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Banx Suspensions Study of 1936
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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SECOND SUPPLEMENTAL REPORT
OF
BANKING
INVESTIGATION
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BY
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ATTORNEY GENERAL
M. Q. SHARPE
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ON
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CLOSED BANK FUNDS
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IN THE
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HOVEN, KIMBALL and PLATTE
STATE BANKS
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FEBRUARY 11, 1931
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Federal Reserve Bank of St. Louis
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State Publishing Co., Pierre, S. D.
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Federal Reserve Bank of St. Louis
SECOND SUPPLEMENTAL REPORT OF BANKING INVESTIGATION
On account of the suspension of the Hoven State Bank, formerly operated by Thomas O'Brien, the Kimball State Bank, and the Farmers State
Bank of Platte (hereinafter called the Smith bank), we consider it advisable to make the following supplemental report to the Legislature. The
conditions existing in these banks emphasize the need for corrective legislation, as recommended in the banking report. We also think this supplemental report will furnish useful information to the Legislature in
deciding upon legislation for future regulation of banking affairs in South
Dakota.
In this connection we think it is due to many safe and efficient
bankers of South Dakota to report that recent events show that the bank
lobby at Pierre and the maladministration of our state banking department
were never truly representative of the wishes and policies of South Dakota
bankers as a whole. It has been plainly shown to us that the true conditions in the banking department and the handling of closed bank funds
were not known to the bankers of this state as a whole and most of them
had no real conception of how the situation was being handled by the
superintendent of banks nor by the small group which constituted the
bank lobby at Pierre, and claimed to represent the banking business.
Since the true situation has become known to bankers generally most of
the reliable and substantial bankers have been the first to denounce the
entire situation and to demand that the governor and other state officers
remedy the situation and provide legislation and faithful administration
thereof which would bring the banking business back to the plane of public
service and confidence where it rightfully belongs.
Hoven State Bank
The town of Hoven has a population of about 350. There were two
state banks there. The Hoven State Bank was owned principally by
Thomas O'Brien, former president of the State Bankers' Association, and
for about four years director of the bank lobby at Pierre. The bank
closed on account of insolvency on November 8, 1930. Its $25,000.00 capital was impaired $17,104.47, leaving only about $8000.00 of capital; its
reserve had been below legal requirements for about two years and was
down to nothing at the time of closing; it was carrying $43,309.05 of
other real estate, encumbered for $26,500.00; it was carrying $16,525.93
of other property and sheriff's certificates of sale; its correspondent banks'
accounts were overdrawn $1652.04; it owed $18,380.00 for borrowed
money. The assets side of the book balance was short $4078.20 on the day
of closing; and neither our investigator nor the examiner in charge had
been able to locate this on November 27, 1930, when we investigated the
bank.
The bank was carrying $20,400.00 of the personal notes, unsecured,
of Thomas O'Brien, president of the bank; and had carried most of this
excessive loan account for upwards of a year.
Despite the small capital and business of the bank it had a payroll
for its officers and directors of more than $1000.00 per month, of which
$500.00 per month was salary of the president.
On September 11, 1929, the deputy superintendent of banks at Pierre,
Mr. A. E. Fossum, wrote this bank a very specific letter of criticism following an examination made of the bank's affairs, calling its attention to
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Federal Reserve Bank of St. Louis
4
SECOND SUPPLEMENTAL REPORT
Its low reserve, excessive amounts of cash items, excessive valuation of
banking building, and excessive loans to officers and stockholders; and in
general requiring improvement of the condition. The condition of the
bank continued to grow steadily worse until it closed November 8, 1930.
The banking department, however, with knowledge of this condition of
the bank, continued to pour the trust funds of closed state banks into it
at the rate of $5000.00 per month; and increased these deposits to such an
extent that there were $90,595.73 of such accounts in the Hoven State
Bank when it closed. The following is a list of the closed bank accounts
in said bank at the time it closed:
Altamont State Bank, Altamont
American State Bank, Parkston
Astoria State Bank, Astoria
Bank of Bowdle, Bowdle
Bank of Commerce, Milbank
Bank of Hurley, Hurley
Bank of LaPlant
Bank of Revillo
Black Hills Trust & Savings Bank, Deadwood
Charles Mix County Bank, Geddes
Chester State Bank
Citizens Sstate Bank, Alexandria
Citizens State Bank, Henry
Citizens State Bank, Lane
Citizens State Bank, Tulare
Cottonwood State Bank
Dakota State Bank, Oldham
Dakota State Bank, Salem
Exchange State Bank, Menno
Farmers Exchange Bank, Toronto
Farmers & Merchants State Bank, Canova
Farmers & Merchants State Bank, Herreid
Farmers Savings Bank, Tabor
Farmers Savings Bank, Wessington Springs
Farmers State Bank, Bison
Farmers State Bank, DeSmet
Farmers State Bank, Kadoka
Farmers State Bank, Lane
Farmers State Bank, Parker
First State Bank, Lemmon
First State Bank, Presho
First State Bank, Timber Lake
First State Bank, Loyalton
First Trust & Savings Bank, Mitchell
James Valley Bank, Huron
Livestock Exchange Bank, Newell
Meade County State Bank, Sturgis
Meadow State Bank, Lemmon
Minnehaha State Bank, Garretson
McLaughlin State Bank, McLaughlin
Northville State Bank, Northville
Peoples State Bank, Bradley
Peoples State Bank, Canova
Security State Bank, Winner
Security State Bank, Clark
F. R. Smith, Supt. of Banks
State Bank of Bradley
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Federal Reserve Bank of St. Louis
$ 1,349.27
5,010.27
2,512.49
500.00
1,524.06
1,028.71
1,011.70
1,036.64
515.21
5,011.67
508.00
1,026.44
226.85
2,032.07
500.00
1,543.46
515.21
508.00
2,025.57
3,014.99
2,032.07
2,023.75
1,036.86
1,030.43
1,015.96
530.07
2,073.81
1,03742
1,038.36
1,241.99
1,042.37
2,027.85
1,000.00
7,559.98
1,578.76
714.80
1,544.47
306.59
514.46
511.86
300.83
503.93
1,186.07
2,017.69
937.66
12,280.39
505.93
1
OF BANKING INVESTIGATION
State Bank of Brandt
Stock Growers Bank, Fort Pierre
Stock Growers State Bank, Harrold
Stockman's Bank, Hot Springs
Tripp County Bank, Colome
Wakpala State Bank, Wakpala
1,004.99
4,268.93
764.37
11.48
5,045.54
505.85
$90,595.73
Total
'
Kimball State Bank
This bank was located at Kimball, South Dakota, and was in the same
trade terrritery as Platte, South Dakota. It closed on account of insolvency on December 20, 1930. This bank had been in a dangerous and
insolvent condition for five years but during all of that time it had been
favored with abnormal deposits of closed bank funds, in view of its dangerous condition and the amount of its capital. A large part of its closed
bank deposits were redeposited in the Smith bank at Platte and carried
as "due from banks" and on this account its statement showed a high
reserve condition, although its true condition was insolvency; and without
the large amount of closed bank deposits it would have been compelled to
close years before it did. Its closed bank accounts, which were redeposited
with the bank at Platte for the last three years, ranged from $246,000.00
down to $87,204.53. The condition of the bank can be judged, however,
from the following facts:
In May, 1926, the bank was compelled to reorganize and required its
depositors to waive 60% of their deposits and put them in a trust fund
against the poorest paper and property of the bank. The remaining 40%
of deposits was to be paid out in installments over a period of five years.
The bank's capital was $40,000.00, but this was impaired $10,757.91 at
the date of closing; it was carrying $32,930.36 of other real estate, encumbered for $26,305.00; it owed $7,000.00 of bills payable for which it had
pledged $48,674.35 of its assets, including a mortgage of $10,000.00 on its
bank building. Two days before it closed its reserve was 32%, but at this
time it credited to the Smith bank at Platte $86,425.68 of closed bank
accounts and issued drafts for $2356.11, which wiped out its reserve
completely. After crediting the closed bank accounts of $86,425.68 to the
Smith bank at Platte this bank still had closed bank accounts and guaranty
fund accounts aggregating $91,813.67, as follows:
War Finance Corporation collateral, F. R. Smith, Supt. of Banks $12,177.93
F. R. Smith, Supt. of Banks, Guaranty Fund Commission
18,259.91
Stock Growers Bank, Fort Pierre
10,742.32
F. R. Smith, Supt. of Banks, Depositors' Guaranty Fund, sus39,830.68
pense
Black Hills Trust & Savings Bank accounts
10,615.83
Lumbard State Bank
187.00
Total
$91,813.67
The list of closed bank accounts which we were able to locate was
as follows:
$
Albee State Bank
537.72
American Exchange Bank, Pierre
5,000.00
American State Bank, Parkston
3,564.14
American State Bank, Huron
1,009.15
Ardmore State Bank, Hot Springs
1,558.43
Bank of Avon
1,631.43
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Federal Reserve Bank of St. Louis
SECOND SUPPLEMENTAL REPORT
Bank of Bijou Hills
Pank of Brookings
Bank of Commerce, Milbank
•
Bank of Hartford
Bank of Hurley
Bank of Lake Preston
Belle Fourche State Bank
Broadland State Bank
Chester State Bank
Citizens Bank & Trust Conipany, Rapid City
Citizens State Bank, Alexandria
Citizens State Bank, Henry
Citizens State Bank, White Rock
Claire City Bank, Claire City
Dakota State Bank, Oldham
Dakota State Bank, Roswell
Moody County Bank, Flandreau
Holabird State Bank
Hyde County State Bank, Highmore
Kaylor State Bank
Kimball Commercial & Savings Bank
Lemmon State Bank
Liberty State Bank, Hillhead
Peoples State Bank. Howard
Peoples State Bank, Ramona
Farmers Bank, Emery
Farmers Bank of Humboldt
Farmers & Merchants State Bank, Farmer
Farmers & Merchants State Bank, Hecla
Farmers Savings Bank, Tabor
Farmers Savings Bank, Wessington
Farmers Security State Bank, Centerville
Farmers State Bank, DeSmet
Farmers State Bank, Fulton
Farmers State Bank, Kadoka
Farmers State Bank, Parker
Farmers State Bank, Reliance
Farmers State Bank, Unityville
First State Bank, Cavour
First State Bank, Harrold
First State Bank of Summit
First Trust & Savings Bank, Mitchell
Security State Bank, Blunt
Security State Bank, Lake Norden
Security State Bank, Montrose
State Bank & Trust Company, Watertown
State Bank of Grover
State Bank of Scotland
Wakonda State Bank
Wessington Springs State Bank
Whitbeck & Holmes, Vivian
345.41
1,479.21
1.00
7.60
3,166.13
1,796.33
466.35
542.08
1,039.58
586.95
73.-03
534.32
1,048.20
37.55
1,047.10
1,598.15
577.95
30.22
1,070.28
1,245.13
4,926.53
574.14
1,038.63
4,205.73
2,122.50
3,121.62
2,588.31
867.82
1,013.20
2,112.98
515.70
69.23
20.85
68.21
3,667.29
3,621.13
1,665.08
830.72
1,213.75
26.60
3,110.16
514.50
911.59
2,098.94
537.07
2,646.68
°
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8..4
44
1,56
1.10
3,118.96
536.92
$79,346.33
Total
Farmers State Bank of Platte
This bank will be referred to as the Smith bank. We have heretofore
reported on its stockholders, officers, financial condition, and the shift of
closed bank funds of January, 1929. This information can be found at
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Federal Reserve Bank of St. Louis
OF BANKING INVESTIGATION
7
pages 21, 22, 23 and 45 of the pamphlet to which this report is attached.
Since that report was published this bank bettered its book showing of
condition considerably but the actual condition of the bank was growing
worse all the time. The bank disposed of its impairment of capital and
reduced its other real estate holdings about $65,000.00, but this was done
as a matter of bookkeeping only and by arbitrary expansions of its items
of deposits, loans, and discounts, and interest earned, using an account of a
firm known as the Farmers Agricultural Credit Corporation; and not by
any actual betterment of conditions.
The Farmers Agricultural Credit Corporation was organized in 1925
by the then superintendent of banks, Fred R. Smith; and according to
reports made to our investigator at Platte by officers and employees of
the Smith bank, Fred R. Smith was the secretary at all times and apparently the only active officer of the corporation. This corporation was used
as the cushion for all required expansion of loans and discounts, reductions of deposits, or other totals, increase of earnings, essential to make a
showing of any condition desired to be shown by the Smith bank. The
corporation was practically bankrupt all the time and its assets had little
If any actual net value at any time. Nevertheless, notes of this corporation of practically any required size up to $600,000.00 were executed by
the corporation by Fred R. Smith, its secretary, and put into the bank;
and cash, time certificates, or checking accounts of the bank increased or
decreased accordingly. Due to the large amount of closed bank accounts
carried by the bank its interest liability at 2% % would amount to about
$20,000.00 per year, which would make a corresponding loss in its statement of condition, as on account of the worthlessness of most of the paper
and assets in the bank it was making practically no actual profits at all.
This condition, however, would be met by the simple expedient of executing
a Farmers Agricultural Credit Corporation note of $18,000.00 or $20,000.00
and putting it into the bank.
The following transactions of bookkeeping in this bank are indicative
of the way this Farmers Agricultural Credit Corporation account was used
in juggling huge sums of interest, loans, and discounts, time certificates
of deposit, and checking accounts, and funds of closed banks:
On June 30, 1930, the account of F. R. Smith, superintendent of
banks, was charged with $896,000.00, as shown by the Journal (checking
accounts) on that date. On the same date certificate of deposit No. 13277
was issued to the Farmers State Bank, Trustee, F. R. Smith, Supt. of
Banks, for $331,000.00. (This is the same certificate cancelled on July
16, 1930.) The discount register showed that loan No. 11116 for $524,000.00 (Farmers Agricultural Credit Corporation) was credited to bills
receivable on that date and interest in the sum of $15,000.00 was credited
on such loan to interest received. In addition to the $524,000.00, several
smaller notes were credited, making a total of $600,000.00 of loans of the
Farmers Agricultural Credit Corporation credited on that date. On the
same date a note loan of the Farmers Agricultural Credit Corporation was
made for $15,000.00, which wiped out an impairment of capital of
$6479.44. Another note of $15,520.00 of the Farmers Agricultural Credit
Corporation was given on the same date, and this was credited to the
Farmers Agricultural Credit Corporation's checking account and itemized
Note 0.1). This is the same date that $65,000.00 was credited to Other
Real Estate, and the bank's other real estate holdings were reduced accordingly on the books. On the same date $100,000.00 of Congo Pictures and
Guerney Refrigerator stock were taken into the bank, and this must have
been done by a switch of closed bank funds and Farmers Agricultural
Credit Corporation notes. The last called report of the bank stated that
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Federal Reserve Bank of St. Louis
8
SECOND SUPPLEMENTAL REPORT
this $100,000.00 was taken for debts previously incurred. All of the loans
credited on this date were loans of the Farmers Agricultural Credit Corporation, and apparently this $100,000.00 belonged to the Farmers Agricultural Credit Corporation previous to turning it in to the bank.
On July 16, 1930, the account of F. R. Smith, Supt. of Banks, was
credited with note $565,000.00, and certificate of deposit $331,000.00.
This was simply credited to open checking accounts although no ledger
sheet showing such credits could be found by our investigator nor by the
bookkeeper of the bank when it was demanded. The discount register of
that date, however, shows the note charge of $565,000.00 to the Farmers
Agricultural Credit Corporation. On the same date the same time certificate of deposit above mentioned (No. 13277) for $331,000.00, is cancelled. This certificate of deposit was issued in the name of the Farmers
State Bank, Trustee, F. R. Smith, Supt. of Banks, on June 30, 1930. No
interest was paid on this.
June 30, 1930, was a date on which a called report of the bank was
to be published and the two transactions of June 30, 1930, and July 16,
1930, show how the bank's books were fixed for publishing the report and
then later re-fixed back to the condition of the bank. They also show that
the superintendent of banks was juggling the closed bank trust funds
through this Farmers Agricultural Credit Corporation account, because
these items of account were carried in the name of the superintendent of
banks and are identical in amount with the charges in the Farmers Agricultural Credit Corporation account.
On December 30, 1930, the journal shows a check given by F. R. Smith,
Supt. of Banks, on checking accounts, for $950,000.00. The same day
certificate of deposit No. 13413 for $350,000.00 was issued to the order of
Farmers State Bank, Trustee, F. R. Smith, Supt. of Banks (this is the
same certificate of deposit cancelled January 16, 1931). On the same date
notes of the Farmers Agricultural Credit Corporation were credited to bills
receivable, aggregating $600,000.00; one of them being for $565,000.00,
and the others for smaller sums. This transaction had the effect of reducing the amount shown on deposit from $1,484,056.39 to $871,687.63,
with a consequent raising of cash reserve shown from 10.9% to 17.1%
(due to lowering of amount on deposit, with the same amount of reserve).
The account also shows $18,000.00 credited to interest on the $565,000.00
note. This raised the profits (together with a few other interest payments) from $3174.91 to $22,848.19. On December 29, 1930, the capital
was impaired $10,840.99, but this credit wiped out such impairment. In
checking the record of the day's transactions we find a new note given by
the Farmers Agricultural Credit Corporation for $18,000.00, which would
be the $18,000.00 interest earnings credit above mentioned.
January 16, 1931. The daily statement for this date shows increase
In loans in the sum of $600,000.00; also certificate of deposit paid for
$350,000.00. These two items were credited on checking accounts to an
account "F. R. Smith, Supt. of Banks." We made a thorough search for
a checking account ledger sheet showing such credit and were unable to
locate a sheet with such credit, although there were ledger accounts with
F. R. Smith, Supt. of Banks, showing smaller sums credited; but none on
this date. Miss Chastian, the bank's bookkeeper, said the ledger sheet
should be in a certain place, but it was missing. The $600,000.00 loan
above mentioned was given by the Farmers Agricultural Credit Corporation, by F. R. Smith. The certificate of deposit paid was No. 13413, which
was made December 30, 1930, to the order of the Farmers State Bank,
Trustee, F. R. Smith, Supt. of Banks. This had the effect of raising loans
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
REPORT OF AN INVESTIGATION
Of the Department of Banking and Finance of the State of South
Dakota Made by the Legal Department of the State of South
Dakota Pursuant to a Resolution of the House of Representatives of the State of South Dakota Found at Page 902 of the
House Journal of the Twenty-first Legislative Session of Said
State. (Report Filed and Published February 27, 1930.)
1 NTRODUCTION
This report is based upon facts found by an examination of the original
the
records of insolvent state banks, from written questions submitted to
superintendent of banks and answered by him in writing, from records of
of
the legislature, and from an examination of the statutes and reports
other states and the federal government relative to their banking systems.
The conclusions herein stated are in responAe to the part of the resolution calling for the result of all the investigations and for recommendations deemed advisable.
On account of the shortage of funds the investigation was limited to
general complaints about the banking system. We did not have sufficient
funds to audit all the business transactions of the banking department nor
to trace fully all individual complaints received. This report therefore
contains no recital of embezzlements, larcenies, or other criminal complaints against individuals. It is not made with the idea of exciting public
feeling against individuals nor satisfying desires for spectacular news. It is
devoted to the broader proposition of showing you the defects in our
banking system; the mal-administration of the same, and recommendations
for its improvement.
This report will show that for the past ten years the true spirit and
intent of our laws relating to banking have been ignored by the persons
In charge of their administration. The purpose of the law has been completely subverted. Instead of administering the law for protection of the
bank
Public it has been administered solely for the benefit of the individual
corporation. Banks which were hopelessly insolvent have been kept open
by deposits of the public money, fictitious valuation of assets, and in utter
disregard of the plain provisions of the law requiring banks in unsafe
condition to be closed. Liquidation of closed banks has been slow and
expensive. Funds of closed banks have been used for bolstering up other
Insolvent banks where they were later lost a second time. Dividends were
withheld from depositors accordingly. The whole system has been badly
in
Infected with politics. The superintendent of banks now in office has,
utter disregard of the spirit of his trust, kept large sums of closed bank
money upon deposit in banks at Platte, South Dakota, on account of his
Interest in one of said banks; and has deliberately tried to conceal the
true facts of such deposits from the legislative investigating committee
The Bankers' Association of the state, aided by the superintendent of banks,
has conducted a vicious legislative lobby during every session of the state
legislature and as a result every important banking law enacted since 1915
when the Association was given official recognition has been a law in the
interests of the individual bank corporation and against the interests of
the public.
We realize that the foregoing statement is strong and pointed. The
following report shows that every statement made is supported by reliable
evidence.
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Federal Reserve Bank of St. Louis
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
4
PLAN AND EXPENSE OF THE INVESTIGATION
In order that we might ascertain the causes of apparent public dissatisfaction with banking affairs we first published in a weekly newspaper
of every county in the state, and in all of the principal daily papers of the
state, a notice of this investigation inviting the general public to make its
complaints in writing. In this connection we express our thanks to the
press on account of the fact that while we expected to pay for the publication of these notices at legal rates and sent claim blanks for the purpose,
only two or three papers out of about one hundred made any charge at all;
and we were thereby saved about $500.00 for other investigation purposes.
In response to these notices we received complaints in the form of
letters, petitions, memorials, and rsolutions, from all parts of the state.
We also read the testimony taken by the joint legislative investigating
committee and traced out all of the important material therein contained,
as far as the funds at our disposal would permit. We also received some
oral complaints at the office and during trips over the state. After analyzing and classifying all complaints and information received, it became
apparent that the most general and important complaints related to defects
in the banking system and administration thereof and to certain special
cases hereinafter reported. There were numerous private complaints which
we were not able to investigate on account of lack of funds.
We employed about fifteen fieldmen for periods varying from one to
nine months and these men examined 242 closed banks and gathered much
of the information on which this report is based. We also submitted written questionnaires to the present superintendent of banks and to all of
these he made full replies. In this connection we express our thanks to
the superintendent of banks for furnishing such information and also for
opening up for us without necessity of subpoenas the records of all closed
banks which we investigated. This saved us at least $1,000.00 in legal
expense. We also investigated the laws and reports of other states and
the federal government relating to banking, for the purpose of making
this report.
The total amount expended upon this investigation is $6,048.08,
classified as follows:
$3,748.50
Paid fieldmen salaries
175.00
Paid special attorneys
2,053.93
Travel expenses of fieldmen and attorneys
70.65
Miscellaneous
Total
$6,048.08
ALLOWING INSOLVENT BANKS TO OPERATE
r 7--144s was the most serious and dangerous of all the negligence or
violation of law which we found in the investigation of the banking department. It caused more trouble to the public than any other thing. More
peoptV" lost their money on account of this policy than any other thing.
It shortened dividends and increased the expenses of liquidation more
than any other thing. It affected and damaged the whole banking system,
strong banks as well as weak, more than any other thing. It weakened
"
1
the public confidence in all banks more than any other thing.
We examined a total of 242 banks. We fo nd on two .pr three which
ad been closed by order of theThanking departmen . The remaining banks
of their cash, had
had been allowed to run until they had exhausted all
I pledged or sold most of their good assets, and had then voluntarily closed
their doors with nothing but the dregs of their assets left. These dregs
could produce little in dividends and were more expensive and slow of
liquidation than good assets would have been.
In tracing this policy of the banking department we instructed the
fieldmen to examine the records of each closed bank for three Years Prior
to its closing and to take a fair average day's reserve out of each month.
f
)h
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
5
We also had them show the "other real estate," "bills payable," "rediscounts," "cash items," and "impairments of capital," carried by those banks
for those days. We also had them list the dividends paid by these banks
after closing. After securing this information we analyzed it and tabulated
in condensed form the records of those 242 closed banks in the order of
the poorest reserve banks first, following in sequence by banks with increasingly good reserves; showing also their "other real estate" and other
items above mentioned, and also dividends paid since their liquidation.
These complete tabulations of the 242 banks are available for use whenever required. The first page following hereafter shows the 30 poorest
closed banks from reserve standpoint as listed, and the next page following
It shows the 30 best closed banks, and will substantiate our statements
heretofore made and our conclusions and recommendations hereafter made,
as this specimen from the two extremes of all closed banks is a fair and
reliable showing of the effect of this policy in all of them. It shows plainly
that allowing insolvent banks to operate was the principal cause of slow
and small dividends upon liquidation. In examining these sheets it should
be remembered that the minimum reserve permitted by law is 17 1/2 % for
all banks and 20% for reserve banks.
Speeinien Sheet Showing Relation of Reserve Conditions to Dividends Paid
In Liquidation of 30 Closed Banks Having Poorest Reserve Conditions
Name of Bank
Fair specimen of its I
I Date of reserve for three years IDividends paid
under
prior to. closing
Closing
I
3rd yr. 2nd yr. ILast yr.1 liquidation
jNone
10-30-26 No reserve
/
2% 8.54%1 1.47%1Paid by Guar8-10-22 161
anty Fund
9- 4-23 7.96% 5.59% 1.84%INone
Far. & M. St. Bk., Verdon
12-27-27 5.29% 3.08% 2.17% None
Exchange St. Bk., Menno
% 2.33% None
7-30-23 6.42% 3
Farmers Home Bank, Lily
9-22-23 5.75% 5.05% 2.71% None
Farmers Sec. Bk., Peever
3.21% None
4-24-24
Commercial St. Bk., Salem
12-10-23 9.08% 12.58% 3.28% 25%
Dempster State Bank
7-20-23 19.89% 6.51% 3.32% None
First State Bk., Vienna
3.37% Paid by Guar2-21-22
Bank of Bowdle
anty Fund
11-12-26 5.85% 4.38% 3.42% None
First State Bk., Harrold
8-20-24 5.61% 4.43% 3.88% None
Citizens St. Bk., Newark
10-27-23 6.42% 4.37% 3.98% 11%
Far. St. Bk., Unityville
1-19-24 7.90% 4.98% 3.99% None
West. St. Bk., Mt. Vernon
10-16-23 9.96% 5.51% 3.99% 20%
Ethan State Bank
2- 9-24 5.83% 7.42% 4.04% 5%
Far. St. Bk., Strandburg
11-17-23 9.42% 6.67% 4.08% None
Reliance Savings Bank
Brule St. Bk., Chamberlain 6-25-28 8.08% 7.17% 4.63% None
12-13-23 6.50% 7.08% 4.92% 15%
First St. Bk., Lemmon
11-21-23 9.04% 7.05% 5.08% 10%
Bank of Hurley
8-20-23 12.83% 11.25% 4.92% None
First St. Bank, Wood
11- 3-25 6.83% 4.84% 5.15% None
Far. Say, Bk., Sherman
10-20-23 7.17% 4.92% 5.17% None
Farmers St. Bk., Veblen
5- 6-26 9.17% 6.84% 5.25% None
Murdo State Bank
10- 6-23 9.75% 11.54% 5.46% None
Belle Fourche St. Bk.
9-16-26 20.49% 20.39% 5.63% 25%
Estelline State Bk
5.65% 10%
3-22-26
Bank of Bijou Hills
5.68% None
Security State Bk., Blunt.... 10- 6-26 Res. 0. D.
2-16-24 7.13% 6.79% 5.75%
Bank of Davis
None
1- 3-24 3.25% 5.83%
Raymond State Bank
State Bank of Melham
Garden City State Bank
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_A
Federal Reserve Bank of St. Louis
6
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
Specimen Sheet Showing Relation of Reserve Conditions to Dividends Paid
in Liquidation of 30 Closed Banks Having Best Reserve Conditions
Name of Bank
Fair specimen of its 1
Date of 'reserve for three years Dividends paid
1Closing
under
I
prior to closing
13rd yr. 2nd yr. Last yr.I liquidation
10-26-26 35.62%
Iroquois State Bank
10-21-25
Albee State Bank
Farmers St. Bk., Groton
9- 3-26 17.08%
Bank of Avon
7-28-26 16.75%
Far. Sc. St. Bk., Centerville 1-17-27 38.33%
Holabird State Bank
11-20-26
6- 9-26
State Bank of Doland
4-30-24 7.33%
State Bank of Scotland
Cit. St. Bk., Alexandria
1-26-24119.13%
Farmers St. Bk., Dallas
6-11-26
McLaughlin State Bank
7-28-26 9.04%
Far. & M. St. Bk:, Canova.. 12-15-24 16.34%
Cuthbert State Bank
12-21-25
•Far. State Bank, DeSmet.... 1-30-24 8.08%
BonHom. Co. St. Bk., Scot. 7- 7-20
25.55% 17.43%135%
17.63% 20%
21.75% 17.92% 20%
25.33% 18
% 30%
36
% 18.17% 55%
18.72% 50%
16.67% 18.75% 30%
12.17% 18.92% 45%
20.30% 23.58% 35%
19.08% None
14.03% 19.10% 20%
15.84% 19.26% 45%
28.60% 19.67% None
11.45% 16.50% 5%
35.75% 20.83% 25% to Guaranty Fund
12.03% 20.99% None
22.61% 21.33% 55%
30.08% 21.67% 10%
21.41% 22.32% 30%
19.54% 22.33% 20%
23.42% 23.42% 25%
Live Stk. Ex. Bk., Newell.. 12- 6-24 11.57%
Sec. Say. Bk., Rapid City.... 2- 8-24 23.55%
Dakota State Bank, Salem.. 4-24-25 22.50%
White State Bank
5-18-26 23.63%
12- 8-25 16
Lemmon State Bank
%
Bk. of Commerce, Milbank 11-18-25 23.92%
Br. Bros. St. Bk. & Tr. Co.,'
1- 1-27 31.50% 31.08% 23.59%
Aberdeen
Security Bank, Tyndall
5-27-25 32.83% 19.83% 23.75%
First T. & S. Bk., Mitchell 10-16-23 10.77% 18.39% 24.18%
29
% 24.38%
First St. Bk., Sioux Falls
10-27-25
Dakota St. Bk., Oldham
1-26-24 21.96% 28.79% 28.91%
Corn. & S. Bk., Sioux Falls__ 1-24-24 27.42% 31.58% 30.17%
% 30.18%
Midland St. Bk., Brookings 7-21-25 20
% 20
2-11-24 50% at date of closing
Bushnell State Bank
Far. Say. Bk., Gann Valley 11-28-24 Always good
None
40%
10%
None
55%
20%
40%
45%
50%
It will be noted from the two preceding pages that the amount of
dividends paid follow with close consistency the conditions of the bank's
reserve prior to its closing. There is an occasional exception due to some
unusual circumstance, but the general result as illustrated follows with
close consistency through all of the 242 banks tabulated, as our information sheets will show. In other words, the reasonable enforcement of the
law as to reserve would have guaranteed much larger dividends upon
liquidation.
In analyzing the entire 242 closed banks for a period of three years
prior to closing, our computation shows that 61 of said banks had been
permitted to operate on an average reserve of approximately 5% during
that time; 35 banks had been allowed to operate at an average reserve
of approximately 8% during that time; 35 banks had been allowed to
operate at an average reserve of approximately 10% during that time;
35. banks had been allowed to operate at an average reserve of approximately 12% during that time; approximately 35 banks at reserves between
12% and 15%; and the remainder at about legal or slightly above. In
other words, the banking department had permitted approximately 200 out
of the 242 closed banks to operate for a period of three years prior to
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
analytheir closing with reserves below the amount required by law. This
sis shows plainly. that our statement that the provisions of law in this
regard were being entirely ignored is supported by record evidence from
the books of the banks themselves.
In addition to the low reserves under which these banks were permitted
to operate during their last three years, the following chapters of this
report, in which we will use these same 60 banks as specimens, will show
that they were permitted to carry for long period of time abnormal amounts
of "other real estate," "bills payable," "rediscounts," and "cash items."
These things are the unerring indicia of unsafe condition or insolvency
in a bank. We also found among the meager correspondence files remaining when the fieldmen checked the banks letters from or to the superintendent of banks, copies of called reports, and other direct evidence showing
plainly that the superintendents of banks were fully aware of the unsafe
conditions.
During all of this time the banks were making to the banking department three to five called reports each year, and were being examined by
bank examiners once or twice each year; and. an expensive official force
was being maintained by the state for the very purpose of watching the
condition of these banks and making them comply with the law. rrractically no banks were closed, no matter for how long, nor how %Rich,
their reserve fell below the legal requirements; and no matter how plain
became the other evidences of insolvency. The banks were allowed to run
as reliable, going concerns, attracting deposits of the public and gradually
using up their assets with expense, losses, and borrowings from other
bank ti
e conclusion is inescapable that the superintendents of banks and
, and
other officials of the banking department all knew of these conditions
the
as bankers themselves they knew that banks in that condition were
most dangerous kind of traps for the public, especially that part of the
y
public not skilled in watching bank conditions and who must necessaril
rely upon the efficiency and integrity of the official whom they were paying
to protect them against such conditions. There is no reasonable or legal
excuse whatever for the wilful and complete ignoring of the public safety
provisions of the law.
For more than ten years we have had in the law sections 8924, 8925,
and 8979 of the Revised Code. In substance these laws charge the superintendent of banks with the duty of closing any bank which has violated.
any law of the state, or is in an unsafe condition, or is operating under
Improper reserve conditions.
For more than ten years we have had in the law of this state section
3819 of the Revised 1919 Code, which is as follows:
"Wilful Neglect by State Officer. Every state auditor, state treasurer, superintendent of public instruction, or any other state officer
who wilfully neglects or refuses to perform the duties of his office,
as prescribed by law, is guilty of a misdemeanor."
In making our investigation we examined the banking laws of other
states and we find in the laws of the state of Nevada the following
statute:
"Sec. 70. The Nevada State banking board or any member thereof, or any bank examiner or deputy bank examiner, who shall neglect
to perform any duty provided by this act, or who shall make any
false statement or any statement, except in the exercise of his duty
concerning any bank, or who shall be guilty of misconduct or corruption in office, shall, upon conviction thereof, be deemed guilty of
felony and punished by a fine not exceeding one thousand dollars or
Imprisonment in the state prison not exceeding five years, and inaddition thereto shall be removed from office."
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Federal Reserve Bank of St. Louis
8
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
In making this investigation we also wrote to the superintendents of
banks and attorneys general of many states for various reports on operation of their law. It is a singular fact that from the state bank examiner
of Nevada we received a letter from which we quote as follows:
"There has been only one bank failure in this state since the
passage of the law and in fact only one in the past twenty years."
It is our conclusion that this statute aided the people of Nevada in
securing real administration of their banking laws and proper supervision
of their banks. It is a fair assumption from our specimen sheets hereinbefore set forth and from the experience of Nevada that with faithful enforcement of the banking law and proper supervision of banks the public
can be kept comparatively safe in its business dealings with banks.
In the state of Nevada we find another salutary provision of law. It is
a requirement of a minimum reserve of 20% for all banks and 25% for
reserve banks. We formerly had in this state a requirement of 20% for all
banks. The checking of records which we made showed that low reserves
caused bank failures, small dividends, and expensive liquidation, besides
some other bad results which we will mention hereafter. It naturally follows that high reserves would be best for the general public. True, this
would lessen the bank's ability to make profits; but in view of the fact
that under our laws the organized banks are given a virtual monopoly of
the business and private persons cannot engage in it, and banking is
deemed of such 'importance in business affairs that the state must give it
special supervision, it is our conclusion that the safety of the public should
be the primary consideration of the law and the profits of the bank, secondary. If this conclusion is correct we think the following recommendation is warranted and would be a safeguard in years to come against uncertain financial conditions which can always accrue suddenly and without
warning from a variety of causes, and against which the public is ntitled
to the utmost protection in return for the exclusive franchise which it
grants to organized banking:
The minimum reserve permitted for all banks should be 25%;
The minimum reserve, permitted for all reserve banks should be
33% %.
To some bankers this may seem a little too high, but to many bankers
it will seem entirely reasonable. You will find that the really reliable and
efficient banker holds his bank to these or better percentages of reserves
although the law does not require it, simply because he knows that it is
sound, conservative banking to do so. Such provisions would be a benefit
to the stockholders themselves because they would tend to produce safe
and conservative banking instead of loose, speculative banking.
We also found in the states of New York and California statutes relative to enforcing proper reserve conditions, containing salutary provisions
for protection of the public depositor. The statutes of the two states are
practically the same and provide in substance that whenever the reserve
sinks to a certain level, the superintendent of banks shall levy an assessment against the bank and have it set aside in cash for the benefit of depositors; and.as the length of time and amount of deficiency of the reserve
Increases, the amount of the penalty likewise increases. This law would
make it unprofitable to the bank itself to operate with deficient reserve and
would keep bringing before the superintendent of banks notice of condition of the reserve. Statutes like these have many other commendable
features which we will not set forth in this report as they will doubtless
occur to any legislative committee which may'consider the recommendation
hereafter made.
We took from the biennial report of the superintendent of banks of
the state of South Dakota for June 30, 1928, a list of the 142 state banks
carrying reserves of 25% or more, most of them 30% or more. We recognized in this list most of the old, reliable, and best conditioned banks
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
9
of the state of South Dakota and banks which have been in existence for
years and have never wavered in any of the financial shocks we have had.
It is a reasonable conclusion that if 142 banks scattered all over the state
of South Dakota can and do maintain reserves of 25% and better that the
other banks can do so if required. As one reads the statements of condition of large banks of the money centers of this country year after year
one becomes aware of the fact that they voluntarily hold themselves to
higher reserves than we have recommended, although their state laws do
not require this. It must be because they recognize the fact that it is
sound and safe business even from their own standpoint to do so. You
will find practically a total absence of bank failures in the large money
centers despite the agricultural deflation, and the more recent stock market
crash.
The requirement of a better reserve condition would in the end react
to the benefit of all banks. It would place them in a more independent
condition in handling their business. It would restore public confidence
greatly and would no doubt bring out and into the banks much of the
money which the people are now carrying on their persons or otherwise
keeping privately, or investing, perhaps improvidently. The really poor
banks might be forced out of existence. The careful, efficient banker would
reap the reward to which he is justly entitled.
If the legislature should see fit to require an increase in the amount
of reserve required we recommend that the date of taking effect of the law
be fixed at least one year from date of its passage in order that a reasonable opportunity may be given to all banks to build up to that reserve.
Some further bad results of the policy of allowing banks to operate
when insolvent are these: It produces carelessness on the part of the
banks themselves because if the head of the system is lax in enforcement
and does not hold the banks strictly to the legal requirements it is inevitable that the smaller units will become careless in their business methods,
loan appraisals, reserve, and bookkeeping and other management conditions. This is dangerous for the people who do business with the banks.
Another result is that such system puts the poorest bank in the state upon
an equal basis with the best. If the poor bank instead of being made
to comply with the law is allowed to ignore it and even given deposits of
public money to help it out, it goes ahead in competition with the good
bank and to all appearances to the general public is an open, going institution of as good repute as any bank. The good bank is in reality supporting its own competitor. When the poor bank finally closes and drags
along year after year with no payment of dividends, or small dividends,
the bad reflection on all banks is inevitable. The good banker does not
get the credit or the public confidence and esteem to which his efficiency
and care entitle him. The system is absolutely wrong to the good banks
as well as the general public.
Another bad result arises from the fact that banks with low reserves
have been invariably assisted with the deposits of public funds or funds of
other closed banks. In most cases these deposits are preferred claims and
are of the same effect as a mortgage upon all money and property of the
bank. The private depositors do not know this because the published
reports of banks come only at infrequent intervals and do not show any
class of preferred deposits separately itemized. The amount of reserve
in terms of percentage should be shown upon the called report and the
law should require the called report to show the date and percentage on
each and every day that the reserve of the bank fell below the legal requirement. The old law which we had requiring a called report five times
per year should be restored or even amended so as to require a called report
and publication thereof every sixty days and a showing of the preferred
deposits and reserve percentages above specified. The cost of publishing
these reports is trifling. To a bank in good condition they are a valuable
advertisement, or can be made so. To a bank in bad condition they are a
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Federal Reserve Bank of St. Louis
10
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
continual reason and incentive for getting into good condition; and if the
bank cannot get into good condition the sooner the public finds it out the
better it will be for the public.
There are two principal causes which tend to perpetuate the policy of
allowing the banks to run when in insolvent condition: first, the superintendent of banks is by law a banker and there is a strong tendency for
him to favor the individual bank as against the public every time; second,
superintendent of banks is an appointive officer. He gets his appointment from the governor and he naturally feels a certain amount of gratitude and allegiance to him. He controls an organization of bank examiners who travel all over the state, has a powerful influence over all of the
going state banks; and when there are many failed banks he has a force
of examiners permanently residing at various parts of the state. It is a
potent political force. There is bound to be a temptation to use it for
political purposes. This is especially true if the governor is at all politically
ambitious. Favoritism, laxness in enforcing safety provisions of the law,
and exertion of all kinds of influence and pressure are a probable result. Li
There is no valid reason why the superintendent of banks must be a
banker. The purpose of our banking laws is to discipline banks and enforce
laws as to them, not to supervise their business and enable them to make
money. The head of the department should be a faithful and impartial
disciplinarian, not an efficient expert or skilled supervisor. A public accountant with proper fieldmen could do the work intended by our law, and
if he were not a banker he would be more apt to perform the duties fairly
both to the public and the banks than a person who had only the viewpoint of a banker.
Second, the head of this department should be elected by the people.
He would then get his authority from the people and would owe his first
fidelity to them instead of an individual who appointed him. He would
be independent of the political ambitions of the governor and all other
state officers. He would perpeuate himself in office or advance himself
by getting results. The people would exercise their choice upon him
every two or four years. He would represent them. Under our system
this is one of the most important offices. Its incumbent possesses broad
and influential powers which react directly upon the business and property
of the people. There is no reason at all against, and every salutary reason
for his election by the people instead of appointment by the governor.
A decentralizing of the executive power would be advisable in this connection anyway.
We therefore submit the following recommendations, and in our opinion
they are among the most Important recommendations of this report:
1. The officer in charge of the banking supervision of this state
should not be a banker nor personally interested in any banks.
2. The officer in charge of the banking supervision should be
elected by the people.
3. The present office of superintendent of banks should be abolished by the next legislature and instead of it a public examiner or
commissioner of corporations should be substituted. The state securities commission should be abolished and its activities combined with
this department. The head of the department should be elected by
the people.
We received many complaints from persons who had deposited money
In banks which closed in a short time thereafter. Many of these complaints
were from elderly persons who claimed to have lost the funds saved for
old age in this manner; many were from widows with dependent children;
and from orphans or their guardians; many were from business men whose
business had been wrecked by the sudden closing of a bank in which they
had accumulated their working capital or in which they had taken large
Items of exchange in business deals. The reading of some of these letters
e
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
1
would impress upon the legislature more forcibly than anything we can
say in this report the necessity for making a system of banking laws which
will guarantee public safety as the first consideration, and profits to the
banks as secondary. The following is a summary of the recommendations
which we make for this purpose:
1. Require a minimum cash reserve of 25% for all banks and
33 1A3 % for reserve banks.
2. Require publication of six called reports each year with all
preferred deposits or trust funds listed separately and also showing
the cash reserve in percentages, and showing a statement of the date
and percentage of every day since last report that the reserve has been
below legal requirement.
3. Provide a statute requiring the supervising officer to levy and
collect a penalty 'from each bank every time its reserve falls below
legal requirement; such penalty to be proportioned to the amount of
the deficiency of reserve and the length of time it exists. The New
York statutes and the California statutes containing this provision
would serve as a model for this; but we would recommend one additional provision to those statutes and that would be a requirement
that the cash penalty assessed against the offending bank should be
deposited in some other bank than the one assessed.
4. Provide a statute making it a felony for any officer or agent
of the banking department to neglect in any manner any of the duties
entailed upon him and with special reference to allowing banks to operate in unsafe condition.
5. Provide a civil proceeding for removal from office of any
such official violating any such statute so that any director, stockholder, or creditor of any going or closed bank can invoke the proceeding
before any court of this state.
6. Abolish the office of superintendent of banks as now constituted and substitute therefor a public examiner or commissioner of
corporations in whom can be combined the duties of superintendent of
banks and securities commission of the state, and require such officer
to be elected by the people. This can easily be done, will remove one
commission from the state payroll, and will increase the efficiency of
both departments. This can easily be done because the superintendent
of banks and the attorney general are both members of the securities
commission. You would have the commissioner of corporations in
place of the superintendent of banks, you have the attorney general
as a constitutional officer to furnish legal advice anyway, and you
would therefore have the benefits of both departments at the expense
of one.
The foregoing recommendations or similar provisions, if adopted by
the legislature, in our opinion will provide safety for the public and will
will
be an actual benefit to the banking business. Under them all banks
become safe and trustworthy institutions of great benefit and service to
the public. The numerous bank failures, heavy losses, and short dividends
on liquidation will not recur if a reasonable reserve margin is required and
an efficient and faithful system for enforcement of it is provided. FinanOur
cial conditions are apparently going to be uncertain for some time.
recent deflation, and the more recent stock market deflation, the flooding
cerof the agricultural country with all kinds of bonds, stocks, investment
tificates from tile east, and the coming among us of great chains of stores
all
and banks with financial headquarters far removed from tile state,
presage uncertain financial conditions for the future. A system of bank
supervision providing primarily for public safety and secondarily for profit
to the bank is one of the important needs of the state.
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Federal Reserve Bank of St. Louis
12
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
THE SIGNIFICANCE OF THE ITEM "OTHER REAL ESTATE" AMONG
THE ASSETS OF CLOSED BANKS
It was not possible to extend this investigation so as to find what real
property, other than the banking house, had been held by each closed bank
prior to its closing, nor over what period of years such items of real property may have been held. The danger of permitting any large amount of
the assets of a bank to be represented by real estate holdings is obvious.
