
legal action in order to conserve the assets of the deposit-
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ors. Experienced receivers, having the assistance of
counsel as in the national system, are, of course, qualified to handle such matters well, and the Commission sees
no intrinsic objection whatever to the employment of
such personnel. It is unlikely, however, that any considerable reduction of the costs of legal fees and other
expenses of liquidation would result from such an arrangement.
Passing now to another phase of the expense question,
it must be noted that the liquidation of each bank presents a separate and distinct problem. In one bank the
major legal problems may be few and comparatively
simple, in another ma!ny and complicated. One bank
may be loaded with real estate in foreclosure and in possession, and thus may constitute a special problem in
administration, requiring the organization of a real estate department with trained employees whose work
must continue over a long period of time. In another
the real estate problem may be simple and quite promptly
disposed of. In short, no two banks present conditions
sufficiently alike to make it possible to standardize the
administration of the liquidation. A certain degree of
elasticity must be preserved, and the Commission believes it to be wise to leave this matter to the discretion
of the Bank Commissioner.
Similar considerations apply in determining the compensation for liquidating agents and their assisting counsel,
if any. The Commission has made every effort to find,
for this purpose, some fixed standard of measurement
and the Commissioner of Banks has in practice made
use of a rough and ready scale based on a number of
factors, such as the deposit liabilities, the aggregate
amount of the assets, and other criteria. This has proved
fairly satisfactory as a general guide, but, if enacted into
law, would prove too rigid for practical use. As has been
pointed out, the liquidation problem in Massachusetts
is not continuous as it is in connection with national
banks, and so there is not available a corps of trained
men permanently in the service on a salaried basis, to
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whom time is no object. If in this State liquidating
agents were paid on a salaried basis there would be
every incentive to make the job last as long as possible,
whereas, if paid as they now are on the basis of accomplishment, there is every incentive to do a prompt and
effective piece of work. The Commission has found
numerous examples of the operation of this principle in
the liquidation of the banks now closed.
It must be remembered, moreover, that after the Bank
Commissioner has passed upon the compensation to be
allowed to liquidating agents and their counsel for services and expenses, the schedules must be examined and
approved by the Supreme Judicial Court, — a safeguard
which further insures the public against the payment of
excessive fees. Again, if the Legislature should see fit to
create the banking advisory board proposed in a later
section of this report, the qualifications of liquidating
agents, and the fees to be paid them, might well prove
a subject upon which the judgment and experience of
the new board could be consulted by the Banking Department as a still further safeguard.
The Commission therefore is convinced not only that
any attempt to fix by legislation a rigid basis of salaried
compensation for liquidating agents, or to prohibit by
law the employment of attorneys as liquidating agents
for closed banks of the State, would be unwise, but also
that the current schedules of expense for fees, wages and
other costs of liquidation to date are not excessive, and
that an endeavor to standardize such costs by statutory
enactment is impracticable and likely to result in more
harm than good.
Summary of Conditions under the Present Law.
As has been seen, the existing Massachusetts law of
liquidation is substantially the same as that which has
been in force in respect to the liquidation of national
banks for a period of many decades. This law has been
in effect in the Commonwealth, tested and interpreted
by judicial decisions, and amended by legislative acts,
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during the past twenty years. Under its terms the administration has been given into the control of the Commissioner of Banks, who has adequate power to build an
organization suitable to any particular needs which may
arise. The Commission therefore believes it undesirable
to make any substantial change in the methods of administration now provided by law, and considers that attention should be concentrated upon the present emergency,
with a view to making such recommendations as may
assist in obtaining a speedier distribution of dividends
to depositors, and in realizing as much as possible for
their benefit.
NEW MEANS TO HELP CLOSED BANK DEPOSITORS.
The Banking Department has already made much
progress in this important work. The following table
shows the dividends thus far paid or authorized to be
paid:
DIVIDENDS AUTHORIZED TO DECEMBER 20, 1932.
PERCENTAGE.
NAME OF BANK.
Commercial Department.
Bancroft Trust Company .
_
Brockton Trust Company .
Savings
Department.
Savings
Department.
10
-
$448,254 16
25
-
328,029 34
Charlestown Trust Company
25
50
Highland Trust Company .
-
25
-
42A
Industrial Bank and Trust Company.
Commercial Department.
$141,840 80
-
971,862 83
1,014,131 76
702,527 08
Inman Trust Company
10
25
84,643 69
528,826 67
Lowell Trust Company
25
45
365,381 99
565,619 87
Medford Trust Company •
Plymouth County Trust Company .
- .
10
25
25
85,958 84
869,696 97
497,222 99
Revere Trust Company
25
-
225,758 55
Salem Trust Company
25
-
307,925 77
Totals .
$677,828 32 $6,459,855 99
Besides achieving these results to date, both by using
the ordinary methods of liquidation and by employing
special means which will be discussed in detail in the
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next following pages of this report, the Banking Department has sought means to accomplish a still more helpful outcome. Clearly, if a bank could be reorganized,
its deposit liabilities scaled down through agreement by
a percentage of depositors which the Commissioner and
the Supreme Judicial Court deem satisfactory, both in
number and in the amount of deposits controlled, and
new money be found to restore the bank to a sound
condition, this procedure would best meet the needs of
all concerned. By such a method the depositor realizes
more than by a forced liquidation. The expense of a
long protracted liquidation is avoided, and market values
of other real estate in the surrounding community are
not depressed as a result of forced sales. As a consequence of the efforts of the Bank Commissioner and of
public-spirited men and of other banks in the vicinity, a
good achievement of this sort has already been accomplished in the case of the Arlington Trust Company in
Lawrence, which was reopened on October 20, 1932, thus
making $1,200,000 in cash immediately available to the
depositors, and also reinstating deposit liabilities to the
further extent of nearly $6,000,000. Similar plans are
under way for two other trust companies now closed.
Another method, by which a prompt dividend may be
paid at least to savings depositors, has been employed
in the national banking system, and is known as the
Spokane Plan. There have been three instances of its
use in Massachusetts. The plan has been adopted in
the case of the Charlestown Trust Company, part of
whose assets was purchased by the National Shawmut
Bank, a dividend of 50 per cent in the savings department and of 25 per cent in the commercial department
thus becoming available to depositors within ten months
after the Charlestown institution had closed. For the
Inman Trust Company of Cambridge, a similar achievement was made possible through action by the Lechmere National Bank of that city, an affiliate of the First
National Bank of Boston, which produced an immediate
dividend of 25 per cent to the savings depositors and of
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10 per cent to the commercial depositors, which otherwise could not have been paid until after prolonged
liquidation. As this report is filed, the Bank Commissioner announces that the Supreme Judicial Court has
authorized the payment of an initial dividend of 25 per.
cent to the commercial depositors and an additional dividend of 20 per cent to the savings depositors of the
Lowell Trust Company, by reason of a purchase of assets
in bulk by the Appleton National Bank.
One special advantage of this plan deserves notice.
When the offices of a closed bank are reopened as branches
of the bank which buys the bulk of their assets, a good
price can be had for the banking houses and banking
equipment of the closed institution, which otherwise
would have to be sold or rented in most instances at a
heavy loss, since little or no general demand exists in a
time of depression for the purchase or renting of buildings and equipment designed for the use of a bank, no
matter how great their intrinsic value may be. Sweeping
losses of this sort may be averted under the Spokane
Plan.
Purchase of Assets by Going Banks.