The matter has long been the subject of legislation in most of our states.
It is usual to limit the length of time that such real estate may be
held
"unless an extension is granted by the superintendent of banks' as provided
by section 8965 of the Revised Code. The appearance in a called report
or in an examiner's report of an item of "other real estate" approaching
or exceeding in amount the total of a bank's capital and surplus should
have put the superintendents of banks on inquiry as to the impairment of
the capital, the solvency, the safety, and the conduct of the bank. It appears that most of the 242 banks covered by this investigation
had. carried large items of other real estate for at least .two years prior
to their dates of closing. Since it is impossible to refer to all of them
without unduly extending this report, and since a true picture of the whole
number is reflected by the sixty banks to which reference has already been
made, I am indicating below the respectvie items of other real estate carried by those banks at the date of closing and the average item so carried
for the two years preceding the date of closing; also amounts of this item
on dates of investigation:
Other Real Estate Carried by First Thirty Banks
Capital
0. R. E. at 0. R. E. 2 yr. 0. R. E. on
Name of Bank
and
date of
average prior date of inSurplus
closing
to closing
vestigation
State Bank of Melham
$15.900.00 $10,438.42 $19,147.06
None
Garden City State Bank
37,500.00
67,900.00
30,000.00 $106,649.20
Far. & M. St. Bk., Verdon 20,000.00
90,824.00
72,858.88
44,397.70
Exchange St. Bk., Menno 57,000.00
85,933.72
63,071.23 130,729.80
Far. Home Bank, Lily
12,500.00
None
None
12,335.10
Far. Sec. Bank, Peever
20,000.00
7,327.12
13,026.40
Commercial St. Bk., Salem 30,000.00
35,296.04
35,296.04
30,275.90
Dempster State Bank
None
10,000.00
None
None
First St. Bank, Vienna
50,000.00 191,580.80
43,122.63 136,902.80
Bank of Bowdle
30,000.00
3,200.00
800.00
41,073.60
First St. Bk., Harrold
43,000.00
27,039.20
21,925.57
33,270.30
Citizens St. Bk., Newark
15,000.00
3,027.86
1,565.48
57,092.70
Far. St. Bk., Unityville
25,000.00
3,500.00
43,609.00
West. St. Bk., Mt. Vernon 35,000.00
11,800.00
9,972.31
48,312.00
Ethan State Bank
2,500.00
20,000.00
2,500.00
15,895.90
Far. St. Bk., Strandburg
12,000.00
6,400.00
6,175.00
27,925.90
Reliance Sayings Bank
27,500.00
69,991.29
33,555.77
27,028.30
Brule St. Bk., Chamberlain 80,000.00
38,463.03
16,883.72
58,168.40
First State Bk., Lemmon._ 25,000.00
16,122.66
13,487.86
4,410.80
Bank of Hurley
45,000.00
49,233.70
17,419.58
13,287.60
First State Bk., Wood
19,638.50
15,000.00
13,401.91
16,764.80
Far. Say. Bk., Sherman
41,932.70
25,000.00
28,086.62
42,651.50
Farmers State Bk., Veblen 50,000.00
17,441.66
6,270.27
31,491.00
37,584.42
Murdo State Bank
30,000.00
19,767.99
70,334.90
Belle Fourche St. Bank__ 50,000.00
19,419.15
18,741.25
87,666.50
Estelline State Bank
50,000.00
35,787.34
31,835.91 159,933.20
Bank of Bijou Hills
20,954.90
15,000.00
20,954.90
36,510.30
Sec. State Bank, Blunt
17,500.00
24,413.61
24,229.86
17,113.40
Bank of Davis
27,000.00
11,746.90
11,746.90
23,623.50
Raymond State Bank
31,487.23
10,000.00
No data
10,459.50
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
Other Real Estate Carried by Second Thirty Banks
0. R. E. at 0. R. E. 2 yr.
Capital
average prior
date of
and
Name of Bank
to closing
closing
Surplus
$28,000.00 $44,693.18 $46,690.86
Iroquois State Bank
7,984.47
8,416.15
12,000.00
Albee State Bank
(car. 20 mo.)
23,827.76
42,832.43
25,000.00
Far. St. Bank, Groton
(car. 22 mo.)
15,226.22
18,221.70
30,000.00
Bank of Avon
Far. S. Bt. Bk., Centery'le 25,000.00
1,892.65
2,176.47
7,450.00
Holabird State Bank
(data 11 mo.)
23,642.99
26,768.02
26,500100
State Bank of Doland
3,895.83
6,500.00
37,000.00
State Bank of Scotland
1,000.00
1,000.00
Cit. St. Bk., Alexandria.___ 25,000.00
9,009.00
13,454.00
26,000.00
Far. St. Bank, Dallas
(one year)
13,614.10
15,699.71
12,500.00
McLaughlin State Bank
(car. 22 mo.)
9,458.40
33,441.94
Far. & M. St. Bk., Canova 29,000.00
(car. 14 mo.)
9,457.27
10,397.13
15,000.00
Cuthbert State Bank
14,092.10
20,086.45
25,000.00
Far. St. Bank, DeSmet
Bon H. Co. Bk., Scotland 35,000.00
12,807.87
15,225.26
Live Stk. Ex. Bk., Newell 18,000.00
6,816.67
8,900.00
Sec. Say. Bk., Rapid City 66,000.00
17,014.80
19,740.40
20,000.00
Dakota St. Bank, Salem
5,251.58
5,686.91
20,000.00
White State Bank
(car. 16 mo.)
6,224.91
6,784.57
15,000.00
Lemmon State Bank
27,884.53
38,000.00
Bank of Comrc., Milbank 30,000.00
Br. Bros. St. B. & T. Co.,
12,389.30
14,416.68
26,000.00
Aberdeen
33,620.07
90,744.25
50,000.00
Sec. St. Bank, Tyndall
5,872.03
9,363.56
First T. & S. Bk., Mitchell 55,000.00
5,000.00
First St. Bk., Sioux Falls 53,000.00
(car. 7 mo.)
2,088.26
3,660.89
25,000.00
Dakota St. Bk., Oldham
11,583.33
14,500.00
Coin. & S. Bk., S. Falls 202,000.00
(not cont.)
(2 yr. ay.)
Midland St. Bk., Brookgs. 50,000.00
16,500.00
Bushnell St. Bank
No data
5,756.00
Far. Sv. Bk., Gann Valley 15,500.00
13
0. R. E. on
date of investigation
$58,388.77
None
62,659.98
31,043.26
17,173.63
234.97
35,731.99
40,037.36
12,860.23
14,259.79
31,706.92
37,381.84
20,462.30
9,338.50
106,777.26
33,808.35
51,939.47
7,744.55
3,605.92
563.96
21,405.06
18,477.82
177,622.88
268,533.02
54,211.68
None
88,578.13
14,700.45
2,025.80
8,095.86
It will be observed that many of the first thirty banks listed above
had a larger item of other real estate than of capital and surplus. The
proportion of other real estate to capital and surplus was large in nearly
every case. This proportion was much smaller in most cases among the
second thirty banks (though much too large) and certainly accounts in
part for the difference between the two lists with respect to payment of
dividends.
A bank which acquires and continues to hold other real estate in an
amount equal to its capital and surplus has literally ceased to be a bank
and has become a real estate corporation instead. It is likely to have difficulty in maintaining its legal reserve. The capital so removed from the
banking business ceases to yield a profit and generally contributes a loss.
In other words the capital is impaired and as a bank it is no longer safe.
Sections 8924 and 8925 of the Revised Code make it the duty of the super-
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Federal Reserve Bank of St. Louis
14
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
intendent of banks to see that any impairment of the capital of a bank is
made good or, if that is not done, to take possession of the bank and
liquidate it.
Large amours of other real estate are usually the result of a gradual
accumulation over a term of years. The end of such a process if not
halted is bound to be disaster such as was permitted to overtake these
South Dakota banks.
"Other real estate" is almost as poor an asset in liquidation as in the
going bank. In liquidation the item presents a variety of problems. It
prolongs the period of liquidation and increases expenses more than proportionately. Cash assets are used to protect equities, many of which
have eventually to be abondoned or at least prove to be unprofitable.
Choices have to be made between selling at a sacrifice or holding at a
sacrifice.
The present superintendent of banks, testifying before the legislative
investigating committee on February 12, 1929, said with reference to the
Consolidated Report of his department dated January 21, 1929:
"The amount of 'other real estate' owned on the date of suspension showed $5,225,665.11; at the present date we own $9,623,363.74
or an increase of four million. That indicates a net increase." (Trans.
p. 4.) * * *
"The real estate has not been carrying itself during the years
1925, 1926 and 1928. It carried itself during the year 1927, during
which year we have in this harvested the only normal crop throughout
the state during my ten years of office." (Trans. p. 5.) * * *
"Briefly it can be said that the lands owned by the various suspended banks of the state and in the hands of the banking department
for sale, are of the poorer classes of land in the state of South Dakota.
The better lands, productive and of more uniform and regular income
have taken care of themselves and have been more readily sold. Our
lands are in the large unproductive land, stony, gravel pits, hilly, and
of the character of land of which there is so much in the state of
South Dakota for which we find a very limited market." (Trans. p. 5.)
RECOMMENDATIONS:
Our law should be amended so as to require that each item of other
real estate be charged out of the assets of the bank on the expiration of
one year after its acquisition unless or until the total amount of other
real estate of the bank is less than 75% of its paid up capital and surplus;
provided that no item of other real estate shall be carried as an asset of
the bank for more than five years.
Such a provision will be of real service in preserving conservative and
safe banking.
As to other real estate held at the time the act takes effect a period
of five years should be allowed within which to charge out the whole
thereof.
In no event should the law be left so as to permit the carrying of an
unlimited amount of other real estate for an unlimited length of time by
the grant of the superintendent of banks.
RE-DISCOUNTS AND BILLS PAYABLE RECOGNIZED AS DANGER
SIGNS BUT DISREGARDED
In a letter addressed to members of the depositors' guaranty fund
commission under date of January 10, 1923, the superintendent of banks
said:
"Since this stringency has been on I have been thinking a great
deal on the borrowing of money, and it appears to me that banks
should be limited as to the amount that they may borrow upon collateral. Every time a bank borrows money on its bills payable it takes
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
15
one-half of the security which properly belongs to the depositors and
secures the borrowed money thereby, and in case of a failure usually
all the good assets are pledged with borrowed money and there is
nothing left but the culls for the depositors.
"While we have been lucky in the past in being able to take care
of our bills payable and get sufficient credit for the collateral, this
might not always be so, and I understand that in North Dakota, Minnesota, and even in the National Banks the borrowing (loaning) bank
usually forecloses on the collateral and then proceeds to collect on the
notes. Usually with the expense of the collection the collateral is dissipated and goes no further than to retire the original bills payable,
and there is practically nothing left to protect depositors.
bank, where most of their
"Take, for instance, the
paper was out as collateral. I understand they paid 10c on the dollar
and that is about all they will pay. And maybe other cases are likevise. We ought to form some bill that will give to the department or
at least to the guaranty fund power to protect them against pledging
the securities which properly belong to the depositors, for borrowing
money and have nothing left to protect the depositors.
"On rediscounts of course each paper stands on its own feet and
I don't care so much whether we place any limitation on this, but it
occurred to me that we ought to place some limitation on borrowing on
collateral, say, for instance, not to exceed Capital and Surplus. A person might make it elastic enough so that under extraordinary conditions
the state banking department or the guaranty fund commission may
permit banks to borrow money on collateral over and above the amount
specified by law, to help it over temporary embarrassment, but that
should be all."
I have underscored the words "temporary embarrassment" in the letter
quoted above because section 8984 of the Revise dCode (and the various
amendments thereof) only permitted and now only permits a bank to borrow money and pledge its •assets "for temporary purposes." Until July 1,
1925, the amount of assets so pledged might not exceed "fifty per cent
in excess of the amount borrowed." By Chapter 92, Laws of 1925, the
amount of assets so pledged was limited to "fifty per cent in excess of the
paid-up capital and surplus of said bank." By Chapter 53, Laws of 1927,
to "not to exceed one and one-half times the paid-up capital and surplus
of said bank, except in cases of extreme urgency * * * upon first securing
written permission * * * from the superintendent of banks."
Thus within four and one-half years after the wise recommendation
contained in the above letter the lid was off entirely except for the written
permission from the superintendent of banks. The words "temporary purposes" appear to have been no deterrent to borrowing and pledging of
assets though opposed to the first sentence of the section: "No bank shall
give preference to any depositor or creditor by pledging the assets of the
bank as collateral security."
While assets could be pledged for the payment of rediscounts only to
Federal Reserve banks, the item of rediscounts has in practice proved to
as
be almost if not quite as true an indication of the condition of a bank
bills payable, and quite as frequent and potent an avenue for the disappearance of the good assets of the bank leaving in the closed institution a
residue consisting of slaw assets of uncertain value for liquidation.
This picture is also sufficiently shown by the following table which
shows in the cases of the same sixty banks heretofore referred to the rediscounts and bills payable at date of closing, the amount of collateral
pledged, and the average rediscounts and bills payable for the two years
prior to closing in each case. The "cash items" at time of closing are also
shown. Any comment on these items would necessarily be extended out of
proportion to the importance of the subject.
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war- Reserve Bank of St. Louis
Federal
I I;
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
First Thirty Banks
(Upper figure after each bank showing re-discounts; lower figure showing
bills payable.)
1. Re-discounts
1. Re-discounts
2. Bills payable
2. Bills payable
Name of Bank
At closing Collateral to
Average
Cash Items
bills payable
for 2 yr.
State Bank of Melham
$15,259.42
$11,743.81 $
814.25
20,451.20
13,557.10
Garden City State Bank._ 31,257.34
69,418.11
53,481.38
Far. & M. St. Bk., Verdon
33,300.00
50,745.40
29,257.04
3,124.25
Exchange St. Bk., Menno_
27,540.43
89,604.57
41,561.49
6,594.43
Farmers Home Bk., Lily..
27,000.00
41,422.50
27,099.98
2,439.60
Far. Sec. Bk., Peever
32,081.42
36,058.83
38,732.00
35,701.06
476.46
Commercial St. Bk., Salem
70,780.27 157,521.90 . 72,410.63
12,240.56
Dempster State Bank
31,564.14
34,954.30
496.82
First St. Bk., Vienna
2,800.00
231,425.90
236,062.00
None
Bank of Bowdle
8,360.00
19,953.69
50,180.00
81,040.00
45,839.35
99.41
First St. Bk., Harrold
9,499.25
6,704.72
38,660.04
61,635.16
19,326.69
1,663.94
Cit. St. Bk., Newark
35,250.00
52,191.33
32,083.34
524.40
Far. St. Bk., Unityville.
95,902.35 359,970.91
92,570.93
1,014.53
West. St. Bk., Mt. Vernon
41,394.76
66,285.95
48,880.30
None
Ethan State Bank
57,718.50
80,050.79
29,356.50
No data
32,743.10
17.38
Farm. St. Bk., Strandburg 23,938.75
14,418.66
8,050.00
27,673.50
18,615.72
None
Reliance Savings Bank
10,580.54
17,546.67
39,509.48
78,575.00
37,752.93
50.13
Brule St. Bk., Chamberl'n
54,714.23 134,223.65
81,455.00
179.50
First St. Bk., Lemmon
50,236.37
No data
51,444.95
7,813.26
Bank of Hurley
32,877.55
47,852.77
76,742.11
48,399.76
35,843.21
1,633.18
First St. Bk., Wood
74.95
83,535.56
54,329.00
53,995.51
None
Far. Say. Bk., Sherman._ 20,000.00
76,056.12
32,190.00
36,766.80
3,535.42
Far. St. Bk., Veblen
1,000.00
5,812.50
55,502.90 104,003.17
58,330.75
1,176.83
Murdo State Bank
41,361.79 116,179.66
70,337.96
297.60
Belle Fourche St. Bank
116,679.89 217,218.70 138,258.13
1,253.92
EsteHine State Bank
8 mo.
None
98,944.06
58,378.28
37,666.31
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
Bank of Bijou Hills
1,150.00
13,580.54
Bank of Davis
930.00
62,510.24
16,838.45
61,755.08
87,169.52
17,866.36
No record
10,177.88
12,279.83
83,030.38
83,067.75
42,629.00
72,064.17
No data
Security St. Bk., Blunt
17
Raymond State Bank
267.10
372.50
231.46
Second Thirty Banks
showing re-discounts; lower figure showing
bank
after
figure
each
(Upper
bills payable.)
1. Re-discounts
1. Re-discounts
2. Bills payable
2. Bills payable
Cash Items
Average
At closing Collateral to
Name of Bank
for 2 yr.
bills payable
$23,000.00 $40,214.39 $
Iroquois State Bank
65,430.00 $
Albee State Bank
1,069.90
Far. St. Bk., Groton
10,108.33
15,134.73
10,000.00
Bank of Avon
343.39
27,272.73
68,601.53
35,000.00
(11 mo.)
Far. S. St. Bk., Centerv'le
1,025.92
19,511.32
45,479.75
22,985.80
(car. 5 mo.)
1,950.00
Holabird State Bank
34.06
No data (car. 8 mo.)
4,010.70
5,388.27
(car. 10 mo.)
(ay. 10 mo.)
State Bk. of Doland
164.03
6,650.24
15,865.50
10,000.00
(not cont.)
St. Bk. of Scotland
7,000.00
(5 mo. in '22)
Cit. St. Bk., Alexandria.
10,833.33
No data
17,550.00
(car 18 mo.)
Far. St. Bk., Dallas
21,044.45
39,945.00
16,840.00
(I year)
7,885.60
McLaughlin St. Bank
200.07
18,622.13
32,027.99
21,000.00
(not cont.)
Far. & M. St. Bk., Canova
24.39
26,366.67
31,000.00
14,850.00
7,032.38
Cuthbert State Bank
72.93
20,518.04 (car. 6 mo.)
8,564.58
(ay. 16 mo.)
9,831.02
Far. St. Bk., DeSmet
700.00
49,788.75
67,034.92
42,000.00
90,026.00
Bon H. Co. Bk., Scotland.
(car. 5 mo.)
No data
25,161.00
(car. 1 mo.)
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Federal Reserve Bank of St. Louis
18
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
Live Stk. Ex. Bk., Newell
15,529.19
Sec. Say. Bk., Rapid City..108,204.01
66,600.00
Dakota St. Bk., Salem
23,886.13
(car. 4 mo.)
White State Bank
19,500.00
Lemmon St. Bk.
12,858.35
13,581.43
33,000.46
84,908.77
32,464.26
35,231.88
80,324.38
1,157.30
31,062.45
18,124.15
2,113.01
8,477.26
13,581.43
20,233.27
3,801.61
(not cont.)
12,350.32
(not cont.)
45,353.28
93,747.20
62,563.72
68.50
10,000.00
(car. 1 mo.)
20,500.00
No data
177.00
5,031.31
Bank of Corn., Milbank
Br. Bros. S. B. & T. Co
Aberdeen
4,576.61
Security Bk., Tyndall
First T. & S. B., Mitchell
79,560.00
166,004.32
4,128.64
(not cont.)
56,244.80
First St. Bk., Sioux Falls.
25,000.00
(3 da. pr.
to closing)
65,250.00
47,733.71
Dakota St. Bk., Oldham.
8,000.00
Corn. & Say. Bk., S. Falls.. 11,986.25
208,250.00
14,970.00
335,019.80
6,195.26
(not cont.)
75,031.25
(not cont.)
(2 yr. ay.)
1,137.05
Midland St. Bk., Brook'gs.
5,300.00
(car. 1 mo.)
12,856.32
None
Bushnell State Bank
None
Far. S. Bk., Gann Valley.
1,419.81
first
most
of
the
thirty
banks had rediscounts
It will be observed that
and/or bills payable greatly in excess of capital and surplus. The total
in certain cases was two, three, or four times the capital and surplus. In
most cases also this condition had existed for at least two years. Notice
also that if any dividend has been paid among such cases that the amounts
of other real estate were comparatively small.
Note that among the second thirty banks the proportion of rediscounts
and bills payable to capital and surplus is less excessive, had generally not
long existed, and where the better dividends have been paid was accompanied by a proportionately small amount of other real estate.
Certainly these data without other evidence show this: that large
items of rediscounts and/or bills payable, as surely as large items of other
real property, are always danger signs of the most serious character, the
precursors of failure and disaster, and as serious handicaps in the operation
of going banks as in the liquidation of closed ones. Yet under the "stress
of circumstance," the men who were best qualified to read these signs and
to appreciate the danger, instead of providing against the natural consequences, have apparently ignored the condition except as they may have
helped to open rather than to obstruct the road to ruin.
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
19
for supervision
Provision against unsafe and dangerous practices and
the purpose of preventing
for
chiefly
be,
should
or
law,
by
made
is
banks
of
The reason for
acts otherwise done under the "stress or circumstance."
y not be offered as
certainl
should
rule
a
of
ment
enforce
and
n
adoptio
the
an excuse for its violation.
RECOMMENDATIONS:
and/or
The law should prohibit any bank from having bills payable
surplus during more
rediscounts in excess of the amount of its capital and
pledging any assets to
than six months of any calendar year, and from
ng one and onesecure the payment of either or both in an amount exceedi
half times the amount of either or both items.
and should
The enactment of this change in the law should not affect
takes effect and reexcept pledges of assets already made when the act
newals of such pledges thereafter made.
we used the
It will be noted that in the two chapters last reported
These banks were
report.
this
ns
for
specime
as
banks
selected
sixty
same
of the closed
selected by computation as being the thirty worst conditioned
real estate and
banks and the thirty best conditioned. The items of other
us effect of such
borrowed money just reported show plainly the dangero
ons react on payitems in the statement of a bank, and how such conditi
in our subsement of dividends upon liquidation. The same will apply
tion, and Attorneys'
quent chapters reporting on Slow and Expensive Liquida
two extremes,
Fees. All of the remaining closed banks in between these
other real estate
used as specimens, show plainly the close coordination of
and expensive
and borrowed money conditions with low dividends and slow
liquidation.
DEPOSITS OF PUBLIC FUNDS
a total of
In the closed bank records which we examined we found
as of the date of
$8,198,502.91 of public funds recorded as on deposit
closing, and classified as follows:
$1,165,396.34
State treasurer's funds
511,081.94
Rural credit funds
1,492,356.84
Closed bank funds
2,504,862.74
County treasurers' funds
1,016,486.71
Cities, towns, and townships
1,508,318.34
School funds
$8,198,502.91
deposits was approxion
fund
y
guarant
the
The original liability of
public taxpayer furmately $40,000,000.00 and so it can be seen that the
from public money.
nished practically one-fifth of all the bank losses
ds and preferred claim
Some of this money has been returned by dividen
lost, however, as it is
payments. It is not so much the amount that was
report.
to
wish
we
which
upon
it
lost
was
which
in
the way
tendent of banks
In connection with the closed bank money the superin
committee that he
admitted under oath before the legislative investigating
up the condition of
had habitually used the funds of closed banks to bolster
public interest and
weak, going banks. This proceeding was against the
money into weak banks
against the interest of sound banks. Putting the
ed claim on their
preferr
a
was
it
while
and
loss
of
risk
high
carried a
t
of dividends and
paymen
up
slowed
eless
neverth
it
assets, if they closed,
closed banks'
second
the
if
and
banks;
closed
first
the
protection of assets of
the use of the money
funds were likewise placed in still other weak banks,
. Furthermore, such
for purposes intended became still further delayed
bank in which
deposits of closed bank money misled the depositors of the
that such deposits
such closed bank money was deposited, for the reason
bank's statement to
were a preferred claim, yet there was nothing in the
money. In cases of exshow how much of its deposits were closed bank
Total
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Federal Reserve Bank of St. Louis
20
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
traordinarily large deposits of closed bank money in a bank in poor condition there is also a considerable risk that there will not even be enough
assets to liquidate the preference, thereby causing a loss to the depositors
of the original closed bank and leaving absolutely nothing for the depositors
in the second closed bank. Furthermore, if banks were so weak that it required public funds to save them it was notice to the superintendent that
they were in such unsafe condition that they should have been closed as
provided by law. It is also plain that if the closed bank money was to be
of any use to weak banks it must be left there for some considerable length
of time. The inevitable result was to defer paying dividends with it or to
defer paying off bills payable, taxes, interest or other liabilities of the
bank to which it belonged. The policy was also against the interests of
the sound banks because they should have had a pro-rata share, at least,
of the public funds, and the delay in payments of dividends on closed banks
naturally created dissatisfaction with all banks, strong as well as weak.
At present the law of this state leaves the matter of where he will deposit
these trust funds in the discretion of the superintendent of banks. He
could deposit them all in one or two banks if he desired. In the faithful
and impartial performance of his trust, however, he should, as a matter of
course, choose the strongest banks as depositaries instead of the weakest;
and if the public interests instead of the interests of the weak banks were
to be safeguarded that is what any reliable trustee would do. This matter
should be regulated by law as hereinafter recommended.
With the other classes of public funds the causes and conditions are
different. The various national banks of the state received deposits of them
but as we had no authority to examine closed national banks we could not
determine the conditions as to them. The losses of state treasurer, rural
credit, county treasurers, cities, towns, townships, and school districts,
show only the amounts of those funds in closed state banks; but there were
losses of them in national banks also.
As to the rural credit losses it will be noted that they were only about
1/16 of the total of all public fund losses in state banks and in view of
the large volume of funds handled by the rural credits department during
the ten years the amount lost in state banks will not be given any particular notice here, other than to say that in checking the records of the various 242 state banks we found instances where a quantity of rural credit
funds would be deposited in a bank under circumstances showing that they
were used primarily for the purpose of bolstering up a weak bank instead
of furnishing credit facilities for agricultural use as they should have been.
As to how much rural credit funds were lost in national banks and as to
why they were deposited there, and how lost, we can make no report as
this investibation did not extend to national banks.
One of the causes for unusual losses of public funds belonging to cities,
towns, townships, and school districts, does not appear from the records;
but it is a matter of such common knowledge that we report it for your
attention. There was a custom quite generally followed throughout the
state for officials of banks to seek the offices of treasurer of the local city,
township, town, school district, or other local public body. In fact the
natural assumption was that the local banker would be the ideal treasurer.
The policy is fraught with danger to the public corporation which owns
the money. If the deposit is to be of any particular value to the bank
It must be left there for some length of time. If the bank's reserve gets to
slipping or other conditions get bad it is probable that the person who holds
the dual trust of bank official and town, township, or school treasurer,
will reason that the loss will fall much easier on the public than on the
bank and will act accordingly. Thus it is that we find cases in the records
of the supreme court and the circuit courts, and instances all over the state
where the matter never reached court, in which treasurers of some public
corporation such as a school district, township, town, etc., were also officials
of the local bank, and had continuously neglected, and in some cases actu-
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
21
ally refused under various subterfuges and technical excuses to call warrants, bonds, coupons owing by the public corporation, or to pay current
orders of their governing board, in order that the bank might have the
continued use of the public money. Public money and property always need
special protections to prevent their lose, and some persons consider such
money and property. from an entirely different viewpoint from the money
and property of private persons. Some method should be provdied so that
the public funds of the various districts of the state will not be under
control of officials with a conflicting interest. The public is entitled to
the first place in the fidelity and loyalty of its own officials at least.
We recommend that the following provisions of law be made for future
protection of public funds:
(1) It should be made a criminal offense for any public official having
any public funds under his control knowingly to permit them to be deposited in any bank which is in unsafe condition, whether such bank shall
have been designated as a depositary or not.
(2) The superintendent of banks should be required to deposit the
funds of closed banks in the sound banks of the state and it should be
made a criminal offense for him knowingly to permit the deposit of them
In a bank in unsafe condition. He should also be required to distribute
the funds pro-rata as far as practical, among all the sound banks.
(3) The law should disqualify any person holding an official position
with, or a position of trust as agent or employee of any bank, from holding
any position under which he can control the management of funds of any
public corporation at the time he is holding position with any bank.
(4) No treasurer of any public corporation, board, body, or commission should be permitted to have on deposit at any time in any one bank
more than the amount of one-half of the capital of such bank.
(5) Neither the treasurer nor his bondsmen should be liable for any
loss sustained from a good-faith deposit of public funds in any bank within
the state in case of failure of said bank, whether said bank has been designated as a depositary or not.
Some of the foregoing recommendations will operate to the inconvenience of banks. In the case of protection of public funds, however,
the safety of the public and not the convenience of the banks should be the
primary consideration. None of these recommendations will work any real
hardship on any bank, however. They will save many persons from getting into the embarrassing situation of being trustee for two diflerent
Interests which are bound to be conflicting as to the handling of public
funds. As we will show in a later part of this report the convenience
of the banks has been given undue prominence in all legislation enacted
In this state since 1915. This report presents recommendations for equalization of that situation. The safety of the public funds should be the
primary consideration in enacting legislation for the handling thereof by
banks.
DEPOSITS IN PLATTE AND KIMBALL BANKS
We are devoting a special chapter to this situation because of the fact
that it was one of the subject brought to our attention by the joint legislative investigating committee of the 1929 session of the legislature.
The present superintendent of banks took office in January, 1925.
Prior to that he had for many years been a stockholder, director, cashier,
or other officer in a bank known as the Farmers State Bank of Platte,
South Dakota. Close family relatives and himself were in fact the principal
owners of the bank, and while the present superintendent no doubt disposed of his actual record interest in it upon taking office, the other relatives continued in actual management of the bank. The 1928 biennial
report of the superintendent of banks of this state shows the stockholders,
officers, and directors of the Farmers State Bank of Platte as follows:
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Federal Reserve Bank of St. Louis
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ATTORNEY GENERAL'S REPORT ON INVESTIGATION
Officers
F. C. Smith, President
G. E. Cool, Cashier
W. F. Smith, Vice Pres.
L. J. Chastain, Asst. Cash.
Directors
F. C. Smith
W. F. Smith
H. D. Smith
G. E. Cool
L. M. Payne
Stockholders
F. C. Smith, Platte, S. D...$42,000.00
G. E. Cool, Platte, S. D
$ 500.00
L. M. Payne, Platte, S. D
W. F. Smith, Platte, S. D. 5,500.00
1,000.00
H. D. Smith, Fond Dulac,
Wis.
1,000.00
There are two other banks in the town of Platte, to-wit: the Commercial State Bank and the Platte State Bank. The condition of these
banks is indicated by the fact that in the year 1926 they all closed temporarily until their depositors signed a waiver agreement and exchanged
their deposits for long term certificates. These banks had carried before
this time, and have carried since, large amounts of other real estate, overdrafts, cash items, bills payable, "clearings," "expense," "interest" paid,
and other items indicating the condition of the banks; and had also shown
impairments of capital in their statements. Their published report of
condition on October 4, 1929, showed among other things as follows:
Farmers State Bank (Smith bank) carrying $79,264.98 other real estate
against capital and surplus of $58,000.00, and carrying $25,189.81 expense
and interest paid, and showing an actual impairment of capital of $5,249.60;
the Commercial State Bank of Platte was carrying $120,654.05 of other
real estate against a capital, surplus and undivided profits of $57,245.33,
and was carrying expense and interest paid of $40,557.32, showing an
actual impairment of capital of $33,311.99; the Platte State Bank was
carrying other real estate of $93,878.62 against a capital, surplus and undivided profits of $84,083.41, and expense and interest paid of $37,158.16.
It showed no impairment of capital but showed a loss on operating expense
of $8,074.75. These figures give a general idea of what the conditions
of these banks must have been from time to time during the year.
The Platte banks furnished another report of their condition as of
January 3, 1930, or three months after the report above mentioned. The
Farmers State Bank (Smith) shows that it is still carrying the same
amount of other real estate, to-wit: $79,264.98; its impairment of capital
has increased from $5,249.60 to $8,522.40, or $3,272.80, an increase of
impairment at the rate of over $1,000.00 per month; the Commercial State
Bank is still catrying the same amount of other real estate, to-wit: $120,654.05, and its impairment of capital has increased from $33,311.99 to
$36,734.32, or $3,422.33—an increase of impairment at the rate of more
than $1,000.00 per month. We shall make no comparioan on the Platte
State Bank as it had only $10,000.00 of closed bank deposits and during the
past three months its condition has improved slightly, except as to other
real estate.
Under section 8924 of the Revised 1919 Code of the state of South
Dakota it is the duty of the superintendent of banks to discipline any banks
which have an impairment of capital and if the impairment is not made
good within thirty days he should take charge of the bank and liquidate it.
Here are two banks running for more than ninety days and showing an
impairment of capital increasing at the rate of more than $1,000.00 per
month each; and instead of being disciplined as the law plainly provides
for protection of the public they are being favored with deposits of closed
bank money aggregating approximately one-fourth of all the closed bank
money of the state. This situation certainly bears out the statement made
In the introduction to this report and it emphasizes the necessity for legislation in accordance with our previous recommendations for election of the
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
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superintendent by the people; and changing the structure of the office so
that it will be in charge of an accountant, examiner, or general commissioner who is not a banker, and providing a felony like the Nevada law
for any wilful neglect to perform a duty plainly entailed upon the officer
by law.
Our information sheets as to capital stock conditions of the 242 closed
banks show that fully 90% of them had been operating for various lengths
of time during the last three years of their existence with badly impaired
capitals or similar capital stock conditions. Such conditions are considered
an unfailing danger signal by the laws of most states and the United States
government in regulation of impairment conditions.
In January, 1919, the legislature of this state met for its twenty-first
session and the joint investigating committee organized soon thereafter.
Some rumor was circulated as to large deposits of money in these Platte
banks. On January 19th to 21st, 1929, there was shifted by order of
the superintendent of banks from the Farmers State Bank of Platte (Smith
bank) to the Commercial State Bank of Platte, at least $303,211.94 of
closed state bank money. This was done by order of the superintendent
of banks to various examiners in charge of closed banks all over the state.
Our fieldmen found evidence of this shift in their checking of the records
of the 242 banks and upon totaling it produced the figure above stated.
Some closed bank money was no doubt left in the Farmers State Bank, and
in the condition that it must have been it can be seen that the bank was
carrying almost as much closed bank money as all its other deposits combined. The fact that this shift was made in less than two days by orders
to examiners all over the state, and at a time when the legislative investigating committee was about to begin a probe of the matter leads us to the
conclusion that the superintendent of banks was getting ready for the investigation; and also to the second conclusion that he must have considered
it wrong to have the money there or he would have left it where it was
during the investigation, or would not have shifted it so suddenly in any
event. The condition of the bank as above reported would also indicate
that no trustee, bent on a faithful and impartial execution of his trust,
would have selected this bank as a depositary for his trust funds when he
had so many good banks in operation all over the state in which the money
might have been deposited.
On or about March 15, 1929, as one of the first acts of this investigation, we made a written request on the superintendent of banks for a written statement of the names of banks holding deposits of closed bank money
and the amount of it held by them. The superintendent made a prompt
reply to this inquiry and furnished us the list. It appears therefrom that
on March 15, 1929, the banks of Platte held deposits as follows:
$ 80,806.75
Farmers State Bank (Smith)
413,656.36
Commercial State Bank
10,979.80
Platte State Bank
The shift which had been made January 19th to 21st was apparently
still in effect. The Farmers State Bank of Platte had apparently had about
$400,000.00 of closed bank money before the shift. Thereafter our fieldmen checked individually all of the available records of all closed banks
except one or two which we did not visit on account of mileage. They took
an account of where all of the closed bank money was on deposit. Their
records were completed by December 1, 1929, and upon checking them and
totaling all of them we found Platte deposits as follows:
$209,767.42
Farmers State Bank (Smith)
423,742.56
Commercial State Bank
15,221.39
Platte State Bank
It will thus be seen that the deposits in the Farmers State Bank
(Smith bank) were built back up after the legislature adjourned and after
the report furnished to this office.
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Federal Reserve Bank of St. Louis
A
24
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
This last set of figures does not reflect the exact amounts due in these
banks on any particular day as the totals were computed from reports
gathered by our fieldmen during a period from about April 1, 1929, to
December 1, 1929. Taken in conjunction with the figures heretofore given,
however, they indicate the amount of funds carried in the banks at Platte.
The statement furnished to us by the superintendent of banks as of
March 15, 1929, showed that he had on deposit in open banks. a total of
$1,937,757.46 of closed bank money of which approximately $600,000.00
were in the Platte banks; or, one-third of all the closed bank money was
being carried by the superintendent in one town of the state, from which
any reasonable interpretation of the facts would indicate that he was
simply favoring a bank and locality in which he had some interest, and
against the interests of depositors to whom the money belonged, and against
other localities in the state where banks may lkiewise have needed closed
bank funds to bolster up their reserves.
The same statement furnished to us shows that the Kimball State
Bank was carrying a total of $207,274.76 of closed bank money. This
town is in the immediate vicinity of Platte and was the home of the present
special counsel for the banking department.
It can thus be seen that in these two neighboring towns was deposited
more than one-third of all the closed bank money in this state.
In going over the list we find no other banks or towns with deposits
anything like this, the nearest to it being Sioux Falls with only $82,924.12,
and Bonesteel—which is also in the Platte neighborhood—with $82,267.80.
The remainder of the money is scattered through 183 banks in varying
amounts.
Several conclusions may properly be drawn from the foregoing facts.
It is apparent that the superintendent of banks shifted the $300,000.00
from the family bank at about the time the legislative investigating committee was to commence work; and thereafter built the deposit back up to
about its original size after the legislature had adjourned and after furnishing this office the statement above mentioned. Handling the funds in this
way indicates an ever-present intention to prefer these particular banks
over all other banks in the state. This is not an impartial administration
of the office. It is also apparent that the condition of the Platte banks
was such that no trustee of ordinary intelligence would have voluntarily
selected these banks as depositaries for this large amount of money, if he
were trying to administer the office for the benefit of the public and the
depositors entitled to dividends as speedily as they could be paid, instead
of administering it with favoritism for these banks regardless of how their
solvency conditions compared with other banks in the state. This is not a
faithful administration of the trust. It may be true that this money would
be safe as a preferred claim in case of failure of the Platte banks, but
there is no valid reason or excuse for ever letting it become a claim at all.
The money should be kept in banks where it will be available as cash
when needed, and not subjected to the procedure of establishing preferred
claims. The mere fact that it is a preferred claim does not guarantee
that the condition of the bank in case of liquidation will be such that it
can pay the preference, especially if the amount of the preferred deposit
gets abnormally large as it is in this case. Handling the money in this
way is extremely dangerous to all private depositors in the banks at Platte
and may eventually leave them with a very slim chance of dividends should
those banks fail.
• If the officer in charge of the trust funds is going to indulge in favoritism in this manner it logically follows that there will be a continual tendency on his part to delay payments of dividends or interest-bearing claims
against the various trusts under his administration which he may be using
for reserves for certain favored institutions over the state.
Another fairly deducible conclusion is that the said Platte banks are
paying the customary 2% interest on their deposits but are to all intents
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
25
receiving the same use of them as if they were time deposits or practically
permanent deposits, since the total in these three banks is practically constant during the periods covered. The customary rate for such deposits is
at least four or five per cent; and it must be that out of all the closed
banks having deposits at Platte there are some with bills payable or certificates of indebtedness bearing 5% to 7% interest, which could be paid
off. Figured on the basis of $600,000.00 of constant deposit it is apparently
costing the owners of this closed bank money from $12,000.00 to $18,000.00
per year to furnish this reserve for the benefit of the banking situation
at Platte.
In the prior chapter on Deposits of Public Funds we have recommended
statutes which we think would prevent a recurrence of this kind of situation. We make no further recommendation here except to say that the
general recommendation which we have made to the governor hereafter
relative to the superintendent of banks is influenced partly by the condition
above shown in this chapter.
SLOW LIQUIDATION
Much of the complaint received by the legislative investigating committee and many of the complaints received in response to our notices were
in regard to the length of time required for liquidation of the closed banks.
While this is one of the most important matters involved in this investigation, the cause of slow liquidation and the remedy therefor are so plain
that this chapter will be one of the shortest of this report.
Much of the delay in liquidation resulted from the conditions reported
in preceding chapters. The information sheets which we have compiled
and which are available for your committee whenever required show plainly
that banks which were loaded up with other real estate, borrowed money,
impaired capital, and low reserves, required proportionately longer times
and more expense for liquidation than banks not so badly afflicted with
these conditions. Dividends from liquidation were accordingly slower and
smaller. The banks should never have been allowed to get into such condition in the first place. Closing them at the proper time would have
resulted in much quicker and more remunerative liquidation for the depositors and would have been an actual benefit to the banking business as
a whole and to the public as well.
Our information sheets as to time of liquidation show that out of 242
banks checked one bank .has been under liquidation for nine years; 5 banks
for more than five years; 36 banks for. more than six years; 87 banks for
more than five years; 37 banks for more than four years; and the 76 remaining banks for various periods of one to three years. We investigated
the time required for liquidation under systems of other states by written
inquiry to their public examiners or other officials in charge of liquidation
of closed banks, and the following is a summary of reports received from
states in various sections of the United States:
Average Period Required for Liquidation of
Closed Banks.
State
2 to 2 years.
1 1/
Colorado
2 years.
Iowa
2 years.
Illinois
1 to 2 years.
New York
2 years.
Oklahoma
2 1/2 years; sometimes requires 5 to 6 years.
Idaho
1 1/2 to 3 years.
Texas
1 to 3 years.
Kansas
2 to 3 years.
Wyoming
3 to 4 years.
Florida
6 years.
•
North Dakota
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Federal Reserve Bank of St. Louis
26
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
We are not able to give the average time required for liquidation in
South Dakota as practically all of the banks checked are still under liquidation and we do not know how long their periods of liquidation will finally
be. The report above made, however, shows that more than two-thirds of
them have already been under liquidation for periods varying from five to
nine years.
One thing which may have tended to slow up liquidation was the
policy of the banking department to use as liquidators or examiners in
charge, the officials of other closed banks. There has been considerable
dissatisfaction with and criticism of this policy by the general public. There
is some merit to this criticism because of the following:
First, under our system whereby the superintendent of banks is by
law a banker and is assisted by an official Bankers' Association created and
recognized by law with power to nominate the group from whom the governor appoints the commission in general charge of guaranty funds, admission of new banks, etc., it practically makes a close corporation under
control of bankers themselves in actual charge of all the substantial matters relating to management of all open and closed banks' affairs of this
state. There is the natural tendency to favor other bankers for the appointive positions.
Second, most of the bankers who had the misfortune of bank failure
got into that condition partly because of improvident management, poor
loan appraisals, laxness in collections, renewals of loans, etc. It was only
natural that they would carry their old habits of business and thought into
the liquidation of other banks. In fact this condition was specifically recognized by the former superintendent of banks, Mr. John Hirning, in his
letter dated August 18, 1923, to Mr. Wm. Hoese, a former member of the
guaranty fund commission, relating to the appointment of a certain official
of a closed bank to position of examiner in charge of another closed bank;
from which letter we quote as follows:
"I hesitate to appoint a man as examiner who has been connected
with a closed bank."
It seems to us that the following recommendation for a substantial
change in the method of appointing examiners for liquidation would produce
much better results in every respect and be much more satisfactory to the
public:
Within sixty days after any bank has been suspended or taken
over by the superintendent of banks, the judge or judges of the circuit
court of the county in which the bank is located shall appoint a receiver therefor who shall thereafter liquidate the said bank under
supervision of the court in the manner prescribed by law.
Returning the appointment of receivers for liquidation of closed banks
to the courts, where it is now reposed in various states, will tend to remove
any political influences from the appointment in view of our judges now
being elected on a non-political ballot. Bringing the control of the appointment and supervision back into the community where the bank is
located will make the judge and receiver more responsive to local conditions and complaints than the present system of remote control of liquidation does. A decentralization of the present close-knit control is advisable
in any event. No doubt there are other advantages which may suggest
themselves to the legislature when this matter is considered.
In the tabulation of time required for liquidation in various states
hereinbefore set forth it will be noted that we have selected states from
all sections of the country—industrial and agricultural. It will also be
noted that there are several states wherein liquidation is accomplished in
about two years. Another significant fact is that in Florida and North Dakata where much real estate speculation was involved, the periods of liquidation were the longest.
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF • BANKING AND FINANCE
27
Our information sheets on the subject of time of liquidation show
that practically all of the 242 closed banks either had overburdens of
other real estate at time of closing or acquired it while under liquidation.
In fact more than 50% of all the closed banks increased their other real
estate holdings under liquidation. The testimony of the present superintendent of banks before your legisative investigating committee shows that
other real estate has increased under liquidation from $5,225,665.11 to
$9,623,363.74, an increase of $4,397,698.63 or more than 90% while
banks were being liquidated. The same testimony shows that loans and
discounts decreased from $58,214,895.16 to $20,052,305.40—a decrease of
$38,162,598.76, or more than 65% during liquidation. The same testimony shows that all other liquid assets such as warrants, overdrafts, stocks
and bonds, decreased in similar proportions. It is plain that the item of
other real estate is the one item which causes slow liquidation. The fact
that other real estate increased nearly 90% during liquidation instead
of decreasing as would be the natural result of liquidation, indicates that
In addition to the other real estate which the bank was carrying on its
published statement, there must have been numerous deals in its note
pouch which were in effect other real estate deals, or deals depending principally on real estate as security. When the bank finally closed and liquidation actually started these deals rapidly became "other real estate" and
slowed up liquidation accordingly. That part of the situation should have
been corrected by proper discipline of the banks before closing. Such
discipline would have no doubt curbed the abnormal real estate speculation
of past years and left the banks in better condition for deflation.
On account of the fact that the delay in liquidation which we are
experiencing is due principally to other real estate holdings, no particular
criticism is directed against the banking department because of the long
delays in final settlement of a closed bank's affairs. Land has so many
potentialities of value that the other real estate holdings of these closed
banks may finally produce value sufficient to make full payment of all depositors possible. There is no reason for any haste in sacrificing these
lands simply for the purpose of terminating liquidation. Land is subject
to poor market prices at present and putting all of the closed bank land
on the market for speedy liquidation would make conditions worse. The
depositors have much to gain and little to lose by a policy of holding the
land until the day when the farms and ranches of South Dakota may be
restored to their proportion of value in our economic system.
The real fault lies in the system of the liquidation. It is our conclusion that all of the property known as liquid assets such as loans, stocks,
bonds, warrants, etc., should he liquidated as rapidly as possible and all
dividends possible paid out of this property so that no excuse would
remain for holding up any dividends from liquid property. The law should
fix a stated period of not more than two years within which the liquidation
of all liquid assets should be completed. Some flexibility should be left in
the law so that the judge of the circuit court may extend the period by
reasonable amounts of time. With any reasonable skill and diligence in
liquidation all liquid assets can be closed out by collection, compromise, and
sale of the residue in one or two years, without any substantial sacrifice
of values at all.
The remaining real estate assets should then be centralized for management either by judicial circuit districts or by a state system similar to
the plan of the rural credit board or department of school and public
lands, or possibly in conjunction with them; and the land made to carry
itself as far as possible toward reasonable market values.
Should your committee act favorably upon the recommendations herein
contained, the details of the legislation can be worked out in the committee
with better results than in this report. We are of the opinion that the
recommendations contained in this chapter will satisfactorily dispose of all
complaints about the length of time required for liquidation.
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Federal Reserve Bank of St. Louis
28
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
ATTORNEY FEES
•The matter of legal expense of liquidation was given considerable attention by the legislative investigating committee. Private complaints were
also made to this department about it. We made it a special subject of
investigation on that account. Our records on that subject show the total
to date of our investigation for each bank and show the other footings of
the banks' assets and liabilities so that comparisons with other systems,
or among the different banks, or percentages of legal expense to time and
values involved can be readily made. These sheets will be available for
use of the legislature, if required. We do not deem it necessary to set
forth these statutes in detail in this report, on this particular subject, but
will simply set forth our conclusions and recommendations on the subject.
The amount of legal expense (this item includes besides attorneys'
fees "court costs, traveling expenses and other legitimate items of disbursement") has been unreasonably large in proportion to the periods or amounts
of liquidation. According to a statement furnished by the banking department the aggregate amount of such expense paid between April 1, 1925, and
December 11, 1926, was $197,823 for 280 closed banks. For 81 of these
banks no legal expense had been paid during that period. The legal expense paid for 24 others had been less than $100 each. The legal expense
paid during that period for certain of such closed banks was in the following respective amounts:
$3,063.20; $3,716.47; $3,729.82; $4,775.50;
$5,017.73; $5,140.59; $6,844.95; $6,298.19; $9,447.67; $20,545.59;
$5,612.80.
The aggregate amount of legal expense paid to attorneys in connection
with the liquidation of the 242 banks examined by me up to date of examination is $547,507.73. Note the following data with respect to the first
twelve banks on our attorneys' fee work sheet:
Date of
Closing
1-24-24
1- 8-24
1-14-24
1-19-24
7- 7-20
4- 9-24
5- 3-24
1-19-24
2-13-24
10-16-23
5-12-24
10-27-23
Date of
Investigation
6-29-29
6- 8-29
6-26-29
6-30-29
6-30-29
5-31-29
5-31-29
6-29-29
7-31-29
5-31-29
6-30-29
7-31-29
Amount Paid Attorneys to
Date of Investigation
$42,659.29
23,165.04
19,491.80
16,883.22
14,363.99
10,889.48
10,728.41
10,706.44
10,618.71
10,533.26
9,524.94
9,009.91
Of the other closed banks 2 had paid between seven and eight thousand
dollars each; 2 about $6,800 each; 2 between five and six thousand each;
8 between four and five thousand each; 23 between three and four thousand each; 26 between two and three thousand each; and 54 had paid
between one and two thousand dollars each.
The first 12 banks with items shown above as of the dates of investigation were paid in the interval covered by the statement furnished by
the banking department previously referred to, according to such statement, the following amounts, respectively: $20,545.59; $9,447.67; $6,298.19; $4,775.50; $1,528.78; $3,729.72; $1,465.95; $2,401.05; $3,716.47;
$2,776.76; $5,017.72; $6,844.95.
A comparison of the data given indicates how large a proportion of
the total legal expense as shown on the dates of examinations had been
incurred prior to those dates and after December 11, 1926.
There still remains and will remain for some time to come ample
opportunities for these totals to grow.
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
29
A comparison of the legal expenses of closed state banks with that
of closed national banks so far as is shown by available reports of the
comptroller of the currency indicates that the comparative amount of legal
expenses have been less in the liquidation of national banks than in the
lequidation of state banks.
It has been impossible to investigate specific complaints or cases of
payments of excessive attorneys' fees and a report thereon could have
served no useful pur'pose. Payments once approved and paid may not be
recovered. It may be a matter of opinion whether or not a given fee
under all the facts and circumstances was excessive. • On the whole it is
probably true that attorneys have received no larger fees than would have
been paid them by other clients for similar services. The real fault
has been in the system. The state or any large corporation having a great
amount of legal work to be done employs full time attorneys and pays them
a salary. Obviously the work may be done cheaper in this way than by
farming out the various items among general practitioners. It may also
be done more efficiently since full time employees become specialists free
from the claims of other clients upon their time and attention.
The attorney general is elected as the legal officer of the state under
the constitution. As such officer he should handle and supervise all of
the legal work of the state, its departments, and officers. He should
handle, supervise, and control the legal work for closed banks.
The number of cases handled by the attorney general and his assistants
In the supreme court is a fair index of the other work done by him just as
the nunTher of cases handled in the supreme court by special counsel for
the banking department and all the various counsel employed for closed
banks is a fair index of the amount of other legal work done for closed
banks.
Look in the Northwestern Reporter and you will see that in 1925 and
1926 the supreme court of South Dakota decided 92 cases which had been
handled by the attorney general and his four or five assistants; and in the
same time the court decided 25 cases which had been handled by the special
counsel for the banking department and the various counsel employed for
closed banks.
During the same two year period one of the attorney general's assistants did all the legal work for the rural credit board, a department having
balance sheet footings of more than $60,000,000, such work including 1171
mortgage foreclosures and 73 actions. This work was merely a part of the
whole work done by this assistant.
We have seen above that during 22 months of 1925 and 1926 the payments made to cover legal expenses of closed banks reached the total of
$197,823. The largest total amount appropriated and available during any
12 months of the same time to cover salaries of the attorney general and
his assistants, including the assistant assigned to the railroad commission,
stenographers, special assistants, traveling expense, court costs, printing,
and all office or other expense of the attorney general's office, was $36,842.50 and the whole total amount appropriated was not spent.
In other words the attorney general with four or five assistants accomplished a great amount of work at a greatly reduced cost.
The conclusion is obvious. The attorney general with three extra
assistants, employed at salaries of four thousand dollars per year, with an
allowance of not more than $8,000 a year for special assistants, traveling
and other expense, could have handled and can now handle all of the legal
work for closed banks.
It is therefore earnestly recommended that the office of special counsel
be abolished and that provision be made for the handling, control, and
supervision of all the legal work of closed banks by the attorney general;
that the attorney general be authorized to employ not more than three fulltime assistants at salaries of $4,000 each per year and such special assist-
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Federal Reserve Bank of St. Louis
30
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
ance as may from time to time be necessary or advisable as the means of
accomplishing a saving; and that the compensation of such assistants and
the traveling and other expenses of the attorney general and such assistants
incurred in such work be paid out of the funds of the several closed banks
as liquidation expense, on a pro rata basis, to be computed and determined
by the attorney general.
SPECIAL CASES
The purpose of this chapter is to give a special history of a few
typical bank transactions and other special transactions which were brought
to our attention by the legislative investigating committee of members
thereof. They illustrate the general chapters and recommendations heretofore made.
The Lincoln County Bank Case
This bank was located at Canton, South Dakota. It carried a book
capital and surplus of $60,000, but it was impaired by $30,000 of expense
and interest carried, or 50% impaired. During the last three years of its
existence its reserve was far below legal requirement practically all of the
time, and on the day of closing the reserve was 1%. During these three
years it carried large amounts of borrowed money ranging from $43,488.29
up to $108,800; it also carried during all of said three years excessive
amounts of cash items ranging from $1,600 up to as high as $24,000. It
was overburdened with other real estate, carrying about $60,000 most of
the time for three years. It was in unsafe and insolvent condition all of
that time according to any reasonable interpretation of its condition. It
closed August 7, 1926. We investigated it July 16, 1929, or nearly three
years later, and it had paid just one dividend of 10% in that time. However, it did have on hand at the date of our investigation $38,140.97 in
cash. Of this sum $12,037.26 was deposited in the Smith Bank at Platte,
$17,214.66 in the Commercial State Bank at Platte, $2,000 in the Security
Bank at Clark (another closed bank, and only $6,000 in round numbers
in a local Canton bank. It could have paid a dividend of at least 5%
and distributed some $30,000 of this $38,000 to the people who had deposit
claims against it at the date of our investigation.
However, the main criticism of this situation lies in the fact that the
superintendent of banks knew of the condition of this bank all of the time
and knew the dangerous results of letting it run in that community.
Among the files of this bank we found a letter directed to this bank,
signed by F. R. Smith, superintendent of banks at the time, from which
we quote as follows:
"You have substantially reduced your bills payable since the last
examination, but it has not been a reduction of loans, it has been thru
the medium of increased deposits.
"It is reported that you enjoy a fine business, and there is a question in the minds of the Commission as to whether or not they are
guilty of criminal negligence in permitting you to accept this increased
business when the conditions in your bank are such that a demand
from the depositors who are giving you this increased business would
without question embarrass you."
This letter was dated March 13, 1925, and we cite it because it shows
plainly that the superintendent of banks who took office in January, 1925,
early in his term recognized the danger of letting a bank run in this condition; and actually knew that this bank was in such condition that the
depositors' guaranty fund commission, of which he was a member and for
whom he was writing, was actually considering the question of being guilty
of criminal negligence for letting it run. It also shows that he was aware
of the fact that the bank was paying off the money it had borrowed from
other banks with the new deposits it was getting. This bank struggled
along for another 18 months after this letter and finally closed its doors
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
because it had exhausted everything convertible into money and had nothing
many
but the dregs left for liquidation. We cannot help but wonder how
of the citizens of Canton and vicinity put their savings and earnings into
that bank after that letter was written and while the superintendent of
e
banks was evidently trying to decide this question of criminal negligenc
as
Instead of disciplining the unsafe and insolvent condition of the bank
he should have done. This is one of the most pronounced cases of favoring
the bank as against the public.
Security Bank of Clark
This bank was located at Clark, South Dakota. It had been in insolvent and unsafe condition for some time, and was reorganized on June 17,
1925, under supervision of the present superintendent of banks. It was
reported to our investigator at Clark that the superintendent was personthe
ally present in connection with the reorganization. The examiner for
banking department, Mr. A. L. Bambenek, stated in a certificate filed in
the stock book that he was acting under specific instructions from F. R.
Sinith, superintendent of banks. It became necessary to cancel all of the
old stock and to sell new stock to the extent of $26,000, or for the full
amount of the capital, to start the bank again. This was the same as
100% assessment on the old stock, and was in itself sufficient to show the
condition regardless of the other items hereinafter set forth. Its statement of June 25, 1925, or eight days after reorganization, shows the condition it must have been in even with the reorganization: It had a capital
of $26,000 and surplus of $20,000, but this was impaired by $17,579 of
expense and interest and the further sum of "other property" carried at
$2,315.67, so that in fact it had no surplus; but the published report would
cause the public to think that it had a big surplus. It was carrying other
real estate of $61,370.17, or more than twice its capital; it owed bills payable and the War Finance Corporation $97,511.80, or more than three
times its capital; its reserve was around 11% or about 6% less than the
amount required by law, but it was permitted to reorganize and was reorganized in that condition and allowed to run under specific instructions
from the superintendent of banks.
This bank operated in the above condition or worse for about ten
closed
months; and on April 17, 1926, it suspended payment and remained
n
until May 7, 1926, when it was permitted to open again, under supervisio
the
of the superintendent of banks. The bank apparently closed because
which
First National Bank of Watertown charged up against the account
notes
the Clark bank carried with it the sum of approximately $53,000 of
the
or rediscounts which the Clark bank carried with it. This converted
an overClark bank's account with Watertown from a credit of $37,000 to
with
draft of $15,000. The bank was permitted to reopen on May 8, 1926,
absolutely no reserve at all. During the period from April 17, 1926, to
made
May 8, 1926, the depositors signed waivers so that their claims were
payable in small percentages over a period of years, but when it reopened,
6
even after this arrangement, it had deposits subject to check of $62,342.8
but absolutely no cash reserve at all; its reserve account being actually
overdrawn to the extent of $1,600. It had improved its real estate and
bills payable account in the meantime but at the expense of the depositors
and not by bettering the solvency conditions of the bank. This reopening
was effected through a Mr. Millard, representing the state banking depart.
ment at the time, and who must have known of all of these conditions
apRegardless of what he knew of conditions, the following advertisements
peared in the local papers at the time:
"TO OUR FRIENDS AND PATRONS
"We want to thank you for the splendid cooperation you gave us
during the re-organization of our bank and in return for this cooperation and your good faith, we are offering you 100% cash and liberty
bonds in reserve on all new deposits placed with us. On this basis we
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Federal Reserve Bank of St. Louis
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
solicit your future patronage and assure you the most courteous and
satisfactory banking service.'
and from the Clark Courier of May 13, 1926:
"Examiner-in-Charge, Mr. Millard, stated that under the system
of reorganization, this bank was placed among the most safe for the
depositor for the fact that new depositors are backed by 100% cash
reserve or liberty bonds and all depositors can receive their full amount
on a few hours notice. The security in notes is sufficient to take care
of all the old deposits with interest and Mr. Millard states that this
was one of the three banks in the State which could be handled in
this way and by so doing, the stockholders of the banks and the people
of the community were saved many thousands of dollars."
These statements and advertisements were all untrue and highly misleading because a bank with an overdrawn reserve account simply could not
offer 100% security in cash or liberty bonds or any deposits. From the
date of reoganization until final closing the reserve of this bank never did
get above 11% and most of the time was around 2 1/2 to 5%. It continued
to run along in a very dangerous and unsafe condition, with actual insolvency always existing, and all of which was known to the banking department as our investigation plainly showed. In fact, Judge Ames, a respected
citizen of the community, reported to our investigator that Mr. Jennings,
managing officer of the bank informed him that the bank was advised a
few days in advance of calls for the reports by the banking department so
that they could fix up the report to some reasonable degree of approach to
solvency. The records show that this fixing was done by sending a bunch
of worthless notes to their correspondent bank at Watertown a few days
in advance of the call, where they would receive a qualified credit; and
as soon as their sworn statement of condition had been made and published these notes would be charged back and the credit charged off. In
this manner the public and others, relying upon the published statement
ob the bank's condition, were deceived as to its reserve and true condition.
The bank was finally closed by its own board of directors on January 28,
1929, after requesting the banking department to take it over and receiving
no prompt results from that request. Its reserve at the time was fourtenths of 1 per cent; it had pledged $106,000 of its assets as security for
$18,000 owing to the First National Bank of Minneapolis and the First
National Bank of Watertown. Its other real estate was carried at $90,220
and was encumbered by $86,500. It had $61,679.77 of closed bank money
which was a preferred claim on its assets.
The period from this bank's various reorganizations was marked principally by getting borrowed money to other banks paid down with money
of new depositors.
This case presents a good example of the results of trying to keep an
insolvent bank in operation instead of meeting the issue squarely and
closing it when it became dangerous to the business public.
Brute State Bank
This bank was located at Chamberlain, South Dakota. It closed June
25, 1928. It had about $125,000 of borrowed money and other real estate
with a capital and surplus of $80,000. It had practically no reserve when
It closed. For five years prior to its closing its reserve had been below
the minimum permitted by law practically all of the time. All of its called
reports from April 22, 1926, until closing in June, 1928, advised the
superintendent of banks that its reserve was averaging around 5%, and
usually 2%, for the thirty days prior to the report. In order to make a
showing at all for the December 21, 1927, called report they issued a certificate of deposit to F. R. Smith, superintendent of banks, for $20,000 and
entered it upon their books among their lists of bank cash as "Public Examiner' $20,000. They then charged this out on January 10, 1928. The
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Federal Reserve Bank of St. Louis
OF DEPARTMENT OF BANKING AND FINANCE
33
reported it in this
singular part of this transaction is that they actually
The superbanks.
of
tendent
superin
the
to
sent
report
way on the called
at all and •they
intendent of banks had made no such deposit with them
tendent of banks
had no such cash. It is certainly strange if the superin
alleged deposit of
would not notice on a called report, sent to him an
but which he had
$20,000 claimed to have been made by him in the bank,
on that it mortnever made. This same bank actually got into such conditi
, for $10,000, to
gaged the bank building in which it was doing business
deposits of other
get funds with which to run. The bank was given large
or more of such
$40,000
about
having
state,
the
over
all
from
banks
closed
of new deposits
dollars
of
ds
d
thousan
acquire
It
time.
the
of
most
funds
closed at least
been
have
should
and
t,
insolven
ly
hopeless
was
it
long after
closed.
ily
voluntar
it
five years before
Bank of Geddes
Private
This bank was located at Geddes, South Dakota. It was a
1926, until depositors
bank owned by Mr. C. W. Pratt. It closed in July
d. It is cited here
had signed an extension agreement, and it then reopene
closed bank
principally on account of its other real estate condition, and its
n.
conditio
money
Pratt
This town is located near the town of Platte, and in fact Mr.
of Platte,
was one of the principal owners of the Commercial State Bank
capital
hereinbefore reported, as he owned some $32,000 of the $50,000
bank carried some
Geddes
This
of
Platte.
Bank
State
cial
Commer
the
of
1927, the
$142,454.95 of other real estate on August 20, 1927. In April,
and he stepped
Geddes
to
Skarvil
S.
John
Mr.
sent
ent
departm
banking
taken off the
in as cashier of this bank. All of this real estate was then
Company, and
books of the bank by forming the Charles W. Pratt, Inc.,
company and the notes
such real estate was deeded by the bank to such
the bank in place
of the Charles W. Pratt, Inc., Company given back to
the condition of the
of it. This was a transaction which did not strengthen
public that the bank
bank a particle, but would make it appear to the
estate in prowas not carrying such an enormous burden of other real
$50,000 of other closed
portion to its capital. The bank was given some
in Platte, Chamberbank money which, with the other closed bank deposits
bank money drawn
closed
of
deposits
the
swelled
,
Kimball
el,
Boneste
lain,
locality at approxfavored
this
in
and
placed
state
the
of
from other parts
imately $1,000,000.
Wakpala State Bank
December
This bank was located at Wakpala, South Dakota. It closed
ment practically
require
legal
m
minimu
the
below
was
Its
reserve
22, 1928.
e. It had a capital
all the time during the last three years of its existenc
the reserve dropped down
and surplus of $16,500. During the last year
s of bills payable, other
to four and five per cent. It had the usual amount
ds at all when we invesreal estate, and cash items. It had paid no dividen
tigated it December 4, 1929.
bank closed
Smee School District No. 4 had on deposit when the
Mrs. M. H.
$36,714.57. Mr. M. H. Severson was cashier of the bank.
the following from
Severson was treasurer of the school district. We quote
banks, found in the bank's
a letter from the deputy superintendent of
files:
to exist
"Apparently, an unusual and strange arrangement seems
has
between the bank and the Wakpala School District. This district
finanapproximately $25,000 on deposit in the bank, and in view of the
and shown
cial condition of the district, its warrants are being sold
report on this
as outstanding. I wish you would give us a detailed
ble against the dearrangement, as the warrants are properly chargea
a doubt
posit in the bank, and if presented for payment, would without
cause the bank considerable embarrassment."
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Federal Reserve Bank of St. Louis
34
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
This case is typical of transactions which happened all over the state
and which are probably still happening wherever there arises a conflicting
Interest in the control of public funds and the management of a bank. It
shows the necessity for the most stringent kind of protection of public
funds.
Peoples' State hank of Ramona
This case is cited for the purpose of showing the lengths to which a
misconception of duty may lead a public officer. On December 30, 1925,
the officials of this bank wrote to the present superintendent of banks for
the purpose of getting him to defer making a request for a called report
on this bank. We quote the following from the reply of the superintendent of banks dated December. 31, 1925, which we found among the
correspondence files of the bank:
"I am, however', helpless inso far as the proposal which you make
is concerned. The law is very specific in this matter and requires at
least the published statements a year. Last June when reserves were
not the best and conditions for a crop looked mighty favorable, I gambled and did not call for a published statement at that time, thinking
that perhaps the crop might mature and conditions would be tremendously better this fall. I lost my bet and if I had to do it again, I
would, of course, publish the June call and could then relieve the
hanks of the necessity of publishing a call that may come toward the
end of the year. Except as to the matter of more than three published
calls a year, no discrepancy is given the superintendent of banks."
This paragraph tells the story of a mistaken idea of duty to the public
better than any argument can do. It shows plainly that in the summer
of 1925, the superintendent of banks knew that numerous banks under his
supervision all over South Dakota were operating under such poor conditions that he did not want to call for a public report of their condition.
He did not want the public to know about it. The law had originally provided a slight safeguard for the public of five published reports per year.
It had been reduced to three at the behest of the Bankers' Association
lobby. The superintendent deliberately decided to defer the customary
call so that banks in such poor condition that their statement would warn
the public might continue to operate and attract into their control the proceeds of the grain, livestock, and other produce of the 1925 harvest. He
deprived the good banks which would have been entitled to these proceeds
from having a comparative statement of their condition and the poor
banks' condition spread before the public. The one thing to which the
public was entitled for its slim chance of choosing a safe bank was denied
It by the superintendent of banks in the exercise of his "discretion." It
is partially for this reason we have made our recommendation for six called
reports to be published each year at reasonable intervals.
Pett r Norbeck Notes
During the last session of the legislature there was a legislative request
upon the superintendent of banks about notes owing by former governor,
now senator, Peter Norbeck, to closed banks. There was some delay in
furnishing the information requested and in the meantime Senator Norbeck
telegraphed some information upon the subject to the senate, or the committee, or some member thereof. The alleged reason for investigating the
matter was that there was supposed to be some close coordination between
th borrowings of Senator Norbeck and certain deposits of state, closed bank,
and rural credit money, in the banks from which he borrowed. As this
subject was first suggested by the legislative committee as one of the items
in which it was interested, we included it among the items which our
fleldmen were instructed to investigate. We see no reason why we should
not report the facts as we found them and such facts are as follows:
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Federal Reserve Bank of St. Louis
Mr-
OF DEPARTMENT OF BANKING AND FINANCE
35
In the James Valley Bank of Huron we found a note of $4,000 given
of $400
by Peter Norbeck to the bank, bearing an indorsement of payment
e. In the coron July 29, 1924, and notes as secured by a second mortgag
t of the bank
respondence file are numerous letters between the presiden
rs, and John
and J. L. Driscoll and W. S. O'Brien, former state treasure
W. Ewert,
Hirning, former superintendent of banks, and one letter to A.
g deposits
former treasurer of the rural credit board, relative to obtainin
and asking for
of state, rural credit, and closed bank money in the bank,
r urging
no withdrawals to be made; also a letter to Governor McMaste
to withdraw from
r
not
treasure
state
the
upon
pressure
some
put
to
him
in unsafe and inthe bank. According to its records this bank had been
to an average
n
sank
conditio
reserve
its
and
1920
n
since
conditio
solvent
closing, January
of about 6% during all of the year 1923. At the time of
$91,499.92 of state
8, 1924, this bank held $35,488.14 of rural credit funds;
time of our
treasurer's funds; and $2,923.47 of closed bank money. At the
examination this bank had paid 18% in dividends.
April
In the Bank of Brookings we found a Peter Norbeck note dated
records
20, 1923, for $10,000, due October 20, 1923, listed on the bank's
now listed as doubtas unsecured and doubtful at the time of closing; and
Grant county.
ful, secured by real estate mortgage on 360 acres of land in
This
This note bore an endorsement of $500 paid February 7, 1929.
treasurer's
bank carried $9,112.07 rural credit money; $46,399.49 of state
on Febmoney; and $1,032.10 of closed bank money, at the time of closing
ruary 9, 1924. According to its records this bank had been in insolvent and
the law
unsafe condition since 1920 and its reserve was such that under
s at the
it should have been closed in 1920. It had paid 17% in dividend
ondence in
time of our examination in July, 1929. We found no corresp
this bank.
In the First Trust & Savings Bank of Mitchell, South Dakota, we
of notes
found notes of Peter Norbeck aggregating $20,146.20, and record
two notes
showing a line of credit consisting of four notes of $7,500 each,
and one note of
of $3,000 each, one note of $4,174.50, one note of $4,500,
or paid from
$5,000. Apparently these notes had been renewed, merged,
ation aptime to time so that the total liability at the date of our investig
.00 of
peared to be $20,146.20. This bank carried deposits of $28,300
closed July 16,
It
funds.
r's
state
treasure
of
$55,000
funds;
credit
rural
it had paid one
1923; and to the date of our investigation on July 6, 1929,
.
ondence
corresp
no
found
We
10%.
dividend of
Peter
In the Sioux Falls Trust & Savings Bank we found three notes of
on which nothing
Norbeck totaling $16,657, dated in 1923, due in 1924,
in 1929. This
appears to have been paid on the date of our investigation
of state treasbank carried $36,782.45 of rural credit money; $257,365.28
the time it closed on
urer's funds; $2,049.30 of closed bank money, at
on June 28, 1929,
January 14, 1924. At the date of our investigation
also held note of W. S.
bank
s.
This
dividend
in
25%
paid
had
bank
this
paid on it at the time
O'Brien for $2,000 dated July 27, 1922, with nothing
and should have carbank
reserve
a
was
bank
ation.
This
investig
of our
to approximately
ried 20% reserve under the law. Its reserve was down
no correspon10% during most of the last year of existence. We found
dence files.
a note
In the Dakota Trust & Savings Bank of Sioux Falls we found
22, 1923, due
of $9,350 given by Peter Norbeck to the bank, dated October
date of our
February 22, 1924, on which nothing had been paid at the
of rural
investigation on July 16, 1929. This bank carried $46,485.21
.75 of closed
$13,114
and
funds;
state
of
r's
53
treasure
$9,322.
funds;
credit
our investigation it
bank money, at the date of Closing. At the date of
the old records of
find
to
unable
We
s.
were
dividend
in
35%
had paid
this bank and so cannot give its condition prior to closing.
the
In this report it has been our aim to treat the rich and the poor,
We therefore
ation.
the
consider
exactly
same
with
great,
the
and
small
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Federal Reserve Bank of St. Louis
36
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
submit the facts found on this particular matter as above stated. We found
no evidence of coordination between the borrowings and the deposits of
state money other than the facts above set forth. We do not know whether
there was any particular coordination or not. We do know that between
state officials there is always an opportunity for coordination of such matters and especially so when some of the state officers holding control of
large public trusts are appointive officers of the governor. Whether or not
anything of the kind was involved in the matters above reported every
person reading the facts is as well able to judge as we. We report, however, that the adoption of the recommendation for the election of superintendent of banks by the people would tend to eliminate any public suspicion of such being the case, as far as closed bank money is concerned.
We have cited the foregoing special cases because they portray conditions involved in our recommendations. They are not all of the worst
cases. We are ready to submit to your committee many other cases which
also emphasize the conditions and support our recommendations. On account of lack of funds we have not been able to trace fully other cases
such as sale of assets of the Tea Bank, Vienna Bank case, American State
Bank of Burke case, etc., which have been brought to our attention. Many
of these matters partook more of personal controversy nature rather than
being illustrations of conditions. We deemed it advisable to apply our
funds toward acquiring information for improvement of conditions rather
than toward prosecution of personal controversies.
BANKERS' ASSOCIATION LOBBY
Considerable protest was made by various members of the 1929 session
of the legislature in regard to the activities of the lobby conducted by the
Bankers' Association of the state of South Dakota. The secretary of the
Association, Mr. Thomas O'Brien of Hoven, South Dakota, who is now
president of the association, was present practically all of the time of the
session; and other officers of the association were there for different
lengths of time during the session. Various members of the association
came in from time to time when matters affecting banking interests were
being voted upon by the legislature. The principal drive of the lobby, however, was directed against passage of the bills under which appropriations
of different size for the purpose of financing an investigation of the banking
system were attempted to be provided. The superintendent of banks, apparently deeming that the duties of his office required his first fidelity
to
be given to the interests of banking as a business proposition instead of
to enactments for the benefit and safety of the public, cooperated ably with
the said lobby; and in fact its chief headquarters were in his office. That
the superintendent of banks cooperates with the lobby is illustrated by paragraph one of his report to Senator A. B. Gunderson, chairman of the joint
legislative investigating committee of the 1929 session of the legislature,
which paragraph begins as follows:
"F. R. Smith, assisted by the lobby of the South Dakota Bankers'
Association, sponsored the introduction of a bill," etc.
This chapter is not devoted to censuring the Bankers' Association or
any other special interest for exerting its influence upon the legisltaure.
In fact the legislature must depend to some extent in ascertaining the
public will, upon information and arguments produced before it through
lobbies. As far as we have been able to carry this investigation we found
no dishonorable tactics of any kind practiced by the Bankers' Association
or the superintendent of banks in presenting their case or exerting their
influence upon the legislature. They simply used the pressure at their
command the same as any other lobby might do.
This chapter is devoted to the proposition of showing what the effect
of such a strong *and efficient lobby can be, and of sustaining our recommendation that the head of the banking department should be an elective
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37
officer and a person not naturally inclined to give his firsi allegiance to the
bankers instead of to the whole state; and also of supporting our original
statement that since 1915 every important statute enacted by the legislature
on the subject of banking has been a statute in' favor of banking as a
private, profit-making business, and against the interests of the general
public in securing safe and serviceable banking facilities.
Our present cycle of banking legislation begins with the year 1915
as during that session of the legislature the first statute relating to guaranty
of deposits was enacted in this state. (Chapter 102, S. L. 1925.) By this
statute the state bankers' association was created and given official authority to nominate the group from whom the governor must select the
members of the depositors' guaranty fund commission. This gave the association sufficient official status and power to make it a powerful factor in
banking legislation thereafter. The following summary of banking legislation since that time will sustain our original statement to the effect that all
important banking legislation since 1915 has been in the interests of private banking instead of the public.
One of the first important amendments thereafter made was Chapter
144 of the 1917 Session Laws. This act reduced the cash reserve required
for reserve banks from 25% to 20% and the reserve required for all other
banks from 20% to 17% %. The consequences of low reserve is shown
by a preceding chapter on "Allowing Insolvent Banks .to Operate." The
reserve should have been raised instead of lowered. The change was
intended to enable the banks to make larger profits. The result was less
conservative banking and diminished security for other business and for
depositors. The banks were thus permitted to keep a larger percentage
of their reposits loaned and earning interest and discounts, but the safety
of the public was correspondingly lessened.
By Chapter 97 of the Laws of 1925 the law was further amended so
as to permit the banks to invest 60% of the reduced reserve in United
States bonds. This enabled the banks to realize some interest from 60%
of such reserve.
By Chapter 72, Laws of 1929, the law was still further amended so as
to provide "that no banks shall be required to keep on hand at any time
any portion of the amount of deposits belonging to the United States or any
department thereof, or to the state, county, municipality, school district,
or township, if such deposits are secured by the said bank by assets pledged
by the said bank if such pledged assets consist of the obligations of the
United States Governor or of the state of South Dakota; provided that any
bank may carry 60% of its reserve in United States bonds, United States
certificates of indebtedness, United States treasury certificates, or any other
evidence of indebtedness or obligation of the United States government
owned by the said bank and not hypothecated as a part of said reserve
* * *." The effect of this act was to further reduce the required reserve.
At a special session of the legislature in 1920 a law was passed permitting banks to "charge a service fee for collecting and remitting by exchange or otherwise, checks, drafts, bills, etc., commonly known as cash
Items"; also providing "that whenever one or more checks on any bank
In the hands of a single holder or holders for an aggregate sum exceeding
amount of such bank's legal reserve required to be kept in its vaults shall
be presented on the same date and Payment thereof demanded, the said
bank may elect to make such payment in exchange instead of cash."
Notwithstanding and without reference to such old and salutary statutes as section 8999 and 8998 of the Revised Code, respectively defining
an insolvent bank and making it a felony for any officer or employee of
an insolvent bank knowingly to receive deposits into an insolvent banking
institution, Chapter 136 of the Laws of 1921 was enacted with an emergency clause attached declaring the act in full force and effect immediately
upon the date of its approval, March 2, 1921. This act actually authorized
the superintendent of banks, with the advice and consent of the guaranty
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fund commission, to take charge of any unsafe bank and to "manage it as a
going concern" and in the prosecution of this strange enterprise of operating insolvent banks as going concerns authorized the deposit in such banks
of moneys in the depositors' guaranty fund "never at any one time to exceed fifteen (15) per cent of the total amount in such fund."
Chapter 133 of the Laws of the same session authorized the punishment of bank robbers "by imprisonment in the state penitentiary for not
less than ten years or life in the discretion of the court."
Chapter 114, Laws of 1923, amended Section 8980, R. C., so that
the prohibition against a loan of more than 20% of the paid up capital
and surplus of a bank "to any corporation, partnership or individual" no
longer applied to loans to a corporation. (204 N. W. 174.)
Chapter 117, Laws of 1923, reduced the number of called reports to
be made during each year to the superintendent of banks, and published
in a newspaper of the town where the bank is located, from five to three.
The same was done for trust companies by Chapter 214, Laws of 1927.
Under the general law, Section 5364, R. C., and also under Section
8942, R. C., a part of the banking laws, the attorney general advised the
department of banking and finance and the superintendent of banks and
conducted or directed and supervised all civil actions and proceedings therefor. By Chapter 98, Laws of 1925, amended and supplemented by later
acts, the superintendent of banks was authorized to employ special legal
counsel for the performance of these or "any other duties * * * as said
superintendent may direct." This took the responsibility for legal advice
on banking laws, conduct of litigation, etc., away from an officer elected
by the people and placed it in charge of an attorney chosen by the superintendent of banks. Many of the things hereinbefore reported might never
have happened had the superintendent of banks been required to utilize
the same legal department that other state officials utilize.
By Chapter 99, Laws of 1925, the depositors' guaranty fund law was
repealed so as to relieve the bank from the payment of an annual assessment of one-fourth of one per cent of their average daily deposits after the
payment of the assessment for the year 1925. This act never became
effective because it was referred to the people and rejected.
Chapter 104, Laws of 1925, authorized the superintendent of banks
to "permit the reinstatement" of a suspended hank "as a solvent corporation by having a reorganization plan and articles of agreement executed in
writing by deposit creditors there of representing 80% of the amount
of deposits of such bank."
This same legislature which passed Chapter 99, Laws of 1925, repealing the depositors' guaranty fund law, and Chapter 100, Laws of 1925,
directing pro rata payments on the principal amounts of all outstanding
guaranty fund certificates before the payment of the interest accrued
thereon (all in response to the argument that the depositors' guaranty fund
was insolvent and that going banks should be relieved from the payment
of annual assessments) passed a joint resolution (Chapter 213, Laws of
1925) which reas as follows:
"Whereas, the guaranty fund established by law for the protection
of depositors in the state banks of South Dakota is unable at this time
to fully meet the demands upon it, and
"Whereas, it is expedient, proper and necessary that such fund be
preserved in its . best possible form and kept intact for the depositors
of failed banks until the loss, if any, may be fully and completely
determined, and
"Whereas, a large proportion of the resources of the failed state
banks consist of real estate, equities in real estate and loans that are
not collectible at this time, owing to present conditions; and
"Whereas the natural conditions throughout the state are improving and in time will reach normal and may fully restore the assets of
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OF DEPARTMENT OF BANKING AND FINANCE
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said banks to par and permit the sale of the real estate and allow the
equities to arrive at cost or a profit to said banks and to said guaranty fund, and
"Whereas, as it is generally conceded that if the conditions agriculturally continue to improve for the next two years, the situation of
the state will be entirely different from the present, and that if a
substantial percentage of the loans of the banks can be collected, the
problem of liquidation and payment to depositors becomes a comparatively easy one, and as it will take probably two years for this liquidation to be made, and
"Whereas, it is necessary that the equities of said banks in said
real estate be fully protected and managed and said banks be liquidated
so that the best interest of said guaranty fund and of said depositors
be conserved.
"Now, Therefore, Be It Resolved by the .Senate of the State of
South Dakota, the House of Representatives concurring, that the Governor and the Superintendent of Banks of the State of South Dakota
are hereby requested and advised to use their utmost efforts and influence for the protection of the real estate equities and the care of the
assets of the closed institutions so that liquidation can be fully made
and the depositors of said banks through the guaranty fund be paid
in full at the earliest possible date, and
"Be It Further Resolved, that: the Governor is hereby authorized
to appoint in the interim between this session of the legislature and
the session in 1927, a committee, the members of which shall be
farmers, bankers, and business men in equal numbers, to advise said
officers of the state, and the banking department, and to present a
report to the Governor of the state and to the next session of the
legislature, in full, as to the best manner to complete the liquidation
of the claims against said banks, to the end that the depositors of
said bauks be paid in full; and to further report on such method as will
take care of the deficiency, if any there may be, in the guaranty
fund heretofore created by law."
There was no appropriation made to cover compensation or expense
of such an interim commission. I have found no record of its appointment
and no report was made. This resolution appears to be a sop thrown to
law.
the public as an excuse for repealing the guaranty fund
I have already referred in an earlier chapter of this report to the sucin
cessive changes in the law relating to the pledging of assets of banks
borrowing money, culminating in Chapter 53, Laws of 1927, allowing such
pledges in an amount equal to one and one-half the capital and surplus of
the bank and as much more as the superintendent of banks might permit.
Although the referendum and the vote of the people thereon in November, 1926, had prevented the direct repeal of the depositors' guaranty
shed,
fund law, enacted by Chapter 99, Laws of 1925, from being accompli
by
the actual abandonment of that guaranty fund law was accomplished
the enactment, in the early part of 1927 of Chapter 54, Laws of 1927,
s in
which diverted from the guaranty fund established to pay depositor
railed banks and certificates of indebtedness of the fund, future annual
assessments against banks; and provided for the payments of such future
assessments into the state treasury for the benefit only of the creditors of
each separate going bank paying such assessment. The old guaranty
fund was thus discontinued, its obligations repudiated as far as any further payment of assessments into the fund was concerned, and a new,
saparate, and different fund set up for each separate bank with no obligation to contribute to the payment of depositors in other banks already
failed or of any other banks that might thereafter fail. This was the
crowning achievement of the lobby since it enabled the state banks to slip
out from the obligation to pay some $35,000,000 of guaranty fund certifi-
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ATTORNEY GENERAL'S REPORT ON INVESTIGATION
cates owing to depositors of closed banks, simply on the grounds that they
would never be able to pay it. We cannot help but wonder how far a private citizen would get if he appeared before the legislature and asked for
an act repealing his liability under a note and chattel mortgage owing to
one of said banks solely on the grounds that he could not pay it. Notwithstanding the high-sounding promises of payment contained in the resolution
of 1925 heretofore quoted, the legislature listened to the defeatist propaganda of the lobby and repealed the guaranty fund act; and this, after the
people had once rejected such repeal.
Chapter 56, Laws of 1927, authorized the superintendent of banks
after six months' liquidation of an insolvent bank "to appoint as examiner
in charge of such bank, any active officer of an open state bank doing business in the same community as such suspended bank formerly transacted its
business."
How truly has the ruining of banks, the supervision, acceleration, and
legalizing of the process, and the disposition of the ruins, been left to
bankers!
It is impossible to ascertain and I have therefore not attempted to
find out how many or what meritorious bills may have been proposed in
the various legislative sessions and killed by influence of the lobby before
or after being introduced. The absence since 1915 of enactments calculated to iniprove and secure the regulation of banks in the interests of
the public is just as vocal an indication of the influences at work and
of the effectiveness of the bankers' lobby as are the various enactments
heretofore cited which, either obviously or in practice, are for the exclusive
and private interest of banks and bankers. The following bills that failed
are, however, noted:
House Bill 287 was introduced by a "Joint General Investigating Committee" of the twenty-first legislative assembly in 1929. The bill authorized
and directed the attorney general to conduct an investigation of the banking
department generally, and "its operations in supervising going banks and
liquidation of suspended banks." A procedure was supplied, appropriate
actions were required to be taken and a complete report was authorized and
required. Adequate funds were appropriated. This bill was killed in the
senate after a sensational fight during which the superintendent of banks,
the lobby of the South Dakota Bankers' Association and their helpers, flocking to the capitol, wielded their utmost pressure and influence shouting
in unison: "Don't alarm the public; the passage of this bill will cause
runs on the open banks and more bank failures."
The attorney general was left to make this investigation in compliance
with the resolution of the house of representatives without adequate machinery, assistance, or funds. It has been made without occasioning "runs"
or "failures" and the public has known that the work was going on all
the time.
Senate Bill 110 and House Bill 213 were bills providing that the legal
work for the department of banking and in connection with liquidation of
closed banks or other matters should be done and supervised by the attorney general and authorizing the employment of two additional assistants
"on account of the additional duties prescribed."
Both bills failed to pass.
Senate Bill 23 provided for the amendment of certain sections of the
banking laws as follows:
So as to require as a condition of the official bonds of the superintendent of banks, deputies, and examiners "the rigid enforcement of all
requirements of the laws of this state relating to banks and banking" and
increasing the amounts of such bonds.
So as to require the superintendent of banks to compel banks and
trust companies to reduce excessive loans to the legal limit or cease making loans.
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OF DEPARTMENT OF BANKING AND FINANCE
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So as to require in plain terms that the superintendent of banks take
charge of and liquidate any bank or trust company failing to make good
impairment of its capital stock for thirty days after written notice.
So as to make clearer and more imperative the duty of the superintendent of banks, whenever it appeared from examination that a bank or
trust company had violated the law, was unsafe, had an impaired capital,
had suspended or refused to make payment of its obligations, forthwith to
take possession of and liquidate such bank or trust company.
So as to require the superintendent of banks to deposit closed bank
money in state banks or trust companies which on examination had been
found to be sound and solvent; such deposits to be further secured by
the deposit of collateral.
So as to limit compensation of counsel and examiners.
so as to require the payment of a dividend to depositors of a closed bank
whenever the funds on hand were sufficient, over and above funds necessary to cover expenses, to pay a dividend of ten per cent.
This bill failed to pass.
The only practical recommendation which we can make in connection
with the situation disclosed by this chapter is that you should consider the
information herein furnished carefully. If you are of the opinion that
undue prominence and solicitude has been given to the interests of banking
as a private profit-making business instead of from its public service standpoint, you have the power to remedy the situation. A well organized and
efficient lobby can accomplish considerable in the way of bluffing, browbeating, cajoling, and predicting future results which may never occur, as
a means of securing legislation for its purposes. The antidote is clear and
careful thinking, independent of private or political considerations; and
with the ever-present remembrance that the welfare of the general public,
as distinguished from the welfare of any particular class of the public, is
the primary object to be obtained.
SUMMARY OF RECOMMENDATIONS TO LEGISLATURE
We submit for your convenience the following summary of legislative
recommendations heretofore made and urge your earnest consideration
of them:
(1) Head of Banking Department
(a) The officer in charge of the banking supervision of this state
should not be a banker nor personally interested in any banks.
(b) The present office of superintendent of banks should be abolished
by the next legislature and instead of it a public examiner or commissioner
of corporations should be substituted.
(c) The officer at the head of the banking department and in charge
of the banking supervision should be elected by the people.
(d) The state securities commission should be abolished and its
powers and duties be transferred to this department.
(2) Reserve
a) That the minimum reserve be twenty-five per cent for all banks
and thirty-three and one-third per cent for reserve banks.
(a-I) The provision increasing required reserve to take effect at a
future date at least one year after passage and approval of the act..
(b) Require publication of six called reports each year with all preferred deposits or trust funds listed separately and also showing the cash
reserve in percentages, and showing a statement of the date and percentage
of every day since last report that the reserve had been below legal requirement.
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ATTORNEY GENERAL'S REPORT ON INVESTIGATION
(c) Provide a statute requiring the supervising officer to levy and
collect a penalty from each bank every time its reserve falls below legal
requirement; such penalty to be proportioned to the amount of the deficiency of reserve and the length of time it exists. The New York and
California statutes containing this provision would serve as a model for
this, but we would recommend one additional provision to those statutes
and that would be a requirement that the cash penalty assessed against the
offending bank should be deposited in some other bank than the one
assessed.
(d) Provide a statute making it a felony for any officer or agent of
the banking department wilfully to violate or neglect in any manner any
plain duty imposed by statute upon him and with special reference to allowing banks to operate in unsafe condition.
(3) Other Real Estate
(a) That each item of other real estate be charged out of the assets
of the bank on the expiration of one year after its acquisition unless or
until the total amount of other real estate of the bank is less than 75%
of its paid-up capital and surplus; provided that no item of other real
estate shall be carried as an asset of the bank for more than five years.