With these facts in mind, the Commission is convinced
that Massachusetts can take a long forward step in the
interest of obtaining speedy dividends for depositors by
the enactment of legislation making easier the purchase
in bulk of the assets of a closed bank.
The Spokane Plan, used for the Charlestown Trust
Company, the Inman Trust Company and the Lowell
Trust Company, has many variations, but in essence it
simply provides for the purchase by a going bank of
certain good assets of. a closed bank for one hundred
cents on the dollar, by making immediately available to
the depositors a credit to the same amount on the books
of the purchasing bank. A lien on the remaining assets
is retained by the buying bank for an agreed period,
usually approximating eighteen months.
Various restrictions now existing in the law make it
difficult, however, to adapt this plan for general use
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among the banks of the State. To take only one example, the limitation on savings banks and savings departments of trust companies restricting their investment
in real estate to 70 per cent of the amount of their deposits makes it in many cases impossible for these institutions in any given community to assist a closed
neighbor bank by the purchase of part or all of its assets,
even though the going bank may be convinced that such
a purchase could be accomplished on terms which would
not affect its own liquidity. And this inability to take
constructive action, it must be remembered, may cause
serious damage to the banks remaining open in that
locality, for the sale of real estate in possession of the
closed bank through forced liquidation may result in
establishing prices for property in the neighborhood far
below the real value, and at such a figure as to impair
the financial soundness of the open banks.
The Commission therefore recommends legislation authorizing savings banks and trust companies, through
their savings departments as well as their commercial
departments, to advance or loan upon, participate in, or
purchase the whole or any part of the assets of a closed
savings bank or savings department of a closed trust
company. In order to permit a purchasing bank to
consummate such a transaction, this legislation should
authorize the Commissioner of Banks to waive such of
the provisions of law applicable to investment of the
funds of savings banks and of savings departments of trust
companies, and of the limitations placed upon deposits
in savings banks, as he may deem advisable. Also the
Commissioner should be given authority to impose such
restrictions as may seem to him necessary upon the withdrawal from the purchasing bank of those deposits of a
closed bank which are assumed by virtue of the purchase
of the assets, or of any advance, loan, or participation
negotiated in this connection.
By such a transaction the liquidity of any savings
bank or savings department of a trust company need
not necessarily be impaired in the slightest degree. The
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bank assisted under this plan may be opened as a branch
of the assisting bank, thus preserving the value of the
banking offices and equipment and gaining all the other
advantages characteristic of the Spokane Plan, including
continuity of service to the people of the community,
with consequent benefits to the purchasing bank by the
increase of deposits and good will. In some instances,
it may be further remarked, this plan would enable a
closed bank to be reopened without change of its corporate structure, subject only to certain restrictions upon
withdrawals which could be gradually lifted as market
conditions permitted. In any event, the procedure here
described would release to depositors percentages of their
funds more speedily than would be the case if liquidation
were to proceed along the usual course. Accordingly, the
Commission urges the prompt enactment of this legislation, believing that it would expedite the payment of a
substantial dividend in the case of several of the closed
banks.
Consideration may well be given, moreover, to the advisability of broadening this legislation so that it would
permit similar assistance to open banks in time of need.
It should be noted, however, that no further legislation
is necessary to enable a going trust company in its commercial department to purchase the assets of a closed
bank. This right already exists, and the voluntary exercise of a spirit of co-operation, on the part of other banks
in a community where closings have occurred, in helping to make available prompt credits to depositors would,
in the opinion of the Commission, not only be of material
relief in the present emergency, but also would redound
to the benefit of any bank taking such action. (For
proposed legislation see Appendix C-1.)
Assessment of Fair Costs upon Savings Department.
As the result of a body of principles built up over a long
period of years, declared by the Legislature from time
to time and interpreted by decisions of the Supreme
Court, it has become an essential feature of the banking
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system in Massachusetts that the savings depositors shall
be protected by every possible safeguard. Savings department depositors are protected to the same degree as
depositors in savings banks by the laws which strictly
limit the type of security in which their money can be
invested; and the law specifically says that all loans or
investments of such savings deposits "shall be made in
accordance with the law governing investment of deposits
in savings banks." Further to carry out the principle
that savings department assets are to be held distinct and
inviolate, the Legislature in 1922 required that full report,
under heavy penalty for failure, must be made to the
Bank Commissioner regarding any transfer of assets from
one department to the other, the Commissioner's approval being prescribed as necessary to the validity of
such a transfer. With this principle the Commission is
in entire accord.
Indeed, the Commission can see no reason why the
concept of segregation should not be carried to its logical
conclusion and be applied, in liquidation, not only to the
disposition of the assets of the two departments as separate entities, but also to a fair distribution between them
of the expenses incurred. Under the existing law, no such
distribution is permitted. The entire expense of the
liquidation of a trust company, except for certain minor
items, falls upon the depositors in the commercial department. The depositor in a savings bank must bear
his share of the expense of liquidation if the savings bank
should fail, and it is hard to see why the depositor in a
savings department of a trust company should have
any higher right to avoid such cost. It required court
decisions to determine that the depositor in a savings
department of a trust company was not only completely
exempt from the burden of liquidation expense, but,
further, that the savings department should have a
claim over against the commercial department up to the
payment of a 100 per cent dividend. It is therefore not
at all certain that it was the legislative intent of prior
years that the savings, department depositors should be
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given such extraordinary preference in liquidation. Moreover, it is extremely doubtful if any depositors in a commercial department of a trust company appreciate that
they are subject to such a burden for the depositors in
the savings department; or, on the other hand, that any
savings department depositors realize that they have a
claim on the commercial department. In the regular
conduct of the business of a going trust company the
savings depositors bear their full rateable share of the
expense of operating the bank. Since this is the practice
while the bank remains open, it becomes the more difficult to understand why the savings depositors should
cease to bear any part of the expense when the bank
closes.
One of the liquidating agents writes to the Commission
in this connection:
I have yet to find a depositor in the savings department — although
I have talked with hundreds of them — who had any idea that he
had any claim on the commercial department.
This same liquidating agent has also written us as
follows:
Probably the injustice will more clearly appear when I point out
a few facts in connection with the liquidation of the trust company.
Ninety per cent of the time of the liquidating agent (and today
almost 100 per cent) has been given to solving problems arising in
the savings department. I believe that today over 90 per cent of
the work done by the employees of the trust company is on savings
department matters.
It is the policy in the liquidation not to sell any real estate in the
savings department, or any mortgages, without an appraisal. Up
to date we have had something over 80 appraisals. The Commissioner
of Banks recently approved a bill for about 77 of those appraisals.
Appraisals take time and require a man of experience if they are to
be worth anything. The bill, while moderate, was substantial. Practically all of the appraisals were of property in the savings department. The Commissioner of Banks recently ruled (and I believe
rightly) that this was a liquidation expense, and chargeable to the
commercial department.
Certainly the commercial department did not profit in any way
from the appraisals, and the commercial department is not profiting
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in any way except very indirectly from the efforts and work of the
liquidating agent and the employees of this trust company, which,
as I have stated above, are practically all concerned with the savings
department.
I am of the opinion that justice requires that the expense of liquidating the savings department of a trust company be borne by the
savings department. It might be difficult to allocate the share of
expense to the savings department, but it can be done, and the determination of what expense shall be allocated to the savings department should be left, I believe, to the decision of the Bank Commissioner, subject to the approval of the Supreme Court, if the present
method of liquidation is to be continued.