(b) As to other real estate held at the time the act takes effect a
period of five years should be allowed within which to charge out the
whole thereof.
(4) Rediscounts and Bills Payable
(a) The law should prohibit any bank from having bills payable
and/or rediscounts in excess of the amount of its capital and surplus during more than six months of any calendar year, and from pledging any
assets to secure the payment of either of both in an amount exceeding
one and one-half times the amount of either or both items.
(b) The enactment of this change in the law should not affect and
should except pledges of assets already made when the act takes effect
and renewals of such pledges thereafter made.
(5) Protection of Public Funds
(a) It should be made a criminal offense for any public official
having any public funds under his control knowingly to permit them to
be deposited in any bank which is in unsafe condition, whether such bank
shall have been designated as a depositary or not.
(b) The superintendent of banks should be required to deposit the
funds of closed b4nks in the sound banks of the state and it should be
made a criminal offense for him knowingly to permit the deposit of them
in a bank in unsafe condition. He should also be required to distribute
the funds pro-rata as far as practical, among all the sound banks.
(c) The law should disqualify any person holding an official position with, or a position of trust as agent or employee of any bank, from
helding position under which he can control the management of funds of
any public corporation at the time he is holding position with any bank.
(d) No treasurer of any public corporation, board, body, or commission should be permitted to have on deposit at any time in any one
bank more than the amount of one-half of the capital of such bank,
(e) Neither the treasurer nor his bondsmen should be liable for any
loss sustained from a good-faith deposit of public funds in any bank within
the state in case of failure of said bank, whether said bank has been
designated as a depositary or not.
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OF DEPARTMENT OF BANKING AND FINANCE
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(6) Legal Work for Closed Banks
banks
(a) All legal work for the banking department and for closed .
attorney general
should be handled, controlled, and supervised by the
not more
(b) The attorney general should be authorized to employ
counsel as
special
such
and
work,
this
for
nts
assista
me
full-ti
than three
a saving.
may be necessary for the means of accomplishing
, traveling
(c) Compensation of such assistants and special counsel
of the several
and other necessary expense should be paid out of the funds
determined by the
closed banks upon a pro-rata basis to be computed and
.
general
y
attorne
(6
) Remedies for Slow and Expensive Liquidation
ded or taken
(a) Within sixty days after any bank has been suspen
of the circuit
over by the superintendent of banks, the judge or judges
shall appoint a receiver
court of the county in which the bank is located
under supervision of
bank
said
te
the
liquida
ter
shall
thereaf
who
therefor
law.
by
bed
prescri
manner
the
the court in
as notes, bonds,
(b) Provide for liquidation of all liquid assets such
by collection
warrants, etc., within a stated period not exceeding two years
ing assets before
remain
the
of
sale
and
e,
possibl
as
far
as
ment,
adjust
and
cause shown,
expiration of the two years unless the court shall, upon good
from liquid
e
nds
possibl
divide
t
all
of
e
paymen
Requir
time.
extend the
assets as rapidly as the court may direct.
s of all closed
(c) Centralize the liquidation of the real estate holding
ement at Pierre
manag
central
or
under
s;
circuit
court
l
judicia
by
banks
or the rural credits
similar to the department of school and public lands
of holding the real
policy
the
with
them,
with
ction
conjun
in
system, or
acquire a reashall
it
until
e
expens
and
e
outlay
possibl
least
estate at the
it as the court may
sonable market value, and pay final dividends out of
direct.
(6%) Bankers' Association Lobby
official body and
(a) Discontinue the Bankers' Association as an
ize its duties in the
discontinue the guaranty fund commission and central
head of the department elected by the people.
ly from the standpoint
(b) Consider all banking legislation careful
consideration, and banking
of public service and public safety as the first
and endeavor to imbue
as a private, profit-making enterprise as secondary;
er with this policy.
all legislation either of substantive or procedural charact
(7) New Code of Banking Laws
so as to repeal present
A new code of banking laws should be enacted
have been referred to in
objectionable laws, all of which may or may not
ons of the present laws as are
this report, and so as to reenact such provisi
the additions and changes
salutary supplemented by and coordinated with
ended.
recomm
herein
RECOMMENDATIONS TO THE GOVERNOR
set out and referred to
Because of the matters and things hereinbefore
ended to His Excelrecomm
fully
respect
and
ly
In this report it is earnest
lency, Governor W. J. Bulow:
removal from office of the
(1) That "good cause" exists for the
or.
govern
the
by
banks,
of
nt
present superintende
sof putting an immediate
(2) That there appears to be no other mean
except by such removal
end to the maladministration shown in this report e going banks for the
regulat
will
or
who
success
a
of
tment
appoin
an
and
and who will administer the
benefit of the public and pursuant to law,
ors and other creditors.
deposit
the
of
for
benefit
banks
closed
liquidation of
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ATTORNEY GENERAL'S REPORT ON INVESTIGATION
(3) That you afford the superintendent of banks an opportunity to
be heard on the question of his removal at as early a date as may be conveniently possible; and that the attorney general be advised if and when
he may assist your Excellency in the premises by producing before you the
evidence upon which the foregoing report is based, or any other material
evidence.
CONCLUSION
In concluding this report we express our thanks for the high privilege
accorded to this department by your resolution, of making investigation
and recommendations upon the important public matter of banking.
As a part of our investigation we secured information which enabled
the attorney's general department to cooperate with attorneys Crawford 8r
Crawford and Charles P. Warren of Huron so as to aid them in bringing
before our supreme court an action now pending for judicial determination
of the constitutionality or effect of the statute repealing the original guaranty fund act; and also to bring to some definite status for the purpose of
distribution the sum of approximately $1,050,000.00 of guaranty fund
money which has been withheld from distribution for several years by the
present banking department.
We have endeavored to conduct this work impartially and free from
any consideration other than obtaining the best results with the funds
available for the purpose. Every finding, conclusion, and recommendation
herein expressed is true and correct to the best of the abilities of the
attorney general's department to make them so. We have available records
and information sufficient to substantiate the facts herein reported or the
inferences expressed, and are ready to produce them before your committees
whenever requested to do so. We are aware of, and have considered the
various arguments expressed against the recommendation herein made. As
this document is intended as a report and not a controversial document we
have refrained from argument in it. We will say, however, in this connection that all opposing argument can be successfully answered by careful
analysis of the facts and information which we have available for your use.
We believe that this report contains recommendations which, if translated into legislation will operate for the benefit of the people of South
Dakota for years to come. Such legislation will prevent lax and careless
banking and credit expansions. Industry and economy should be a natural
result. Confidence will be restored in our banking system and increased
safety afforded to private deposits and public funds. The careless, speculative, and unsafe banker will protest against it. The safe and efficient
banker should welcome it.
Respectfully submitted,
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Federal Reserve Bank of St. Louis
RAY F. DREWRY,
Assistant Attorney General,
M. Q. SHARPE,
Attorney General.
OF DEPARTMENT OF BANKING AND FINANCE
45
SUPPLEMENTAL REPORT OF THE INVESTIGATION OF THE
DEPARTMENT OF BANKING AND FINANCE OF
THE STATE OF SOUTH DAKOTA
Made by the Attorney General of Said State Pursuant to a Resolution of the House of Representatives
Wiled Oct. 23, 19301
I NTRODUCTION
During the past six months we have received numerous complaints
from the holders of depositors' certificates on closed state banks to the
effect that dividends due to them were not being paid. Investigation revealed that in practically all cases the funds of the closed bank involved
were being held in some of the banks at Platte, South Dakota. When the
first banking report was published all of the banks at Platte were going
banks and we had no authority to investigate their records under the
House resolution. The Commercial State Bank of Platte and the Platte
State Bank have now closed, leaving only the Farmers State Bank of Platte
(which we will hereafter refer to as the Smith bank) in operation. We
completed an investigation of the Commercial State Bank and the Platte
State Bank on October 15, 1930. We found the conditions as to the juggling and shifting of funds and withholding of dividends to be much worse
than we originally reported. The principal juggling and shifting took place
between the Commercial State Bank and the Smith bank, and so we will
make no further reference to the Platte State Bank in this report. As the
additional facts found bear out our original recommendation that the pressent superintendent of banks should be discharged from office and that
the legislature should change the law so as to provide for the election of
the Superintendent of Banks and also should provide for a return of the
liquidation of closed banks to the local courts, we desire to file this supplemental report at this time.
DEPOSIT OF CLOSED BANK FUNDS AT PLATTE
The present superintendent of banks spent most of his business life
as an officer of the Farmers State Bank of Platte and such bank is now
owned and managed by his close relatives.
When the 1929 session of the legislature convened there was much
talk about an investigation of the deposits of closed bank money in the
Smith bank at Platte and the legislative investigating committee was threatening to subpoena the books and go down to Platte and investigate the
matter. At about this time the shifting of funds between the Platte banks
began.
At this time there was shifted from the Smith bank at Platte to the
Commercial State Bank of Platte the sum of $418,592.76 of closed bank
accounts. The Commercial State Bank of Platte was either furnished with
the original ledger sheets from the Smith bank or else with a simple typewritten list of the banks and the amounts of their accounts. It immediately added these accounts to its deposits and simultaneously redeposited
the total sum in its own name with the Smith bank at Platte. No money
changed hands at all but the shift of accounts would show the Smith bank
holding on its records only about $80,000.00 of closed bank money when
as a matter of actual fact it held about $500,000.00 of such money. Thereafter the Commercial State Bank of Platte credited these accounts with the
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ATTORNEY GENERAL'S REPORT ON INVESTIGATION
2% interest but such interest was in fact paid by the Smith bank of Platte.
The whole transaction was accomplished with much speed and was nothing
more than a camouflage of bookkeeping calculated to deceive the legislative investigating committee.
The condition of the Commercial State Bank was such that it was not
entitled to have any closed bank money deposited in it, if safety of the
funds was to be given any consideration at all. It had been hopelessly
insolvent for two or three years; its reserve had never been up to legal
requirements for about two years and was generally hovering around 6 or
7%, and sometimes dropped as low as 2%; its capital was badly impaired;
it carried an abnormal amount of other real estate. The present superintendent of banks knew of these conditions and no official would have selected this bank for a depositary of trust funds under any conditions if he
was giving faithful and impartial administration of his office. Nevertheless, when this small bank closed it had $620,000.00 of closed bank accounts
on its books.
The 'other real estate' holdings of the Commercial State Bank deserve
special mention, particularly because the present superintendent of banks
actually approved the transaction under which it was allowed to carry approximately $366,000.00 of other real estate and to show Only $120,000.00
of it on its statement. The extra $246,000.00 was carried in the name of
a holding company known as the Commercial Investment Company, whose
officers were practically identical with the Commercial State Bank. Under
date of March 14, 1928, the present superintendent of banks actually approved in writing a transaction by Which $246,000.00 of this Commercial
Investment Company notes were taken into the Commercial State Bank
as an offset to a like paper valuation of other real estate. The only object
such a transaction could have would be to deceive the public into thinking
that the other reel estate holdings had been decreased by $246,000.00 and
loans and discounts increased accordingly. The other real estate of the
Commercial State Bank was practically all heavily encumbered and judging
from the records of other closed banks it is doubtful if the salvage from
its other real estate will pay the carrying charges and expenses of liquidation.
The Commercial State Bank of Platte closed on April 14, 1930. Prior
to its closing, however, it made out a list of part of its closed bank accounts, totaling $283,144.31; and took them back to the Smith bank. It
also paid to the Smith bank some outstanding checks and drafts and in
fact paid the Smith bank a total of $292,763.58 before closing. This left
practically no cash on hand or due from banks at all, so that it in fact
preferred and turned over to the Smith bank all of its cash on hand and
due from banks, a day or two before it closed. After turning over to the
Smith bank all of its cash assets the Commercial State Bank of Platte was
still owing $338,174.31 of closed bank accounts and $5010.58 of guaranty
fund money as preferred claims, but with no cash assets of any kind to
pay them and with.nothing but the worst of its assets remaining. A serious
question will naturally arise from this transaction as to whether or not
the remaining closed bank accounts in the Commercial State Bank should
not share pro rata in the $292,000.00 of cash assets turned over to the
Smith Bank a day or two before closing of the Commercial State Bank.
The following list shows the closed banks and the amount of their
money as turned back to the Smith bank by the Commercial State Bank a
day or two before closing of the Commercial State Bank:
Security State Bank, Argonne
$ 2,007.97
Bank of Avon
9,838.02
Bank of Brookings
17,390.33
First State Bank, Cavour
6,237.58
Black Hills Trust & Savings Bank, Deadwood
12,469.40
Estelline State Bank
4,055.06
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OF DEPARTMENT OF BANKING AND FINANCE
• Ethan State Bank
Moody County Bank, Flandreau
Hamlin County Bank, Hayti
Citizens State Bank, Henry
Peoples State Bank, Howard
State Bank of Humboldt
James Valley Bank, Huron
Lemmon State Bank
State Bank of Melham
Farmers State Bank, Mina
First Trust & Savings Bank, Mitchell
American State Bank, Parkston
Farmers State Bank, Parker
Farmers State Bank, Pierpont
Merchants Bank of Redfield
Commercial & Savings Bank, Sioux Falls
Security Bank of Tyndall
Farmers State Bank, Unityville
State Bank & Trust Company, Watertown
State Bank of Winfred
First State Bank, Newell
Iroquois State Bank
Stockmans Bank of Hot Springs
State Bank of Grover
State Bank of Bemis
Altamont State Bank
First State Bank, Sioux Falls
47
5,158.04
10,219.60
2,023.57
18,458.50
10,145.07
6,353.64
6,136.58
7,065.50
2,054.76
3,537.06
14,472.93
13,005.64
12,475.70
1,004.16
9,700.00
37,051.32
9,357.01
3,565.13
9,067.35
15,86,5.81
2,181.83
6,122.95
2,528.09
2,044.70
4,020.33
500.74
17.029.94
The following list shows the closed bank accounts and the amounts in
such accounts remaining in the Commercial State Bank of Platte after it
had turned over all its cash assets to the Smith bank and closed its doors:
$
514.54
Altamont State Bank
3,061.67
Security State Bank, Artesian
3.45
Colton Savings Bank
2,046.50
Albee State Bank
2,107.17
Citizens State Bank, Alexandria
1,534.15
Alpena State Bank
2,542.60
Ardmore State Bank
1,015.28
Astoria State Bank
.48
Belle Fourche State Bank
2,054.53
Bank of Bijou Hills
509.39
Farmers State Bank of Bison
591.55
Citizens Bank, Bonesteel
1,500.00
Bank of Bowdle
2,010.17
State Bank of Brandt
1,509.83
Broadland State Bank
2,015.79
Farmers State Bank, Bruce
2,790.91
American State Bank, Burke
4,039.38
Farmers & Merchants State Bank, Canova
12,428.52
Lincoln County Bank, Canton
505.37
Carter State Bank
1,179.94
Farmers Security State Bank, Wakonda
1,010.74
Perkins County State Bank, Chance
2,028.16
Chester State Bank
1,250.63
Claire City Bank
3,012.50
Bank of Clear Lake
1,506.25
Farmers & Merchants Bank, Conde
838.67
Cottonwood State Bank
2,082.50
Bank of Dallas
509.37
Bank of Davis
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ATTORNEY GENERAL'S REPORT ON INVESTIGATION
Granite City Bank, Dell Rapids
Dempster State Bank
Farmers State Bank, DeSmet
American State Bank, DeSmet
Bank of Edgemont
Eden State Bank
Security State Bank, Egan
Emery State Bank
Bank of Erwin
Ranchmans State Bank, Fairburn
Farmers and Merchants Bank, Farmer
Forestburg State Bank
Stock Growers Bank, Fort Pierre
First State Bank, Fulton
Farmers Savings Bank, Gann Valley
Garden City State Bank
Minnehaha State Bank, Garretson
Farmers State Bank, Groton
Hamill State Bank
Bank of Hartford
Savings Bank of Hartford
Farmers Security State Bank, Harrisburg
First State Bank, Harrold
Holabird State Bank
First State Bank, Herrick
Hyde County State Bank, Highmore
Hosmer State Bank
Farmers State Bank, Humboldt
Bank of Hurley
Citizens State Bank, Isabel
Farmers State Bank, Kadoka
Kai/or State Bank
First State Bank, LaBolt
Farmers State Bank, Lane
Citizens State Bank, Lane
Bank of LaPlant
Bank of Lake Preston
First State Bank, Lemmon
Lesterville State Bank
Citizens State Bank, Letcher
Security State Bank, Lake Norden
Bank of Lily
Bennett County Bank, Martin
Mervin State Bank
Meadow State Bank
Exchange State Bank, Menno
Bank of Commerce, Milbank
0. L. Branson & Company, Mitchell
.........
Todd County State Bank, Mission
Security State Bank, Montrose
McLaughlin State Bank
Livestock Exchange Bank,
.'' Newell
Farmers State Bank, Nisland
Northville State Bank
Dakota State Bank, Oldham
State Savings Bank, Ortley
Guranty State Bank, Osceola
Citizens Bank of Parker
Treasurer, Guaranty Fund Commission
Miscellaneous, Guaranty Fund Banks
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2,090.06
1,021.97
2,544.76
1,967.58
2,079.65
1,487.44
1,547.20
1,515.61
515.49
7.73
4,718.36
1,004.21
18,820.25
4,087.94
1,018.72
428.75
1,548.25
495.45
1,531.52
7.39
2,060.47
13.69
712.29
1,005.78
269.89
509.38
209.19
1,536.72
1,024.32
25.25
4,228.55
3,744.07
4,065.52
2,055.93
4,522.21
1,981.65
1,058.21
4,653.31
1,892.58
2,037.50
4,044.97
535.46
4.56
2,391.16
1,008.01
3,046.15
4,143.0.4
1,048.04
1,531.47
527.98
1,509.09
589.40
1,018.72
2,000.00
4,098.50
2,010.28
1,517.55
4,429.91
6,244.60
71,844.20
OF DEPARTMENT OF BANKING AND FINANCE
First State Bank, Presho
Security Savings Bank, Rapid City
Peoples State Bank, Ramona
First State Bank, Revillo
Bank of Ravillo
Dakota State Bank, Roswell
Farmers Savings Bank. Rutland
Dakota State Bank, Salem
Bon Homme County Bank, Scotland
State Bank of Scotland
Farmers Savings Bank, Sherman
International State Bank, Sioux Falls
Bank of Springfield
Meade County Bank, Sturgis
Farmers State Bank, Storla
First State Bank, Summit
Bank of Summit
Farmers Savings Bank, Tabor
Farmers State Bank, Thunder Hawk
First State Bank, Timber Lake
Stock Growers State Bank, Timber Lake
Farmers Exchange Bank, Toronto
Trent State Bank
Farmers State Bank, Troy
Citizens State Bank, Tulare
State Bank, Twin Brooks
Security Bank of Tyndall, No. 122
Security Bank of Tyndall, No. 122A
Security Bank of Tyndall, No. 122B
Security Bank of Tyndall, No. 122C
Security Bank of Tyndall, No. 122D
Farmers & Merchants Bank, Verdon
First State Bank, Vienna
Wakonda State Bank
Wakpala State Bank
Wecota State Bank
State Bank, Wentworth.
Farmers Savings Bank, Wessington Springs
Wessington Springs State Bank
Citizens State Bank, White Rock
Woonsocket State Bank
First State Bank, Zell
49
1,083.64
3,572.36
4,181.22
1,010.74
1,024.42
3,554.21
1,004.21
3,007.13
2,984.55
3,065.68
4,083.79
5.72
1,429.37
1,733.31
5,132.99
2,524.53
3,258.65
4,206.02
3,917.03
2,073.95
50.61
3,302.49
8.44
508.48
1,000.00
3,012.50
320.00
320.00
320.00
320.00
320.00
658.53
1,164.43
4,121.91
1,020.84
500.00
1,020.85
1,010.74
5,578.15
2,965.47
509.38
1,500.00
The following narrative of complaints received during the past six
months shows the inevitable result of permitting a practice, such as is
above reported, to continue:
STATE BANK OF BEMIS
Under date of June 20, 1930, I received a complaint from a depositor
in this bank to the effect that pursuant to notice of a dividend he had sent
hi his certificate for endorsement about May 15 and received no dividend.
same person
On August 20, 1930, I received another complaint from the
that the dividend had not yet been paid. The dividend was in fact paid
about September 10, 1930. As this was one of the banks which we did not
investigate we cannot locate all of its funds but $4020.00 of its funds were
in the Smith bank at Platte by shift from the Commercial State Bank of
Platte on April 11, 1930.
MERCHANTS BANK OF REDFIELD
On or about the 7th day of August, 1930, I received a written complaint to the effect that pursuant to notice of the banking department the
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50
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
complainant had sent in his certificates for a dividend declared about January 16, 1930. The matter had been delayed about seven months at the
time of this complaint and upon my making complaint to the superintendent
of banks he informed me that he had paid the dividend August 1, 1930,
which would make a delay of practically six and a half months. When we
examined this bank on October 25, 1929, the Commercial State Bank of
Platte was holding $10,000.00 of its money; the bank at Seneca in which
Mr. Tom O'Brien is interested, was holding $2500.00; the Farmers & Merchants State Bank of Hoven, which is another O'Brien bank, was holding
$1000.00; and the Smith bank was holding only $500.00. Before the
Commercial State Bank closed it shifted $9700.00 of Merchants Bank of
Redfield money to the smith bank at Platte and this money was apparently held by the Smith bank until August when this dividend was finally
sent out.
IROQUOIS STATE BANK
On September 30, 1930, I received a complaint to the effect that the
banking department had declared a 10% dividend on February 20, 1930,
and the complainant had sent in his certificate pursuant to notice. To date
of September 30, 1930, this dividend had not yet been paid. This complainant wrote the superintendent of banks in April, 1930, and again in
July, 1930, and received no reply, according to his report. When we examined this bank in July, 1929, the Commercial State Bank of Platte held
$6021.84 of its money and the Smith bank $2001.11; and in the shift of
accounts from the Commercial State Bank back to the Smith bank on
April 11, 1930, it appears that the Commercial State Bank shifted $6122.05
back to the Smith bank.
FARMERS AND MERCHANTS STATE BANK OF CANOVA
Under date of October 1, 1930, I received a complaint to the effect that
the banking department declared a dividend April 3, 1930, and asked the
depositors to send in their dividend certificates. To date of October 1,
1930, no dividend had been paid. In January, 1929, this bank had on
deposit in the Smith bank at Platte $10,158.29 and this was shifted to the
Commercial State Bank in January, 1929. When the Commercial State
Bank closed April 14, 1930, it had approximately $4000.00 credited to the
Farmers & Merchants State Bank of Canova. We have not made a recent
check for the balance of the funds of this bank.
CITIZENS STATE BANK OP HENRY
Under date of October 7, 1930, I received complaint to the effect that
a dividend had been declared on this bank about eight months ago and the
certificates called in for payment. The compainant had sent in his certificate but to date of October 7, 1930, no dividend had been paid. Approximately $18,000.00 of this bank's money was in the Smith bank at Platte
and some two or three thousand dollars in the Lakeside State Bank of
Lake Andes, which has since closed.
ESTELLINE STATE BANK
Under date of October 10, 1930, I received a complaint to the effect
that in February, 1930, the examiner in charge of this bank was ready to
pay a 5% dividend and the depositors' committee signed the approval. To
this date no dividend has been paid. The complaint further stated that the
examiner in charge had written two different letters since February to
F. R. Smith, superintendent of banks, to pay the dividend; and that nothing
had been done. The Smith bank held $19,270.66 of this bank's money on
September 30, 1930, and had held over $16,123.39 of it since April 30.
1930. The bank also had $4171.20 in the Corn Exchange Savings Bank
of Sioux Falls.
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OF DEPARTMENT OF BANKING AND FINANCE
51
ts of this kind. We
It is not necessary to continue a recital of inciden
t of declared divireceived similar complaints relative to delay in paymen
Bank of Edgemont, Ethan
dends on the Farmers State Bank of Storla,
Bank of Humboldt; which
State Bank, Wakonda State Bank, and State
or any other public use.
ture
legisla
the
of
use.
for
file
on
are
nts
complai
of
the funds of the closed
part
large
a
show
records
the
cases
such
In all of
favored bank. We
other
some
or
banks
Platte
the
with
ed
banks deposit
ng
dividends on the
declari
in
delay
to
e
relativ
nts
complai
also received
State Bank of Parkston,
Farmers Savings Bank of Gann Valley, American
The same conditions exist in deand the James Valley Bank of Huron.
d has been declared and
posits of their funds. The Gann Valley dividen
tion of a 7% dividend for
paid, and recent newspaper reports show declara
may be other instances of the
the James Valley Bank at Huron. There
our attention by complaint.
same kind which have not yet been brought to
d by this department we imreceive
is
nt
a
complai
where
case
every
In
funds and make
mediately investigate the location of the closed bank's
situation and inform
the
about
banks
of
tendent
the
superin
to
nt
complai
the complainant of our findings.
necessary. The facts
No comment on the situation above reported is
speak for themselves.
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Federal Reserve Bank of St. Louis
Respectfully submitted,
RAY F. DREWRY,
Assistant Attorney General,
E,
SHARP
M. Q.
Attorney General.
52
ATTORNEY GENERAL'S REPORT ON INVESTIGATION
INDEX TO THE REPORT
Subject
Page
Introduction
3
Plan and Expense of the Investigation
4
Allowing Insolvent Banks to Operate
4
The Significance of the Item "Other Real Estate" Among the Assets
of
Closed Banks
12
Re-discounts and Bills Payable Recognized as Danger Sign but Disregarded
14
Deposits of Public Funds
19
Deposits in Platte and Kimball Banks
21
Slow Liquidation
25
Attorney Fees
28
Special Cases
The Lincoln County Bank Case
Security Bank of Clark
Brule State Bank
Bank of Geddes
Wakpala State Bank
Peoples' State Bank of Ramona
Peter Norbeck Notes
30
30
31
32
33
33
34
34
Bankers' Association Lobby
36
Summary of Recommendations to Legislature
Recommendations to the Governor
43
Conclusion
44
41
INDEX TO SUPPLEMENTAL REPORT
Introduction
Page
45
Deposit of Closed Bank Funds at Platte
45
State Bank of Bemis
49
Merchants Bank of Redfield
49
Iroquois State Bank
50
Farmers and Merchants State Bank of Canova
50
Citizens State Bank of Henry
50
Estelline State Bank
50
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1217
down and regimentation and e nomic planning would be over,
that the country would return t an honest gold standard, that
the efforts to restrict the production of food and clothing would
be stopped, that the compulsion features of NRA would be
permitted to expire, and that for the next year there would be
a moratorium on reform of business by Act of Congress and that
our administration would devote itself to the four vital problems of reviving international trade, which has been choked and
strangled for so long a time, of caring for the needy and the
destitute, of balancing the budget, and of returning the control
of the credit of this nation to the Federal Reserve System,
where it belongs, I believe that, if such an announcement should
be made tomorrow, a firm and lasting recovery in this country
would begin within twenty-four hours. (Applause.)
President Withers: Thank you very much, Dr.
Carothers; we appreciate your honesty and frankness.
We will now adjourn for the Grand Ball.
. . . Whereupon the Banquet Session adjourned. .
. . A colorful Ball followed in the Venetian Room . .
Saturday Morning Session, May 19, 1934
The Third Business Session of the Annual Convention of
the New Jersey Bankers Association convened at ten-thirty
o'clock on Saturday morning, May 19, 1934, President Withers
presiding.
President Withers: The Convention will come to
order. This morning I will confine my remarks to simply a brief review; coupled with several recommendations, which I trust may merit the consideration of my
successor and his Executive Committee.
THE PRESIDENT'S ADDRESS
MR. CARL K. WITHERS
Trust Officer, First-Mechanics National Bank
Trenton
It would be difficult for nyone not having served on the
Executive Committee; throug the offices, and finally as President of this Association, to app ciate the feeling with which
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I approach this time-honored custom of addressing you just
before my retirement. Mingled with a certain feeling of relief,
is that greater satisfaction of having earnestly tried to carry
on in the best tradition of the past; of being privileged to have
as my immediate associates, the finest group it has ever been
my good fortune to know, and in receiving at the hands of every
last member of each committee, a degree of cooperation that
was a constant inspiration. To all of these, I owe a great debt
of gratitude that I hope Time may permit me to repay.
Coming into office shortly following the darkest days in
American Banking history, with our banks apparently faced
with the strictest kind of Governmental regulation and control,
it was difficult at the time to see where there might ever be
any further need for a State Bankers Association. Indeed, it
has but recently become known, from sources of high information, that it was only by the smallest margin that all banks were
not taken over by the Government and federalized on reopening immediately following the March holiday.
As late as May banks all about us were still closed, or operating on a restricted basis; public confidence was at low ebb,
and sentiment bitter as the result of frozen and lost deposits.
Startling revelations of weakness and violation of trust in our
banking system followed in rapid succession. From every angle
the banker was "despised and rejected among men." Painfully, yet courageously we took it—the while slowly fighting
our way back into the confidence and respect of our depositors
and communities; against a continuing barrage of public and
governmental denunciation—against legislation and regulation
which threatened—and still threatens to wipe out our independence, if not our existence.
One by one, we have watched with growing satisfaction, our
banks and trust companies reopen and return to the confidence
of their former depositors and stockholders. Today, the number of our banks still unopened, or operating on a restricted
basis, can be counted almost on the fingers of one hand. New
Jersey, and this Association, have reason to be proud of this
record of recovery, and may face the future with more than
reasonable assurance—that, spared unwarranted regulation or
possible extinction—our banks may continue to give to the people of the State a safe and adequate banking service.
Time will not permit even a partial review or comment on
the causes leading up to the proclamation which last March
closed all of our banks. Too many poor banks, too few good
bankers; the unwise and unwarranted competition between State
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129
and National sAtems; over-extended credit; the abuse of confidence by some 'banks and their securities affiliates—these are
but a few of the 'causes which we all know—and in fairness—
must admit. Aiming at the majority of these abuses of sound
banking practice, the Banking Act of 1933—much as we may
dislike its restrictive provisions, and its implication of Government control—will unquestionably go a long way in the right
direction toward ass4ring the future stability of our banking
structure. The more, obviously unfair provisions of the Act,
including the permanent guarantee fund; the wide latitude in
the removal of officer --cumulative voting, and possibly the
unwise extension of branch banking, we must continue to oppose, or attempt to have modified.
I need hardly remind you that the Association year now
drawing to a close has been an active one. If you have any
doubt of this, ask the Secretary! Starting with our open opposition to the Banking Act at the A.B.A. Convention in Chicago,
(which didn't get us very far against the barrage laid down by
Government emmissaries) hardly a week has passed without
its new problem or uncertainty calling for the fullest cooperation; not only of your officers and Executive Committee at
frequent and odd intervals, but in turn, each of your various
committees as well. Your President has attended a total of 83
meetings during the year of almost every conceivable nature;
in every corner of the State and practically every hour of the
day and night—including four trips to Washington in the interest of non-member State Banks—six public hearings in addition to regular Monday evening attendance at the State House
in opposition to harmful legislation—County Association—
American Institute of Banking—and committee meetings, Tax
Conferences—and, even rare in these days, anniversary celebrations and bank reopenings. Your Executive Committee has
gathered from all corners of the State for a total of five meetings, more than during any other in recent years, and then
almost without exception on urgent call. Every committee
has had at least one meeting, and some of them several in the
interest of their particular activity. Several new committees
have been appointed; the publication of an official magazine
started, and the idea of a combined Mid-Winter Banking and
Trust Conference brought into successful being. Aside from
this we haven't had much to do, other than to cooperate with
State Officials of the Reconstruction Finance Corporation—
The Federal Deposit Insurance Corporation—the Federal Land
Bank and Farm Credit Administration—and in between times
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130
Proceedings New Jersey Bankers Association
keep in close touch with the Department of Banking and Insurance in their heroic, if not at all times understood or appreciated,
efforts to assist non-member State Banks to qualify for deposit
insurance.
Closely allied witlt,all of this activity—and vitally necessary
to whatever success inNy have resulted from the effort—has been
the splendid interest an aid of the County Associations. In the
matter of the Code—thy dissemination of protective information; in furnishing mucliv of the available experience for committee appointments, and 'n many other ways they have been
of the greatest assistance, nd form a most necessary part of
our organization.
You have already heard r d, or will hear this morning, the
fine results of Committee act ty during the year. Feeling that
nG one honors, but is honored 4,y appointment to serve the Association, every last member o every committee this year was
selected either on the basis of kast service, or County recommendation; acceptance was rec ved before confirmation, and
except where circumstances madè it impossible—every member
has served willingly and helpfull
The work of the Committee oi Agriculture has met with
conspicuous success. In cooperati n with Federal and State
authorities, meetings have been held 'n practically every County
in the State, and have resulted no only in bringing about a
healthy return of confidence between farmer and banker, but in
releasing hundreds of thousands of d lars in frozen bank assets
through the liberal agency of the Fede al Land Bank of Springfield, and the more recent Farm Credit Administration.
/ The Bank Advisory Board—appointed for the first time this
year with the approval of the Commissioner of Banking and
Insurance, and comprising in its membership a representative
of each of the various types of banking in the State, has met
several times at the call of its Chairman, Colonel William H.
Kelly, for the consideration of problems vital to the welfare
of our banking structure.
The Committee on Clearing House Associations and Credit
Bureaus has made an exhaustive study and recommendation
that merits the most serious consideration of every banking
group, when conditions become more settled. That wellorganized credit bureaus are not just a passing fancy, is evidenced by the fact that no such agency organized in New
Jersey within recent years has ceased to function, or justify its
existence.
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HOUSE — No. 1184.
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It is tru that legislation now pending in Congress
(Senate, No. 4412) provides for lie creation of a Federal
Liquidating orporation to und rtake the liquidation of
any Federal eserve member b nk which hereafter may
be closed; an it is also true hat well-qualified judges
anticipate that this provisio very like y will gain approval either in he present s sion of the Seventy-second
Congress or in th first sessi an of the Se nty-third Conhowever, ti4t a large part
gress. It must be\ observ
such a Fderal corporafor
of the capital fund' requ ed
a it is proposed 4iat they shall
tion can be raised
er not applicable 4 any similar
ma
a
be raised -- in
be launched by he Commont
enterprise which mi
wealth of Massachu tt for the use of stat banks. The
pending national 1 *sla ion, in demanding that each of
the twelve Feder Rese ye Banks should cntribute to
the capital of a ederal I iquidating Corpor tion, at the
same time woul give to t e Reserve Banks 1 beral financial compensat on by rep aling certain ta4s formerly
levied upon t m, which m ny authorities c4tend never
should have b en taken from them by the Fed4ra1 government in th past. No si liar compensation appears
readily wit n the gift of th Commonwealth in return
for subscri ions which state anks might be compelled
to make t a central liquidatin corporation.
Moreov r, the pending nati nal legislation proposes
that a la ge contribution should be made to the Federal
Liquidat ng Corporation directly by the Treasury of the
United tates. Legal though sue a use of public funds
may be under the Federal Constit tion, the employment
of pub c funds and credit for a c tral liquidating corporati would meet in this State practically insuperable c nstitutional objection.
For all these reasons the Commi-.ion has reluctantly
concl ded that it is not worth while t i pursue this matter
further at the present time.
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Federal Reserve Bank of St. Louis
.
THE COMMONWEALTH OF MASS.
-Report of Special Corn, on
Reirision
of Laws relating to Trust
Companies & Private Banks, and
to
Liquidation of Banks.--Jaec.. 1932
[Jan.
HouSE — o. 1184.
42
Part II.
LAWS liELATING TO THE OPERATION OF TRUST COMPANIES AND PRIVATE BANKS.
KI,ETIRG THE PRESENT STRUCTURE SOUND.
It will hot do to limit our consideration of the recent
emergency to a discussion of means to improve methods
of liquidation. To do so would e to deal only with
water that has already gone over the dam, whereas we
should take all steps which are presently possible to keep
more water from going over the clam, that is, to give
still further protection to the motey of depositors in
open banks.
No act of the Legislature can prevent bank failures.
The essential requirement of sound banking is good management. Proper methods of administration cannot be
legislated into bank officers and directors. Another fact
deserves clear recognition just now: Banks which have
weathered the recent storm have passed a strong test
of their stability. Their management has successfully
withstood heavy strain, and has demonstrated its good
capacity. But this is not to say that economic conditions in general justify any relaxation of vigilance, or,
indeed, that conservation of the soundness of our banking
system does not require more than ever the close supervision of officials whose sole concern is in the public
interest and to this end legislation can strengthen the
hands of the Bank Commissioner and make more effective
his regulation of banking management within the Commonwealth.
We therefore earnestly recommend the enactment of
legislation (I) to create a banking advisory board, and
(2) to improve the present system of examination.
A Proposed Banking Advisory Board.
The recent collapse of values and the attendant economic conditions affecting the banking structure have
added enormously to the responsibilities of the Commis-
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16.!
19331
•
HOUSE
No. 1184.
43
sioner of Banks. He is charged with the supervision of
800 institutions, having resources aggregating $4,000,000,000, and in addition he is now charged with the
direct operation and management of closed banks having assets amounting to approximately $100,000,000.
The evidence presented before the Commission shows
that the present Bank Commissioner and his assistants
have gone through the most trying period in the banking
history of our Commonwealth. For more than a year
the Commissioner and his central staff have been confronted with the necessity of working far beyond the
ordinary business hours and late into the night, attempting to stem disaster and shifting aid and assistance to
quarters which required support, in order to avert bank
closings wherever possible. In the. face of every difficulty, the Commissioner has held unswervingly to the
line of duty; he has shown himself able in judgment and
energetic and conscientious in action. But no matter
what his merits, the Bank Commissioner, during such
periods of emergency and crisis as we have been passing
through, is subjected to an inordinate strain not only
by the burden of the work itself, but also by the sharp
conflict of interests which always work for and against
any decision to close a bank, no matter what the conditions may be. Yet in all this confusion and overwork
the Massachusetts Commissioner has thus far been left
without any opportunity of official consultation with
persons capable of providing competent and disinterested
advice.
In this relation, still other matters must be considered.
It is not to be doubted that our economic system has
undergone extensive changes within the past four years,
and that other adjustments accordingly will be inevitable. The basis of values has changed considerably.
Subnormal values necessarily create a pressing demand
for expert opinion in the conduct of banks. In accepting
the responsibility for momentous decisions the Bank
Commissioner is entitled, this Commission believes, to
an official opportunity of consultation with a group of
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HOUSE — No. 1184.
[Jan.
men, subject to his call, who can give him the benefit of
their varied experience and co-ordinate :their judgment
with his.
The Commission therefore recommends the appointment of a board to be known as the banking advisory
board. The Cominission does not propose that there
should be conferred upon this board the direct powers
which the Bank Commissioner now possesses. For the
sake of efficiency, economy and concise administration it
remains desirable that one man be the responsible head
of the Banking Department. The Commission's view is
that the proposed board should be so constituted that
the Commissioner may seek its advice in all important
matters which he may refer to it. The members of the
board would not be expected to devote their entire time
to the work or to act upon all matters affecting the
Banking Department, but to devote only such time as
may be necessary to consider the questions laid before
it by the Bank Commissioner.
The proposed method of appointment and a statement of the specific powers which would be given the
board are set forth in a draft of legislation accompanying this report. As in the case of the Bank Commissioner, members of the advisory board also should be
granted immunity from civil and criminal liability in
connection with their acts, or failure to act, so long as
done in good faith.
The usefulness of such a board would not be limited,
it should be clearly understood, to times of emergency.
Even under normal economic conditions, ' perplexing
problems of policy constantly arise for decision in the
Banking Department. In some cases these involve
material interests, both public and private, of such
weight that the broadest possible basis of counsel and
experienced judgment should be sought regarding them
before a determination is reached. On every problem of
special perplexity the advisory board would be in a position to supply useful guidance. Moreover, it would permit the Commissioner to gain from time to time the
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1933.]
HOUSE — No. 1184.
45
advantages of a deliberative review of any or all of the
major policies and practices regularly maintained by the
Banking Department.
The values which might so be won are substantial.
Important, urgently necessary, though it is to administer
well the affairs of banks which have closed, still more
important it is for the future that matters be so administered in Massachusetts that, to the limit of human
capacity, bank failures may be averted. With this end
in view the Commission believes that the creation of a
banking advisory board would be one of the most constructive steps that could be taken to strengthen the
state banking system. (For proposed legislation see
Appendix C-11.)
Examinations.
Another step that can be taken to protect further the
depositors in the going trust companies is in the matter
of examinations. Under the law as it stands, the Commissioner is required to direct in writing the discontinuance of any unsafe or unauthorized practice disclosed by
an examination, and,1 in case a trust company fails to
comply, he may mak0 a report to the shareholders, or,
with the consent of thr State Treasurer, Attorney General and Commissioner pf Corporations publish the facts.
tin the effective admini tration of the law, however, the
Commissioner is hamp red in several respects. With
800 institutions under he Bank Commissioner's supervision, it is difficult for the Banking Department, even
with the addition of ei hteen temporary examiners by
authority of the last L gislature, to make more than
barely enough examinat ns to comply with the law's
requirement of an examin tion "once each year.”_.]
Examinations are han led by the Director of each
division, namely, the Tryst Company, Savings Bank,
Co-operative Bank and Cbredit Union divisions. These
directors are also charged vith many matters of routine
in supervision and contro11 and accordingly are unable
to devote their concentrted efforts to examinations.
The necessity of the presence of these directors in the
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Federal Reserve Bank of St. Louis
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HOUSE — No. 1184.
[Jan.
central office to conduct efficiently the affairs of their
respective divisions makes it impossible for them to go
to banks throughout the State Or the purpose of meeting officers and directors and taking effective measures
to correct situations disclosed by examinations.
We do not think it necessary, even were it constitutionally possible, to provide, as is now the case with a
savings bank, a method for the removal of a bank officer
on petition to the Supreme Court, since we believe a
great improvement can be effected without going so far.
We recommend the creation of the office of chief examiner, and an amendment of the law to provide that,
whenever the Commissioner deems it necessary, such
chief examiner shall present to a board of directors in
person the criticisms of the Commissioner, and shall follow up the examination report to make sure that practices complained of are corrected.
The appointment of a chief examiner would serve to
co-ordinate the work of examinations, and would necessarily accelerate all matters incident thereto. This man
would be available to go to banks throughout the State
as the direct representative of the Commissioner, appear
before officers and boards of directors, emphasize and
follow up defects or irregularities revealed by examinations, and thus obtain more speedy and efficient results.
He would be directly responsible to the Commissioner
and work under his direction. This would relieve the
Commissioner of the necessity of personally attending
to many of such matters, and thus free his time to that
extent for attention to other subjects of major importance.
The man to be appointed to such a position as chief
examiner should be one thoroughly trained in the methods of bank examinations, including the various types of
banks, — trust companies, savings banks, co-operative
banks and credit unions,—and capable of making impressive and effective the importance of the position he holds
in order to obtain the best results possible for depositors.
The Commission is not unaware that examinations do
not necessarily prevent irregularities or bad loans. But
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HOUSE — No. 1184.
47
a thorough examination, actively and diligently followed
up, undoubtedly acts as a deterrent and frequently discloses irregularities in their early stages so that corrective
measures may be taken before wholesale wrong develops
or general disaster occurs.
With examination so, administered under the direction
of the Commissioner, with the assistance of the chief
examiner, the policies and procedure could be amended
and improved as the banking advisory board advocated
by this Commission may from time to time recommend,
all with the paramount purposes of instilling strength into
the banking structure, preventing dissipation of assets,
and affording the utmost protection to the funds of depositors.
Independently of our own conclusions in this respect, it
has been called to our attention that the Commissioner,
in his budget requests for the coming year, has asked
for the creation of this new position. The Commission
expresses the hope that a sum sufficient to employ a
competent man to fill this position will be provided in
the executive budget and authorized by the Legislature.
(For proposed legislation see Appendix C-12.)
PROBLEMS OF THE FUTURE.
Both in the proposal of a banking advisory board and
in the plan to better the system of examinations, the
Commission has had in mind, as the foregoing discussion
has shown, not alone that part of its instructions from
the General Court which looks toward improvement of
the laws relating to liquidation, but also the larger field
of duty which the Legislature imposed upon the Commission, namely, to examine all the laws relating to
trust companies and to recommend such changes as will
assist their safe and successful'operation.
The Commission was also instructed to consider the
laws relating to private banks, so called. In this matter
the task assigned was found to be very simple. Thanks
to the wisdom and foresight of the Legislature in adopting section 8 of chapter 182 of the Acts of 1929, every
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HOUSE — No. 1184.