The Commission therefore favors legislation to right
this injustice and to impose upon savings department
depositors their fair share of the liquidation expense.
(For proposed legislation see Appendix C-2.)
Permitting the Commercial Department some Early
Dividend.
Another point in the existing liquidation law has led
to a difficult and, it would seem, needlessly trying result
for the commercial depositors. Under existing law the
depositors in the savings department not only have a
first claim upon the capital stock, but also, in the event
that liquidation of the savings department fails to realize
dividends to the full amount of their deposits, they have
a claim to share pro rata in all the assets of the commercial department to the extent of any deficiency. Since
this claim remains alive until the assets of the savings
department shall have been wholly liquidated, it is rarely
possible to declare any dividend, no matter how small,
upon the deposits in the commercial department until
the deficiency, if any, in the savings department has
been determined and provision made for it, which ordinarily cannot be done until almost the end of the liquidation, except when the Spokane Plan is used. To require the commercial depositors to undergo what thus
usually becomes a long postponement of any payment
whatsoever seems an unreasonably harsh provision.
Moreover, this condition operates adversely to the eco-
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nomic interests of the community. Since the bulk of
commercial deposits is made by business men, small
and large, the complete tie-up of their funds often results
in a serious further restriction of their normal activities,
not only in gainful commerce and trade, but also in providing employment to workers. If some part of their
deposits could be as promptly released to them as to
depositors in the savings department, it is reasonable to
believe that the whole community would benefit. Therefore the Commission recommends legislation which would
repeal the claim now given to the savings department
upon all the assets of the commercial department, reserving, however, to the savings depositor his prior claim
to the proceeds of the stock assessment as is now provided by law. (For proposed legislation see Appendix C-3.)
Abatement of Transfer and Other Taxes.
One of the largest expenses necessarily incurred in the
conservation of assets or in the liquidation is for taxes.
Real estate taxes amounting to substantial sums must
be paid in order to preserve the position of a closed
bank with respect to real estate held on mortgage or in
possession. It has been urged upon the Commission
with some force that legislation ought to be enacted
relieving the depositors of closed banks from the burden
of this payment. The Commission does not believe,
however, that it is fair to the general taxpayers in a
community to increase their burden to benefit a special
class of depositors in closed banks. There are, however,
certain other taxes in which the State alone is concerned
which the Commission believes should be eliminated.
The transfer tax upon securities is burdensome, and
the Commission recommends legislation to forego the
collection of this tax in the case of a sale of securities by
the liquidating agent for the benefit of depositors. In
addition to the transfer taxes, the Commissioner of Corporations is at present insisting on a preference for the
full amount of the excise tax on savings department
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deposits accrued up to the time of closing. This question is now before the Supreme Court, and if a decision
should result in favor of the Commissioner of Corporations, the Commission believes that legislation should
be enacted modifying the provisions of existing law with
reference to the payment of this tax. (For proposed
legislation see Appendix C-4 and C-5.)
Clarification of the Law pertaining to Civil and Criminal
Liability of the Commissioner.
By virtue of the penalty which section 54 of chapter
266 of the General Laws imposes upon officers and employees of going banks for the receipt of deposits with
knowledge that the bank is insolvent, combined with the
provisions of section 22 of chapter 167 (giving the Commissioner power to take possession of the property and
business of a bank under such conditions), a heavy burden is placed upon the Bank Commissioner. On the one
hand he has the responsibility to order the closing of a
bank when, and only when, this course seems absolutely
required, and in making such a decision he is necessarily
influenced by the desirability of keeping a bank open if
this be in any way possible; and on the other hand he
runs the risk of indictment for failure to take action
soon enough. This is a burden which the Commission
feels in all fairness is too great to ask any Commissioner
of Banks to assume in addition to his other duties
and responsibilities. Various other States (for example,
Idaho, Wisconsin and New Jersey) have recognized the
injustice of this situation as it arises in like manner
within their jurisdictions, and have corrected it by providing that in acting or failing to act, in matters of the
kind being considered, the Bank Commissioner and his
assistants should not be subjected to civil or criminal
liability for acts done in good faith. The Commission
believes that similar legislation should be enacted in
Massachusetts. (For proposed legislation see Appendix C-6.)
In this connection a kindred point should be noted.
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Under the law as it stands, in all litigation in which
testimony is desired from the Banking Department, the
Commissioner of Banks may be put under summons;
and, if so, he is bound to make his appearance in person,
no matter how trivial the action or how remote and
purely formal his official relation to it may be. Under
these circumstances, serious inroads are frequently made
upon the Commissioner's time and energy, which ought
to be kept free for the performance of his important
duties of office. Accordingly, the Commission recommends the passage of legislation which, in cases of the
kind here described, would give the Bank Commissioner
authority to respond to a summons by sending a deputy,
or assistant, except when otherwise ordered by the court.
(For proposed legislation see Appendix C-7.)
Three Needed Simplifications.
Next, the Commission offers three suggestions of slight
importance in relation to the subject of liquidation as a
whole, but nevertheless worthy of attention, each upon
its own merits.
The first item concerns the simplification of payments
to minors and next of kin. There is nothing now in the
statute to authorize such payments, in the course of
bank liquidation, without going through all the pertinent
formalities required by law, such as the appointment of
guardians and administrators. In some cases liquidating
agents, acting upon their own responsibility, have made
payments to minors or next of kin after protecting themselves so far as possible by the taking of affidavits, and
so forth. The Commission believes that the situation in
this regard should be improved, and therefore recommends legislation to authorize the payment of dividends
up to an amount of $300 without requiring the appointment of a guardian in the case of a minor or of an administrator in the case of a deceased person. (For proposed legislation see Appendix C-8.)
The second item relates to set-offs. Chapter 295 of the
Acts of 1932, mentioned in an earlier part of this report,
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dealt with the question of set-off in connection with
deposits in the commercial or savings departments of
trust companies. The Commission believes that this
provision, as a feature of the law of liquidation, should
be extended also to savings banks and recommends legislation to that effect. (For proposed legislation see
Appendix C-9.)
A third point which has been brought to the Commission's attention, and which seems clearly well taken,
relates to the 'old books and records of banks liquidated
by the Commissioner in time long past. A mass of such
books and papers has accumulated as the years have
gone on. Though these documents have long since outlived their usefulness, the cost of their storage and care
is a constant source of expense to the State. On one
occasion the Commissioner of Banks appealed to the
Supreme Judicial Court for authority to destroy all such
books and papers, but was advised by the court that
this authority could only be given by act of the Legislature. The Commission therefore recommends that a
statute be enacted which would permit the Bank Commissioner to destroy the books and records of a closed
bank at any time after the passage of six years from
the date when the final accounting of its liquidation was
received and allowed by the Supreme Judicial Court.
(For proposed legislation see Appendix C-10.)
OTHER MEASURES CONSIDERED.
The foregoing statements complete the recommendat
tions of the Commission with respect to liquidation.
Other important suggestions touching this subject have
had careful consideration, however, and the Commission
believes it desirable that they be discussed in the present
report, although no present action upon them is recommended.
Stockholders' Liability.
One feature of the liquidation law which commands
special notice is the provision relating to stockholders'
liability. This, like other details of the law, is largely
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copied from and is almost identical with the provision of
the national banking act. Moreover, the legal procedure
set up in the statutes as interpreted by the Massachusetts Supreme Court seems adequate and competent to
look through all subterfuges to reach the true owner,
regardless of any devices that may be created by him to
evade liability. In practice, however, the total amount
realized from stockholders' suits is small, and also the
burden of payment falls in most cases on the small
stockholders instead of upon those whose control and
management may well have been responsible for the
failure of the bank. Thus the law fails to provide the
protection for depositors which, on its face, the statute
purports to give, and therefore the Commission, while
making no present recommendation, believes that the
double liability clause should have further study with a
view to designing an adequate substitute.
Directors' Liability.
Another feature of the liquidation law, which impels
consideration in passing, is that of suits against the
directors for mismanagement and negligence in the conduct of the bank's affairs. In this relation the courts
have declared that the liability of a director for negligence and mismanagement is an asset or a debt due the
bank, and under section 24 of the liquidation statute
the Commissioner is instructed that he "shall collect all
debts due and claims belonging to it" (the bank). The
policy of the Treasury Department of the national government appears to call for the bringing of directors' suits
only when there exists a good chance of substantial recovery; whereas, under the interpretation given to the
Massachusetts law when such liability appears, the Commissioner of Banks seems obliged by the statute to bring
suit to enforce it in all cases. At least it can be said that
this policy should have the effect of maintaining, and of
bringing strongly into view, the high standards which
bank directors ought to be required to follow. Therefore, in the opinion of the Commission, the law in this
respect should not be changed.
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Christmas, Tax and Vacation Clubs.
In recent years, so-called Christmas clubs, tax clubs
and vacation clubs have become increasingly popular.
When the special legislative commission of 1921 was
conducting its studies, the status of these clubs was
still undetermined. It was argued, on the one hand, that
they should stand in no better position than the ordinary
commercial account; and, on the other, that they should
have at least the same status as a savings deposit. This
question was carried to the Supreme Court and it was
decided that they should be treated in the same manner
as savings deposits; and so the law stands today. It is
sometimes urged that this class of deposit should be
given an even more preferred status, but, after consideration, the Commission came to the conclusion that
essential justice to all parties is best served by making
no change in the present law.
A Central Liquidating Corporation.
The Commission has given earnest study to a suggestion made by His Excellency the Governor in his annual
message of 1932. In that message he proposed "the
creation of a corporation with an authorized capital of
$20,000,000 to which any state banking institution may
subscribe with the permission of the Commissioner of
Banks. The fund so created shall be used to take over
mortgages or other securities of a closed institution or
of going banks, and thereby afford the release of funds for
dividends to depositors of closed banks, or the reopening
of such institutions, or the assistance of going banks."
The Governor reiterated this recommendation in a special message to the Legislature dated March 14, 1932
(House, No. 1244).
The idea of such a central corporation has much to
commend it. Most of the remaining assets of the closed
banks are frozen, and their liquidation will undoubtedly
require a long period of time (unless there is a substantial improvement in business conditions and a consequent
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rise in values). Any method, therefore, by which a central corporation could take over the assets either by
purchase or on easy loan terms, and so advance cash to
closed banks for the payment of dividends, is attractive
in purpose and highly to be desired. But there are
difficulties and obstacles to be considered. In the first
place, where is the money to come from which the central corporation is to advance upon the assets of closed
banks? It can only be obtained by the sale of bonds or
other obligations of the central corporation. But who is
to buy them? They will be secured by assets of an essentially unattractive nature, — frozen, long-term in character, and more or less speculative in value. It would
seem clear that at a time when new money cannot be
obtained for the expansion of sound industries, or even
for refunding their obligations, the general investing pub-lic cannot be counted on to provide any of the requisite
funds. And the same argument is equally true if it be
urged that the going banks might voluntarily subscribe
the necessary capital. Their first duty is to maintain
themselves in a sound and liquid condition, ready to
meet the demands of their depositors and legitimate
business requirements, and they cannot be expected to
invest their depositors' money voluntarily in so doubtful an asset.
Again, suppose it be said that the money might be
obtained by assessment upon the other trust companies
of the Commonwealth in the same manner as the assessment required from all savings banks in the act which
created the Mutual Savings Central Fund, Inc., for the
benefit of savings banks needing assistance and suppose, further, that the serious question of the constitutionality of such assessments in the present case could
be satisfactorily answered, nevertheless there would still
remain a grave practical question whether going banks
with their thousands of depositors should be required by
law to use the funds of their depositors in this manner,
even though for the meritorious purpose of assisting the
individuals whose funds are tied up in the closed banks.
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An important distinction exists between such a proposal
and the legislation which created the central funds for
co-operative banks and for savings banks. In their case
an assessment is made upon all going banks for the
assistance of each other, and to throw the combined
strength of all into the breach in case of need by any
one. The purpose of such measures is to maintain the
soundness of the existing structure, and to prevent the
calamity of any further closings. It is quite a different
thing to take away any part of the strength of a going
bank, and to prejudice in any degree the interests of its
depositors solely for the purpose of paying an earlier
dividend to depositors in banks already closed. A good
argument can be made for pooling common resources to
meet an admittedly common need. The case is not so
clear for using other people's money to relieve the burden of a few.
Also it is important to note the distinction which exists
between the proposal of a central liquidating corporation
and the plans, described in this report, whereby an individual open bank may purchase all or part of the assets
of some one particular closed bank. In the latter case,
the open bank acts voluntarily, and is free to judge for
itself whether the assets are worth buying and the risk
'worth taking, and to employ to that end all the tests of
value and profit customarily applied in business transactions. In the case of an enforced contribution to the
capital of a central corporation, on the other hand, not
only would it be true that no individual bank could remain in a position to govern the subsequent use, in, any
particular instance, of the money which it subscribes;
but also, since the central corporation would be called
into existence by legislation having a broad general intent, both express and implied, to help all closed banks
in the State, its directors would necessarily be subject
at all times to strong pressure — often, perhaps of an
intensely political nature — to lend the aid of the corporation with or without full regard to the value of the
collateral security offered and obtained in any particular
instance.
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together with their annual rates of compensation, and the
weekly averages thereof for the one year prior to their closings. This compilation is not intended as a test of what such
expenses should be in liquidation; it is presented only as one
element to be considered under this general subject, having
in mind that while the receipt of deposits and payments thereon
cease upon a closing, thus dispensing with the necessity of certain employees, yet the same assets and liabilities remain,
requiring continued administrative expense as in the case of '
the bank while open.
— Employees Prior to Closing.
TABLE
Number of Number of
Officers Employees
on Date
on Date
of Closing. of Closing.
NAME OF BANK.
Aggregate
Average
Annual
Weekly
Salaries
for
Salaries
for
Total' One
Year One Year
Prior to
Prior to
Closing.
Closing.
Bancroft Trust Co. .
.
.
3
It
22
$43,732
Brockton Trust Co. .
.
.
1
5
6
9,776
188
Central Trust Co. .
.
.
7
0
56
102,384
1,969
$841
Charlestown Trust Co. .
.
4
ii
15
27,672
532
Exchange Trust Co.
.
.
10
89
99
192,164
3,695
Haverhill Trust Co.
.
.
2
II
13
23,052
444
Highland Trust Co.
.
.
6
17
23
47,884
920
Industrial Bank and Trust Co.
4
21
25
38,412
739
.
.
3
15
18
41,630
81:n•
Lawrence Trust Co.
.
.
2
23
25
60,516
1,163
Lowell Trust Co.
.
.
.
3
24
27
43,700
840
Medford Trust Co. .
.
.
6
19
25
51,496
990
Millbury Savings Bank .
.