[Jan.
monfinancial house then still operating in this Com
ve
wealth as a private bank under the authority to recei
the
of
169
money for safe-keeping prescribed by chapter
tion
General Laws was ordered to discontinue such opera
on or before July 1, 1932. Accordingly, on that date,
in
the business of private banking ias formerly known
ed
limit
Massachusetts became extinct, save only for a
on to
missi
trans
for
y
mone
ve
continuing right to recei
has
on
issi
Comm
the
foreign countries. On this account
t
emen
thought it needless to make any extended stat
present
concerning private banks in the body of the
tial
essen
the
of
w
revie
a
B
report, but offers in Appendix
facts.
of
Concerning the laws which regulate the operation
many
trust companies, the Commission has considered
Rel.
detai
of
some
suggestions, some of substance and
duty
ary
garding bank management, the State has a prim
to
to see that new bank charters are granted only
osed
prop
The
cter.
competent applicants of high chara
debanking advisory board may well be called upon to
asvise and recommend measures that will increase this
has
er
chart
bank
a
After
s.
surance in Massachusett
ent
been granted, many feel that subsequent improvem
that
and
in banking standards must come from within,
loped
deve
and
lated
stimu
be
such an impetus can best
ps
grou
n
in
iatio
assoc
by further extending the principle of
nvolu
through
like the clearing house associations which,
s and methods
tary co-operation, develop higher standard
t Company
Trus
s
sett
in banking. Recently the Massachu
the oring
urag
Association has been very actively enco
members in each of
ganization of such groups among its
. Meanwhile,
the various sections of the Commonwealth
nning in the
the State of Wisconsin has made a begi
divides all
same direction by adopting legislation which
stimuof its territory into clearing house districts, and
house
ing
lates membership by all state banks in the clear
underassociations thus formed. The voluntary work
iation
taken by the Massachusetts Trust Company Assoc
cter.
might be assisted by legislation of similar chara
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HOUSE — No. 1184.
49
Then there is the large problem of what to do about
group, chain and branch banking. We have had ore
notable example of the disastrous and widespread effect
of the bad management of a chain of banks extending
through five of the counties of the Commonwealth; and
there is much to be said for putting a curb on the whole
principle of chain banking in this State. On the other
hand, it is urged that branch banking under the State's I
jurisdiction might well be extended beyond the close
limits now defined by law. Allied to this problem is the
troublesome question of investment affiliates and the use
of holding companies and other devices by which control
of a number of banks may be acquired and exercised
without effective supervision of the management by the
Banking Department. There is the problem of investments; should the trust companies of the Commonwealth
be restricted to the same degree as are the national
banks, or, in any event, limited in some respects in the
investment of commercial funds? Should there be a
further segregation of functions, and should trust companies doing a commercial business be prohibited from
carrying on a savings department at the same time; or
will it be sufficient to limit the size of an individual
deposit in the savings department of a trust company
as is now the case in savings banks, or, perhaps, to grade
such deposits in the most definite sense, and to allow a
higher rate of interest on them than on deposits which
can be withdrawn on demand? Is it possible to improve
the method of appraisals upon which real estate loans
are made, by requiring resort to an unbiased board?
Should the guaranty fund required by law in the savings
department of a trust company be increased, both as to,
the total amount and as to the percentage of earnings
required to be carried annually to such fund? If the
protection of depositors were increased in this manner,
it would seem the more possible to devise some good
substitute for the stockholders' double liability feature
of the present law which, in practice, does not work
well.
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HOUSE — No. 1184.
[Jan.
All these and more suggestions have been made to the
Commission and have received earnest consideration.
Many of them appear to the Commission desirable to
adopt in any thoroughgoing revision of our trust company laws. The Commission is particularly impressed
with the desirability of achieving a more uniform standard of banking laws for banks doing principally a commercial business. The competition between the national
banking system and the systems of the different States
has too often resulted only in a successive broadening
of the powers first of one and then the other; and the
necessary consequence has been not a strengthening but
a weakening of the banking structure of both. Massachusetts standards are high; but we have not been
wholly free from the effects of this harmful influence.
The nature of the problem was indicated by the special
commission which reported in 1922, when it said that
"in our efforts to strengthen our banking laws we should
not make the conditions so onerous upon trust companies
that it would be to their advantage to surrender their
state charters and incorporate as national banks."
Nevertheless, upon none of the suggestions which have
been considered is the Commission prepared at this time
to make a definite recommendation, and for the following reasons. In the first place, any of these subjects
requires more study than could be given in the brief time
since the Commission was organized; and, in the second
place, prospective and possible changes in the national
banking system, far-reaching in nature, make it undesirable and unwise, the Commission believes, to take
action now. The relationship between the two systems,
\ national and state, is so close that action taken in one
' field necessarily affects the other, as the history of banking in the United States clearly shows.
Since 1930 the Senate committee on banking and currency has been holding hearings at Washington and has
been securing the opinion of leading bankers and financial authorities in all sections of the United States as
to possible reform of the national banking structure.
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HOUSE — No. 1184.
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The result is embodied in the so-called Glass Bill, Senate
No. 4412, which was reported on April 19, 1932, after
having undergone at least two extensive revisions during
the first session of the Seventy-second Congress, and
which under a resolution adopted by the Senate on December 15 is now a special order of January 5, 1933.
This is not the place for any detailed analysis of the
pending Federal legislation. It is necessary to observe,
however, that the Glass Bill, as it now stands, comprises
many significant provisions which, if enacted, would
profoundly affect not alone the national banking system, but also the existing relations between the national
banking associations and the systems of banks incorporated and developed under the laws of the forty-eight
States. Among the provisions which would affect these
relations there may be mentioned in particular the following:
1. After defining the terms "bank affiliate" and "holding company affiliate" the pending Federal legislation
provides extensive new measures for regulating such affiliates by requiring full statements of their condition to
be made to the Federal authorities in connection with
the examination not alone of national banks having an
interest therein, but also of state banks which desire to
continue as members of the Federal Reserve System.
The bill would also limit the right of banks to own, control, or be controlled by, certain types of such affiliates,
and looks, in some cases, to their complete divorce in
the future.
2. Still more basic and more important in its possible
effect upon the whole banking structure of the country
is the proposed extension of branch banking for national
banks. The Glass Bill in its present form provides for an
extension of branch banking within state bounds, and it
may be assumed that this proposal will be pushed to the
limit. The latest annual report of the Secretary of the
Treasury again recommends an extension of branch
banking for national banks within their "trade areas."
Though strong opposition has been offered, there are
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HOUSE — No. 1184.
[Jan.
many who would go much further, even, than the grant
now contained in the Glass Bill, as, for example, Thomas
W. Lamont, who, in a speech before the American Academy of Political Science at New York, on November 18,
1932, proposed "regional branch banking," and Eugene
Meyer, governor of the Federal Reserve Board, who
urges that the twelve Federal Reserve districts be set up
as the regions within the limits of which national banks
may maintain branches.
It cannot be necessary to explain at length how significant a new condition would be brought to pass if
such authority to do state-wide or regional branch banking should be extended to the national banks. In the
past, when dealing with this matter, Federal legislation
has qualified the grant of branch-banking power to national banks, by making it effective only to the extent
that the state laws governing state banks permitted, in
each of their several jurisdictions, a like authority. The
new proposals, it will be observed, would give the national banks a state-wide or regional branch-banking
power regardless of the provisions of existing state law.
Going further, even, than the proposals contained in
the Glass Bill is the suggestion, strongly advocated by
many leading bankers, students of finance, and various
spokesmen on behalf of the public at large, that the
national banking system might pre-empt entirely the
field of commercial banking, and by legislation compel
a unified system of banking for the whole country under
the jurisdiction and supervision of the Federal Reserve
Banks and the Federal Reserve Board.
CONCLUSION.
It must be obvious that if any of these major changes
should prevail, — and the fact is almost equally true of
several other provisions of the pending Federal legislation, — it will become incumbent upon this Commonwealth to look promptly and with the most diligent care
to protection of the interests of the state banks, and this
means especially of the trust companies, of Massachu-
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HOUSE — No. 1184.
4
r4
setts. It will become vital not alone to see that the
trust companies of this Commonwealth are permitted to
operate upon a fair competitive basis in respect to the
national banking associations, but also that such an equilibrium may be achieved between the two as will best
serve the broad interests of the State and its people.
On this major account the Commission believes it to be
undesirable to recommend any present action for change
of the laws relating to trust companies, and requests for
that purpose an extension of time until the first Wednesday in December, 1933.
HENRY PARKMAN, JR., Chairman,
By the Senate.
CLYDE H. SWAN, Vice-Chairman,
By the House.
JOHN W. HAIGIS,
THOMAS W. MURRAY,
J. RANDALL CHILD,
By the Governor.
Representative B. Farnham Smith, having been prevented by illness from attending the meetings of the
Commission, is unable to sign the report
While agreeing with the report in main outline and in
many of its essential features, Representative John P.
Higgins dissents from certain features, and concerning
them he has the Commission's approval that he file a
minority statement which will be part of the report and
be incorporated therewith in publication.
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HOUSE — No. 1184.
[Jan.
MINORITY REPORT OF REPRESENTATIVE
JOHN P. HIGGINS.
When the legislative resolve was adopted establishing
a commission for a survey and revision of the laws relating to trust companies, private banks, and to the liquidation of banks, I was of the opinion that a thorough
investigation of the causes of the failure of the sixteen
trust companies and two savings banks that were closed
from March 19, 1931, to May 10, 1932, would follow,
and that constructive suggestions of change in the existing law would be made with a view to preventing a
repetition of the acts of larceny by those in charge of
the management of banks upon future depositors.
I was confident for a time that my thought was not
amiss when at our first meeting we settled down to a
discussion of the cost of liquidation. But as time went
on it became evident that this expensive method of administration of closed banks would remain unchanged on
our statute books. One public hearing was held, and
although invitations were sent to each of the eighteen
liquidating agents who were employed by and under the
direction of Commissioner Guy, one agent appeared to
give the Commission the benefit of his Thoughts on the
subject; five others replied by letter; and the remaining
twelve agents did not deem it of sufficient importance to
advise us on this matter. It seems to me that this group
of men could best advise us as to the cause of the failure
of the bank of which they were liquidating agents. Any
evidence of unwise, reckless and possibly malicious mismanagement was before them when they assumed their
positions. This body of men could tell us of the abuses
practiced by miscreant officials of closed banks, and thus
enable us to incorporate into law preventive measures
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a
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HOUSE — No. 1184.
103
APPENDIX C-10.
An Act authorizing the Destruction of Certain Books and
Records relating to Closed Banks.
1
Whereas, The deferred operation of this act would
2 tend to defeat its purpose, therefore it is hereby de3 clared to be an emergency law, necessary for the im4 mediate preservation of the public convenience.
Be it enacted by the Senate and House of Representatives in General Court assembled, and by the
authority of the same, as follows:
1
Chapter one hundred and sixty-seven of the Gen2 eral Laws is hereby amended by inserting after section
3 thirty-six the following new section: —
4 Section 36A. After the expiration of six years from
5 the order for final distribution, the commissioner may
6 with the approval of the supreme judicial court cause
7 to be destroyed any or all of the books, records, cor8 respondence and other papers concerning any such
9 bank and the liquidation thereof.
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Federal Reserve Bank of St. Louis
Air
on
THE COMMONWEALTH OF MASS.-Report of Special Corn, on Revisi
to
and
e
Banks,
&
Privat
ies
Compan
Trust
to
ng
of Lqws relati
the Liquidation of Banks--Dec. 1932
104
[Jan.
HOUSE — No. 1184..
(
_-_,•,
APPENDIX C—
An Act establishing the Banking Advisory Board.
Whereas, The deferred operation of this act would
1
2 tend to defeat its purpose, therefore it is hereby de3 clared to be an emergency law, necessary for the im4 mediate preservation of the public convenience.
Be it enacted by the Senate and House of Representatives in General Court assembled, and by the
authority of the same, as follows:
SECTION 1. Chapter twenty-six of the General
Laws, as appearing in the Tercentenary edition thereof,
is hereby amended by inserting after section five the
two following new sections: —
Section 5A. There shall be a banking advisory
board serving in the division to consist of five members, as follows: The commissioner, ex officio, who
8 shall be chairman of the board, and four members
9 appointed by the governor, with the advice and consent
10 of the council, in the following manner: one member
11 from three candidates nominated by the Massachu12 setts Trust Company Association; one member from
13 three candidates nominated by the Massachusetts
14 Co-operative Bank League; one member from three
15 candidates nominated by the Savings Banks Associa16 tion of Massachusetts; and one member from among
17 the citizens of the commonwealth at large. Upon the
18 expiration of the term of office of one of the members
19 required to be appointed from nominated candidates,
1
2
3
4
5
6
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Federal Reserve Bank of St. Louis
162
19331
HOUSE1184.
105
20 his successor shall be appointed in the manner afore21 said for a thrm of three years, and upon the expiration
22 of the term of office of the other appointive member
23 his successor shall be appointed in the manner afore24
II.r term of two years. Any appointive member
25 may be removed for cause by the governor, with the
26 advice and consent of the council. Any vacancy in the
27 number of appointive members shall be filled for the
28 unexpired term in the same manner as in the case of
29 the original appointment. The board shall meet when
30 requested by the commissioner or by any three memdollars
31 bers and each member shall receive
travel32 a day while attending meetings and his actual
33 ing expenses incurred in the performance of his official
34 duties. With the approval of the commissioner, mem35 I. of the board may have access to the records of the
36 division and the reports of banks and examinations
37 thereof as provided by section two of chapter one
38 hundred and sixty-seven.
39 Section 5B. Upon request of the commissioner, the
40 board shall advise him with reference to: —
41 (1) Methods and standards to be used in making
42 examinations as provided in section two of chapter one
43 hundred and sixty-seven;
44 (2) The establishment of banking practices and
45 policies for the use and guidance of persons and cor46 porations subject to the supervision of the commis47 sioner;
48 (3) Measures for safeguarding the interests of
0 deposit,ors and other creditors thereof;
50 (4) The valuation of the assets of any such person
51 or corporation;
52 (5) Action to be taken by the commissioner under
53 section twenty-two of chapter one hundred and sixty54 seven; and
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Federal Reserve Bank of St. Louis
106
HOUSE — No. 1184.
[Jan.
55 (6) Any other matters which the commissioner may
56 submit to it.
57 The board shall exercise advisory powers only and
58 nothing contained herein shall be deemed to abridge
59 any power or authority conferred upon the commis60 sioner by any provision of law. No member of the
61 board shall be held civilly or criminally liable for any
62 action taken or for any failure to act hereunder in the
63 absence of bad faith.
1 SECTION 2. As soon as may be after the effective
2 date of this act the governor, with the advice and
3 consent of the council, shall appoint the three appoin4 tive members required by section one to be appointed
5 from nominated candidates, one for one year, one for
6 two years and one for three years from the following
7 June first and the other appointive member for two
8 years from the following June first, and thereafter shall
9 appoint such members in the manner provided in
10 section one.
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Federal Reserve Bank of St. Louis
411
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Sept. 23, 1933
Defense of Banking Act of 1933-Deposit Insurance Provision-J. F. T. O'Connor, C/C
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
In conclusion, let me say that as
politics have never entered
'nto the consideration of any
plan for re-organizing or reopening or the establishment
of any bank or branch in any
f the divisions of the Comptr
oller's office, can I ask you to
bear with me in the solution of
difficult problems in the same
spirit.
281
THE COMMERCIAL & FINANCIAL CHRONICLE—ABA Convention—Sept. 25, 1953
Interest Rates on Time Deposits—by 0. Howard Wolfe, Cashie o Phil
r f
a.
Nat. Bank, Phi:a., Pa.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
. All of us can
agree that it
would have
been able to
been better
solve the ques
had NN
tion of intere
the second me
st on deposi
thod, by th
ts ifr
e method of
management.
enlightened
The reasons
bank
why that has
possible, I th
not seemed
ink, need not
to be
necessarily be
of discredit to
ta
our intelligen
ken as a matt
ce or good se
er
the result, as
nse. It is ra
I see it, of co
ther
nditions over
have any cont
rol; at least,
for which none which none of us
I will just me
of us are to
ntion them be
blame.
cause they al
of interest on
l bear on th
deposits.
e subject
One is the du
al banking sy
stem which
peting sets of
gives us two
banks; too ofte
comn, I am afra
which of the
id, competin
two can do mo
g to see
re
banking than
in
th
e
wa
y of improv
the other. Th
ident
e other is wh
to as the fr
ee banking la
at we shall
w
refer
which perm
bankers or pe
it
ople to go in
to the bankin s a great many
any previous
g business
training, whic
with1o
h always ma
1t
banks in the sa
kes it diffic
me neighbor
ult f r
hood to comp
on the same gr
ete with ea
ounds.
ch ot r
S
THE COMMERCIAL & FINANCIAL CHRONICLE—ABA Convention---Sept. 25, 1953
Address of the Pres., L.A. Andrew, V.P., First Bank & Trust Co., Ottumwa, Ia.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
l'he "./nerican Banker" in an editorial
printed a few days ago said:
•If there was anything to distinguish the
national record as better than
the State, we might admit for this plan some
dodge the fact that the Federal Reserve System juctice. But we cannot
prolong prosperity, despite a realization withinwas used to stimulate and
the Reserve Board that
every step of credit ease was a step deeper
into a trap out of which the
Board has thus far escaped, but in which scores
and
thousands of honest
bankers, putting their faith and trust
banks, their reputations, and their all. In the Federal Reserve, lost their
"If we could forget the fact that national
distinguished by any foreseeing wisdom as tobank examinations were not
secondary reserve or other
requirements, that national charters were about
charters—in New Yo?k City,ir anything, aTii,t,IiTe as easy to get as State
ager=trat,the percentage
or errors at % ashington was but little different—
1t3
Baton Rouge, or the other State capitals, on the from that in Columbus,
whole—if we can ignore
uch points, we could concur in a move to give
Washington greater powers
o lead the way to better banking.
"However, the role of strong banking supervision
has been reversed.
State banking systems are leading the way with
a strong banking policy."
158
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Sept. 23, 1933
Address of Pres. R. M. Sims, VP., American Trust Co., San Franci. co
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Federal Reserve Bank of St. Louis
I think with the adoption of a code the Trust Division, through its
Executive Committee, should co-operate with the Comptroller of the
Currency, and with the Superintendents of Banks of the various States.
or the regulation or restriction of the issuance of trust charters. Unfortunately, in small communities where there is not sufficient business
established trust departIto sustain a trust department some banks have
ments whose potential earnings could not pay for the proper personnel.
sufficient equipment or satisfactory administration.
I
I think that the officials
authorized to grant a trust charter
)
should.
before granting such a charter,
first determine if trust service
with the code can be rendered
consistent
through proper personnel and
equipment
and executive supervision, and
if the bank is willing to assume
the cost of
such service irrespective of the
earnings from the trust department
. This
may seem to some visionary at
this time and to others as the
assumption
of an unnecessary or undesirable
function. However, I believe that
merely
through correspondence and
considerable co-operation it can be
obtained.
In any event, the position of the
Division would be better If the
principles
of trust service and the proper
requirements for a trust departmen
t were
called to the attention of the Federal
and State officials.
.....
.
_
157
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Nov. 1935
Business, Industry and Taxation--by Lewis H. Brown, Pres. JohnsManville Corp., NYC
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Federal Reserve Bank of St. Louis
— Business is tremendously interested in a sound banking
system. Business recognizes only too well that because the
people themselves demanded local control of banking, many
banks were started in the past, by people who were, in fact,
not bankers capable of being entrusted with other people's
money but might better have risked their own money in their
own private enterprise I suggest by far the largest portion
of the banks that were wiped out during the depression were
not operated by bankers. The confidence of business and
the
industry to-day in our banking system lies largely in
by
belief that the banks that are open to-day are operated
mystic
some
have
may
trained bankers. Deposit insurance
merit in the mind of the average small depositor, but those
who understand the problem realize that having banks man'
aged by real bankers is the greatest and best insurance
for the safety of depositors' funds.
'
7
155
•
SOURCE:
PROCEEDINGS NEW JERSEY BANKERS ASSOCIATION—MAY 1954
Address of Fred N. Shepherd, Exec. Manager, ABA-NYC
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Federal Reserve Bank of St. Louis
While a few banks had failed through crookedness, thousands
failed, not through mismanagement, but because of the failure
of the communities that had sustained them. Typical was the
Arizona town whose people awoke one morning to find that the
banking department had put on the door of its only bank a
notice of its failure. Below this official notice was one from
the bank's board of directors, reading:
"This bank didn't fail. The citizens of this town, who owe
it, failed."
The Government itself has a major responsibility for the
collapse of the banking structure, which it permitted to be
erected upon a foundation, the inadequacy and unsoundness of
which had for years been pointed out by banker after banker.
Government instrumentalities, both state and national, had
competed with each other in the chartering of banks, often with
insufficient capital and in communities already adequately supplied or unable to support
a bpnk.
1.5()
•
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--Geo. V. McLaughlin,
Pres., Bklyn. Tr. Co., Brooklyn, N.Y.
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Federal Reserve Bank of St. Louis
.
This brings us to the point from which we should
hay
started years ago—correct diagnosis of the trouble
and
treatment of causes rather than symptoms. Back
in th
year 1900. there were about 10,000 banks in
the United
States. For 20 years thereafter, the National
and State
supervisory authorities permitted an average increas
e of
1.000 banks a year, with the result that in 1920
there were
more than 30.000 banks in the country. This represe
nted an
increase of 200% in the number of banks in a period
when
the population of the country increased only 39%.
The re
actidn was inevitable, and now we have about 14,000
actiN t
banks, approximately the same number as in 1904. I
think
that there can be no doubt that the musihroom growth
of
banking between 1900 and 1920 was due to "compet
ition in
laxity" between Federal and State authorities in
the authorization of new banks.
In 1900 the National Bank Act was amended to
reduce the
minimum capital requirement for new Nationa
l banks.
presumably in order to compete with the lower
requirements
of State laws. In the succeeding 32 years, there
were about
4,800 National banks chartered with capital of
less than
$50.000. Only one out of three has survived—the
others having been liquidated or merged. If figures were
available.
the record for State authorities would probabl
y be shown
to be even worse. It was a common practice
for groups
seeking to form a new bank to apply first to
one set of
authorities, and if they refused, to apply to the
other, and
in many cases they were successful.
Therefore, I think we should start our legislat
ive program
by removing the. possibility of competition in
laxity between
the two sets Gf supervisory authorities. It can
be provided1
[that no new bank or new branch of an existin
g bank may
be authorized without consent of both State
and Federal
authorities.
1
149
•
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Federal Reserve Bank of St. Louis
Address of Clark_Hammond, Pres.,
Pa. Bankers'. AssocTa"tioir
Pittsburgh, June 8, 1927
(The Financial Age, Vol. LV, No. 29)
In many of the states the minimum captal stock with which a bank may orgatize is entirely too small, and this has
teen responsible for the failure of many
small institution; which cannot afford to
t ngage experienced efficers. It is generally conceded that there is no justification for a bank having a capital of less
than $25,000, at d some of the states are
now raising the minimum to this amount.
In a number of the states the banking
department does not have the power to
reject applications for bank charters, with
the result that numerous communities
throughout the country have more banking institutions than can be properly sup:,orted. The existence of too many banks
,yith insufficient capital in a community
tas undoubtedly been responsible for
many bank insolvencies. In one Western state, the number of banks more
than doubled between 1910 and 1920,
while the population remained stationary.
It is essential in the proper regulation of
the banking business that the supervisory
.,nthorities be empowered to refuse charters when there is not a legitimate need
for additional banking facilities in the
community. Numerous consolidations in
many over-banked communities have
greatly-relieved the situation by bringing
about fewer and stronger institutions.
By eliminating banks with inadequate
capital, awl permitting the organization
of new banks only when there is a genuine need for them, a large percentage of
such failures as we have had in recent
years would not occur.
I
l
148
•
PROCEEDINGS NEW JERSEY BANKERS ASSOCIATION--MAY 1934
Banking--Yesterday, Today and Tomorrow--by Dr. W. Randolph Burgess,
Deputy Gov., FRBk. N.Y.
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Federal Reserve Bank of St. Louis
Fewer and Better Banks: The present tendency is toward
fewer and better banks. This exactly reverses the tendency i
during the first two decades of this century. In the years from
1900 to 1920 it might fairly be said that the tendency was
toward more and poorer banks.
During those twenty years the number of banks in the country increased from approximately '0,000 to about 30,000. It
might be called the period of free banking, when almost any
group of people with a little money who wanted to start a bank
could obtain a charter. In 1900 the law governing the capitalization of national banks was relaxed so that banks were
permitted to organize with a minimum of $25,000. of capital,
as compared with the previous requirement of $50,000. In a
number of localities national and state authorities vied with
each other in chartering more banks. Legal restrictions were
relaxed upon real estate loans. The average population served
by each bank in the country declined from 5,800 in 1895 to
3,500 in 1920. In .particular a great many small banks were
organized in agricultural states, and in nine of these states the
population per bank in 1920 had declined to less than 2,000
persons. In two states it was less than 1,000. Over 11,000 or
more than one-third of the banks in this country in 1920 had
loans and investments of less than $250,000.
,
137
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Nov. 1935
National Banking Situation--by J.F.T.O'Connor, C/C
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Federal Reserve Bank of St. Louis
r /3/.
Greater latitude has been provided as to time of repayment and the character of assets on which loans may b
obtained from Federal Reserve banks. This should prove t
be a bulwark in times of stress.
/*-----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 $7,510,640,000 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.
)77From Oct. 31 1932 to Oct. 31 1935 only 66 primary National
banks have been chartered by the Comptroller's office; 29 for
the year ending Oct. 31 1933; 26 for the year ending Oct. 31
1934, and 11 for the year ending Oct. 31 1935. This is the
smallest number of National banks chartered in any three/
year period during the past 30 year
'Prior to that tim
the office records were not segregated as to primary orgai,
'
izations as distinct from conversions or reorganizations.
\IN,
131
•
THE CWREPCIAL & FINANCIAL CHRONICLE
•
ABA CONVENTION—Oct. 1952
heport of Economic Policy Commission—by R.S.Hecht, Pres., Hihei•nj Bk &
Tr Ca., Ne Crl,Jans--"Bankers Favor Unification of Banking
Through Federal
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
past largely as a
ct that was created in the
The looseness of this conta
ring practices on the
charte
ed
nsider
ill-co
and
e
result of former competitiv
has, as we have indinal banking authorities,
requirements of
part of both State and Natio
one of the cardinal
is
It
ted.
correc
ively
these mistaken
- ted, been extens
situation for the future that
ng
banki
sound
a
g
isurin
eration of the adconsid
Fill
ted.
repea
be
not
olicies of the past shall
existing laws, both
charters can be exercised under
enactment
isability of granting new
for any major legislative
need
no
is
there
so
nal,
State and Natio
of unqualified
of over-banking or the entry
evils
the
of
n
retur
the
to prevent
business
persons into the banking
L,
la
size of the banking ),,
sions can be stated for the
'
that
While no arbitrary dimen
the Nation, it is probable
of
ties
activi
mic
econo
ng it in
plant required by the
place have gone far in bringi
taken
now
have
that
nts
the readjustme
ng needs of the Nation
onship to the actual banki
line with a sounder relati
t number of banks .
presen
the
that
and
e,
a decad
of
than has existed in over
for some time to come
care
take
can
l
capita
to be
;mid volume of banking
the country which is now
of
ties
activi
ss
busine
expansion in the
and the dispersion
among too many banks
expeci ed. Over-competition
-cost units have been
a number of small, high
large
too
g
amon
l
capita
of
banking developments. ,
past for unsatisfactory
1
largely responsbile in the
safe.
are
Only prosperous banks
[
of
out, that, the elimination
We believe, as we have already pointed
not suited to the changed condi
those
and
units,
rmal
subno
and
dant
redun
truction
ht about the required recons
tions that now prevail has partly broug
ions,
n of normal economic condit
of the banking situation. If, with the retur
ng
in a measure in their banki
the business methods of the country return
onships and practices, the
relati
credit
rcial
comme
ard
stand
to
contracts
ied
liquidity will thereby be remed
'chief cause of the impairment of bankling
better
a better capitalized and
or reduced. Likewise business will find
condi
it than under pre-depression
managed group of banks ready to serve
caused over-compeplaces
some
in
field
in
the
banks
tions, when too many
the scramble for business.
tition and even cut-throat practices in
I
19:'/ 1
1. Banking Reform.
of the drawbacks and weak- y
It has long been generally admitted that one
m was that we had more banks than'
nesses of our American banking syste
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
tion of this particular weakness in
has in recent years been a marked correc
11 years the number of banks in the
American banking, for during the past
0 to 20,000 through suspensions,
United States has been reduced from 30,00
. In this way many uneconomic
consolidations and voluntary liquidations
on of the remaining institutions was
units were eliminated and the positi
•
thereby strengthened.
125
The Commercial & Financial Chronicle--Oct. 1932
R. S. Hecht-2
1. Banking Reform (contd.)
Unfortunately the violence and rapidity with which the
process of elimination has operated during the period of the
depression carried it to disastrous lengths that increased general
business unsettlement and public alarm. This in turn caused the
suspension of many good banks and the ruin of many excellent bankers
that would otherwise have weathered the storm. Doubtless, also, many
communities have been deprived of the banking facilities for which
their business activities present a real need. In the main, however,
the processes that have so largely reduced the number of banks in the
United States have to a great extent weeded out institutions from the
banking field that fall under the following heads:
1. Banks
that should never have been granted charters
because of inadequate capital, lack of proper qualifications to
engage in banking on the part of their organizers, or insufficient
available business to support them in the places where they were
started.
2. Banks in places where probably permanent local changes later
reduced the volume of available business to a point below the amount
necessary to support then existing banking facilities.
3. Finally, institutions in which improper or incompetent management had come into control.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
SOURCE:
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention
Nov. 17, 1934
Deposit Insurance as an Aid to Banking--by Leo T. Crowley, Chinn. FDIC
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The two more general factors relate (1) to the re-chartering
of banks, and (2) to the sound management of institutions
tilkt are members of the Fund.
1 The failure of 14,000 banks in 13 years is unmistakable
evidence of the gross error that was made in the almost indiscriminate licensing of banks. We should not repeat that
: errsj We are concerned about it because the unnecessary
new
multiplication of banks will vitally affect our Fund. No
bank or bank branch should be licensed or chartered unless
it is economically necessary in the particular community.
This is a problem upon which your judgment and your
voice will be serviceable.
The other general factor relates to the management of the
bank. We have previously touched upon it, and now I
urge it upon all as a general practice. It is the current
absorption of all losses and the building up of reserves for
any future losses. This is part of that capable management
of banks which we expect from all members of the Fund,
and which we desire to promote.
Possible changes in the permanent Deposit Insurance
Statutes, which, I believe, merit consideration as a means to
help achieve the public purpose of the Act are:
)
•
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention-Sept. 23, 1933
Annual address of Pres. Francis H. Sisson, VP., Guaranty Trust Co., NYC
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
fro"
)
r It can fairly be
said that a great partrof
this unsound bank char
history was carried
tering
out by political banking
officials and legislative
wholly against the
bodies
earnest protests of the
more responsible bankers
pleaded for stricter bank
who
ing codes and policies,
charged with selfishn
but were ignored and
ess and fear of competit
ionj
It is indisputable that
too many banks, part
icularly with too smal
capital or in localities
l
too small to support them
, were thus brought
existence. Some corr
into
ection by the natural
forces of elimination,
consolidations, voluntar
such as
y liquidations and espe
cially failures had some
-
what reduced this; from
the peak of 31,000 banks in
1921 the number had
fallen to 25.000 by 1929
. In this period 5,000 bank
s failed, of which 60%
were capitalized at $25,
000 or less and 80% were in
places under 3,000 in
population. Even duri
ng the era of booming prosperi
ty, bank failures
averaged some 650 inst
itutions a year. Yet, although
these drastic processes'
had largely corrected
the weaknesses of over-bank
ing in the banking
gtructure. there was still
a great deal of dead wood
in it when it entered
th' depression in 1929
.
, of past events will help
A critical examinat
to reveal where the
ion
opportunities for futu
lie.
re progress
in the first place, our
recent banking hist
ory shows very clea
been made far too easy
rly that it
to enter the banking
sented in 1921 of 31,0
business. The spec
00 banks operating unde
tacle
r 49 jurisdictions of
ying powers and polic
ies, some banks with
widely
small capital and som
to do business in haml
e trying
ets that amounted to
little more than coun
roads—all this woul
try crossd have been grotesque
if we had not beco
to it.
me accustomed
How can we prevent
a repetition of the
banking history of
Can 48 States be prev
recent years?
ailed upon to enac
t and maintain bank
will plaoe suitable
ing codes that
restrictions on the size
and location of bank
an adequate quality of
s and insure
bank management?
to appoint banking
Can they be depe
authorities who will
nded upon
enforce the codes
favor in the face of the
without fear or
personal and political
be brought to bear on
pressure that will
inevitably
them? Apparently
the United States
.hinks not, for one of
the aims of the Bank
Congress
ing Act of 1933 is
commercial banks into
to bring all
the Federal Reserve
System, thus maki
1,all intents and purposes
ng
, national banks.
them, to
Unfortunately, the
adopted to accomplish
this aim is the guar
instrument
anty of bank depo
the opinion of most expe
sits, which, in
rienced bankers, is
unsound and will
not endure.
t
J 2(1
•
NATIONAL BANK DIVISION.
•
33
86% of our loaned money; 23% borrowed 3-10ths of 1% fears, viz., for their competitors and for the public. The
IS It did not take a wise banker, Regional Clearing House Associations can bring competitors
in amounts less than
nor even an experienced one, th realize how .preposterous into line, and the public when properly and clearly informed
a situation these figures indicated, once they had been need not be feared. They do not resent fair charges when
ascertained. The method of ascertaining them was not they understand them. I can state this absolutely from
Si no personal experience throughout a very trying period.
difficult for us, and is not difficult for any
I do not, however, want to seem th stress the raising of
figures
these
with
Armed
small.
nor
how
matter how large
and other local institutions likewise arming themselves, income while ignoring the reduction of outgo. Sound b
we were in position to do some pioneering in our territory. ness principles clearly demand that both are necessary toFinally, early in 1931, the Little Rock Clearing House day. Salaries must be moderath, frills must be eliminated,
Association adopted charges which eliminated is; in- the expense account must be carefully guarded so as to save
equalities and brought every account at least to a break-even the pennies. Interest bearing deposits must be scrutinized
basis. We took this a,ction with fear and trembling. Both and controlled so that they are not handled at a loss. Local
were needless, however, because the charges were well re- taxes and insurance protection offer fertile fields for reduced
ceived. They have been continuously in force ever since. costs. Right now the temptation is exceedingly strong to
Meanwhile, in 1930 the Arkansas Bankers Association increase income by putting into the note portfolio a poorer
adopted a slogan to guide its activities for the year. The quality of notes in order th buiM up the interest account.
slogan was, "Know Your Costs—Know Your Loans." A Nothing couM be more dangerous. The answer must be
Bank Management Committhe was created, of which I had fIII in service charges and low expenses. May I cite two
the honor to be Chairman. This committee worked un- extremes to illustrate my point. Last summer I spent a
ceasingly for the ensuing two years to widen knowledge of little over three weeks at a certain summer resort. On the
bank costs, to improve pra,ctices, to secure whole-hearted day of my arrival I opened a bank a,ccount, &positing a
I was given an expensive
co-operation by the banks. In the course of this work check on a nearby ii: 555
we adopted a code of fair practices for the Association. passbook and checkbook. I drew quite a number of checks
That word has a familiar sound now since the creation of during the three weeks, and at the end of the period drew
tI e NRA. At that time, however, it was quite unfamiliar. out my balance. No charge whatever was made for all
We are still proud of our initiative. T s code was adopted this service. I actually protested to an official that I
formally at the 1931 convention. L er it was read to would like to pay something. Si the other hand, I kmow
is, neighborhood which earns its upkeep and
practically every bank board of direct s in the State and of a bank in
signed by executive officers. Its 12 rtieles constitute a an adequate divi&nd entirely out of its service charges,
gospel of sound banking practices ju4 as cogent now as so that it has no need whatever of an interest account. It
they were then. These articles were Wowed by suggested happens to handle a great many cotton tickets, but it exschedules of charges to take care of s ggested costs. The acts adequate toll for this and its other services. And its
State was then divided into 11 regiona clearing house asso- community, far from being resentful, is exceedingly proud
ciations. These associations held
eetings, exchanged of its institution.
rne get back again to school days for a moment. Is
me of them were,
views and gained the elbow touch.
remember
that when you first started the study of hisyou
of course, more active and efficient tha others. Some have
uses, and installing tory you had a rather fixed i&a that history had pretty
gone much farther in rectifying local
charges. But all have to this day ret ined at least a skele- well happened; that all the wars, upheavals and events had
ton organization which makes it poss•le to &al with any led up to the point of that year of existence, thereby making
territorial group quickly and effici tly. Naturally the it possible 1,5r the world th be rather static henceforth, and
IS
experiences of 1933 very largely dam ened the enthusiasm life smooth \and uneventful. Of course, we have
truthfully
said
Adams
so
istake.
As
Henry
learned
our
with which this work of organization as being carried on
in his splendid\ autobiography, "History is constantly acbut it never stopped.
The territories which adopted ch ges have in no case celerating," so tat you and I are being whirled along at a
constantly quick ng pa,ce. Particularly in the worM of
givSi them up, nor would they dreani of doing so.
NOW if you have in the past deve ), ped your costs as we banking, it takes is and open-mindedness as well as
did, how recently have you checked .up on them ? If you knowledge and cour e to hold a proper place in the progress
have not done so very recently, get tfiena out, brush off the of events. Banks of terest have become banks a service.
cobwebs and then refigure them. S e if they are still cor- They may become so•ething else th-morrow. As recently
rect. We have done so and found I., quite askew. To as five years ago one of he foremost financiers of this councash an "us" check now apparently costs 3Vic. instead of try told me that he is ht commercial banks wouM grad5%c. previously mentioned; similarl , to handle a clearing ually change into invest nt banks. His error now seems
/
tc. Both as you see are laughable. Yet our com rcial demand has been steadily
ltem respectively 1.2c. and 23
reduced. On the other hand, to hal:1We a transit check now shrinking and there has be a contest for the best of the
costs 2.4c. against 2c. previously. This last called for remainder which has cause unequal competition—often
analysis, which readily developed *e fa,ct that the vastly between the larger city banks nd is own good bank correduced volume was responsible lor the increased cost. respondent customers. A m nifest injustice. Banking,
On account of super-liquidity and lor interest rate, we found more than any Other business oi\profession, is on trial. We
that instead of $10.00, it now requires $18.00 of collected feel, and I think justly, that the 0\5mmercial banker has been
fuI5 s on deposit to cash a check. And so I might continue made the scape goat of the later\phases of the &pression.
ngly down the list, but I desire only to emphasize the It is no use to rail at these facts. The important thing is
.
fact that costs have changed tremendously in recent months. that we justify our mdstence, sri.t in doing so we never
• The day of pioneering with reference to cost-finding and drive any business away which is Ming to pay its way,
adoption of schedules of service charges has passed. The nor alienate our public. To operato prditably, secure in
American Bankers Association has done splendid work in the knowledge that banking is far too 'essential to drift very
disseminating information and preaching the gospel of long without satisfactory objectives, is the best rebuttal
S rofitable banking. All necessary information, or the means to those who, through prejudice or impatience, wouM make
of getting it, are available. The task of learning costs and un.wise changes. So long as our books reflect that the
installing compensating charges rests with the bankers them- "2 plus 2"a our income equal "four and that the expenses
selves. The ideal vehicle for use in the imposition of uni- equal only "3 leaving the "1" of profit, we are safe. Or
form charges is the Regional Clearing House Association. as we used to add after our geometry problems were solved,
It comprises a group of competing banks, operating under "Q. E. D."
similar conditions in a restricted trade territory. ComMay I close by citing another homely recollection of
munication and conta,ct between the banks are easy. The boyhood days which will be familiar to many of you oldsters.
elbow touc5 is provided. Bankers ordinarily have two You remember that when the circus came t5 town it always
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'The Commercial & Financial Chronicle--ABA Convention--Nov. 17, 1934
•
34
BANKERS' CONVENTION.
gave a parade up Main Street. At a certain point in the
parade, a nian used to come riding along on a prancing horse
shouting, "Hold your horses, the elephants are coming";
and if you didn't hold your horses, they ran away. I know
of no thought which is more applicable tb us right now.
The elephants of progress are thundering along irresistibly
If we don't, so to speak, old the horses" of our profession
well in hand, they will un away and leave us stranded.
Let's hold them, and k p up with the procession.
[In introducing Mr. Kahn, President Cook said:
"The next subject on our program is one which I know
intrigues the interest of all bankers. It is one in which the
greatest study has been aroused largely by force of necessity.
This speaker, wit° comes to us from the middle south section
of our countr , is a recognized authority upon the reasons
for, the me ods of, and the results obtainable by determining ex tly what the banking operations cost. He has
given m
study and research to the subject."]
Who Should Handle Reserves of National Banks?
By FaANK P. BENNETT, Editor "United States Investor," Boston, Mass.
Three years ago, it was ray privilege to address such representatives of this Division as dared to stray away from their
banks long enough to attend the convention at Atlantic
City. We considered together as ..s
steady thinning of the
ranks in the National Bank.System. A tidal 'Si was sweeping many metropolitan banks, and an even larger number of
small national banks into State banking systems. State
bank charters had lured them away from the restricted life
in which Congress had anchored them, into that less restricted condition that state banks enjoy. I said at that
time that the future of the National Bank System depended
upon the rank and file of National banks. Disintegration
of the National Bank System must go relentlessly on, unless
the 7,000 National banks themselves should move upon
Congress with the zeal of evangelists. They could not expect either the authorities at Washington, or the great
correspondent banks in metropolitan cities that hold reserve deposits from State and National banks alike, or
the members of Congress with their necessarily limited
.no'edg
the respective merits of national and state banking
systems, to v,-age their battle for them.
What I shall say to you to-day, after the lapse of three
crI'S ed years, bears some resemblance to what I said then.
There has been no change in the attitude of Congress toward
National banks. There is the ..a edisposton on the one
hand to disregard what State legislatures and State banking
authorities may be doing, and on the other hand to set up
increasingly stringent rules for the government of National
banks. Crhe curious theory has prevailed in Congress that
National banks must be held back from waywardness by
sufficiently stern Federal laws, but that State banks may be
left free to be quite as well behaved or quite as wayward as
48 different legislatures may allowO So the question we
shall now consider together is of primary importance to
National bank men. Except there shall come over Congress
such a change of faith as befell the great Apostle on the road
to Damascus, any law for a central bank will be coercive in
its treatment of National banks and pleasantly seductive
tI'.rd State banks and trust companies. The banks you
represent will be made to bear the major part of the burden.
They will be rounded up like sheep and driven into the new
system, with only such associates from
is, the State
banks as come willingly into the fold. It is your reserves
that will create a central bank and permit it to function, and
you are, therefore, peculiarly concerned as to what central
banks are.
There is a good deal of loose thinking on this subject of
central banks. Almost everybody knows hissr less vaguely that central banks dominate the financial situation in
England, France and Germany and that Canada, is completing arrangements for a similar institution. The names
of Bank of England and Bank of France are surrounded with
glamor in most eyes. What they do, how strong they are,
and to what extent they hold the fate of the world in the hollow of their hands has become a legend. When Mr. Bryan
undertook, almost forty years ago, to terrorize our people,
with visions of what the money power of Europe was about
to do to the helpless millions a America, it was the Bank of
England that stood in the foreground of his dream-drama.
When,later S. the Bank of France was reported to look with
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Federal Reserve Bank of St. Louis
a somewhat friendly eye upon a larger use of silver for currency, silver advocates felt that a great accession had been
gained for their cause. In the years that have followed,
there has developed in the minds of Congressmen and a good
many others the conception of these banks as two potent
monopolies, wielding a whip hand over all other banks in
their respective countries, but docile to the point of subservience in their attitude toward the finance officers of
govermnent. Their function is conceived to be that of
Ia.rshaling all the banking reserves and all the banking
IS''r of England and of France, and then of placing, this
completely at the service of Chancellor of the Exchequer or
Minister of Finance when he shall ask for it. Who can wonder that with this conception of the British and Frencn banking systems, many men in public life have come to think of
it as preferable to our Federal Reserve System? How are
they to know that this conception is as grotesque as a picture
from Alice in 'Wonderland?
Let's take a square look at those banks. What is the
Bank of England, and what is the Bank of France? Each is
in essence a private business enterprise. Its capital stock is
owned by anybody who chooses to buy it. Figures compiled a few years ago showed that the Bank of England had
10,000 stockholders and the Bank of France 30,000. These
III;, each with his one share, or five shares, or more, and
not the government, own the Bank of England and the Bank
If France. The only limits upon their right to fix the policies of their bank, exactly as stockholders in America fix the
policies of the banks they own, are the limits set by custom
and one other. At the Bank of England, this other is that,
no stockholder can have more than one vote, regardless of
the number of shares he holds, and at the Bank of France
that only the 200 largest holders of stock can vote. But
the stockholders actually choose the directors of the bank.
The British Chancellor of the Exchequer has no more to do
with the choice of the 26 directors of the Bank of England
and the Minister of Finance d France no more voice in the
choice of the lo regents and the three censors who direct the
Bank of France than have you and I who are gathered in
this room this afternoon. The Chancellor is equally without
voice in the selection of Governor and Deputy Governor for
the Bank of England and although the Minister of Finance
and his President appoint the Governor and two Sub-Governors for the Bank of France, it is the 15 Regents or
Oirectors, meeting once a week, who decide upon rate of discount and the Governor or Sub-Governors cannot change this
rate by so much as one iota without their approval. You
see, the very essence of the structure d these banks is their
independence of government.
Nor do the stockholders ask that the directors shall promise
to be humble collaborators at all times in whatever Treasury
policy the party that happens to be in power shall adopt.
The directors of the Bank of England generally serve for
life. When vacancies occur among the 26, the other directors look over the most promng young men in the oldestablished firms of London and choose the new director frona
that group. They are not looking for popular favorites.
Their deliberate intention is to pick men who will grow in
mental stature and become pretty good directors after some
20 years or more of association with the bank. Walter
•
107
4
U
NATIONAL BANK DIVISION.