1
7
8
13,476
259
Plymouth County Trust Co. .
3
23
26
43,596
838
Inman Trust Co.
.
Revere Trust Co.
.
.
.
3
8
11
14,780
284
Salem Trust Co.
.
.
.
2
11
13
17,992
346
Somerville Institution for Sayings.
3
9
12
21,102
406
63
361
424
$793,364
$15,255
Total .
.
.
•
•
For the purpose of comparison there is set forth below a
compilation as of December 17, 1932, showing the number of
employees, other than agents, engaged by the Commissioner
in respect to each of the seventeen closed banks, together
with the annual rates of compensation and the weekly averages thereof.
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TABLE 2. — Employees in Liquidation.
NAME OF BANK.
Average Weekly
Number of
Aggregate
Employees. Annual Salaries. Salaries November 12, 1932.
Bancroft Trust Co.
7
$10,296 00
Brockton Trust Co.
4
7,228 00
139 00
22
36,140 00
695 00
Central Trust Co.
Charlestown Trust Co.
8198 00
5
9,984 00
192 00
Exchange Trust Co.
35
56,083 04
1,078 52
Haverhill Trust Co.
9
12,428 52
239 01
Highland Trust Co.
8
15,652 00
301 00
Industrial Bank and Trust Co.
2
4,940 00
95 00
Inman Trust Co. .
9
13,676 00
263 00
Lawrence Trust Co.
13
22,152 00
426 00
Lowell Trust Co. .
8
10,036 00
193 00
Medford Trust Co.
10
16,796 00
323 00
Millbury Savings Bank
7
13,208 00
254 00
14
21,684 00
417 00
Revere Trust Co. .
6
10,452 00
201 00
Salem Trust Co. .
5
8,424 00
162 00
11
18,018 00
346 50
175
8287,197 56
85,523 03
Plymouth County Trust Co.
Somerville Institution for Savings
Total
.
The employees of the closed banks consist almost wholly of
persons employed by the respective banks prior to closing,
and whose services have been continued by the Commissioner
while in possession.
In order to conserve space it has not been attempted to set
forth in this memorandum the amounts of the individual
weekly salaries of employees and assistants now employed in
the closed banks. The number of employees and their compensation, of course, will fluctuate as circumstances require,
but will generally diminish as liquidation progresses. It can
be stated as a fact, however, that the weekly compensation of
clerks, bookkeepers, stenographers and other nominal employees is at prevailing rates, and varies between $20 and
$35 weekly. Comparatively few employees receive more than
$35 weekly. The two classes of employees generally receiving
more than said rates are the principal assistants to the liquidating agents and the heads of the real estate departments.
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In respect to six of the banks in connection with which real
estate departments are operated, the heads of the real estate
departments in three of those six banks receive $60 per week,
while in the other three, which include the two largest trust
companies now closed, they receive $70 per week. The weekly
salaries of the principal assistants to the liquidating agents
vary from $40 to $75. Only one such assistant receives the
maximum of $75 weekly. He is connected with the largest
trust company now closed.
In the matter of employees and assistants generally it is
the practice of the Banking Department that no additional
assistants may be employed by any agent or other person,
or any compensation increased, without the knowledge and
approval of the Commissioner. There has also been obtained
for each bank a so-called blanket or schedule bond covering
dishonest acts on the part of the employees thereof.
From the evidence submitted to the Commission it will be
seen that some latitude is necessary in the matter of the number of employees to be engaged in respect to specific banks
and their compensation, and that the problem generally resolves down to one of honest management to be adapted to
the particular circumstances present in each bank.
In managing the affairs of the closed banks, as indicated to
the Commission, there is a determination on the part of the
Bank Commissioner and the Banking Department to reduce
expenses in this connection as circumstances will justify and
as prudent administration will permit.
II. FEES OF AGENTS AND ATTORNEYS.
At the commencement of the recent closings the Commissioner was confronted with the necessity of deciding whom
he should select as agents to take charge of the specific banks.
After lengthy consideration he continued the practice of appointing lawyers, as has been done in the past. This practice
differs from that employed in connection with the appointment of receivers of national banks. But in Massachusetts
we have had so few failures in the past twenty years (and
none at all from 1921 to 1930) that there has been no opportunity here, as in the national bank system, to develop a
force of trained receivers.
Consideration was given to the appointment of examiners
in the employ of the Banking Department as such agents.
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Every competent examiner in the Department was urgently
needed, however, for the more important duty of continuing
the supervision of the going banks, particularly during the
past year of financial crises.
The matter of the appointment of practical bank men aside
from trained liquidators was likewise considered, but difficulties were encountered in that respect, in that no satisfactory
men with such training were immediately available during
the emergency. Where employed in open banks it was not
possible at that time to obtain their services; and where connected with closed banks obvious reasons of public policy
prevented their employment.
In any event, whether examiners or practical bank men
were appointed as agents it would be necessary to supply
each of them with an attorney so that the problem of legal
expense would still be present.
In connection with the national bank liquidations, it appears
that there is a large central force of attorneys in Washington
who have devoted their entire time for years to this type of
work, and receivers of national banks who are not lawyers
are able to refer routine matters of liquidation to this central
force for determination. In addition, each national bank receiver has a local counsel assigned to him to consult. At the
time of the present closings no such central force as is maintained at Washington existed in the Bank Commissioner's
office, there never having been occasion for one in this State.
The Commissioner accordingly felt that it was expedient to
appoint lawyers as agents during this present emergency, and
that under the prevailing circumstances the rights of the several hundred thousand depositors and borrowers received the
best and most immediate attention through attorneys acting
as agents, particularly for the reasons that most of the problems arising in connection with closed banks are legal problems, in many instances requiring quick decisions, and attorneys by training are accustomed to making decisions.
Whether lawyers or practical bank men are appointed as
agents, the problem is the same, and that is, the question how
the compensation for their services shall be determined.
Evidence shows that receivers of national banks receive
compensation up to $15,000 annually, together with certain
expenses and the use of an automobile.
While the Bank Commissioner in the case of the closed
state banks has not fixed any definite annual basis of com-
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Federal Reserve Bank of St. Louis
1933.]
69
HOUSE — No. 1184.
pensation, he has fixed for his own guidance a scale of basic
compensation to agents, which scale ranges from $500 monthly
to $1,000 monthly, according to the size and the difficulties of
the bank, any additional compensation to be governed by any
special results attained by agents. Thus, according to this
scale the maximum basic compensation would be $12,000 annually. In determining the reasonableness of this scale of
compensation it is to be considered that the agent is charged
with the combined responsibilities of the former president,
treasurer and other officers of the bank.
There has been previously presented to the Commission a
schedule showing the amount paid to agents. This schedule
has been revised to December 1, 1932, and is set forth below,
together with the dates of closings of the respective banks.
TABLE 3. — Amounts Paid to Agents to December 1, 1922.
NAME OF BANK.
Date Closed.
Amount.
Dec. 15, 1931 •
Bancroft Trust Co. .
$9,000
Dec. 15, 1931 •
Brockton Trust Co.
3,800
May 10, 1932 •
Central Trust Co. .
Dec. 21, 1931 .
Charlestown Trust Co.
Apr. 25, 1932 •
Exchange Trust Co.
Dec. 26, 1931
Haverhill Trust Co.
Oct. 13, 1931
Highland Trust Co.
Mar. 19, 1931
Industrial Bank and Trust Co.
Dec. 15, 1931 •
Inman Trust Co.
Dec. 15, 1931 .
Lawrence Trust Co.
Dec. 16, 1931 •
Lowell Trust Co.
.
6,700
Oct. 7, 1931 •
Medford Trust Co. .
10,416
3,500
2,800
15,763
9,500
.
9,000
.
Mar. 14, 1932 •
Millbury Savings Bank .
Dec. 17, 1931 •
Plymouth County Trust Co. .
Oct. 13, 1931 .
Revere Trust Co. .
Dec. 15, 1931 •
Salem Trust Co.
Feb. 2, 1932 .
Somerville Institution for Savings .
.
.
7,300
8,000
5,000
It appears from the above schedule that the highest amount
paid to any agent in the current liquidations was paid to the
agent of the Industrial Bank and Trust Company. This bank
was closed six months before the failure of any other bank
now closed, and nine months before most of the other recent
closings. Of the amount of $13,763 paid to the agent of the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
r
70
HOUSE - No. 1184.
[Jan.
Industrial Bank and Trust Company pursuant to a decree of
court entered January 21, 1932, $5,500 was paid to him as
agent and the balance for specific legal work performed by
him and by an assistant. An additional $2,000 has since been
paid to him on account generally for services rendered.
Each agent is expected to administer the routine legal matters pertaining to the institution assigned to him, and in this
connection, where an agent renders additional legal services,
this is considered in the general determination of his final
compensation.
Because of the appointment of lawyers as agents, it has
been the practice of the Bank Commissioner to refer only
specific legal matters to other attorneys, such as specific suits
and matters involving large sums of money, where it could
not be expected that the agent would have the time to handle
them in addition to the liquidation problems for which he is
responsible.
At the request of the Commission there has been compiled
a statement showing somewhat the extent of the legal matters
affecting each bank and the amounts involved in connection
therewith. The figures set forth therein cover the period
from the respective closings through November 15, 1932.
This does not afford a complete perspective of what legal
proceedings may be necessary ultimately, as in some instances
reorganization plans are being considered.
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Federal Reserve Bank of St. Louis
TABLE 4.-Information Pertaining to Suits and Other Legal Matters.
t
az
S
0
46
5
4
33
35
26
115
3
19
54
23
Bancroft Trust Co. .
Brockton Trust Co. .
.
Central Trust Co.
Charlestown Trust Co.
Exchange Trust Co. .
Haverhill Trust Co. .
.
.
Highland Trust Co. .
Industrial Bank and Trust Co. .
Inman Trust Co.
Lawrence Trust Co.
Lowell Trust Co.
Medford Trust Co. .
.
Millbury Savings Bank
Plymouth County Trust Co.
.
Revere Trust Co.
.
Salem Trust Co.
Somerville Institution for Sivings
Totals .
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
79
49
:
39
37
7
86
660
o.
.8
amt
0
Z
7
27
2
8
2
2
8
43
25
$479,423
17,747
1,142,630
328,961
904,950
299,476
1,382,764
49,228
308,715
1,046,482
168,216
43
21
46
98
64
13
27
36
03
24
24
Yee
No
No
No
No
No
No
Yee
Yee
Yea
Yee
2,344,856 73 Yes
738,848 07
695,933 32 I Yee
8
309,595 08 Yes
1 I
93,835 13 Yes
71
1,496,625
36 '
31
17
4
221 $11,808,290 03
SUITS WHERE
BANK IS
PLAINTIFF.
No
No
No
No
No
No
No
Yes
No
No
Yes
Yes
57
1
8
$360,000 00
40,500 00 1
135,270 89
9
$40,000 00
11
32,858 07
68
27
103
77
18
14
34
34,929 88
62,000 00
178,020 88
850,000 00
260,300 00
66,700 00
258,961 71
17
8
10
8
5
6
18
62
5
534,194 57
8
1
OTHER Sun's
WHERE BANK
IS DEFENDANT.
Sum WHERE BANK
APPEARED AS PLAINTIFF.
tr;
No
Yes
Yes
39
82
102
10
5,550 00
125,986 50
270,935 01
510,000 00
163,000 00
707 $3,856,349 44
Tried, 33; settled, 3.
6
90
8
1
;
to
4
I
2
119,610-00
8,500 00
36,663 50
15,000 00
17,144 00 ,
24,000 00 ,
59,145 17
20
32
1
28
3
26
29
23,599 70
1
200 00 '1i
61,291 13 , 11
36
70,337 94
30,000 00 !i 50
10,000 00 11 13
206 $548,34951
SUITS WHERE
BANK APPEARED
AS DEFENDANT.
$95-00
3,60000
30,700 87 $63880-88
60 00
24,536 00
6,1550- 0
90,283 71
2
12
1
Dismissed
2 dismissed
1 $5,500 recovery
19,305 30
487 00
1,066 16
31,789 36
65,000 00
21,500 00
4
12
256 $288,423 40
39
3 dismissed
1 terminated
01\1 -HS110H
178II '
8
Total Book Value.
%
,
2
I
Directors' Suits Pending.
1,
NAME OF BANK.
SUITS TERMINATED.
SUITS PENDING
FORECLOSURES.
72
HOUSE — No. 1184.
[Jan.
Experience has demonstrated it to be necessary that each
case be considered separately and the compensation to attorneys for services rendered in connection therewith be determined according to the various elements entering into the
handling thereof. In this connection, before final payment to
an agent or an attorney is made, the Bank Commissioner first
requires that a detailed statement be rendered, showing the
time devoted, together with the dates thereof. This is considered in connection with the results obtained and with the
general circumstances known to the Commissioner and followed by him during the progress of the liquidation. A petition is then prepared and is first approved by an officer of
the bank as well as by the Commissioner, and later presented
to a justice of the Supreme Judicial Court, who has opportunity to examine the same and pass upon the amount fixed
by the Commissioner.
Prior to the appointment of the special commission, the
Bank Commissioner considered at length the advisability of
recommending legislation providing for salaries or other fixed
rates of compensation to agents and to attorneys handling
specific legal matters. He decided against it for the reason
that the fixing of a maximum compensation might well have
the effect of prolonging liquidation if an agent were told that
the most that he can receive in any one year is a fixed sum
of money. It is quite human to expect that under such circumstances an agent might be impelled not to proceed at
high speed in returning the largest amount possible to depositors, and likewise that might be the feeling of attorneys in
specific cases, if their compensation is to be at a nominal fixed
rate, which accordingly might well result in impairing their
efficiency in handling suits to the most favorable conclusions.
In this connection it is to be remembered that where suits are
brought, except in rare instances, attorneys are paid out of
the amounts collected in the specific suit, and not out of the
assets generally.
The careful and exhaustive survey of the many elements,
including those outlined above, made by the Commission in
order to ascertain what changes, if any, could be made to
reduce expenses of liquidation, has tended to enforce the view
previously arrived at by the Commissioner, that no matter
from what angle this problem is considered it all finally resolves down to one of honest management. As circumstances
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1933.]
HOUSE — No. 1184.
73
permit, attorneys will be dispensed with, and, moreover, it is
the determination of the Department that when and as liquidation
progresses and dividends are paid, agents will be dispensed with
and the banks will be taken into the central organization, or two
or more banks will be consolidated under one agent, in order to
conserve expenses.
III. EXPENSES GENERALLY.
On the general subject of expenses the Commission has requested figures which would show comparisons between the
expenses incurred in the liquidation of national banks, the
trust companies of this Commonwealth closed in 1920, and
the banks of this Commonwealth now closed.