Bagehot, in his famous book "Lombard Street", tells of his
surprise in discovering "a very fresh and nice looking young
gentlemen" to be a director of the Bank of England. He
discovered, however, that the Bank is really run by the older
directors who test out the younger members and retire them
if they fail to grow as expected. The so-called Committee
of the Treasury, made up of those who have had 20 years
or so of service, and have ultimately been Deputy Governors
and Governors in rotation, really run the bank and they
have particular control over the relations of the bank with
the government.
Do you see in this situation the slightest similarity to
that Central Bank which some men in public life are asking
that this country establish? This central bank of England
finds its own directors, takes them from among the merchants and private bankers of London,'pays no moce attention to their party affiliations than to their religious beliefs,
pays no more heed to government suggestion as to who shall
be Governor or Deputy Governor or who the new director,
than to suggestion from any other source, and deliberately
sets up its directors of longest service and sturdiest independence for its negotiations with the British Treasury. The
men who govern the Bank of England are as far removed
from the tidal currents of party politics as men who have
had a lifetime in mercantile and banking can possibly be,
and the whole body of English people will probably echo
than
the comment of Bagehot that "no result could •:"S
that the conduct of the Bank of England and its management
should be a matter of party politics." At the Bank of
France, also, the selection of Regents or directors is made
largely from among the bankers of Paris and their policy has
been, to quote Professor Andre Liesse, an outstanding
author, to make the bank, "self-governing and independent
of the State."
The argument for conversion of our Federal Reserve System into a single central bank and branches, finds most of
its advocates among those who think our present system is
not docile enough when the Treasury speaks. They would
have a central banking organization because they believe it
would come quickly to heel at the Treasury's desire. The
men to direct the organization would be chosen by public
authority; they would be expected to retire cheerfully when
new executives take over the government, because each new
executive would naturally prefer minds that keep time with
his own. They must have the wishes of the Treasury in
mind when they fix discount rates, and they must lend cheerfully to the Government or, at the Government's behest, to
others, whether that procedure accords with their own independent judgement or not. Isn't that a correct statement
of the desires of those who advocate a central bank? Isn't
the major objection now raised to the Federal Reserve System that some of the Governors of Federal Reserve Banks
have independence of judgement and express their views
before committees of Congress and to members thereof ?
And isn't one other objection that the 72 directors elected
by member banks to the governing boards of the 12 Reserve
Banks are strong figures from banking and commercial life
who aim to be men and not mere lay figures in the conduct
of those institutions?
If this is a correct analysis of the desires behind the movement for a central bank, then that movement takes on an
ominous character. It asks that this country undertake
something that is without sanction of anybody's experience.
Contrary to the popular notion, the long and useful records
of the Bank of England and of the Bank of France furnish
no precedent for this purely American proposal.. They are
not agencies of government, nor are they conducted from the
Government point of view. They choose their own directors, they deliberately select these directors from among
the successful merchants and private bankers of London
and of Paris, they retain these directors for life service without regard to the ebbs and flows of party politics and policies
of government, and they ask of them only that sturdy independence of judgement common to men of this type. They
do have close relations with the National Treasury, and they
do share with the Treasury grave responsibilities for national
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Federal Reserve Bank of St. Louis
35
welfare, but when officers or directors of Bank of England
or Bank of France meet in conference with offiPers from the
Treasury, it is a meeting of strong men with strong men, and
of independent judgement with independent judgement.
There is no calling to heel of supple servants. There is quite
as much likelihood that Treasury will yield something to
Bank judgement as that the reverse course will prevail. If
the notion shall prevail that we need a central bank of the
type now favored by many men in public life, then this
country will sail upon a sea whose reefs are unknown and
whose ports of arrival have yet to be discovered by man.
The courses which the Bank of England and the Bank of
France have pricked on the chart, out of many generations
of experience, are not at all the courses over which our
central bank is to sail.
This recalls to mind the further disturbing thought, that
Congress has always appeared to regard National banks as
an experimental laboratory for ventures in finance. Take
the occasion when national banks were created in the 60s.
The primary motive of Congress was less that of providing
the country with a better banking system than of discovering whether a much broader market for government bonds
cound not be discovered. The new banks were also set up
as a laboratory to discover whether a bond-secured currency
will capably serve a country like ours. Experience proved
that National banks could be a very good market for government bonds but that neither they nor any other banks can
make a bond-secured currency any better than a make-shift
sort of money.
The next experiment perpetrated by Congress upon the
National banks was with a view to discovering how puny an
individual bank can be and still not collapse through sheer
anaemia. By the Act of March 14 1900, Congress created
National banks of as little capital as $25,000, governed by
directors who need not have more than $500 each at stake
in the outcome. Comptrollers of the Currency became aware
years ago, that most of these puny banks were having trouble
in keeping their heads atlove water. Acting Comptroller
Await merely summarized in his annual report what his
predecessors had felt, when he characterized the further creation of such banks as dangerous. Of all the banks, National
or State charter, that suspended from 1920 to 1932,65 7-10%
had capital of less than $50,000. But not until 33 years
had passed since Congress called upon the National
bank system to make this experiment did Congress relieve
that system from further creation of such puny institutions.
Then came a period when the law-makers of many States
concluded that banks should be allowed to have branches.
Such representative States as New York and Michigan took
a stand in favor of branches years ago and California went
over to branch banking in a big way a few years later. Instead of allowing National banks to meet such competition
squarely, Congress now insisted that National banks should
try the heart-breaking experiment of confining their operations to a single building in a single city, even though their
competitors were tapping every section of that city and perhaps many parts of the entire State with their branches.
That experiment was doomed to failure from the start, as
the number of conversions of National banks to trust companies proved, but Congress has not yet given the National
bank system complete release from this experiment..
From the day, moreover, when Congress plunged National
banks into this ill-fated experiment as to branch banking, it
began a deliberate policy of pampering State banks. It did
not call upon them to give up branch banking, when it forbade National banks to have branches. When it moved on,
later, to the creation of the Federal Reserve System, the
favor it extended to State banks was flagrant. They were
not obliged to become members of the new system, they were
allowed to carry their reserves at interest with correspondents. They were even allowed, indirectly, to have most of
the benefits of Federal Reserve membership without paying
a tithe for the support of the Federal Reserve System. The
National banks, on the other hand, were compelled to keep
their reserves on deposit with Federal Reserve banks at no
36
BANKERS' CONVENTION.
interest, to provide the Federal Reserve Banks with working
capital, but allow most of the profits to pass to the National
Treasury, and were limited in their use of Federal Reserve
services by rigid rules as to eligible paper. Finally, after
being for more than half a century under the stern oversight
of the Comptroller of the Currency and his bank examiners,
the National banks were compelled, as the most recent experiment, to accept thousands of State banks as equal partners
in a bank deposit insurance scheme, with no more assurance
as to the soundness of these partners than the certificate
of State bank examiners plus a hurried examination by the
Federal Deposit Insurance Corporation.
One need not be a partisan of National banks to be disturbed by this disposition of one Congress after another to
treat National banks as experiment stations for the trial of
financial theories, but to deal much more gently with State
banks. It warrants an expectation that any central bank
plan satisfactory to Congress will embody the same idea.
Twice in the life of the most recent Congress, special favor
for State banks was displayed, first when they were allowed
to enter the Federal Deposit Insurance Corporation without
becoming members of the Federal Reserve System, and next
when the date on which they must ulitmately join the system
was pushed further into the future. If the will of one branch
of Congress had prevailed, the time when State banks must
pay for membership in the Federal Deposit Insurance Corporation by becoming full-fleged Federal Reserve members,
would have been pushed as indefinitely into the future as
the coming of universal peace or perhaps even of the Day
of Judgement. The central bank plan that satisfies Congress may easily turn out to be one that locks up reserves of
National banks in the new institution, deprives them of even
the limited voice they have to-day in Federal Reserve management, takes away from Federal Reserve Banks, for Government use, the surplus which the money of member banks
has earned for the Federal Reserve Banks, and puts funds
of National banks more completely under Government control that ever before, but that allows State banks a large
degree of release from either the responsibilities or the expenses of the new bank.
I have purposely refrained from discussing the danger that
the proposed central bank will become a football of politics.
I have confined this discussion instead to a statement of exact
facts about successful central banks of other countries and
about the angle from which Congress is likely to approach
this problem. I cannot avoid the conclusion that National
banks should begin at once to take a livelier interest than
heretofore in the welfare of the Federal Reserve System.
Why should it be scrapped or further dismembered, for the
sake of bringing an untried and unproven sort of bank into
being? If fault be found with it for having banks instead
of the government for its stockholders, then the answer is
that those model central banks of Europe go still further
and have individuals for their stockholders. If complaint
be made that six out of nine directors in each Federal Reserve Bank are elected by member banks, then the answer
is that the model central banks of the rest of the world have
their entire boards of directors elected by these same individual stockholders. If it shall be complained that captains
of banking and of industry are potent in the management
of Federal Reserve banks, then the rejoinder is that both the
Bank of England and Bank of France deliberately build up
their boards of directors from among the merchant princes
and the banking leaders of London and of Paris.
A very careful observer has recently described the Federal
Reserve System as having fallen into an estate where it is
nothing more than a servile adjunct to the Treasury Department, owning practically nothing but government obligations, irredeemable gold certificates and a number of pretentious bank buildings. But if that shall seem too refractory an organization for loyal service to the Treasury
Department, then it is interesting to recall that when the
Bank of England and the Bank of France negotiate with
their respective National Treasuries, the Treasury Committee of the Bank of England is made up of the strongest
and most experienced figures that the banking industry of
England can-bring forward and the regents of the Bank of
France put forward as their spokesmen the representative
bankers of the city of Paris. Is there something peculiar to
the atmosphere of America that makes it perilous for the
Treasury Department to have to deal with men and not
with mere creatures of its own, when it is working out its
problem of relations with banks?
The trouble with the Federal Reserve System from the
first has been that it has had no really earnest friends among
bankers but has had some decidedly zealous enemies among
banks and men in public life. When it came into being,
most National banks accepted membership reluctantly and
most State banks took no membership at all. When it has
undertaken to assert its influence against speculation, its
right to be spokesman has been challenged by most bank
men and openly contested by some. When it has asked for
broader powers from Congress and sometimes with good
reason, it has found no great number of bank men rallying
to its support, and when it has suggested that its membership be extended to cover all commercial banks, whether
of National or of State charter, it has met with irresistible
opposition.
The question really is whether National banks can afford
to continue a policy of passivity toward the Federal Reserve
System. Everybody knows that the bank reserves of this
country whether of State or National banks ought to be
centralized. The earlier practice of depending upon correspondents in big cities for the management of the,bank reserves of this country proved a miserable failure in the days
before the Federal Reserve system. The practical question
is whether the central reserves shall be handled by organizations that are trained in banking and business and have
banking and business reputations to sustain, or by a type of
organization never yet proven by actual operation in any
great country, whose personnel shall be political in its origin
and political in its point of view. National banks may be
standing at the cross-roads to-day and their decision to be
active or passive may mean much to the future of American
banking. The militant course of trying to re-establish the
Federal Reserve System in public esteem and of trying to
bring all commercial banks into its membership does seem
the more praiseworthy decision.
Movement to Stimulate American Commerce with Other Countries
By GEORGE N. PEEK, Special Ac.viser to the President and President of Second Export-Import Bank at
Washington, D. C.
In introducing Mr. Peek as a speaker before the National
Bank Division, Irving W. Cook, Preiident of the Division,
said:
The character and volume of foreign tra le is of such tremendous importance to all nations just now that it seemed advisable to allot some
time on our program for a brief statement of some of the steps being taken
to stimulate American commerce with other countries. Our program was
printed before this conclusion was reached, and therefore this does not
appear in our schedule. However, we have invited the I'resident of the
Second Export-Import Bank at Washington to make this presentation.
He is an industrialist with a broad and varied experience. He was a mem-
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Federal Reserve Bank of St. Louis
ber of the War Industries Board during the World War period, and later
as Chairman of the Industrial Board Of the Department of Commerce.
He is well qualified to speak on this subject, and I find pleasure in introducing to you this Special Adviser to the President on foreign trade. George N.
Peek, whom I would like to have come to the platform.
Mr. Peek's address follows:
In approaching the subject of foreign trade, in the capacity
of Special Adviser to the President, I approached it from
exactly the angle that any of you gentlemen would approach
any business proposition: first, for the purpose of trying to
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Federal Reserve Bank of St. Louis
No.6
Hearings - S. 4115
R. S. Hecht
Eugene Meyer
J. W. Pole
Allan M. Pope
3.
102
J. W. Pole, Comptroller of the Currency
Hearings — S. Res. 71
, /73/
Senator NORBECK. I want to clear up one more question, Mr. Chairman. The comptroller also made a statement that a large number of I
national banks have taken out State charters. Am I correct in that
being your statement?
1
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
I
11
Mr. POLE. That is true, Senator.
Senator NORBECK. Now then, the comptroller said nothing about
State banks that have taken out national charters? How do they
compare ?.
Mr. POLE. Unfavorably.
Senator NORBECK. In number, but speaking of capital. Speaking
of capital?
Mr. POLE. Yes.
•
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Federal Reserve Bank of St. Louis
fli
The CHAIRMAN. You knowarom time to time, Mr. Comptroller, I
when we have had occasion to propose modifications of either the
Federal reserve act or the national banking act it has seemed tc
me that instead of creating a national standard of sound banking
which the State systems might be induced to follow, we have introduced into the national banking system some, if not many, of the
abuses of the State systems, in order to enable national banks to
compete with State banklj Do you think that is a sound policy?
Mr. POLE. I think such a policy is positively unsound. I have upon
several occasions emphasized the need for a strong independent national policy in Federal banking legislation regardless of the status
of the 48 State banking codes. The State banks engaged in receiving savings deposits and in trust activities and the trust companies
engaged in commercial banking and in taking savings before the
national banks invaded either of these fields.
The CHAIRMAN. But they have finally invaded the State practices
and engaged in the trust business and fiduciary business.
Mr. Pon. Yes.
The CHAIRMAN. Do you think a commercial bank should be permitted to do that?
Mr. POLE. Well, of course, Senator, they are in it now, and it
would be very difficult, I imagine, to unscramble them. Of course,
that was not your question, I realize.
George L. Harrison, Governor, FRB, N. Y.
Hearings — S. Res. 71
It was only in 1838 that we had the first "fee banking
system
which was initiated by the State of New York and quickly
followed
by other States. That was a State banking law under which any
of persons could get together and organize a bank for the condugroup
ct of
the banking business. That law set forth certain limitations
as
to
capital, reserves and other requirements. As I say, it was
quickly
followed by other States and we had a wave—almost a mani
a—of
banking growth following that period under these gener
al
banking laws which led eventually to the passage of the national
act and to more strict limitations in the various State laws. banking
•
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33
After the passage of the national bank act every
State in the
Union adopted some sort of free banking law.
the present time,
therefore, we are confronted not with one bankiAt
ng system, not with
one set of banking laws providing sound and safe restri
ctions for the
operation of all banks, but rather with 49 banking
syste
ms with the
Federal reserve system superimposed.
The CHAIRMAN. Do you think it is desirable to have
this dual system or multiplicity of banking systems?
Governor HARRISON. Senator, my belief is that
banking laws has perhaps done as much to encouthat multiplicity of
rage or make possible bad banking as any other one thing in the funda
that we have got, because the competition between themental set-up
Federal and 1State Governments, or between the various State government
s? to increase the number of their own organizations has,
from time to
time, led to the adoption of liberalizing laws which
have made possible—I will not say have provoked—but have
possible, some
1 developments which I think contribute to our made
prese
nt
trouble; in
other words,I think that we have had over 6,000 bank
failur
es during
the past 10 years, as you have all heard here, and I
and the comptroller can check this up if I am inshould imagine—
error—I should
imagine that a great part of those failures was
attributable not to
any violations of law but rather to the abuse of the
privileges provided by law. In other words, the limitations of the
of being restrictions on bad banking, have become an law, instead
bankers to use what Congress or the State legislatures invitation to
have defined
as proper limits of banking.
The CHAIRMAN. Is it not largely the business of the
comptroller
himself, as to the national banks, and State bank exami
ners or
State bank superintendents, as to State banks, to cure a situat
ion of
that sort?
Governor HARRISON. I think the difficulty there, Senat
is
The CHAIRMAN. I mean where bad banking occurs and or,
where
the
law is flouted.
Governor HARRISON. Where the law is flouted, I think there
is
no question of the jurisdiction of the comptroller or the State
bank
superintendents and possibly the Federal reserve system.
own belief, however, is that the difficulties into which banks My
that are the forerunners of failure, are difficulties not caused get,
violation of law—certainly not in the first instance—but rather by
by
1 the exercise of poor judgment within the law, and at that
stage
is very difficult to say what the comptroller or the State banki it
ng
superintendents can do.
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George L. Harrison — Page 2
e----,,-7, /r-3/
yThe
CHAIRMAN. How do you distinguish between poor judgment
1
within the law and violations of the banking laws?
Governor HARRISON. There are certain things prohibited, and if
a bank violates those prohibitions of the law the comptroller has definite powers in regard to the indictment and prosecution of the
officers; or, in the Federal reserve act, we have definite authority
in the case of national banks to ask the comptroller to bring suit
for forfeiture of charter and, in the case of State banks, to expel
them from the Federal reserve system. That is in the case of
violation of law. Even that is a pretty drastic remedy for what
might be a technical violation of the minor provisions of the statutes.
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NATIONAL AND
FEDERAL RESERVE
BANKING
SYSTEMS
But the difficulty is largely, what are you going to do with a bank
acting. quite within the legal provisions, whether of the national
banking act or a State law, but which, in our judgment, is on the
way to difficulty. I remember that when I had the privilege of
being with the Federal Reserve Board any State bank that applied
for membership in the Federal reserve system was required by a
condition imposed by the Federal Reserve Board to limit the amount
of its real-estate loans to some percentage depending upon the kind
of business that the bank was doing. That condition of membership was very much resisted by the State banks applying for membership and the pressure was so great that Congress amended the I
law so as to provide specifically that any State bank that came
into the Federal reserve system should retain all of its State charter rights. From then on, it was not competent for the Federal
Reserve Board to limit the amount of real-estate loans that a bank
could engage in. That is what I meant a moment ago by the competition between the different banking systems that results in a
gradual development that tends to break down the barriers.
Now, at the present time—and the comptroller will probably
bear me out in this—part of the difficulty of a number of these
banks that have failed is the loans that they have been authorized
to make on real estate. But those loans are not illegal loans in many
cases. They are specifically authorized by the State law and the ,
,,
Federal reserve act, and the Federal reserve banks probably could not
\,......4place any binding restriction as to the percentage of real-estate loans
hat a bank can engaqe in.
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Governor HARRISON. That was my impression of that provision,
because it was a fact that, prior to the adoption of that provision,
the Federal Reserve Board did place conditions in practically all
approvals of memberships of State banks in some fashion limiting
the volume of their real-estate loans.
The CHAIRMAN. Has it not an unrestricthd right to do that now
under the law ?
Governor HARRisoN. That action upon the part of the board
. caused a great deal of discussion and unhappiness in the minds of
s some State bankers who wanted to become members of the system.
Subsequently, if my recollection of this is right—and I have not
looked at it for a number of years either—subsequently, the law
was amended specifically SISovide that all State banks becoming
members of the system should retain all their State charter rights.
The CHAIRMAN. No; subject to the provisions of this act and to
the regulations of the board made pursuant thereto.
Governor HARRISON..Well, perhaps. I do not remember all the
circumstances surrounding that amendment, but I do know that subsequent to it the board abandoned the practice of requiring this condition, and I think it was because they felt they no longer had the
1 authority to require
i The CHAIRMAN. It has full authority to require it, and if yoluit
\ will note paragraph 3 of section 9 of the Federal reserve act, yo
;_will see that it is so. So, if there has been any abandonment of a
policy or practice, it has not been due to the statute itself, but to the
regulatiS ns of the board. This paragraph reads:
In acting
1
IS
such application—
That is, the application of a State bank for membership in the
Federal reserve system—
the Federal Reserve Board shall consider the financial condition of the applying bank, the general character of its management. and whether or not the
corporate powers exercised are consistent with the purposes a this act.
Therefore, if the board should reach a determination that excessive loans in the commercial bank on real estate are contrary to the
IIlicy of the board and the requirements of this act, certathly it is
within the power of the board IIIohibit any such thing by a member bank, whether State or national. But that is not important. It
just struck me--Governor HARRISON. I was reviewing only the chain of events at
that time and the fact that the board did stop, as I remember, requiring that condition, in view of that provision of the law. They
may have been wrong in their interpretation of
One other effect of the multiplicity of laws which makes it possible
fIr one institution to do na only IIInk of deposit business but
engage in other kinds of business, is the development of these secur
ity affiliates.
The CHAIRMAN. Yes.
J. H. Case, Chairman, FRB, N. Y.
Hearings — S. Res. 71
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Mk. Wm.'s. At what time did the examiners of the reserve bank
find out or know of the condition of the United States Bank?
Mr. CASE. Mr. Willis, one examiner of the Federal reserve bank,
went in with the State superintendent of banks' examiners as of June
23. I should like to say, as you know, that they had some 48 or 49
branches. There were about 50 offices, and my recollection is that the
State superintendent had a force of 130 or 140 people. Now, the
report of that examination was not finished until well after the early
part of November; that is, it was early November before we received
a copy of it. But, going back of your question, I might say that the
management of that bank did not have our full confidence for a
period of years.
Mr. WILLTs. What steps were taken by the bank?
Mr. CASE. We had a number of interviews with the president,
over a period of years. But let me say this: (There was some
little discussion a few moments ago about the attitude of the
Federal reserve banks when member banks are not borrowing.)
For a considerable part of the period during recent years this
bank was not a borrower. Moreover, the bank was steadily, with
the approval of the superintendent of banks, absorbing other banking institutions. Let me say that we in the Federal reserve bank
knew nothing of these mergers until after the event. But it is
true, sir, that the management of that bank (like some of the corporations we were speaking of a moment ago), did go into the capital
market and help themselves very liberally to new capital. So
that on the date of this last examination, of which you speak, the
bank had a capital of $25,000,000, and surplus and undivided
profits of some $17,000,000. The examiners' report, which, as I
say2 we received in November, indicated that the surplus and undivided profits were wiped out. It also indicated that there were
some additional items that were exceedingly difficult to appraise,
including many notes that were predicated on real-estate equities.
Mr. WILLIS. Did you have any information in the Federal reserve bank of the methods employed by the affiliates of the United
States Bank in the buying up of securities and the speculating in the
stock of the bank itself?
Mr. CASE. No; not until this examination.
Mr. WILLIS. You knew nothing about it?
a
Edmund Platt, V. P., Marine Midland Corp.
Hearings — S. Res. 71
/
Senator TOWNSEND. IS it not a fact that there is a great competition between the State and Federal banks?
4
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225
Mr. PLATT. I think there is a great deal of unfortunate competition.
Senator TOWNSEND. Have you a remedy for that?
Mr. PLATT. I would relax the national laws and allow the national
banks to do a certain amount of branch banking business as Mr..
Pole suggests. I would not go into any unsound propositions. I
rather doubt whether it is very wise to let national banks do as much
real-estate business as some do.
Senator TOWNSEND. You think a great deal could be accomplished
by liberalizing the national banking law?
Mr. PLATT. I think if you allowed the small banks to consolidate,
making larger institutions, with branches, they would perhaps become
national banks; at least they would be large enough to become members of the Federal reserve system. That would bring the thing more
nearly to uniformity. I would not do away arbitrarily with the
State systems. The State banks do most of the experimenting and
sonic of the State laws are excellent. I have always believed the
California law was superior to the national banking act.
The ACTING CHAIRMAN. The comptroller has sent me his final figures in reference to bank suspensions, and they show 6,968 banks
suspended between the years 1921 and 1930, inclusive, of which 797
banks reopened, or a total closed of 6,171.
Senator TOWNSEND. Does he give the proportion with respect to
State and Federal?
The ACTING CHAIRMAN. During those same years, 1921 to 1930,
inclusive, national banks suspended, 925; State member banks, 257;
and State nonmomber banks, 5,786.
Now, of those reopened there were, national banks, 98; State member banks, 27; and State nonmembers, 672, leaving a net total closed
of all banks, 6,171, or, national banks, 827; State member banks, 230;
and State nonmember banks, 5,114.
NT,----v,rv The cliverP;eP tion Adv;em r•;--
George W. Davison, Pres., Central Hanover Bank & Trust Co.
Hearings — S. Res. 71
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252
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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
Mr. DAVISON. I think the great trouble has been the too liberal
chartering of banks. There have been banks with too small capital,
and certainly in the past there has been a sort of rivalry between the
State and National systems. Where one bank was operating successfully in a small community, another would be started under a different aegis. The result of two banks attempting to operate in a community that will support but one is had. The tendency is for the
new bank to take accounts from the old bank, and it may be that the
old bank will do things it ordinarily would not do, in order to keep
accounts.
Coupled with that you have had a change in economic conditions.
The larger centers, with good roads, etc., have been brought very
much nearer to the small communities, and business tends to the
centers. That probably has been helped by the absorption of small
businesses into chains or groups where a clerk, instead of a business
man is running the business, and the business of the group has been
done in some larger center.
I think those two things have contributed very largely to the failure
of banks, coupled with the further fact that banks have been formed in
communities where there was not enough business to furnish a bank
with opportunities for a proper use of its money and, having deposits,
it has had to go and buy bonds and with the tremendous swings that
we have had in interest rates, beginning in 1914, good bonds have had
a wide variety of prices which would seriously affect the capital and
surplus structure of a small institution.
The CHAIRMAN. Mr. Davison, have you given any consideration at
all to the question of how we may, by legislation, readjust the competition between the National and State systems?
Mr. DAVISON. No; I have not. I think it is a real handicap that
we labor under, having 49 different systems.
The CHAIRMAN. And you can not tell us any way of correcting
that situation?
Mr. DAVISON. Except by more cooperation.
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Senator TOWNSEND. Have you a suggestion looking toward the
helping of the condition that seems to exist—the very keen competition between State and national banks?
Mr. DAVISON. No; I have no suggestion. I wish we could have a
uniform banking law, if possible, throughout the country. I think
it would be a grand thing.
Senator TOWNSEND. For both State and national systems?
Mr. DAVISON. Yes. You have tried to reach it by permitting
national banks to do whatever State banks do in any particular State?
Senator TOWNSEND. What influence would you say the State
banks have had on the organization of affiliates by national banks?
Mr. DAVISON. I think they were undoubtedly started because the
national banks could not do certain things the State banks could do.
That was the beginning.
Senator TOWNSEND. Exactly. Then, you have no specific suggestions for relieving this competition other than what you have
just stated?
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265
Mr. DAVISON. No. 1 think that latterly there has been sonic
relief, because I think both State and National Governments have
been more chary of chartering banks.
Senator TOWNSEND. They have increased the capital stock,
probably.
Mr. DAVISON. Yes; but I remember a good while ago in a vicinity
that I was very familiar with, there were a number of State banks
along through a section of the country, and a group of people came
out and formed a national bank in every one of its communities.
They have all prospered because the communities grew rapidly, but
that sort of thing, in a community that does not grow, or starts to
go back at all, works out disastrously.
Senator TOWNSEND. Does not the reverse condition obtain in a
great many cases; so that where a national bank has been organized
in a community, it has shifted to State charter?
Mr. DAVISON. It has been both ways. There is no doubt al-out
that.
Senator TOWNSEND. Then another condition exists, too. For
instance, a national bank is in a community where they have probably a liberal State charter. The examiner has insisted on the
national bank's doing certain things and it begins to get worried.
It immediately takes out a State charter which gives it a little
longer lease of life. I think that may weaken the State banking
structure very much, too.
The CHAIRMAN. The dual system of banking has seemed to me to
be an almost insuperable obstacle in the way of sound banking legislation. If we undertake to make certain prescriptions for the conduct or management of national banks
Mr. DAVISON. They take out State charters.
The CHAIRMAN. Yes; if any number of them do not like it, they
take out State charters.
Mr. DAVISON. That is a very unfortunate situation.
Senator TOWNSEND. Have you any suggestion looking to' Ward
liberalizing the Federal reserve system that would make it more
attractive for banks outside of the system to enter it?
Mr. DAVISON. I do not know of any; no.
John A. Broderick, Supt. of Banks, State of N. Y.
Hearings — S. Res. 71
/f..3/
affiliates;
the
of
State
ity
liberal
the
ly
probab
and one banker has stated that
law had compelled the national banks to go into affiliates because the
State law permitted it.
Mr. BRODERICK. The only section of the State law to which that
which
reference can be made is in connection with trust companies
the
is
only
cally,
practi
That,
.
in
stocks
to
invest
right
have the
power which the State trust companies have which the nationali
- has been some criticism here on
• senator TOWNSEND. There
MS
NATIONAL AND FEDERAL RESERVE BANKING SYSTE
273
does not
banks have not. They may be referring to that. But thatthe
State
en
betwe
ence
differ
even justify them. That is the only
banks.
and national
•
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your district
Senator TOWNSEND. Suppose a national bank inr: What
are the
charte
State
a
decides to give up its charter and take
over?
it
taking
to
nce
refere
provisions of law with
to find out if their
Mr. BRODERICK. A very thorough examination
over.
taken
be
to
them
permit
condition is such as to
Senator TOWNSEND. It is absolutely under your authority?
Mr. BRODERICK. Yes.
r from the
Senator TOWNSEND. In some States they get a charte
has no
sioner
commis
bank
or
er
examin
legislature and then the bank
r.
a
charte
them
give
and
over
them
take
to
except
matter
choice in the
has
State
our
in
sioner
commis
bank
Mr. BRODERICK. I think the
unlimited discretionary power.
some authority.
Senator TOWNSEND. I think he should have—or
hank
charters, bank
with
tion
connec
in
it
has
Mr. BRODERICK. He
es.
branch
bank
and
mergers,
Owen - D.0 Young, Chairman, General Electric Co.
Hearings — S. Res. 71
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—11fi:.YANG. I have made a memorandum, Mr. Chairman, without
knowing, of course, very clearly just what your committee would
like to have me speak of. I have only read the testimony of Governor Harrison before the committee and I have endeavored to
relate this memorandum somewhat to'
the questions which you put
to Governor Harrison in the thought that that might at least in
some measure meet the inquiries which would be in your mind.
I want to say, first, Mr. Chairman, if I were speaking in terms
of theory—and perhaps it is justifiable to do so in order to test
our practical steps—I would say that all commercial deposit banking in the United States should be carried on under one law, that
examination of banks and their controls should be under one authority. Their reserves should be mobilized in the Federal reserve system. Then we could develop for the country as a whole a sound
banking system, and definitely fix responsibility. That would mean
that all banks of deposit, as distinguished from savings, should be
national banks.
As it is now, banks are chartered ,both by the National Government and by each of the 48 States. (They are in competition, each
354
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
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1
endeavoring to offer the most attractive charters and the most liberal
laws, to say nothing of the liberality of administrative officials in
interpreting the laws. The national banking act has to compete
not only with the most conservative States but the most liberal
ones. Consequently, there has been a constant tendency to liberalize
banking laws and to weaken their administration. In such cases
the argument is always made that it is desirable to liberalize thlaw
so as to enable the banks to be of greater service to borrowers
The first question always regarding banks doing a demanddeposit business should be the safety of the deposits and the ability
of the bank to return them to depositors instantly on request, unless
they be time deposits. No thought of service to borrowers should be
permitted to impair the safety and security of depositors. Banks of
deposit are, after all, primarily custodians of liquid funds. Only
such use of such funds should be permitted as may be consistent with
the interests of the depositors.
In the early years of our Government, our business was largely
done by currency moving from hand to hand. It was felt at that
time, and properly so, that we should have a national and uniform
currency. Consequently, Congress was given power to coin money
and regulate the value thereof. This power was made effective as to
paper money by the national bank act. Now our business is carried
on mostly by transfers of bank deposits, currency forming only a
small part of our money transfers. If control of our currency were
necessary in the beginning by the Federal Government, control of
our bank deposits by it now would seem desirable We have transferred, either affirmatively or by acquiescence, many powers to the
Federal Government which ought not to be there. I am bitterly
opposed to the impairment of the rights of the States in their appropriate field. It does seem strange, however, that in the face of such
gravitation toward Federal authority, we should have retained
divided rather than unified power over our deposit banking system.
Except for the currency in our pockets, our banks of deposit hold
the liquid capital of the people of the United States. The transfer
of this capital from one of us to another, promptly and safely, should
be facilitated. That means, however, that every bank of deposit is
truly engaged in a national business. Its soundness and safety is of
concern to our people everywhere. Our business of deposit banks
is not local in character; it is, and should be, national. Therefore,
in my iudgment. it should be governed hv
., the national law.
- . ..
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NOW;I realize, Mr. Chairman, that of the 24,000 banks of deposit
doing business in the United States only about 7,000 of them are
national banks and 17,000 are State banks. Under those circumstances, we probably can not hope, immediately at least, for the
surrender by the States of their right to grant banking charters.
Nor can we expect reincorporation rapidly of State banks under
national charters. The practical question is, therefore, what, if
anything, can we or should we do now? I think it would be highly
desirable that all banks of deposit holding themselves out to the
public to do a national or international business should be required
to be members of the Federal reserve system, as national banks
now are. This would at once mobilize all of our banking reserves
into one central system, which is as it should be. In addition, I
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think that the powers of examination by the reserve system of all
member banks should be clear, and that it should have certain
powers to see that banking practices inimical to the safety of
depositors should not be indulged in by member banks.
That would mean that when the words "member of Federal reserve system" were put on a bank's window there would be, in fact,
some such responsibility on the Federal reserve system as the public
now assumes there is. Then, for the first time, we shall be able to
fix responsibility somewhere for a sound banking system. It will
not prevent bank failures—no law or system can do that—but it will,
in my judgment, minimize them greatly. Even now membership in
the Federal reserve system is apparently helpful to banking practice, because of the 7,000 banks which have failed in the last 10 years,
5 out of every 6, I am told, have been State banks not members
the Federal reserve system.
I have spoken only of banks of deposit, as distinguished from
banks for savings. I believe that banks for savings and for the administration of trusts or other special time funds should be State
banks, and that these powers should not be included in national
banking charters. The investment of savings deposits, which are
withdrawable only after a specified notice, is quite a different kind
of business from the handling of demand deposit assets. In my
judgment it is undersirable to combine them in the same institution,
because any bank having demand deposits can never invoke a time
notice on savings. If it does, it stimulates quick withdrawals of demand deposits and postpones the savings deposits, which are the most
sacred,of all, to the least desirable assets of the bank.
It has been suggested, to meet this difficulty, that the assets of the
bank created by savings deposits should be segregated and held for
them only. I am of the opinion that any segregation of assets in a
bank for a particular class of depositors, or for any individual
deposit, is highly undesirable practice. Therefore, I see no way of
combining wisely savings deposits and demand deposits in the same
bank. This does not mean that national banks can not take deposits
either for a specified time, which is a true time deposit,,or deposits
withdrawals only after a specified time notice. It does mean, however, that when deposits are put into a national bank either on time
or upon specified withdrawal notice, neither the depositor should be
permitted to withdraw nor the bank permitted to pay any such
deposits, except strictly in accordance with its terms. My thought
is that even thrift deposits might go into national banks, but they
could only go in upon specified withdrawal notice with a definite ,
restraint against withdrawal except in accordance with the notice.'
1
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Senator WALcorr. May I in.sert a question there? If your previous suggestion could be carried out, and if gradually we could force
Jail of the banks of deposit under the roof of the Federal reserv
it would then eliminate largely this element of competition betweee,
n
the State banks, which are perhaps under a more liberal charte
r,
and
the national banks?
Mr. YOUNG. Yes, sir.
Senator WALcorr. And make it easier not only to control
.affiliate but, if it was then abused, to do away with it altogether? the
Mr. YOUNG. Very much easier.
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R. S. Hecht, Pres., Hibernia Bk. & Tr. Co., New Orleans
Hearings - S. 4115
March 1952
248
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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
Senator BARKLEY. Do you think our dual system of banking has
anything to do with that?
Mr. HECHT. No,I do not. I am afraid I am, perhaps, a little prejudiced on that subject, Senator, being a State banker; but I do
believe that there is a place in the banking structure of this country
for the dual banking system if the dual banking system is notIused
am
to make unfair competition. I have fought many times, arid
it
make
would
that,
ation
discrimin
prepared to fight now, against any
bank.
State
a
with
properly
compete
to
bank
difficult for a national
on, of
I am in favor personally, and not speaking for my commissi
the
Where
basis..
e
state-wid
a
on
the extension .of branch banking
an unfair
be
would
it
think
I
it,
do
to
d
permitte
are
banks
State
. In
disadvantage for a national bank not to have that same privilege
ity
opportun
of
equality
an
be
should
there
that
believe
other words,I
be
should
there
think
not
for the two systems on a sound basis. I do
permitbe
will
bank
one
loosely
more
much
competition to see how
the dual bankted to do business than another, but I still believe that things
in this
of
scheme
our
in
place
ing system has its proper
country.
••••
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•
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Federal Reserve Bank of St. Louis
Senator BROOKHART. You have had small unit banks at all times?
Mr. HECHT. We have a great many yes. Senator, in our State
you can have county branch banking, and that is what has happened
down there in a good many instances where the very small bank
went in with the bank in the county seat.
Senator GLASS. You know a large part of our trouble in legisla_lion, Mr. Hecht, has been caused by the dual system of banking.
I_Whenever we tried to do something to make the national banking
system sounder than it is and to put it upon a high plane, we have
always been confronted by the objection that that puts a national
bank at a disadvantage with the State bank_j
Mr. HECHT. That may be true, Senator. On the other hand the
48 States of the Union have their right and privilege to govern
their own banking system, and I do not see how they are going to get
away from that.
Eugene Meyer, Governor, Federal Reserve Board
Hearings - S. 4115
March 1932
Mr. MEYER. Further, in regard to section 15: The clause commencing in line 19 on page 35 apparently is intended to enable
national banks to compete more effectively with State banks. Its
tendency would be to lower the standards of banking in the national
banking system to the standard of the State banks, where more
liberal powers are granted to State banks by State law.
The definition of investment securities which is contained in the
law, as amended by the act of February 25, 1927, would be stricken
out and apparently the comptroller would be given unlimited power
to prescribe his own definition except that stocks could not be included. This modification is undesirable.
For the reason stated, it is recommended that this section be
omitted entirely.
But with the other idea as to the intent, which you have discussed
here, I should like to ask our counsel to make a suggestion as to a
draft.
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1
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Federal Reserve Bank of St. Louis
Mr. MEYER. Of course, I will call your attention to this, Senator:
As indicated in the letter transmitting the memorandum, it should
be recognized that effective supervision of banking in this country
has been seriously affected by the competition between member and
nonmember banks. Ithink btanch bankiLg,under a unified banking /
system, would meet with a gre-ardan-f -support. I know it would
from me.
Senator GLASS. Can you suggest to us a constitutional method of
creating a unified banking system in this country?
Mr. MEYER. Well, I do not know how to do that, but I believe
it can be done by taxation or some other method. I do not think
there is any doubt about the ability to do it. The principal thing
about being able to do something is to want to do it.
Senator GLASS. We have wanted to do it.
Mr. MEYER. Do you want to bring about unified banking?
Senator GLASS. Why, undoubtedly: yes.
Mr. MEYER. I will be glad to help you.
Senator GLASS. I think the curse of the banking business of this
country is the dual system.
Mr. MEYER. Then the board is entirely in sympathy with the
committee on that subject.
Senator GLASS. Then let us get your recommendation.
Mr. MEYER. We will try to prepare one for you.
Senator GLASS. Let us get it quickly, then, if you please.
Mr. MEYER. We saw no evidence in the bill that there was such a
desire.
Senator GLASS. I do not suppose that I violate any confidence
when I said that the board went to the extent of trying to obtain
and did obtain an opinion from the Attorney General of the United
States, and he could not suggest to us any method of doing it.
Mr. MEYER. I do not know whether the opinion was in reply to
questions which covered all the possible ways of doing it. I certainly
think it can be done, although I am not a lawyer. I do know, however, that competition between the State and National banking systems has resulted in weakening both steadily.
Senator GLASS. I say so, yes; and I have not been afraid when we
come to tackle a question of that sort. There are more State banks
than there are national banks, and very likely more State bankers
would vote against me than national bankers would vote for me.
But that does not bother me the least in the world. If you will
simply suggest a constitutional way of doing the thing I will try to
put it through.
1
J. W. Pole, Comptroller of the Currency
Hearings — S. 4115
March 1932
.
.:
.
.
I
be
I
the
to
am
in
purpose
what
with
conceive
general'
sympathy
,
of this bill, namely, the establishment of a high standard of commercial banking within the Federal reserve system. It seems to me,
however, that there are fundamental practical difficulties in the realization of this objective so long as Congress has legislative control
over only a portion of the institutions which are engaged in the
general banking business. The Federal Government exercises no
control whatever over State banks and trust companies operating on
the outside of the Federal reserve system. It has control over the
banking operations of State member banks of the Federal reserve
system only to the extent that it may set up conditions of member-
•
1
NATIONAL AND FEDERAb RESERVE BANKING SYSTEMS i). 423
•
1
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Federal Reserve Bank of St. Louis
ship in that. system. It may restrict the operation of such member
banks, but Congress can not confer upon them charter- powers to
bring them within a. national: operating standard, nor can the Federal Government enforce • the State laws against such member banks.
The third class of banks are the national banks which .are wholly
under the jurisdiction and control of the Federal Government and
. • - .
are instrumentalities thereof.
Let us assume for the sake of argument that a .high standard of
banking in the United States would require commercial banks to
divorce themselves from all connections with the securities business,
the savings bank business, and the trust company business—and I
take it that this is, in part, one of the underlying ,purposes of the bill,
particularly with reference to securities: How can Congress make
any such standard fully effective if the standards set up for the
national banks are more severe than can be enforced upon the State
member banks in the Federal reserve system? A national bank can
easily escape the higher standard by taking out a State charter and
still remain in the Federal reserve system. If Congress attempts to
bring the State member bank standard up to the national bank
standard through the imposition of conditions upon membership in
the Federal reserve system, such State member banks can escape that
standard by choosing to operate as State banks on the outside of the
Federal reserve system.
In this connection I wish to direct the attention of the committee
to the fact that whereas the national banks at one time controlled
'ng resources of the country. to-day
nearly all of the commercial hamit
the last. few years we have
Within
it.
of
half
than
they hold less
witnessed one large bank after another giving up its national charter
and taking out a State charter. The motive for thus removing themselves from the direct supervision and control by the Federal Government was undoubtedly to gain, from the standpoint of the bank,
more favorable operating conditions. It is true they have remained
within . the Federal reserve system. New restrictions by Congress
applicable solely to national banks must inevitably accentuate this
movement from national to State bank charters.
J. W. Pole - Page 2
March 1932
Under such conditions we have to face the question of a Federal
Reserve system composed solely of State member banks, with Con°Tess limited in its control over banking operations to setting up
conditions of membership in the Federal reserve system. This
method of control is too weak to furnish the basis for a national
policy in banking. There are two methods of setting up a standard of banking: One is negative by prohibitions upon the exercise
of certain powers, and the other is positive by conferring upon
banks the appropriate powers to conduct a sound banking business.
As to national banks, Congress can legislate with respect to both
of these elements, but as to State member banks it is limited to
the former and must leave to the State legislatures to confer the
positive powers of banking.
• Looking at banking from the standpoint of a national question,
particularly its essential connection with commerce and industry,
it seems to me that the .conclusion is inescapable that Congress
should, if it can possibly do so, have complete control over the charter powers. and the Federal Government complete supervision over
the operations of all members of the Federal reserve system, and
424
•
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Federal Reserve Bank of St. Louis
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
should prohibit commercial banking by banks outside of that system. If that be impossible or impracticable of realization, a bill
of this character, that is to say, a bill which attempts to raise the
standard of banking for national banks alone, will fall short of
its purpose because its provisions can be evaded by banks who
choose to remove themselves from the jurisdiction of the Federal
Government.
There are many sections of this bill which impose what may be
regarded as burdens upon national banks but not upon State member banks. This is particularly true of those sections which amend
the national bank act, such as restrictions on voting national bank
stock, holding company control over national banks, and the divorce
of national bank affiliates through prohibition of indorsement on
stock certificates of national banks.
•1•
J. W. Pole — Page 3
March 1932
1
Ii
•
1
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Federal Reserve Bank of St. Louis
Senator GLASS. Why does a national bank ever give up its charter
to take a State bank charter ?
Mr. POLE. So that it may have, perhaps, greater ease of operation.
Senator GLASS. And engage in unsafe banking?
•
Mr. POLE. Well, I would perhaps
say more liberal banking in a
good many instances.
Senator GLASS. You said that there is nothing in the State banking requirements that is soundly available to the national bank.
Mr. POLE. I klIOW of nothing that is desirable in the State law that
is not embodied in the national banking law.
Senator GLASS. Then, why should a national bank give up its
chI rter and go into the State• bank business ?
Mr. PoLE. Greater liberality of powers, sound or unsound.
Senator GLASS. And chiefly unsound, do you think?
Mr. POLE. I Would not say so, Senator.
Senator GLASS. I krIOW ; but you think so, do you not?
Mr. POLE. I can not think out loud,[Laughter.]
The CHAIRMAN. I might ask at this time: You say quite a number
of national banks take State charters. Is the reverse true in a good
many instances ?