In view of the fact that the annual reports of the Comptroller of the Currency set forth for purposes of comparison
the total expenses against total collections, and that the annual reports of the Commissioner of Banks pertaining to the
liquidation of banks of this Commonwealth contain similar
comparisons, the Bank Commissioner herewith presents such
comparisons to the Commission for its consideration.
The report of the Comptroller of the Currency for the year
ending October 31, 1931, shows that for 989 liquidations completed from 1865 to 1931, there were collections and expenses
as follows:
TABLE 5. — Collections, Expenses, Percentages — National Banks.
.
$395,456,485
Total collections from assets, including set-offs
closed
989
of
the
ration
administ
the
to
Expenses incident
banks, such as receivers' salaries, legal and other
. 26,931,467
.
expenses
It further appears from the report that the total expenses
as shown amount to 6.78 per cent of collections from assets
and stock assessments.
The Comptroller's report then refers to 91 liquidations completed during the year ending October 31, 1931, and recites
figures as follows:
. $29,662,231
. .
Collections from assets, including set-offs .
91
of
the
ration
administ
the
to
incident
Total expenses
closed banks, such as receivers' salaries, legal and
2,484,670
other expenses .
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Federal Reserve Bank of St. Louis
t
74
HOUSE — No. 1184.
[Jan.
It appears from that section of the report that the total
expenses of those 91 banks as above set forth amount to 8.37
per cent of collections.
The total collections and expenses incident to the liquidation of the Hanover, Prudential, Cosmopolitan and Tremont
Trust Companies, closed in 1920, also of the Hampshire County
Trust Company, closed in 1930, are as follows:
TABLE 6. — Collections, Expenses, Percentages — 1920 Liquidations.
NAME OF BANK.
Hanover Trust Co.
Total Col- Total Exlections.
penses.
Percentage.
PERCENTAGE OF
DIVIDENDS PAID.
Commercial Department.
Savings
Department.
.
$2,353,335
$251,622
10.69
68.40
100.00
Prudential Trust Co. .
1,947,516
182,666
9.37
100.00
100.00
Cosmopolitan Trust Co.
Tremont Trust Co.
.
Hampshire County Trust Co.
Total
.
.
9,697,790
411,709
4.24
38.07
92.04
11,462,292
416,373
3.63
51.33
100.00
2,723,103
47,590
1.74
100.00
100.00
$28,184,036 $1,309,960
4.64
Total collections do not include transfers between departments and set-offs.
It will be seen that the total expenses of those five liquidations above set forth amount to an average of 4.64 per cent
of the total collections, including stock assessments.
It appears that the percentage of expenses to collections
respecting the specific trust companies above mentioned varied
widely in some instances, and it is to be presumed that this
was the case, according to circumstances, in regard to national
banks.
A compilation is set forth below showing the total collections and total expenses incident to the sixteen trust companies and two savings banks closed in 1931 and 1932, together with the percentages of expenses to collections, and
also showing the aggregate amounts of dividends paid and
authorized by the court to be paid. This schedule was compiled in October at the Commission's request; the dividend
payments have been revised to date.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
,
C.4
co
TABLE 7. — Collections, Expenses, Dividends, etc. — Present Liquidations.
NAME OF BANE.
October 10,
1932, Total
Collections.
October 10,
1932, Total
Expenses.
Percentage.
DIVIDENDS PAID OR
AUTHORIZED BY THE COURT
TO BE PAID DECEMBER
20, 1932 (PER CENT).
Commercial
Department.
Arlington Trust Co.
Bancroft Trust Co.
834,662 84
2.84
32,424 74
5.41
10
$448,254 16
25
328,029 34
10.62
.
1,262,912 23
44,081 49
3.49
Charlestown Trust Co..
912,041 76
25,440 21
2.78
25
50
Exchange Trust Co.
850,269 99
58,114 01
6.82
Haverhill Trust Co.
387,119 02
24,076 73
6.21
1,247,038 31
52,889 55
4.24
25
421
Highland Trust Co.
.
Savings
Department.
599,095 20
17,482 54
Central Trust Co. .
Commercial
Department.
81,218,126 72
164,598 14
Brockton Trust Co.
Savings
Department.
AMOUNT.
Industrial Bank and Trust Co.
866,726 41
52,026 00
6.00
Inman Trust Co. .
473,944 58
32,641 75
6.88
Lawrence Trust Co
468,881 63
56,190 23
11.98
10
25
$141,840 80
971,862 83
1,014,131 76
702,527 08
84,643 69
528,826 67
1 In reopening Arlington Trust Company of Lawrence, $1,200,000 of depositors' balances were released in cash, which, together with the dividends declared in the
other banks, makes a total recovery in cash to depositors to date of $8,336,684.31. Plans for reorganization or sale in bulk of assets are being considered in connection with
several of the other banks listed above as not yet having paid dividends.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
'
t4
•
TABLE 7. — Collections, Expenses, Dividends, etc.— Present Liquidations— Concluded.
October 10,
1932, Total
Collections.
October 10,
1932, Total
Expenses.
Percentage'
DIVIDENDS PAID OR
AUTHORIZED BY THE COURT
TO BE PAID DECEMBER
20, 1932 (PER CENT).
Commercial
Department.
I
Savings
Department.
Commercial
Department.
Savings
Department.
$365,384 99
$565,619 87
La well Trust Co. .
.
.
.
.
.
.
.
.
$652,774 67
$28,800 73
4.41
25
45
Me(Hord Trust Co.
.
.
.
.
.
.
.
.
963,847 92
60,086 74
6.23
-
25
.
.
.
.
.
.
952,689 34
34,984 64
3.67
10
25
PI'mouth County Trust Co.
AMOUNT.
85,958 84
869,696 97
497,222 99
Re vere Trust Co. .
.
.
.
.
.
.
.
.
249,092 90
31,097 97
12.48
-
25
-
22.5,758 55
Sa[ern Trust Co. .
.
.
.
.
.
.
.
.
313,608 47
29,044 43
9.26
-
25
-
307,925 77
.
.
.
.
.
.
.
214,615 39
10,599 32
4.93
-
-
-
-
.
.
.
.
675,035 00
19,552 00
2.89
-
-
-
-
$12,472,417 68
$644,195 92
-
-
28,768 40
-
-
-I
-
4.93
-
-
$614,044 60
Millbury Savings Bank
So nerville Institution for Savings
H available credits
Total
.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
$12,472,417 68
$615,427 52
Totals in both departments, $7,137,684.31.
-
-
-
-
$677,828 32
$6,459,855 99
178II '
0N -HS.110H
NAME OF BANK.
,
0
..
1933.]
,
HOUSE — No. 1184.
77
It appears from the foregoing compilation that the total
expenses amount to 4.93 per cent of the total collections.
While these percentages will vary from time to time as liquidation progresses, there is no reason to believe that when the
liquidation is completed the final ratio will exceed this average percentage.
There is listed below an analysis of the expenses of all of
the present closed banks from their respective dates of closing
to October 31, 1932. The figures for Arlington Trust Company of Lawrence are not included because of the resumption
of business of that bank on October 20, 1932. However, the
total for that bank is shown.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
TABLE 8.- Analysis of Liquidation Expenses to October 31, 1932.
COUNSEL FEES.
Advertising.
AME OF BANK.
Bancroft Trust Co.
.
Brockton Trust Co. .
.
Central Trust Co. .
.
Charlestown Trust Co.