Mr. PoLE. Not comparable at all to the number of banks which
have gone out of the system over.the period of recent years.
' Senator FLETCHER. You mean more have gone out than have
come in.
Mr. POLE. Many more have gone out than have come in.
I
Allan M. Pope, Pres., Investment Bankers Asso., Boston
Hearings — S. 4115
March, 1932
Senator TOWNSEND. What effect,if any, would this provision have
upon national banks becoming State banks? Would there be a
tendency toward a change from national to State banks?
Mr. PorE. Of course, I can not answer for any national bank, but
it is the opinion of investment bankers that the important provisions of this bill are so discriminatory that it would certainly necessitate sonic change of national-bank charters into State-bank clwters. But that is only an opinion.
Senator TowNsEND. Consolidation or the reverse.
Mr. POPE. It would certainly not do the reverse in any circumstances.
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"REGULATION OF LOAN AGENCIES IS ILTERATIVE, SAYS C11OWLEY". May,lst
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Amorican Braiker, October 26, 1936
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"State Banks Can Be Kept Pre-Eminent, Says Elliott"
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----
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U
M 001,11M.1.41..INTMAOMCS,M
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•
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Clipped pages 47-54 from Rural Mtg. Reform by Canna
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U.
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178131
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by Gov. Alf Landon
"A Banking Reform Program"
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Letter of
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QUI Laz44rtag- 45-e-tetai" t7ir 11C4 -P4--GePaarit
q Itgyisvr• Warch 1935
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Letter of
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s. ooriRsmwr PiINTING orricl. loss
178151
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New York 7ournt.,1 of Camorc..0„ Nov. 1, 1932
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Letter of
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178151
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11. B. OOTCRNICITIT
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Clipping from the American Banker, June 10, 19544 fFedgral_
Savings Loan Competition"
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stuly #5
--------------------
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V. G. GOVERNMENT pancrnvo ornce. Ina
178151
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Printed pamphlet of a pages containing Attc,rney vole-rail a
report ane supplemental report to the So. rak. legielature
of the investigation of the department of banking and
finance Feb. ,11
4
1930
2nd Sapp. report by Attorney
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SEE
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Letter o
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U. S. OOTIRNMENT
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6
Speech by Tom
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SEE
File No. Study #15
Letter of
-
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178151
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Clipping from the American Banker, June 5, 1936, "Governor
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Study 45
Letter of
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6
V.S. 00VILANMCNT
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178151
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GOVIRMIIENT
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178151
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UNIFIED CONTROL OF BANKING
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178151
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"Detter Bank Managements An An4yeie of Fifty Bank renstrial
by Robert raid Wanner The Annals, january 1934
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Study
tn.
Letter of
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6
u. s. oovinxiarrrr
,ammo am.. 1933
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178151
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THE FEDERAL RESERVE BOARD
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FDrni7n fierce"
LIN3.E1Y132_
±:hs. Annals. January 1934
*Mk
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Letter of
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Nyttic Atm
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IRS
---------------------------------
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Studying Oklahoma Bank Code Rey:Id-SAL _aourae__ AniRri can Rpnke,r,May_,1936
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U.
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Edmund Platt
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Study # 6
ABA Journal - January 1931:
"Trends in State Bank Legislation"
Virgil P. Lee
Texas A & M College
ABA Journal - July 1030:
"Advantages of Segregating the Funds of Each Department"
T.H. Steensen
Asst Cashier, California Bank, Los Angles, California
ABA Journal - September 1030:
"Boundary between Savings and Commercial Banking"
Howard Whipple
V. P. Bank of America of California S.F.
CROSS REFERENCE
FILE NO.
SUBJECT:
Address by Leo T. Crowley, Chairman of the FDIC, May 12, 1937,
before the Missouri Bankers Association, St. Louis, Missouri.
"American Banking Faces the Future"
SEE FILE NO. 1 D
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SOURCE:
THE CALIFORNIA BANKER--JUNE 1934
Address of the President—WILLIAM A. KENNEDY,
Pres., The First National Bank of Pomona
PaRe 201
********
Control of Interest Rate
It is also an unfortunate fact that frequently the rate of
interest was determined more by competition than by common sense.
This large increase in the proportion of earnings turned back in
the form of interest occurred at the very time other operating
costs were mounting, and undoubtedly it was an important contributing
factor in reducing bank reserves. The elimination of compeCtion in
this field must prove beneficial, but periodic rate adjustments are
necessary. Hereafter when the Federal Reserve Board fixes the maximum
rate to be paid, such action should be governed with due regard to the
established earning capacity of banks and we should not shirk our
responsibility in seeing that the prevailing rate is in accordance with
possible earnings.
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******* **
SOURCE:
ASSOCIATION NEWS BULLETIN — Savings Banks Association of
State of New York
OCTOBER 18-19, 1934
ADDRESS by Hon. Joseph A. Broderick
PaKe 15
* * * We want no competition on the basis of interest rates in
this state again. I put that down as one of the most disturbing
and disastrous factors we have had in the banking situation in this
state during the past fifteen years. So many institutions, 4ot so
much the savings banks, in order to obtain income or apparent income
sufficient to enable them to pay the rate of interest that was being
paid by other institutions, permitted their funds to be invested in
a class of securities that should never have been placed in the banks.
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Federal Reserve Bank of St. Louis
SOURCE:
Proceedings of the New York State Bankers Association-1955
Mr. S. Sloan Colt, Pres., Bankers Trust Co., New York City—
REPORT OF
THE COMMISSION FOR STUDY OF THE BANKING STRUCTURE
Pages 148-49-50-51
Variations in performance within individual groups were
considerable. Such results as these, however, give us food for
thought, especially when a considerable measure of consl
tency is shown in the various districts of the State, in city
banks and country banks, in banks which had built up their
loans more than the average, and in those which had
built
up their investments more than the average. Most of
you
remember the competitive bidding for deposits which took
place during the period of expansion and even later.
Sometimes it was purely against local competitors in the
commercial banking field. Sometimes it went further afiel
d and
reached well outside of the State. Sometimes it
was aggressive bidding for deposits that would otherwise have
gone to
savings banks or into investments; at times,
doubtless it was
defensive bidding against savings or other insti
tutions. In
districts where competitive practices were aimed
in selfdefense against other commercial banks or again
st savings
banks, and in those where they can only be
properly described
as aggressive, the ultimate results as shown by
income accounts seem by and large the same.
Here was a picture of struggle for size, compe
tition for
deposits, high rates paid on deposits, rapid expan
sion of resources and in many cases a levelling down of
the quality
of assets. Income from the growing volume of asset
s was
too liberally paid out in interest on deposits
instead of being
used for writing off doubtful assets and build
ing up surplus
funds or reserves. The banks showing the great
est expansion
did not become more cautious in their lending and
investment
policies in order to insure the necessary
protection to depositors by improving the quality of assets.
On the contrary,
the intoxication induced by rapid growth and
high earnings
frequently led to the opposite result.
Whether the competition for deposits at high
rates of interest led to a search for high yield investments
or whether the
availability of assets at high rates led to the
competition for
deposits, the results were substantially the
same, because the
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Federal Reserve Bank of St. Louis
Address by Mr. S. Sloan Colt (contd.)
Pages 148-49-50-51
depositors' margin of protection was lessened.
Necessity for Building Up Capital Funds
A primary consideration of any bank or any banking system should be the protection of depositors' money. Although
a bank has many obligations to its community, no institution
can long endure nor can it continue to be a constructive
force in its community if it forgets or neglects this primary
duty to the depositor. Management which conducts itself in
such a way as to maintain an adequate supply of capital funds
is the most effective protection to the depositor. The first
risk falls upon the stockholder, and his equity stands as a
protective cushion to the depositor. The greater the equity
the greater the protection.
In order to insure adequate protection, therefore, the conditions under which banks operate must be such as to lead
to the accumulation of capital funds. The incentive for
investment must be there. If the investment isn't sufficiently
attractive to secure and hold funds, then the deposi
tors'
security will inevitably be lessened and an invitation extende
d
to the Eovernment to get into the banking business.
The competition for money and the consequent high rates
which have been paid have a particular bearing on this
question. How much can be paid for money is
one of the
most important questions for each banker to answer taking
,
into consideration the returns available on assets suitable
for
a bank's portfolio and also the necessity for
the growth of
capital funds. Whether a banker permits these important
facts to determine for him the rate he can pay
on deposits
or whether the competitive price which he must pay for deposits is allowed to determine the quality of assets
in his
pertfolio may mean the difference between
success and failure
of his institution. If the competitive rate for money does
not permit the proper return on investment and
a reasonable
growth of capital funds without resorting to high yield loans
and investments at the risk of security, then no bank
can
afford to pay such a price. The prohibition of interest on
demand deposits and the fixing of maximum rates for time
deposits modifies the problem somewhat, but
does not solve
it completely.
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Federal Reserve Bank of St. Louis
,
Address by Joseph M. Dodge, Pres.,
Detroit Savings Bank, Detroit
49th Annual Convention, Michigan Bankers Asso., June 1935
(Michigan Investor, July 13, 1935)
* ** *****
Competition for commercial deposits in terms of interest paid and
the charge for interest on commercial deposits having been eliminated
by law, we still have with us the problem of savings interest which is
probably the largest single charge against the bank operating income
and, as such, entitled to more than passing comment.
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Federal Reserve Bank of St. Louis
********
,
SOURCE:
THE FINANCIAL AGE -- June 18, 1935
THE CURRENT BANKING SITUATION--Dr. Luther A. Harr, State Secy. of Banking,
Harrisburg
Page 430
Another measure we are sponsoring gives the Secretary power to
fix maximum interest rates on various types of deposits and to
classify the rates according to maturity and according to the
community in which the bank is situated. The limitation of
interest is necessary, I believe, to prevent a return of the cutthroat competition which marked banking activities in the State
during the boom years. In their feverish desire to get business,
banks were offering interest at rates far out of line with sound
practice. We do not want to see such conditions return.
The department also realizes that what may be a fair rate of
interest in a city may be an unfair rate to impose on a rural
bank. For that reason the department proposes to classify the
rates. No doubt the Banking Board will be of assistance in preparing
a schedule of rates.
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Federal Reserve Bank of St. Louis
The California Banker--June 1933
COMPETITION, COOPERATION OE CONTROL--by Paul F. Cadman, Associate Prof.
of Economics, U. of Calif.
Page 208
So much has been said on these vital issues by experts from within
the profession that the layman hesitates to voice his opinion. Perhaps
some observations from an outsider will serve to emphasize the tAo great
hazards egainst which the banking industry must contend: competition and
control. There may be some virtue in again calling attention to the
middle road--Cooperetion--which alone may leed to survival.
Competition is the prevailing order in the banking world. In this
it follows the former trend of our national and traditional policy. There
is now abundant evidence that the excesses of competition have been as
destructive as the excesses of monopoly. In the exercise of the powers
which we have recently handed over to the Federal Government, there will
be, no doubt, an increasing burden placed on the privileges of monopoly,
but it is equally certain
_ laws limiting combinations will be greatly
from destructive competition.
away
I odified. The drift is
The competitive aspects of banking are mitigated to some extent by
the appearance of bankine combinations in various forms, but even if the
number of banks in the United States should be reduced to fifty, which is
not likely, dangerous competition would prevail as it does today. The
battle to win deposits has been waged without regard to the balance sheet.
The rise in the deposit curve has been so abrupt as to be amazing, but the
potential of this index has been severely lessened by the continuing
decline of net earnings.
The colossal failure to reap the benefits of a vast increase in
deposits was due in a large measure to the unsound competitive practices
which prevailEd in securing and holding these deposits. Among California
national banks elone, demand deposits increased 126.56 per cent between
1918 and 1931, while time and savings deposits increased 1,374.80 per cent
in the same period. The competitive bidding for these deposits led to the
payment of an excessive return, which was the principal drain on income.
In 1932 the total net profit column for all United States national banks
showed a defict of $139,000,000. To be sure, it was a calamity year, but
the trend line had been so clearly established that the red would have
appeared in the near future if a major depression had not overtaken us.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
t,AGLY,
?S. I101/13.7!TT
l2. DRTLE3E13I
LB. SOL01.10Y
31Atf2.1711:e,
FILE:
Study
Address by President Robert C. Clark,
Commissioner of Banking & Insurance, Vermont
32nd Annual Convention,
National Asso. of Supervisors of State Banks
Chicago, September 1933
**** * ***
The banking holidays, both local and nation-wide, were the culmination of several years of unfavorable experience in the banking world.
Each year, since the war-time boom period, has recorded a disgracefully
large quota of bank failures. It has become increasingly evident that
there were too many banks. Competition played too large a part in the
management and the rates of interest paid to depositors were too high
to be consistent with sound banking. * * * * * *
********
There is reason for doubt whether savings deposits as distinct
from commercial deposits should come under the Federal insurance plan
and also whether a bank doing a purely savings deposit business should
become a member of the Federal Reserve System. The record of our
mutual savings banks has been so remarkable that banks of this type
should be able to inspire public confidence without any guarantee, or,
if one seems necessary, with that of local voluntary associations.
There is no indication that pressure will be brought to bear to force
savings banks into membership against their will. Here the field of
the State supervised institution bids fair to be unchallenged by
Federal edict. We will do well to throw the power of our influence
into the move to bring about the segregation of commercial banking
from savings banking and the absolute divorce of both from investment
banking. The ambition of the state bank with capital stock doing a
combined commercial and savings business to maintain an equal interest
rate on deposits as mutual institutions with no capital stock has
brought about many of the unsound situations with which we are now
struggling. Competition of this kind should stop.
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Federal Reserve Bank of St. Louis
** * * * * **
SOURCE:
THE COMMERCIAL & FINANCIAL CHRONICLE--Proceedings of Convention
of A.B.A.--New Orleans, Nov. 1935
NATIONAL BANKING SITUATION--by J.F.T.O'Connor, C/c, Wash. D.C.
Page 14
The Congressional Act prohibiting the payment of interest
on demand deposits and placing certain restrictions on the
payment of time deposits has been of great benefit to the
banks. During the five years prior to the passage of this
law member banks alone paid on demand deposits $1,230,242,000,
or an average of $246,048,500 per annum. The total assessment
paid to the FDIC to date by all insured banks in the United States
during thensarly two years of operation is $41,031,652.85. Annual
assessments under the permanent plan are estimated at $35,000,000.
The practice of paying interest on demand accounts was generally
condemned and denounced by the bankers, but they were powerless to
correct the evil until Congress acted. This practice caused unwarranted competition between banks through the payment of high interest
rates, which, in turn, necessitated unsound investments and loaning
policies, and unreasonable rates of interest to the borrower in order
to earn and maintain the payment of interest on demand deposits.
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Federal Reserve Bank of St. Louis
4u4,
?re.1 Berger, V. P., Norristown-Penn Trust Co., Pa.
Speech - Pa. B. A.
Source: The Financial Age - May 1983.
* N4 * * * * *
Trust Activities
8. Our trust departments in :any sections of the country aze..vielna_with
one another for a volume of trust business and in that cAupetltion are taking
business at such ridiculous rates that undoubtedly as this business matures
they will find themselves in just the same position with regard to their trust
department activities as we now are ritn regard to our small balance checking
accounts. The hue mnd cry which will be raised at that time could be entirely
eliminated by cooperative effort at the present time to establish minimum
rates below which no trust department would take trust business.
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Federal Reserve Bank of St. Louis
* * * *
* * * * * *
7
SOURCE:
ASSOCIATION NEWS BULLETIN — bavings Banks Association of
State of New York
OCTOBER 18-19, 1954
ADDRESS by HON. JOSEPH A. BRODERICK
Page 15
Voluntary action is preferable at all times. Those of you
who know me well know that I am opposed to "the big stick", end
it has never been used in the Banking Department except as a
last resort. Why can't the savings banks of this state take
voluntary action? It is to the interest of their own institutions;
it strengthens their own position and strengthens the system as
a whole.
You say you can't do that unless the commercial banks follow
suit. I tell you gentlemen, from my conferences with commercial
banks throughout the state, they will follow very quickly, they will
go along with you at the same time. We have had discussions with
the Washington authorities for the lest six months on this question.
I have favored a reduction of interest rates since the first qiierter
of this year as a mark of conservatism. I realize that it would be
better if we could get unified action on the part of the national
and state departments, but I find they have complications down in
Washington which make it almost impossible for them to direct a
reduction of interest rates covering the whole country. They say
each state should handle its own affairs. If a reduction is possible
in one state or one district, it should be made there.
Well, it took two years to get the rate down from four and a half
to four per cent in up—state districts. To be quite frank, I want to
say it didn't take fifteen minutes to get them down from four and a
half to four in Greater New York some four years ago; but it is to
your interest, it is to the interest of the depositors of your bank,
and it is to the interest of the savings bank system of this state
that the rate be reduced to a maximum of two and a half per cent, and
just as quickly as you can do it.
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Federal Reserve Bank of St. Louis
/7
Address by L. A. Andrew, Iowa
National Asso. of Supervisors of State Banks
33rd Annual Convention, Baltimore, Md., October 1934
***** ***
The section of the Glass-Steagall bill doing away with the payment
of interest on demand deposits was a step in the right direction, but
its effect was almost completely nullified by a Federal Reserve regulation issued shortly after, allowing the payment of interest on short
time deposits. Bankers should have learned from their experience of
the past five years that volume of business is not the greatest thing
to be desired.
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Federal Reserve Bank of St. Louis
********
SOURCE:
THE OHIO BANKER -- JULY 1934
ADDRESS OF THE PRESIDENT -- Clark Will
Page 6
While on this subject, let me voice the opinion that eventually
we must cease the payment of savings deposits entirely on demand.
If we are to pay interest on these deposits we must look to the day
when we may reouire some reasonable notice for the withdrawal of
sizeable amounts. Had such withdrawal restrictions been a matter
of general banking practice in years gone by our recent difficulties
might have been less severe.
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Federal Reserve Bank of St. Louis
SOURCE:
THE OHIO BANKER -- JULY 1934
ADDRESS OF THE COMPTROLLER, J. F. T. O'Connor
Page 30
There are benefits which are coming now to the banking industry
that were undreamed of possibly in the earlier days of Federal
Deposit Insurance. Let me name one of them. We passed a regulation
effective Jann.6ry 1st in which we required a fixed rate of interest
in every bank in the United States that became a member of the
Federal Deposit Insurance Corporation. That was sound. That had
never been accomplished before. If there ever was anything unsound in banking, it was the bidding for deposits by one bank
against another by paying higher rates of interest. Now we have
the interest rates fixed and all institutions which are accepting
deposits from the people ought to be compelled to pay a reasonable
rate of interest, depending upon the conditions in the country and
the demand for money, and not permit the great banking structure
to suffer because a part of it was trying to destroy the whole system.
That is a great benefit.
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Federal Reserve Bank of St. Louis
SOURCE:
THE MISSISSIPPI BANKER -- MAY 1934
CHANGES IN MISSISSIPPI BANKING LAS—by Hon. J.T.Brown, Pres.,
Capital National Bank in Jackson
Page 26
The rate of interest that may be paid on time and savings
deposits is fixed by the Comptroller as it used to be by the
Superintendent of Banks, but the rate named by the Comptroller
must not exceed the rate permitted to be paid by Nt!tional Banks.
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Federal Reserve Bank of St. Louis
SOURCE:
THE GUARANTY OF BeNe 1- :E?OtATE--e ree,ort of the Commission an'
banking Law and Prectice, Aeeocietion of Ees. City Bankers
Chicago, Nov. 19----Bu1letin BO. .T
Fate 19
Although nearly one-half of the banks of the countr heve been
elinineted since 19f,), there are still many uneeoposic unite in our
dofs not eern a fir evere!,re rate of
bankint structure. e bank
only is uneble to build up reserves
not
ycare
return over e period of
improve profit, ir under constant
to
order
aiainst bad timer, but, in
end ere likely to leed to fellure.
the
in
temptation to take risks which
7Neee 24-25
INTEREET ON DEPOSITS.--Under the provisions of tbe liankinz Act of
lans, member beekke were prohibited from ping interest on demand depoeite.
it ims the motive of the framers of the bill to discourage competition in
interest payment, which hee worked aceinet conservative banking, and to
provide a saving to the banks which would eneble them to write off losses
and build 12:) cepital structure. The: also had in mind that the measure
would proeide funds out of which to meet the essesements under the guaranty
plan. For many years there hae been ennsiderable sentiment among bankers
against indiscriminate payment of interest, and tnere Pre many reesons
why restrictions should heve been imposed earlier. Competition between
banks in interest peyment ha r undoubtedly been a souree of weakness in the
bankinc otructure. It ht.e led Wine banks to purchase high 000id securities
and to make loans et high rates of interest. It has also doubtless been
one of the factors which has prevented merry banks from writing off losses
: surplus to meet emrgency
as they occur or from building uj. the neceszrconditions.
Figures have been presented by tke Comptroller of the Currency which
indicate that interest paid on dement deposits by member benks has averaged
C.46,000,000 per annum during the pest five years. For the past year, however, payments probably amounted to less than one-third of that amount.
There is little basis es yet for estimating the amount of saving from this
source which might be available for astioessments, because there are many
offsetting factors to be considered. At 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. Aoreover it will take many pars for even some of
the good banks to write off cocumuleted losses and build 11 toe necessary
surplus for safety. A more rigid policy of writing off future losses as
they occur will probably farther reduce earnings. * * *
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Federal Reserve Bank of St. Louis
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.
Pages 41-42
Second, we have a distinct situation with regard to competitive
interest rates. That, however, is within administrative control.
If you have a commercial bank next door, which by way of time
deposit or thrift deposit can pay three per cent, and that thrift
account is guaranteed by the insurance scheme as a competitive matter,
it is likely to attract funds which either have been in savings
banks or would normally go there. That would mean a shift in funds
in the direction of the guaranteed bank as against the unguaranteed
bank, and that perhaps really is the major consideration in determining
our own course. If we have it, we have to consider that any attempt
to shift our funds to another bank would precipitate the kind of
situation which makes for an unsettled banking community. The process of that shift would essentially be a disorderly and disrupting
thing. I take it the great responsibility on trustees is determining
what they are going to do should a grave situation develop in case
they elect to stay out.
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Federal Reserve Bank of St. Louis
The California Banker—June 1935
COMPETITION, COOPERATION OR CONTROL—Paul F. Cadmhn, Associate Prof.
of Economics, U. of Cal.
FaE_e 209
** * * *** *
However fiercely the battle may wage in terms of incidental
services, the big drain appears in the competitive interest rate on
pseudo—time deposits, many of which should bear no interest at all.
The answer is agreement as to interest rates, which agreement
will no longer be unlawful in the face of the growing public sentiment
against wasteful competition. Once the public realizes that it will
receive the same treatment from all banks, it will cease to expect
high rates on time deposits and will eventually recognize the wisdom
of foregoing this return in the interest of solvency and stability in
its banking institutions. Once this major leak is stopped, the other
follies of unjustifiable gratuitous service will easily be controlled.
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Federal Reserve Bank of St. Louis
******** *
"The Regional Clearinghouse Movement"
Address by William K. Payne, Chairman,
Nati-)nal Bank of Auburn, New York
40th Annual Convention, New York State Bankers Aso., June 1933.
** * * ****
Mindful of the fact that unoounl banklng operations on the part of any
of its competitors will not only be harmful to the community and all of
its banks, but that the losses incurred by reason of such practices will
h!,ive to be made good out of the deposit insurance func: contributed by all
the ban, the clearinghouse will have both the will and the power to insist on high standards of bank management. Under such an organization,
unprofitably high interest rates .on deposits, and on public funds, would
not be long maintained, unkno-mn duplicate borrowings would be prevented,
new bank charters to inexperienced men desiring to aivemture into the
banking field would be more readily prevented, and, in qeneral, a long
list of unwise practices which no individual bank likes alone to stand
out against for fear of incurring ill will, would, by the cooperative
action of the groups, be easily controlled. The chief strength of the
movelent will come, however, through a spirit of mutual confidence,
understanding and good-will, which is inevitably engendered when a group
of strong men work side by side for their mutual benefit and for the
well-being of their community.
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Federal Reserve Bank of St. Louis
* * * ** * **
SOURCE:
THE CALIFORNIA BANKER—JUNE 1933
ADDRESS OF THE PRESIDENT--J. F. Sullivan, Jr.
Page 185
Payment of interest on deposits has at last become an issue
for Congressional consideration, to the everlasting shame of the
banking fraternity. We have, among ourselves, created the weapon
of competitive interest rates and then permitted it to be used
against each other in the silly campaign for big balances on a
profitless basis, knowing full well that a situation must eventuate
where we would be compelled to pay the price of our folly. Our customers took advantage of our foolish ambition, as they had a perfect
right to do, and now we are to be told by legislative fiat that which
we already knew, but lacked the courage and foresight to admit. Thus
stupid competition has led us to the point where we now have to submit
to the humiliation of further regulation in a field where our better
judgment should have prevailed.
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Federal Reserve Bank of St. Louis
•
SOURCE: ASSOCIATION NEWS BULLETIN - Savings Banks Association Of
State of N.Y.
Sept. 26-27, 1935
PUBLIC APPROVAL FOR THE IDEAL SAVINGS BANK -- by Dr. Harold Stonier,
Educational Director of the A.I.B.
Page 59
CHARTERED BANK SYSTEM
We have no private banks in the United States; they have
been abolished by law. We never did have a private banking
system. What we have is a chartered banking system. American
bankers, to my mind, have never taken full advantage of the
possibilities of the public relations that lie in that word
"chartered". A charter is a grant of power by a sovereign state
to a group of people to do something for the public, but always
under the regulation, control, and supervision of the state.
Your banks are chartered institutions, and the word "charter" has
a long and noble record in the history of the Anglo-Saxon pecIple.
From the days of the old chartered companies on down, chartered
rights have had a peculiar significance to the Anglo-Saxon people
wherever the word "charter" has been properly displayed.
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Federal Reserve Bank of St. Louis
•
SOURCE:
THE DEPRESSION EXPERIENCE OF SVGS. AND LOAN ASSOCIATIONS IN THE U.S.
by—Morton Bodfish-Exec. VP.
U.S. Bldg. & Loan League
Sept. 1955
Paige 28
Bank competition on the mortgage lending side is an undecided
question but will probably not be great. One favorable factor with
regard to our program is the sweeping acceptance of the amortized
mortgage in all government operat ons and in the public mind as we
emerge from the depression. It is being rapidly adopted by mutual
savings banks, insurance companies, and other mortgage lending
institutions. The building and loan type of mortgage has won the day.
It is a victory not only for our type of institution but for the
progress of home ownership in the nation.
Page 29
Bank competition for savings is still a major problem of savings
loan
and
associations. Apparently the demand for prime mortgages is
developing ahead of a resumption of a bcoad flow of savings or investments.
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Federal Reserve Bank of St. Louis
•
The Commercial & Financial Chronicle--Proceedings Convention of ABA
New Orleans--Nov. 1935
THE PROBLEM OF BANK EARNINGS—Rat. M. Hanes, Pres. Wachovia Bk. & Tr. Co.
Winston-Salem,
Page 75
Bankers are to-day seriously cutting each other's income by
a senseless bidding for loans at low rates. Many bankers are going
outside of their regular trade areas, offering money to non-customers
at lower rates than they are willing to offer their regular customers,
simply to employ their idle money.
This practice is just as bad as was the old habit of bidding for
deposits by paying high interest rates. As a result, many borrowers
are shopping around to get the best possible rates, and in arder to
make any loans at all, banks have had to reduce rates almost to the
vanishing point. I believe there should be more co-operation on this
point between bankers and that we should not allow senseless competition
to deprive us of a reasonable return from our loans.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
SOURCE:
ANNUAL RE?ORT OF THE COMMISSIONER OF THE BANKING DEPtRTIENT OF
THE STATE OF MICHIGAN -- December 31, 1935
Page xvi
The Federal Reserve Act provides that state bank members shall retain
their statutory state right after becoming a member of the Federal
Reserve System, and the reserve requirements of member banks are
governed--after they have become such members--by the rederal Reserve
Act, ri,ther than the provisions of the state banking law.
The Federal Reserve Act provides that the Federal Reserve Board may
accept in lieu of their own examinations of member state banks, the
examinations made by the respective state departments, havink supervision
over them. The examinations of this dep6rticent have been accepted by
the Federal Reserve Board.
SOURCE:
Annual Report of Supt. of Banks, N.Y. Dec. 31, 1935
Page 9
SAVINGS BANKS
The last two annual reports of the Superintendent have briefly
reviewed the organization and activities of Savings Banks Trust
Company and the creation and functioning, under the trusteeship
of the Trust Company, of the fund for insurance and protection
of deposits in savings banks. The general services of the Trust
Company and its administration of the insurance fund continue to
command attention in any discussion of the forces and considerations which make for a better system of savings banking.
The extent to which savings Banks have taken advantage of the
facilities of the Trust Compeny to act as their agent or trustee in
reorganizations and rehabilitaticns of investments has increased
substantially during the year. This trend has been augmented to
some extent by the fact that the lest Legislature restated and clarified the power of the Tru:t Company to act in such capacities. The
investment advisory service supplied by the Trust Company to its
members has grown in scope and importance. The vital interest of
the Trust Company in the welfare of its members adds to the value
and significance of this service.
Thc fund for the insurance of deposits and the protection of
depositors has definite4 established its usefulness. Its outstanding
practical feature is its ability to liquefy and improve the character
of assets of member banks.
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Federal Reserve Bank of St. Louis
.
0
e
•
o
Resolutions
40th Annual Convention
Oklahoma Bankers Asso., May 1936
(The Oklahoma Banker, May, 1936)
**** * ***
BE IT RESOLVED, that the members of the Oklahoma Bankers Association, represented by their delegates at the 40th annual convention held
in Tulsa on May 7th and 8th, 1936, do hereby approve and adopt the
following statements as a declaration of the policy of this association
for the guidance of its officers, committees and members.
* *******
i
We commend the Banking Board for its careful consideration of every
application for a new bank charter, and for the staunch manner in which
they have prevented the miscellaneous issuances of charters.
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Federal Reserve Bank of St. Louis
**** * ***
11?
•
Proceedings of lend. Atinu(91 Convention,
Pennsylvania Bankers Association, May, 1936.
(The Financial Age, June 4, 1936)
"The Banking_ Board:
It is a privilege to express the confidence
felt througnout the Colaaonwealth because of the manner in which the
plans of Secretary of Banking, Luther A. Harr, have materialized
since the Scranton convention in setting up the banking board as an
arm of the State government in supervising State-chartere banks and
trust coqpanies and trust departments of national banks.LThe authority conferred upon the banking board together with its present personnel, assures a continuance of sound regulations and administrative
policies within the banking department, and is a considerable
guarantee against undue nolitical influence in the conduct of the
work of the department. 0Anion of our bankers is to the effect that
the establishment of the banking board marks a real step in advance
for an even stronger banking system for Pennsylvania." (Excernt from
tile report of the Secretary.)
-4
•
•
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Federal Reserve Bank of St. Louis
113
Address of A. L. Lathrop, Pres., Calif. B. A.,
V. Pres., Union Bank & Trust Co., Los Angeles
45th Annual Convention of California
Bankers Asso., Sacramento, May 1936
*******
**
Bank Chartering Policies
The history of the chartering of banks in the United States, reveals
a widespread disregard of the proper relationship between the economic
needs of the country and the number of banks permitted to open for business during all the time prior to the depression which begun in 1929.
Not only the general public, but both state and national banking au orities
who were responsible and empowered by law to guard against unsound charter
policies, were equally oblivious to the unwisdom of the course. Many
factors, of politics, competition between the national and state banking
systems, mistaken ideas with respect to national development especially
in the sparsely settled districts, motivated this chartering policy.
Despite the high ratio of bank failures from 1920 to 1922, which indicated
clearly that the nation had become heavily overbanked, these policies were
persisted in by both state and national governments, and their respective
charter provisions were liberalized in the progressive competition to attract new banks.
These conditions contributed in a large degree to the creation of a
banking structure which failed to meet and withstand the destructive shocks
of 1929 and the period following. ,This overchartering of banks by public
officials was a distinct cause of the abnormal bank failure conditions
that prevailed from 1920 to the bank holiday in 1933. In these days, existing sound banks, especially the smaller banks in the- rural districts which
are serving their communities well, should be protected against any
resumption of chartering policies which were largely to blame for the
thousands of failures of banks over the past twenty years.
Bankers are assured that federal and state authorities recognize the
weaknesses of the practice; which prevailed, and use careful and sound
discretion in the few charters which are being granted, and we most
heartily commend them in this policy.
***** *** *
Present day conditions intensify and demand that public officials,
both national and state, use highly prudent and restrictive policies in
connection with the chartering of new banks. Incidentally, we again urge
the retirement of the federal government from the banking business, in
order that the surviving banks may prosper and the private system then
be extended according to the needs of national credit.
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Federal Reserve Bank of St. Louis
* * *** * * **
117
•
Report of the Resolutions Committee
45th Annual Convention of California
Bankers Asso., Sacramento, May, 1936
* * * * * * ***
Resolution No. 3 — Chartering of New
.
National and State Banks
"WHEREAS,tiOne of the contributing causes of bank failures during
the period 1920 to 193 was the chartering of too many banks by national
and state authoritiesliand
"WHEREAS, With the return of prosperity there is a danger that this
unsound practice may be resumed; now, therefore, be it
"RESOLVED, That we urge upon
the adoption of a fixed policy of
banks unless definite evidence is
facilities are required by public
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Federal Reserve Bank of St. Louis
both the state and federal authorities
declining to grant charters for new
presented that additional banking
convenience and necessity."
** * * * * ****
/
_
. ••A
f
'
re,
41.1'
ti
126
I
SOURCE:
THE ARKANSAS BANKER—JULY 1936
The "Voice" of the Association--Resolutions submitted by Resolutions
Committee, W. A. McDonnell, Chmn.
PaRe 8
New Bank Charters
.One of the principal factors which contributed to the breakdown
in the American banking system in 1953 was the indiscriminate granting of
bank charters by State and Federal authorities, which commenced in 1900
and continued over a period of twenty-five years. During this period the
door of banking was opened to virtually all who sought admittance, regardless
of whether the particular community already had adeqvate banking facilities,
and often regardless of whether the proposed capital structure was sufficient
to provide a fair margin of safety for depositors:7 The result was that by
the year 1920 there were approximately thirty thnland banks in the United
States. That this number was grossly excessive is clearly indicated by the
fact that approximately eight thousand of these banks failed during the years
1920 to 1929, a period when the country as a whole was enjoying the greatest
prosperity in its entire history. The danger of indiscriminate granting of
bank charters is clearly recognized in both Federal and State banking
legislAion which has been enacted since 1953. While the issuance of new
charters is left within the discretion of the Comptroller of the Currency
and the various State bank commissioners, they are clearly enjoined to do so
only where there appears absolute necessity for additional banking facilities
in the communities which will be affected, and where those who apply are
clearly qualified by experience and integrity to enter into the field of banking.
This Association desires that every section of Arkansas shall have
adequate banking facilities, but it does not want a repetition of the "overbanked" condition which formerly existed.
THEREFORE, BE IT RESOLVED, That we commend the Bank Commissioner
of the State of Arkansas and the Comptroller of the Currency for the
attitude they have taken during the past two years in requiring that those
who apply for new bank charters shall be well qualified to become bankers
and that they show an absolute necessity for additional banking facilities
in the communities they propose to enter. We believe that strict adherence
to this policy in the future is for the best interests of sound banking in
our State.
Banking_Cooperatives
Act No. 632 of the Acts of the General Assembly of 1921 was passed
to enable farmers to organize cooperative associations, stores and marketing
agencies. Under the provisions of this act it is possible to organize socalled "banking exchanges", about twenty of which are in existence in
Arkansas at this time. Under the law these exchanges arc required to make
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Federal Reserve Bank of St. Louis
12?
-2-
W. A. McDonnell
Page 8 (contd.)
one report a year to the Commissioner of Mines, Manufactures and
Agriculture. Since this office was abolished several years ago, there
is now no department of State to which reports can be made. The result
is that these exchanges are receiving deposits of the public and have no
supervision whatever.
On March 31,1956, one of these cooperative associations, known
as the Citizens' Banking Exchange, at Marshall, Arkansas, failed. It
was reported that the cashier closed the exchange without notice and left
town. The fact that such cooperative organizations are confused in the
minds of many people with regularly organized and supervised banks was
glaringly illustrated by a story carried in a Little Rock newspaper under
the headlines of "Marshall's Only Bank Closes Doors."
The fact that the Marshall exchange closed does not necessarily
mean that similar banking cooperatives are not honestly managed. te deem
it a menace to sound banking, however, for these associations to be permitted
to receive deposits from the public without careful and rigid supervision.
Since these associations do not have sufficient capital to provide adequate
margins of safety- for their depositors, the act authorizing their creation
should be repealed and the associations should be abolished.
BE IT RESOLVED, That this Association adopt the above statement
its policy concerning banking cooperatives.
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Federal Reserve Bank of St. Louis
as
Preliminary report of S. E. Sobeloff (former U. S. District
Attorney), special court officer appointed to investigate the conditions leading to the suspension of the Baltimore Trust Company,
Baltimore, Maryland. ("The Sun" (Morning), January 25, 1936.)
The report comments, among other things, on:
1. Huge losses which had been accumulating for years.
2. Negligence of officers and directors in determining
the condition of the bank's assets.
3. Quest for size - mergers, establishment of branches,
unwise loans, investment in banking house, etc.
4. Dealings with affiliates.
5. Disregard of warnings in examiners' reports.
6. Payment of dividends.
7. Unwise management by executive heads.
-135
(Clipping in Division of Examinations File - "ff5 Richmond,
General")
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Federal Reserve Bank of St. Louis
SOURCE - THE SUN, Baltimore, January 25, 1936.
(
.4464w/d,
'0)
Excerpt from summary of preliminary report on the affairs of
the Baltimore Trust Company filed by S. E. Sobeloff, Special
Investigator.
"The directors made no independent investigation into the affairs of
the bank, relying on tne public authorities (p. 175). These authorities, on
tne other hand, received the published reports of the bank, examined them for
rtatistical purposes, but failed to compare them with the findings of their
ovin examiners. In many instances the examiners' reports were not laid before
the directors and the directors seem not to have noticed the omission (p.177).
The examiners reported to their superiors that tne reports had not been laid
before the board, but these officials took no action (Sup. Rep. p. 27). Important criticisms of tie examiner, even when concurred in by his superior,
the Bank Commissioner, in many instances failed to result in action because
the commissioner accepted general assurances of the bank's officers of tue
soundness of the institution (Sup. Rep. p. 25).
"On at least one occasion an examiner, noting the large loans to tne
Baltimore company, requested an opportunity to examine its books, and this was
refused (p. 182). The Pank Commissioner did not press the matter.
"Bank Statement of June 701 1972
[
"After the hank had received the examiner's report, dated March 28,
-1972, recommending charge-offs of .8,574,224.48, which would have wiped out
the reserve account, the bank officials published their statement of June TO,
1932, without tnis charge-off and snowed a condition substantially the same
as the preceding December (pp. 187-8; Sup. Rep. p. 20). The examiner's recommendation was moderate even in the light of existing conditions. It is fair
to say t-at a conference had been held on June 15, 1932, by the officers and
certain members of the executive committee of the bank :ith the State Bank
Commissioner, the Pederal Reserve agents and members of their staffs. At this
conference the bank officials demurred to the charge-off and the supervisory
officials acquiesced. It appears, however, that their acquiescence was influenced in part at least by representations made b:, one of the officials of
the bank that there vias no substantial loss in the Baltimore Company and the
raltimore-Gillet Company repurchase agreements (Sup. Rep., pp. 25).
L
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Federal Reserve Bank of St. Louis
Report of S. E. Sobeloff (former U. S. District Attorney), special
court officer appointed to investigate the conditions leading to the
suspension of the Baltimore Trust Company, Baltimore, Maryland. ("The
Sun", (Morning), Baltimore, Md., June 7, 1936 - Pages 8-9.)
The report comments, among other things, on
1. Relations with affiliates
2. Analysis of bank's loan, investment and other
policies.
3. Negligent conduct of bank's affairs by the directors.
4. Difficulties faced by examiners.
Conclusions and recommendations on:
(a) Limiting ratio of deposits to capital
(b) Segregation of banking functions - trust,
savings, investment and commercial banking
(c) Limitations on investments - prohibit
buying of stocks, confine investments to
higher rated bonds, restrictions on investments on bank premises, loans on
mortgages, etc.
(d) More comprehensive statements of condition
(e) Powers of State banking department should
be increased.
(f) Courts should investigate bank suspensions
(g) Responsibility of directors
(h) Examiners' reports should be considered by
directors.
(i) Directors should have audits made by outside
auditors.
(j) Bonds should be required of directors.
(Clipping in Division of E„..aminations File - "fit5 Richmond, General")
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Federal Reserve Bank of St. Louis
136
SSW
•
SUMMARY OF FINAL RE:DORT
by
S. E. Sobeloff
Appointed under court order to investigAe affairs of the
Baltimore Trust Company - Baltimore "Sun" June 7, 1936.
Feeble attempts by the bank ex 'miners to keep the Baltimore
Trust in line were noted by Mr. Sobeloff, who included among his recommendations for better banking the extension of bank examiners' activities.
Of the checking efforts of the examiner in the Baltimore Trust instance,
Mr. Sobeloff said:
•
"But the examiner should not be too severely censured.
One can readily understand the disparity in position between
the examiner who received a salary ranging from $1,500 to
$2,200 (this was the scale of salaries paid to the State Bank
Examiners prior to 1932), and the commanding figure who headed
the bank at a salary of $50,000 per year.
"He would be an unusual examiner who failed to give
thought now and then to the probability that the president,
if sufficiently autagonized, could, without difficulty, arrange
with the superior authorities for his transfer or dismissal.
"Considered in this light, some of the criticisms
contained in the examiners' reports u90n the Baltimore Trust
Company appear quite vigorous and almost daring."
•
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Federal Reserve Bank of St. Louis
SOURCEI
THE FINANCIAL AGE---JUNE 1936 (Convention No.)
N.Y. State Bankers Association
ADDRESS OF THE PRESIDENT—S. Sloan Colt
Page 445
It is of interest to note in this connection that a hundred
years ago the banking system in England was suffering from many of
the same difficulties which we are facing today. In periods of depression there were many private bank failures which repeatedly shook
the confidence of the public and led to the gradual development of
joint stock banks and the growth of branch banking. The results are
familiar to you all. In spite of all the economic difficulties of England
during the depression no depositor in England has suffered the loss of a
singe dollar from bank failures since 1925. In fact only two banks have
failed in England since 1914, and the deposits of those two banks together were less than ;5,000,000. Yet there has been no lack of adequate
service to the English public. At the present time there are over 10,000
commercial banking offices in England serving 41,000,000 people, as
contrasted with about 18,500 banking offices in the United ,W;es serving
128,000,000 people. In other words, England, which is muclirnickly
populated than this country, has a banking office for every 4,000 people
as compared with a banking office for about every 6,900 people in the
United States. If we take the thickly populated State of New York we
have a commercial banking office for every 9,400 people. If we make the
comparison on the basis of area, England has a banking office for about
every six square miles, while New York State has a banking office for
about every thirty-four square miles.
The banking record in Canada has been similar to that in England.
Canada's economic problems are somewhat similar to those in the United
States, and yet in that country no deposit.dr hz..3 lost a dollar of his
deposits through bank failures since 1923. In Canada there is a banking
office for every 5,000 people contrasted with one for every 6,900 people
in the United States.
FOR BETTER SERVICE
I point these matters out not by way of sug„sting that we should
duplicate the English or the Canadian banking system, but merely to show
the type of service which it is possible for a banking system to render
and which the public in this country may ultimately demand. Banking is
not an end in itself, it is merely an instrumentality for serving the
public, and if the service we are now furnishing does not prove to be
satisfactory it is likely to demand something different. Are we ingenious
enough and far-sighted enough to anticipate that demand?
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Federal Reserve Bank of St. Louis
160
-2-
Financic..1 Az,e--June 1936
S. Sloan Colt
P_Age 445(contd.)
Legislation which has already been enacted permits the development
of rccional systems of branches that might serve the public effectively.
If more banking offices are required in the State they should be established
not through the chBrtering of new banks, but rather by existing banks taking
advantage of laws which permit branch banking within specified districts
of the State.
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Federal Reserve Bank of St. Louis
SOURCE:
THE ARKANSAS BANKER--JULY 1936
The Loyalty Leave Campaign--W. A. McDonnell, Chmn. Ark. Loyalty League
Page 12
"BANKING" CO-OPS
The rather spectacular closing of the "Citizens Banking Exchange",
in Marshall, on March 31, indicates the need of legislative action in respect to the "Co-ops" which are rendering limited banking service in this
State, especially in towns having no chartered banking facilities.
Here was a little financial service concern organized and operated
under Act 632 of the 1921 Legislature, which was passed to enable farmers to
organize co-operative associations, stores, marketing agencies, etc. Articles of Association are granted by the Secretary of State, and such "banking exchanges", under the law, are required to make one report a year, and
that to the Commissioner of Mines, Manufactures and Agriculture, which office
was abolished several years ago, so there is now no department of State to
which to make report. There is no State supervision over these "co-operatives".
At one time State Bank Commissioner Wasson took court action to gain supervision and chartering powers, but lost the case.
There are now said to be
about twenty "exchanges" of this class in Arkansas.