.
Exchange Trust Co. .
.
Haverhill Trust Co. .
.
Highland Trust Co. .
.
Industrial Bank and Trust Co.
Inman Trust Co. .
.
Lawrence Trust Co. .
.
Lowell Trust Co. .
.
Medford Trust Co. .
Millbury Savings Bank . .
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
•
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
180 50
119 57
620 70
280 04
186 40
670 34
1,271 16
412 28
120 00
36 25
64 46
Appraisals. Insurance. Directors'
and Stockholders'
Suits.
$5 00
815 00
5 00
875 00
2,700 00
1,000 00
70 00
1,105 00
310 48
-
$1,072 80
927 26
3,633 79
1,292 85
1,425 70
965 62
746 64
915 58
599 07
1,112 48
1,736 88
1,675 94
522 01
$1,500 00
620 00
5,000 00
-
Other
Counsel
Fees.
$1,169 48
597 43
2,846 73
5,015 76
4,370 82
3,547 43
12,911 19
2,290 16
597 43
10,650 95
2,860 84
8,039 98
957 27
Sheriffs'
Fees.
Court
Fees.
Liquidating Agent.
$17 90
29 15
286 90
63 45
102 50
681 61
1,006 90
-
$2 50
22 61
31 05
123 40
135 66
90 15
893 00
513 79
-
$8,888 09
3,800 00
3,500 00
2,800 00
15,763 00
5,500 00
9,000 00
5,700 00
10,416 04
-
•
I
IIP
i
Revere Trust Co.
Salem Trust Co.
Somerville Institution for Savings .
Total .
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
.
363 00
2,365 95
180 80
196 09
7,300 00
311 11
45 00
981 62
_
5,097 43
100 99
177 80
8,000 00
204 75
250 00
1,572 20
-
2,270 44
465 30
139 16
5,000 00
48 05
-
1,467 57
_
2,842 08
$4,481 99
.
Less available credits
Grand total
56 38
-
$7,543 48
$20,913 28
$7,120 00
$68,431 37
-
$2,935 50
-
$2,325 21
-
_
-
_
_
-
_
-
_
_
-
_
-
_
CSJ
CAD
CO
_
$85,667 13
-
'NTT '
1DNI — aS110H
Plymouth County Trust Co. .
265 27
CC
oo
NAME OF BANK.
Bancroft Tru.s
Brockton Trus
Central Trust
Charlestown Trust Co. . .
Exchange Tr ,t Co. . .
Haverhill Tr ,t Co. . .
Highland Trus
Industrial Bank %rid Trust Co.
Inman Trust
Lawrence TrusFUD
Lowell Trust 43. .
Medford Trust
Millbury Savi gs Bank . .
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
.
.
.
.
.
.
.
.
•
.
.
.
.
.
.
.
•
.
.
.
.
.
.
.
Light,
Heat
and
Water.
Opening Postage,
Safe Stationery Protest
and
Fees.
Deposit
Boxes. Printing.
Rents and
Janitors.
Salariea
and
Wages.
Telephone.
Miscellaneous
Items.
Total.
00
229 55
1,178 71
427 83
1,184 32
748 11
500 90
583 56
483 17
601 30
159 50
865 93
266 05
$5 00
31 50
333 00
-
-$12 32
-33 70
21 16
56 74
38 91
6 70
-13 68
10 50
60 94
-31 76
-
$5,333 28
3,575 00
7,857 11
1,170 00
8,166 65
660 00
1,420 00
7,251 89
4,892 86
6,411 68
1,487 50
1,300 00
264 00
$11,817 72
6,978 14
24,065 21
13,332 74
34,082 67
12,087 01
26,225 67
16,754 67
16,523 46
21,144 27
10,947 23
18,745 98
5,719 40
$356 55
210 78
490 60
286 43
777 41
590 10
881 06
602 10
519 51
879 37
499 11
977 43
199 41
$2,992 50
903 44
7,154 90
1,691 56
7,816 23
1,366 97
3,055 72
982 76
2,358 85
4,569 36
2,138 78
10,155 74
2,689 56
$33,506 37
17,936 77
49,483 10
20,375 48
61,939 26
24,835 52
51,480 36
52,414 68
33,142 80
57,356 04
29,751 82
61,031 58
11,629 08
$1,649 87
595 60
2,253 55
1,256 31
3,781 65
891 94
2,298 43
2,749 80
1,070 74
2,593 48
825 18
1,990 67
1,011 38
178I I •01\1 -HS11011
TABLE 8.-Analysis of Liquidatian Expenses to October 31, 1932-Concluded.
;ID
41
N...1
I
•
Plymouth County Trust Co.
89 63
Revere Trust Co. .
224 58
Salem Trust Co. .
Somerville Institution for Savings
Total
Less available credits
Grand total
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Federal Reserve Bank of St. Louis
500
82 90
$8,560 25
.
19,431 68
599 86
2,768 70
36,319 00
847 49
47 30
757 00
12,828 84
331 20
2,301 31
31,916 72
745 39
=15 91
2,500 00
9,179 21
436 48
6,492 95
29,469 55
1,969 71
2 02
742 92
10,329 21
210 36
3,114 18
20,809 00
$136 90
$53,789 89
$270,193 11
$8,847 76
$62,553 51
$632,397 13
1,992 06
799 21
$374 50
$28,523 25
27,595 62
27,595 62
$34,957 89
$604,801 51
.
.
17, 1931, to October 21, 1932, were $37,571.16.
Expenses of Arlington Trust Company, in possession from December
5)
00
•
•
82
HOUSE1184.
Experience has demonstrated that usually the income received during the period of•possession or liquidation is more
than sufficient in II'tase of each bank to pay the expenses
of liquidation, thus rendering it unnecessary to use any part
of the principal for the expenses of liquidation.
The income of each bank (including Arlington Trust Company) from their respective dates of closing to October 31,
s set forth below. For the purposes of comparison the
1932, iFl
total expenses to October 31, 1932, are again set forth.
TABLE 9.-Income and Expenses.
NAME OF BANK.
Total Income.
Total Expenses.
8244,680 67
$37,571
Bancroft Trust Co.
178,752 75
33,506
Brockton Trust Co.
41,003 39
17,936
Central Trust Co. .
235,612 20
49,483
Arlington Trust Co. (to October 20)
Charlestown Trust Co. .
117,113 48
29,375
Exchange Trust Co.
234,576 88
61,939
Haverhill Trust Co.
71,595 77
24,835
Highland Trust Co.
151,567 38
51,480
48,297 36
52,414
Industrial Bank and Trust Co.
Inman Trust Co. .
110,219 97
33,142
Lawrence Trust Co.
261,954 76
57,356
Lowell Trust Co. .
69,504 68
29,751
Medford Trust Co.
77,759 84
61,031
Millbury Savings Bank .
.
120,737 94
11,629
Plymouth County Trust Co.
87,626 95
36,319
Revere Trust Co. .
32,438 22
31,916
Salem Trust Co. .
33,521 45
29,469
161,017 63
20,809
$2,277,981 32
$669,961
Somerville Institution for Savings
Total
.
Income as listed above does not include earnings from operation of real estate held in
foreclosure and in possession.
The ratio of expenses to income varies as in the case of
expenses to collections, which necessarily results from the
problems and conditions peculiar to the individual banks.
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Federal Reserve Bank of St. Louis
Respectfully submitted,
FREDERICK D. BONNER,
General Liquidation Counsel.