The Marshall "Exchange" was organized in May, 1933, with 41,500 capital, divided into 300 shares of $5 each, increased later to 600 shares at $5
each. Amount of deposits was not indicated in press reports. Without notice
the"cashier" is reported to have closed the "Exchange" and left town. Officers,
directors, stockholders and depositors have no "friend at court" such as the
Bank Commissioner, to turn to to assist them in unravelling the tangle.
The fact that evil days have come upon the Marshall "Exchange" does
not necessarily mean that other "money co-ops" are not honestly and safely
managed. But it does mean that if such institutions are permitted to do any
sort of "banking business"--especially receiving deposits--they should be
chartered and supervised by the State Banking Department. The Act of 1921
either should be repealed as to "banks" and'banking", or it should be amended to
give the State Bank Commissioner full and complete jurisdiction over all such
"exchanges".
Discerning people know that these "Co-ops" are not hanks, but many
people do look upon them as banks and some deposit their money in them. The
newspaper story of the Marshall "closing" bears this headline: "Mar8ha11ys
Only Bank Closes Doors." So among the unthinking the right sort of chartered
and supervised banking has received another black eye, because of confusion
in names and terms. It is distinctly for the public welfare, and to the best
interests of chartered banks, that every institution by whatever name, that
holds itself out as a bank and receives deposits should be strictly examined and
supervised by State or national supervisory authorities.
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Federal Reserve Bank of St. Louis
171
SOURCE: Excerpts from resume of speech by Glenn Griswold,
editor of Business Week, etc., before Wis. Bankers
Asso. Tues. dune 23, 1956
Following the debacle of 1921, four or five very simple reforms
could have been effected by the voluntary cooperation of organized
banking and by the pressure it could have exerted on public opinion
and political action:1. They were:
1-Immediate and permanent correction of the evil of too many
banks destructively competing for business often with incompetent
management. Mergers and liquidation would have accomplished part of
the job the basic cure for the evil rested with inviolable legislation
to prevent the opening of a bank anywhere unless the community needed
increased facilities and also unless the applicants for a charter were
competent bankers, adequately financed.
2-An adequate, unified, non-political and competently staffed
system of the bank examinations working in cooperation with urban and
regional clearing house associations.
5-A single banking system, whether it be state or national.
For years the integrity of our banking systems has been undermined by
laws permitting unsound practices first to the state and then the national system that one might have an advantage in competing with the
other.
4-Arbitrary and inescapable rules assuring that the moment a
bank's capital is impaired, it must be restored or the bank closed.
5-Complete segregation of banking into its natural functional
divisions. To some extent this has been accomplished in form by recent
legislation but the benefits of that legislation are lost by the failure
to make the investment policies of banks conform to the needs of the
division of the business in which they operate.
I believe that the guarantee of bank deposits is unsound in
principle and must eventually fail in practice as it has heretofore.
** *
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Federal Reserve Bank of St. Louis
170
AMERICAN BANKER, September 15, 1936
Extract from an address by C. M. Preston, President, Hamilton National Bank, Knoxville, Tennessee, to the Financial Advertisers
Association in their annual convention at Nashville.
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Federal Reserve Bank of St. Louis
1
"We have also learned that one of the main
sources of grief in the past has been the multiplicity of banks. For 25 years or more thousands
of banks were established throughout the nation
that had no rightful place in our economic structure. This brought about much unwise competition
and you are well aware of the stress that followed
such conditions.
"This situation cannot be remedied until we
have a uniform system of banking in the United
States and a system of chartering new banks which
is removed from political influence. There is no
Institution in any community that is as valuable
to it as a sound bank. Then how much better it
is that we have a few well-regulated institutions
than numerous ones struggling for existence."
198
•
SOURCE:
NORTHWESTERN BANKER--JULY
-JULY 1936 •
WHICH ROAD ARE YOU GOING TO TRAVEL?--by Claude L. Stout, Exec. Vice Pres.
Poudre Valley National Bank, Fort Collins,
Colo.
Page 9
*
**
The highway of banking now definitely branches in two directions.
One rosd bears the sign: "Confidence, Honor and Respect." The other
leads to "Failure, Disrepute and Destruction."
Many will say that the greater proportion of the 13,641 bank
failures were cross-roads banks. All of whic:1 is true. They will further
state that these banks should never have been chartered. This, too, is
admitted. But these same people say that in the future we shall not
charter a depository longside every neighborhood grocery. This is one
of the challenges to modern bankers. In some manner these cross-road
communities must be served satisfactory or the result will be another mad,
,destructive period of chartering banks. When there is a return of
what
is termed normal business conditions, and banks are making the proper
I proportion of profits, capital will again seek investment in cross
-road
banks. Will the politicians withstand the pressure of these bankless
1 towns, or will statutes again be enacted dropping the bars? Now is the
time to begin this phase of our community education.
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Federal Reserve Bank of St. Louis
199
SOURCE:
NORTHWESTERN BANKER—JULY 1936
Page 7 (Editorial section -- by Clifford DePuy)
Chartering
New Banks
The desire to charter new banks has started again.
New banks should not be started anywhere unless there
is a real need and a demand for such banks and it is proven in advance
that they can be made successful institutions if they are started.
D. W. Bates, superintendent of banking, is insisting that no charters
be issued for banks with less than $25,000 capital and 45,000 surplus, although the minimum capital requirement is $10,000.
Many banks that were closed during the depression should never have
been organized in the first place. There was no economic need for many of
them and not a sufficient amount of business in their communities to support
them.
If both the national banking department and the state banking departments will exercise the careful scrutiny of applications for new banks which
the,/ should the country will not again be faced with another bank closing
era.
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Federal Reserve Bank of St. Louis
200
•
winter* of Banking in the United States'
by Wood Netherland, V. Pres.,
Mercantile-Commerce sank & Trust Co., St. Louis, No.
40th Annual Convention
Oklahoma Bankers Asso., May, 1076
** **** * * **
Whether we like it or not, we must realize that in our present economic
order banks have now been placed substantially *n the category of public
utilities, in which state they enjoy certain rights and at the same time
assume certain responsibilities. We must also reali-e the public utilities
are so closely associated with our civilisation, supplying wants so funds,mental to the community that government has at all times subjecteithes to a
large measure of control. Chief Justice Taft once said that in a sense,
the public is concerned about all lawful business because it cantributed
to the prosperity and well-being of the people. But the expression
"clothed with a public 4nterest" as applied to a particular bus;nees means
aore than that the public welfare is affected by the continuity with which
or by the price at which a commodity is sold or a service rendered. The
circumstances which clothe a particular kind of business with a public
interest must be sOch as to create a peculiarly close relation between
the public and those engaged in the business, and raise implications of
an affirmative obligation on their part to be reasonable eben dealing with
the public. We may just as well realize that we exist by sufferance, and
not by divine right. Therefore, if in this new future banks are to have
the status of a public utility with rights and definite obligations, we
should know what those rights and obligations are.
The Service Charge
Certainly ae have a right to collect a reasonable price for our sm.,vices and receive therefor a reasonable profit. Since our success or
failure more deeply affects the community life than that of any other
business, it should be patent that no banking service Whatever should be
rewlered at less than cost. Profits should be so sure and so dependable
as to permit the accumulation of reserves sufficient to meet all contingencies. We should be privileged to establish such rules and regulations both for our own respective institutions and for the banking business as a whole as will insure sound and sensible management, even to the
denial of banking service to those individuals or corporations whose
operations are subversive of sound business.
We have a right to expect, particularly in view of our general
participation a the Federal Deposit Insurance Corporation, that no man
or set of men will be allowed to enter or to remain in the banking business
when their conception of their responsibilities is not of the highest order.
We have a right to expect that the political machinations by which bank
charters have too often been obtained in the past, shall be relegated to
the rubbish hasp along with foreign bonds and watered stocks.
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Federal Reserve Bank of St. Louis
.39
,a
1
41110
We have a right to expect that the Government will withdraw forthwith
from competition both in the matter of receiving deposits in postal savings
and through subsidized agencies in the lending field. In e,ort, if we are
to assume the responsibility of provisling an Tieguate banking system in
these United States, then we have the right to a clear track.
But if we are to Insist on these rights, then What obligatinns it we
assume? First and foremost is that of continuous self-examination and selfaudit. Ir. Owen D. Young, who f-r fifteen years has been a director of the
Federal Reserve Bank of New York, in a statement on the Ba.nkthe Act of 1_955
made the following observations "One may yell say that a bankin system
*doh failed to restrain a boom and collapsed during a depression should
be restudied as a whole." Many other lines of business for years have devoted much of their energy and resources toward a scientific investigation
of the factors which affect their business. Telephone companies, steel
manufacturers, the railroads—all have maintainrld substantial research depilrtments ink.order to meet thc growing demands of the public. In contrast,
bankers have done little work of this type. "By initiating research projects
in their own field of operntions, bankers may take an active part in
iiaproving the structure and operations of the mamercial banking system,
-c.ay render a service not only to themselves but to society as well."
Moreover, they may anticipate and forestall hasty and ill-advised legisla,
tion by proposals which ,tre the result of proper research and sound consideration.
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Federal Reserve Bank of St. Louis
-* * * * * * * * *
Study #6
41/
SOURCE: Address delivered by H. A. Bryant, President of the Kansas
Bankers Association, at the annual meeting held in Kansas City, Mo.,
May 5-6, 1936
One important problem that has been well taken care of in recent
years has been the granting of new bank charters, both national and
state. It is to be E-Dped that never again will the federal and state
authorities permit an over banked condition to exit. However, as business conditions improve there will be a constant demand and in some cases,
pressure will be brought to bear in an effort to secure new charters.
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Federal Reserve Bank of St. Louis
23()
SOURCE:
THE TENNESSEE BANKER--JUNE 1936 (Convention number)
AN APPROACH TO BANKING PROBLEMS--Tom K. Smith, Pres., Boatmen's Nat. Bank,
St. Louis, First Vice-Pres., ABA
Pages 73-74
With the F.D.I.C. in effect, every banker is truly his brother
banker's keeper. We cannot sit idly by and see things done which we know
will wreck the insurance corporation. Furthermore, the Federal Government
has a responsibility it did not hive before. It cannot, on the one hand,
insure the solvency of chartered banks and, on the other hand, permit
governmental agencies in the banking field to take from these chartered
banks their sources of strength and usefulness by cutting rates or
indulging in unsound bankink, practict.,. 71 _ presence of the F.D.I.C. also
puts an obligation on the public to see to it that they do not permit the
chartering of too many banks in the future. We cannot have 0 .',ound banking
structure if we have more banks than bankers.
Recently I heard , half dozen banking superintendents discussing the
subject of bank chartering, and the:: all agreed that overbank,-d communities
are a serious menace to the banking structure of the country. Berman B.
Wells, secretary of the department of financial institutions of Indiana,
said in a public utterance in Chicago recently: "The continuance of our
banking system in its present form depends in a large measure on the development of a sounder chartering policy than we have had in the past."
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Federal Reserve Bank of St. Louis
233
•
"Recovery of Business, Banks & Agriculture"
by Howard C. Johnson, State Bank Commissioner of Okla.
40th Annual Convention
Oklahoma Bankers Asso., May, 1936.
The safe and conservative condition in which Oklahoma finds its banking
institutions today has been the result of National Financial planning.
Whether you and I agree that National Planning has a place in our form of
government is of no consequence. It is important and of considerable consequence that citizens of this state and nation may have the facts in order
that they may intelligently determine the issue of national planning. In
the earlier years of state life In Oklahoma, we have had as many as 1100
banks in Oklahoma at one time, 670 of which were state banks. Today we have
404 banks in Oklahoma, of which 190 are state banks and from all indications
it would appear that the banks of today are performing all of the necessary
service of yesterday. The overbanked condition of Oklahoma in its earlier
history may have represented the highest tide of rugged individualism. However, the economic convulsions which have sei7ed Oklahoma and the millions
of dollars which have been lost in bank failures is the guiding star which
tells our national leaders that that type of rugged individualism should
never be returned as a part of our national or state life. It is therefore, a firm policy of our national leaders that the right to engage in the
banking business should be restrained to the extent that safe and conservative banking service is a necessity. As bank commissioner of this state, I
accept that policy of bank charter restrictions in order that we may protect the investment of those now engaged in the banking business and at the
same time afford to the citizens of Oklahoma a sound and permanent state
banking system.
In conclusion, I predict that the immediate future for the state banks
in Oklahoma is unusually bright, because of the soundness of their investments and the immediate possibilities of reasonable profit. The longer
range prediction is more difficult in that the fate of the state banking
system hangs upon the wisdom of financial planning. If we return to the
old philosophy of rugged individualism, we may expect an overbanked condition which will lend weakness to the entire financial structure. If, on
the other hand, we accept the facts as we find them today and carry forward
a national program designed to the end that we may hold the ground we have
so ably gained in the past three years, we may expect a long prosperous
period for the bankers and for those who deal with the banking fraternity.
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Federal Reserve Bank of St. Louis
232
•
"The Future of the Unit Bank"
by H. W. Koeneke, President
Security Bank, Ponca City
Before State Bank Division, May 7
(The Oklahoma Banker, May, 1936)
** ** ****
It has been fortunate for the unit banks, both state and national,
that at the present time and for the past 18 months, there has been much
dissension and lack of coordination in the different governmental agencies
which were in reality to have been the instrumentalities to bring about
unification in the minds of the framers of the 1953 Banking Act. Therefore, no definite action has been taken on behalf of these agencies to
force all banks into a common system. There is a possibility, however,
that coordination will be brought about and when this happens we may expect a more aggressive campaign toward unification.
The American dual system of banking, with its many individual unit
country banks, both national and state, I am sure are determined to fight
for their continuation and existence and all the unit banker really desires is an opportunity to be permitted to serve his community and continue to have his small part in the building up of our country. There
can be no question in the mind of anyone that the dual system of banking
and the unit system of banking should receive credit for the progress
made in this nation and the development of our natural resources. In
Oklahoma, the spirit of the pioneer is still with us and we, as individual
unit bankers, most certainly are in a better position to judge the credit
needs of our respective communities than some executive or official
residing in a nearby state. I am quite sure that the spirit of America
and the desire to have a truly American system of banking is quite
pronounced in our respective communities and the folks back home who
have prospered with the unit bank and who have suffered when they were
unable to pay the obligations causing the unit bank trouble, are ready
and willing to continue the fight to maintain our unit banking system.
All they need is factual information, which you and I can give them.
********
We in Oklahoma and other states are justly proud of our state rights
and, while I do not wish to get into the discussion of the subject of
state rights, there are some things which seem important to me, that could
be accomplished and should be given serious consideration, which would
further fortify and strengthen our state banking system. One of the most
important of these undertakings is the forming of a sound policy for
chartering banks. In approaching this subject one must keep in mind that
there are 48 subdivisions of our government, each state having authority to
issue charters for banks or corporations, and in most states the power to
issue a charter is vested in a board or commission. These boards or commissions are, in most cases, of a political nature and their judgment is at
times swayed by political favoritism. It is, therefore, highly important
that a non-political board or commission have the authority vested in it by
a state law to make a thorough investigation of a proposed organization of
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Federal Reserve Bank of St. Louis
c
- 2any bank or financial institution, before the application for a charter can
receive favorable consideration by the charter board or commission. In
states where they now have a banking board, whether they act in an advisory
capacity or are actually in charge of supervision of financial institutions,
it would be a rather simple matter to have state laws enacted which would give
this board ample authority to investigate the proposed organizers of the bank,
the need for a bank in its particular community, and the possibilities of its
profitable operation. This board should be given the power to make favorable
or unfavorable recommendations to the charter board or commission in their
respective states. The law should be so worded as to give the charter board
or commission the right to refuse to grant a charter, even though it had the
approval of the banking board, but limiting favorable action on those applications which have the approval of the banking board. In states where no
banking board exists, a plan could be worked out whereby a non-political
board or commission could act in its stead.
It is my thought that by limiting the authority and eliminating, as
nearly as possible, all political favoritism in the granting of bank charters,
the danger of over-banked conditions, such as existed previous to the bank
moratorium, could be prevented. By having a set-up similar to the above outline in all 48 states in the Union, I believe whole-hearted cooperation could
be expected and obtained from the national authorities, in regard to the
issuance of charters for national banks. The attitude of the Comptroller's
office at present is quite favorable to the curtailing of issuing of bank
charters without an ample justification for a new bank. I am sure that the
banking board of the State of Oklahoma--or any other state, for that matterand the national supervising authorities would welcome any information as to
the banking history in the respective communities. II therefore, believe
that all bankers should be in a position to furnish such information to the
respective supervising agencies or banking boards. Therefore, it would be
my suggestion that you make an exhaustive study and survey of the banking
history and conditions in your community, primarily for the purpose of being
informed as to the past experience in your community and, secondly, to be in
a position and every ready to furnish detailed information to the various
supervising agencies, both state and national, should a movement be started
for additional banking facilities in your community.
******* * * *
Another very important thing which should receive careful consideration if we wish to strengthen and preserve the state banking system in the
State of Oklahoma, is a careful study should be made of the banking laws
governing the operation of state banks within our state. As the matter now
stands, Oklahoma state banks are very much kestricted as to their investment policies, being limited to investing rands in Oklahoma municipal and
Oklahoma state bonds and warrants, and obligations of the United States
government. While we all have the utmost confidence in Oklahoma municipal
and state bonds and warrants, and I am sure we are all carrying a liberal
amount of such investments, we are at a considerable disadvantage when we
compare our investment privileges with those the national banks in Oklahoma
enjoy. It seems to me that we could safely be permitted to invest in
municipal bonds originating in other states of the United States and other
evidences of indebtedness issued by corporations, under strict rules and
regulations issued by the banking board, meaning thereby that only such
investments should be permitted as would pass the most rigid tests.
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Federal Reserve Bank of St. Louis
******* ***
•
SOURCE:
THE TARHEEL BANKER---JULY 1936
(Convention no.)
ANNUAL ADDRESS OF THE PRESIDENT--C. T. Leinbach, V.P., Wachovia Bank & Tr. Co.,
Winston-Salem
Page 32
A
* ** ***
CHARTERED BANKING
SYSTEM
ces
This will continue to be our motive and desire, but the experien
being
applied
are
that
s
standard
onal
professi
of recent years, the higher
d
to the selection of bank officers, the greater care that is being exercise
usly
laws
courageo
stricter
with
combined
in the chartering of new banks,
of stability and
administered will assure in the future a higher degree
l service which
essentia
the
lasting
and
security, thus making more permanent
you.
I
thank
e.)
the business of banking renders. (Applaus
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Federal Reserve Bank of St. Louis
235
•
Draft of Suggested Law Governing Operation
and Management of Mutual Savings Banks
Prepared by National Asso. of Mutual Savings Banks
(June, 1936)
Section 3. Submitting Certificates of incorporation to the superintendent;
approval. (1)
Within ten days after the date of the last publication of the notice of
intention to organize, the incorporation certificate, executed in triplicate,
shall be submitted to the superintendent at his office, with affidavits showing
due publication of the notice of intention to organize. When any such certificate shall have been filed, the superintendent shall thereupon ascertain, by
such investigation as he may deem necessary.
(a) Whether the character, responsibility and general fitness of the
persons named LI the certificate are such as to coamand the confidence
of the community and to warrant belief that the business of the proposed corporation will be honestly and efficiently conducted;
(b) Whether public convenience requires facilities for savings at the
place designated in the certificate, and whether, in the opinion of
the Superintendent of Banks, a Mutual Savings Bank so situated, has
reasonable promise of a sufficient volume of deposits for successful
operation.
To assist the Superintendent in making such determination, he shall
hold a hearing or hearings, either public or private, at which all interested
parties shall be given an opportunity to appear in favor of or in opposition
to the application.
The Superintendent shall give notice of the hearing to
each existing bank and local thrift institution in the county in which the proposed savings bank is to be located by letter mailed at least one week in advance of the date set for the hearing. Notice of the hearing shall also be
given by publication in such manner as the Superintendent shall direct.
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Federal Reserve Bank of St. Louis
24?
- 2After making such determination, the superintendent shall, within
sixty days after the date of filing of the organization certificate, endorse
upon each of the triplicates over his official signature the word "approved"
or "refused", as the case may be, and shall forthwith notify the proposed
incorporators. In the case of approval, one of the triplicate certificates
shall be filed by the superintendent in his own office and the other
triplicates shall be filed in such county or state offices as may be
designated by the general laws relating to the organization of state banks.
In the case of disapproval, the superintendent shall forthwith
return one of the triplicates so endorsed to the proposed incorporators.
From such disapproval, the applicants may within thirty days from the date
of disapproval, appeal to the banking board. (3) The procedure upon appeal
shall be such as the board may prescribe and its determination, which shall
be certified
and filed in the same manner as the superintendent's, shall
be final; provided,however, that after a period of not less than one year,
the application may be renewed in the manner provided above. (4)
EAplanatory Notes
*********
Historical Note
The Superintendent of the Banking Department in New York
in his annual report to the Legislature for 1871 pointed out
that the vicissitudes which attended the savings banks during
the year were attributable to the policy of the legislature of
incorporating savings banks in localities which were already
adequately served and without reference to the requirements of
the population. This situation is again referred to in the
annual report for the following year and for 1875. Such protests were common in the Superintendent's reports beginning
in 1858 and the situation was carefully discussed by Keyes in
Special Report on Savings Banks (1868) pp. 77-91.
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Federal Reserve Bank of St. Louis
** * ****** * * * * * ***
•
Page 331 - The Financial Age, June 4, 1936.
Proceedings of 42nd Annual Convention,
Pa. Bankers Asso., Atlantic City, May, 1936.
"Mistaken Supervisory Policy
"Sensing from correspondence with members of the association, many new problems arising nowadays in practical banking,
It is difficult to avoid expressing the thought that constant
aggressions in the field of banking by Federal authorities, —
have brought to the forefront the grave necessity of aggressively upholding States rights in banking, if the normal
processes of banking in America are to be preserved to us
for the future." (Report of the Secretary, Chas. F. Zim
President, First Uational Bank, Huntingdon, Pa.)
•
t
(0`14...-4-•,-..,
•
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Federal Reserve Bank of St. Louis
244
0
ralle May
BOOM Address of Comp L. Merriam
at Sami.Annual Dimmer Sating* Aestmay
of Politica 5ctanoe I.e York
l936, pp: 1142.
Thursday, Awn
Se, alas, sir areopreial taiNag system which estlepasd maw ighe
of 19411. 1111416 and 1954, hem lam mattgamild is valises slopsete•
imuldes WU*at 19213, es/y fame larks bellsont to be and
Aftor
erne posettted
Napes, se that may mak beaks sere Pitteisated flys
baakies etruaimmil, ftwihseara, a large amber it lake ham sieve
joined the 'edema Roservo System ant OM new ander seme term of natters'
maperristas through the Federal Rimers, apotom sr the Yetsial Deposit
lasammo Ossimmedass6 The capital alivOlure at vuderwaspitalised banks
has tome vosterod Oros. private subsariptiamo set through the RoomntroOties Plana Corporation*
In spite of V:ese steps, hoverer, there osse still sea flinesnanisl
shorieemimee in our banking system ASA, to so, Wad, sat sums dip be
corrected if we want to avoid future usabass*
Oar eaussestal tmaktag votes gra op nosh las Temp At the be.
gii..,Aisg it Ur diagaressissit sessisted it Ma* 240100 aspirate vett
"ft
all sigatat sod spersAtag atm IS different Ms at Issai — the
itral law sad the lame of the 46 stat 4414 ems at them basks are
ossbeto of the redeaul Deserve Irstes but tasi thirds of thee ewe nots
IbisssI leserve
sorotat use smsribspossit sous this heterogamous
Iva* stbsikint SoOtitatimas at
ser subotastial change in the
system itself. le osstes1 taiktog gal= sus toads a sub.
etitnte far a mound essayists/ baktot 4,141004 I.ddiAl
h
160010
amity teem takes, as shall sot be abl, to bast it a dadly
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Federal Reserve Bank of St. Louis
249
t
110
e
4111
adequate banking strestere Wel Mb tine as it VW be isowilila te
vele. a mere unified essurelai beelling swim milli water emestre.
tlem of both authority
Ude
Old
ispLtes a greater maifermity of booking laws beim
the di&
fesest states. 411S the emu heed. mod hetillieli the *tete, ind the Tederel
awangesto 4. leis
a.m. it Implies greater asumietesty awl effeetive-
ed
sees of heath* emperyleiesi reesseseilillty fbe,'bids is um 4:lidd
mow toe mar seseelese It lapliee
th41
eseessity of improvise the
'pal shaumeter of Wait ammeseist three* the deort.lopment of
par
IMMO MIPS
It iselise
liberal Rolm of Weak buidee MIAs eigregatate areas.
atires
soS satietaetery disposition of this Iniettp pestion at sepot
the
commercial hustbm tsieWAs few the sovisee bairiag itakettau•
been owe
ceabinatice of them two hisettese im the oine imotitutima bar
Lastly,
of the apparmat *MOM of oar baking tase of the past.
eemmereial basks
it implise the ultimate asessoltr of lotneing fan the
mia
of the offiratir fats tile Maga Ttsora
possias
Jua t.*Me illeselliamo
att.,* as to tins or settod, It
Li
diffiasit t.ditemaise
will regular likeres0011111
fihr 16 net rept eauteet
Poi empty, aid peallisps a mama sib:tilos tut we
er I
problem has too smeasised aid its solution alleolelen
rail the
umns Ito onindoin
do met ism to imply that ow booking Konen today onin
itors. PA I do nu%
*tabling,of the selatry or the Ands at its depos
soneavms and
that it will awes ratittas to the ridi lt of its
disposed of in sem
safety until these gmestiono aoto emsoidored aid
Pet,.
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Federal Reserve Bank of St. Louis
ry
fashion,
I
On page 3 of the Michigan Investor, June 27, 1936 issue,
appear the following comments (apparently editorial):
"Important Chanpes in Laws Outlined by Bank Study_ Commission
One of the startling proposals is the creation of a three-man
banking commission, in order to split the burden of work which now
falls on one man. In this connection, it is suggested that examinations
be made more frequently and that the examiners see that their recommendations are carritA out, instead of repeating them after each
examination.
Complete abolition of private banking in Michigan is proposed,
mean that the 29 now operating without charter go out of
will
which
business or accept state or national supervision.
Prohibition is also recommended of the use of the word "banker"
by any other financial organization but a licensed bank. This recalls
the controversy that was precipitated by real estate men over the use
of the word "realtor."
An increase of capitalization of state banks was proposed to
the extent of 25 per cent. On this basis the minimum capitalization
would be $25,000. In addition, it is suggested that $50,000 be fixed
as the minimum capitalization of banks not members of the Federal
Reserve System but which wish to open branches."
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Federal Reserve Bank of St. Louis
SOUECE:
BANKING, Nov. 1936
Page 36
*Ltatement of Principles of Commercial Banking*
DEFINITION. A comzercial bank is 4 financial institution, chartere
d and
supervised by the state or Federal Government primarily to receive
deposits
and provide for current credit needs. It operates under specific laws,
regulations and limitations which emphasise that the bank's primary
obli‘stion is t: serve the public interest.
PURPOSES. Comnerciej beaks have three aain functions. The first is
to accept and to safeguard deposits. The second is to derwit the
payment
of mono-„'
elccks .41.-awn atianzt those dotAzIt3. Tht third ic to lend
funds it interest to meet the legitimete creat needs of merchants,
farmers,
lanufacturena and others.
EIII,CT 3N GLNEBid, WILYALE. In the United Statee, where all forms of
economic activity are carried on elmost entirely by means of bank credit
and check, mither tnan by payment it currency, it is cleer that everj
man,
woman and child has a direct interest in the stability of the commerci
al
banks.
ThIPL1: al:PUN:ABILITY. lor the full develotAment of its usefulness and
its dependability, commercial banking calls for the intelligent cooperation
of three important groups, namely, the governmental authorities, the greet
body of citizens and the bankers themselves. Through such joint effort,
the commerciLl benkl; can attain their largest value to the people as a
source of credit in normal times, and as a powerful reserve in periods of
emergenzi.
FOUNDATION. The bed rock upon which ever./ polic and action c)
mercial banking should be founded is the principle of stewardship.
OBLIGATION.
of peodle:
CO2-
A costmercial bank it res)onsible t five different group:.
The
The
The
The
Oepositorc, whose funds the bank holds.
borrowers, to whom it has advanced credit.
stockholders, whose money provides the bank's capital.
community served by the bank, which will benefit by
the soundness anc capable manacement of tte institution.
The officers end employees of the bank.
NEW CHARTEBS. Nhile the bankers must bear most of the responsibility
for the actual practice of banking, there are other Papeete of sound bank
opttation which are be.,,one the control of the bankers. Among these is theiie
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Federal Reserve Bank of St. Louis
-2BANKING - Nov. 1956
grr,nting of new charters for commercial banks, by state or Federal agencies,
It would appear from long experience that the following Tinciples may
pro7lerly be applied in approving or rejecting an applicbtion for charters
1. Will the proposed new institution fill a definite need for
improved or additional bank facilities in the corvaunity?
2. What is the general character and banking ex?erience of the
nroposee mcnagement?
5. Tr its pro',oserl ce-Atal struct,rr allequete, and Rre its
future earning proppects such as to justif: such investment?
SUPYRVIION. In the supervision of commercial banks by the state or
Federal tuthorities, sneeie roFerd should be given to the esstrability of
thorough exaainations, and to the necessity of competent and adequetely
compenrste4 sofsmininr strffs. They, together with the resoective supervisory
authorities, should be wholly free from partisen influence, both in their
ap-ointment and in their won* of assisting in the protection of the Aiblic
against unsound banking.
VIGILANCE. Commercial banking is competitive. The public has a direct
interest in the chFrseter and cLalificctionr of those of any group rto seek
a charter for a new bank. Therefore, there should be active public cooperttion with the chertering authorities to carist them in 11i tth the
granting of new charters to only those groups who can meet the requirements
as outlined above.
BANK/NG REUTIONSFIP. In common with ever:- other forn of business which
closely affects the vast body of people in the United States, banking must
operate at a. reasonable profit, after the creation of reserves sufficient
to safeguard the public. If this is to be accomplished, ever citizen in
the bamk'r coamunit.y haz c deeper interest in the soundness of that institution
than merely to demand banking service on a price bsais. He should support the
bnnk s'rould be. dec?uptely compensutcd.
thet
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Federal Reserve Bank of St. Louis
Praia "American Banker*
Published in
The ftesier BRnker, June, 1935
Eccles Would Limit Branch Banking by Twelve Districts
Explains Purpose of Compulsory Reserve
Membership for Insured Banks to
Committee; Wants National Marter Control
Seeks Compronise on Reserve
Membership
Governor Eccles sought a compromise on the question of forcing all
insured banks to join the Federal Reserve System, but went on record for
a more closely unified banking system, saying: "There ought to be a
national control of charters granted to banks, and there ought not to
be unfair competition betweaa member and non-member banks in regard to
interest on deposits and other matters."
Noting that many small banks not in the system derived a considerable portion of their income from exchange charges, he proposed
that the bill make mandatory "that all insured banks with deposits of
t500,000 or more join the Federal Reserve System within a year after
they become nembers of the Deposit Insurance Corporation," anl that
*smaller banks have the option of joining the Federal Reserve System
if they wished.*
With this Change, he would provide wthat any new bank chartered
after the passage of the Banking Bill of 1955 be required to belong to
the Federal Reserve System, if it joined the Federal Deposit Insurance
Corporation.*
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Federal Reserve Bank of St. Louis
****** ***
291
•
•
Page 11 - "The Bank Chartering History and
Policies of the United States ".
Report of Economic Policy Commission,
A.B.A. 1935
11
In some states, in fact, the issue of a charter was
made mandatory upon the bank supervisory authorities upon the mere
fulfillment of the technicalities of application. In others, even
wnen discretionary powers were given and exercised adversely, overriding court orders were obtainable. Also, in some cases, the
properly provided discretion was manifestly exercised not from
purely economic standpoints, but from those of local desires or
even political influence. ' One Comptroller gave, perhaps unwitting,
evidence of this when he wrote that 'prior to the disposition of an
application a copy thereof is sent to the national-bank examiner,
to the Member in Congress for the district in which the bank is to
be located, and to the superintendent of the state banking department,
iitE-FiqUest for information with respect to the cclaracter and standing
of the applicants, the existing demand for a bank at the locality, and
an expression of opinion as to whether success is probable."'
•
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Federal Reserve Bank of St. Louis
28F
The Commercial & Financial Chronicle--Proceedings Convention of A.B.A.-New Orleans--Nov. 1955
THROUGH THE BANKERS' EYES--Address of Pres. of ABA-R. S. Hecht
Page 26
It also seems to me that in view of the ample banking facilities
already existing (except in a few isolated cases), we should do all
in our power to prevent a new overproduction of banks through the
indiscriminate chartering of new banks with small capital in places
which are either not large enough to support a bank or in which there
already are available sufficient banking facilities to take care of
their reasonable requirements. In this respect the new authority given
FDIC under Title I of the Banking Act of 1955 is particularly timely,
because it vests authority in the Board of that Corporation to determine
whether there exists an economic necessity for the creation of a new
bank before a newly chartered institution will be admitted to the
benefits of the Insurance Fund.
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Federal Reserve Bank of St. Louis
•
Roy A. Haines (Kansas)
Proceedings of the 34th Annual Convention
National Association of Supervisors of State Banks
Atlanta, November 1935
* * * * * * * About the only law outside of that was a law that the
banking board had to pass upon applications for new bank charters. We
have had very few banks chartered and granted in Kansas in the last five
years. Four was where national banks took out a state charter for a new
bank. We are cooperating with the national department and seeing no
new bank starts unless it is absolutely necessary. We are still overbanked in places, cooperating in every respect except receivership of
banks. Kansas is an independent state, always has and always will be,
and less than half are now operating under the FDIC. * * * * * * * * *
Our state is rapidly forging ahead in new loans except just what I told
you; we are goLng to try and keep the banking situation down and not
going to consider the number of banks a state has but whether they are
good large banks. In other words, we are getting to the point where we
must have larger and better banks. I believe that is all I have to say
for Kansas except that we are going along and cooperating; while the
deposits are increasing in the FDIC more than in the nonmembers, and
that will be something to consider, with a two and one-half million
increase the last call in FDIC banks and a million in nonmember banks.
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Federal Reserve Bank of St. Louis
22E
The Commercial & Financial Chronicle--Proceedings Convention of ABA-New Orleans—Nov. 1935
REPORT OF COMMITTEE ON RESOLUTIONS—GOVERNMENT URGED TO RETIRE FROM
CONTROL AND OPERATION OF INDUSTRIAL, COMMERCIAL AND FINANCIAL EYLERPRISE --Francis aarion Law, Chmn.
Pak! 59
Restriction on Bank Charters
We are also wholly in accord with eresident Hecht's statement,
in his address before this convention Tuesday (Nov. 12), relative
to the necessity of limiting the chartering of new banks rigidly
in accordance with the economic needs of the country. Every effort
should be made by bankers, and they should enlist the support of
public opinion, to prevent a new overproduction of banks through the
indiscriminate chartering of new banks in places which are either not
large enough to support a bank or in which there already are available
sufficient banking facilities to take care of their reasonable requirements.
We commend those provisions of the Banking Act of 1935 which give the
Federal Deposit Insurance Corporation new authority to determine whether
there exists an economic necessity for the creation of a new bank before
a newly-chartered institution shall be admitted to the benefits of the
Insurance Fund. 17.e believe the banking profession should give the
Corporation the fullest co-operation in this connection at all times.
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Federal Reserve Bank of St. Louis
-
Address by W. S. Elliott, V. Pres., Bank of Canton, Ga.
Proceedirws of the 34th Annual Convention
National Association of Supervisors of State Banks
Atlanta, November 1935
State Banks of Today
* * * * * * Too many banks were chartered and competition resulted
which was harmful to the banks and later brought distress and loss on
stockholders and deositors. According to a report submitted in 1934
by tir Economic Policy Commission of the American Bankers' Association
there was one bank to each twenty thousand people in 1865; there were
six banks to twenty thousand people in 1921 and the nivlber had fallen
to three banks to each twenty thousand in 1933. We have heard, from
time to time, statements to the effect that the state bank was responsible for most of our financial ills that could be laid to banking,
and that less banking ability was to be found among state bankers,
that supervision was less efficient and that the small banks, the
majority of which were state institutions, should be eliminated in the
interest of better banking. This has been the cry of proponents of
unification for many years. * * * * * * *
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Federal Reserve Bank of St. Louis
229
"State sank Failures in Michigan"
by Robert G. Rodkey
Aichigan Business Studies - Vol. VII, No. 2.
University of Michigan - 1955
gummarv end Concluaions
1. The 163 Michigan state broke which failed between JantImiy 1, 1930,
and February 11, 1933, constitute the subject of this study. With one escooption,
theme beaks were located outside Detroit and they therefore belonged in the
won*, bank classification. Purist this same period 411 other state banks renotaad spea. The figures used in this analysis are taken from the bank,' statements as of December 51, 1928.
2. In the aggregate these 183 banka cannot be said to have had, at the
end or 1928, capital funds inadecuste to support their volume of ?!eposits.
Nevertheless, they were operating in this respect closer to the minimum rata
has come to be considered adequate than were the state banks which did not
fail, or than were all national banks.
3. The pereemtage of their capital rands which the failed banks had tied
up in the non-liquid form of banking house, furniture, and fixtures, and other
real estate me numb larger than it was for the banks which did not fail, or
for all oonntry national banks.
4. The failed banks had a linuidity ratio at the end of lan of 14.6 per
oast, while all country national banks an the same date were rie.s per cent
liquid.
,
5. The percentage of their savings deposits tied up in real estate sort
did
not
that
rail.
gages was no larger for the failed balks then for those
This percentage, however, was almost twice as large as it was for all country
national banks.
6. Only 56 per cent of the combined bond portfolios of the failed hanks
was in those classes of securities free which the major portion of bank bond
investments Should come. In these classes country national banks had placed
over 69 per cent of their bond funds.
7. Over 42 per cent of their entire bond account was connosed o' real
estate and Oenstruction bonds, a class of securities which, under no circus,
stenaes, meet the fundamental tests of either soundness or liquility.
8. Over 55 per cent of the combined eapital ?ands 'Ind gross derosits
were from at the end of 1928.
9. All Michigan state banks compared favorably with all national banks
in earning power and in the percentage of net earnings consumed in charge-offs
and write-doems. This fact indicates that there was nothing fundamental in
conditions in Michigan which made it relatively difficult to conduct banking on
a pound basis.
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Federal Reserve Bank of St. Louis
-11.5
- 210. It seems reasonable to assume that the group of failures unler oboorea,
tion includes an uncertain number of institutions shich were foroed to suspend
boomse of location is dee/ging communities, or because of failures of nearA,
batiks which led to hysterical runs on banks reasonably and. bat looking 11101101,
what in liquidity. NeVerthelese, due regard to the facts enumerated above
indicates iaccepeteree as the Alniamental cause of failure of these banks cossidered as a group.
U. The problem of incompetence in management ray be attacked through a
licensing system for bank officers, and by attenipting to limit the scope of
operations for such incompetence as may creep in despite safeguards intended
to eliminate it.
12. Limitation of the sleeps of operations for incompetent beakers nay be
achieved through wisely dosigmed statutory standards, tit. larger measure of
publicity as to actual osedition„ and higher quality bank exemiaere4
** ** * * * * ****
laskislialiarlamma
Authority granted the Swerve banks by the Banking Act of 1935 to discount sound real estate mortgages at a penalty rate will serve to make such
assets less daagereas thee formerly. With the further development of national
mortgage assesiatiems mad a vide extension of the insured cortgne principle*
real estate mortgagee, from the standpoint of the individual bank* may come
to acquire some of the ehiftability of long-term bonds. At the time of
writing (August* 1B55) it is not possible to estimate eves approximately how
extensive this movement may be. it mast be admitted, however, that the admission of real estate mortgages into the class of eligible paper at the
Reserve banks* oombinod with the possible development of a widespread larket
for these instruments* will servo to eliminate the chief weakness of this
form of investment for savings funds. Nevertheless, the principles of Nomad
banking will sentimee to require a strict limitation of this form of commitsent if adequate diversification is to be achieved.
Diversifip4tim
Safe sad owed leaking, like insurance* is based on the principle oP
spreading the Asko To follow the policy efezeessive local loams is to overlook this principle. It there is any econanic justification for a particular
balk, it must be its service to the home oommunity. But the local community
is poorly served was more local loans are made than sound banking practice
can justify. Reference here is not to the quality of those local advaaces bat
to their Tlautity. 'bore is a disposition on the part of many bankers to believe that the balk Woad take care of the local demand for good loans, irrespective of the quantity. Only after this demand is satisfied, they assume*
are Panda available for investment elsewhere. In instances where this local
demand is heavy, the pursuit of this policy leads to an excessive concentrep.
tion of the risk.
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Federal Reserve Bank of St. Louis
- 3tem in the very largest cities there are inadequate possibilities for
sound diversification. The development of the banking crisis in Detroit in
February, 19S3, furnishes a good mample of this principle. In The Detroit
Money aarketts 0. Walter Iftodworth demonstrates clearly the excessive
character of their local commitments. From Table 59, page 118 of his stu/y,
we learn that, in Detroit banks, investments emnstitated a smaller peronistas,
of aggregate loans and investments than they did for all banks outside New
York City. Not only this, but from 1922 to MO this percentage decreased
regularly from year to year while no such tonimagy appeared for banks outside New York City. The Detroit banks held practically no outside commitments in the form of commercial paper or beakers' acoeptances, and Professor
Woodworth shows, in Table 42, page 125, that in January, 1929, over 90 per
cent of their loess were local ineharacter. With their total loans reprosentimg an unduly heavy percentage of their total loans and investmosts„ and
with their loans so predominantly local, their lack of admimate diversification
is apparent. Too many of their eggs were in the Detroit boOket, and this conlition famished the fundaaental factor underlyimg the bmmkimg crisis of 19S3.
Until adequate diversification is secured outside the lime mummify,
sound banking dictates that local loans, both oommercial mod otherwise, be
definitely restricted. If, after the risk has been spread by moos of an
adequate vole', of outside sosoltoests, there are not sufficient funds
available to meet the local doland for good loans, then there is need for
additional capital.
Small communities constitute the principal location of our 163 failed
banks, and in such oommunities the local demand for short-tern, selfliquidating commercial leans is likely to be extremely restricted. If the
temptation is resisted to meet this situation by using commercial funds for
lese-tern lova loans, rem/urge to the outside market is indicated.
The most satisfastory media by moans of which outside diversification
be
me,
ashiewodl osier normal conditions are opemomarket commercial paper sod
bankers acceptance.. Such instruments represent funds used for short-tern,
self-liquidating oommercial purpome, and thee they constitute the most desirable outlet for commercial bank fends. Ordinarily the yield on commercial
paper is lomer than emu be immured on lem1 advances* and during 1935 the
yield has declined almost to the vanishing point. With a return to more
normal conditions, however, it is eilteMeeedemable to expect that the yield
on this open-market paper may return le the Medest but satisfactory level of
pro-depression years. is the writer boa Shown elsewhere, the average yield
on open-market 'commercial paper during the first twenty-five years of the
present century vas 4.89 per cent. Daring that same period the average
yield on high-grade bonds was only 4.85 per cent. Not only earn the bond
yield smaller bat the rate of loss on bonds actually held bir books MS OMsiderably larger. It is easy enough to understand and to empathise with the
disinclination of the average irAnker to build up ossoodary ressewse and at
the same time severe outside diversification thromihismakers' acceptances and
short-term tompary notes. Even in normal times the yield on such instruments
is extremely 1ee4 But, in view of the facts just cited, the common preference
for bonds over ePos-merket paper cannot be justified when sonditions in the
money market even avproximate normal. Nevertheless, bonds will no doubt Continue to be the principal outlet for funds which are not needed locally or
which it appears unwise to lend locally. The problem which needs emphasis,
therefore, is the selection of sound and suitable bonds.
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Federal Reserve Bank of St. Louis
- 4*** * ** * ****
Tbe Profits aØ Looses
crtmpda
Answers to the questions propounded at the beginning or this section now
seem slear. Michigan state banks did not fail in larger proportions than did
state banks in the rest of the essmatry. Furthermore, while Michigan may have
been somewhat herder hit by the depression this was the country as a whole,
still the reminds presented above indicate that it was by no aeons impossible
for good ammegmmests to conduct safe slid sound honking institatioas. But if
Michigan state books as a whole made a not unfavorable comparison with other
banks in respoot to earning pacer, soundness of assets, and persestago of
fiAlurier additional unfavorable reflection is oast on the character of the
163 failed boas. They 'ere constituent elements in a group of state banks
Which in important Pendaesatal rospecta yore as geed as banks •lssubssels lbw
there is indicated a vide disparity betssem the charaeter of the memadomats
of the 163 failed banks and that of all other Michigan state banks. And in
, of an institution
the final analysis, of course, the soundness of the asset:
is a function of the character of its nimmgemont.
Is There Any Remedy?
The only practical value of an investigation into bank failures either in
a particular state or in the country as a whole lies in the possibillty of thereby isolating fundamental causes for such failures. The remedy for bank failures
waits on a clear understanding of the nature of conditions which brood failures,
just as the curative efforts or tine physician necessarily come after and not
before his diagnosis of the seat of the trouble.
In a state so far-flung that it reaches fres Detroit and Toledo in the
southeast almost to Duluth in the northwest, a groat variety of local conditions is encountered. Certain oommunities which flourished before the timber
was gone are dying away. Others in the copper regions face a like fate. The
growth of the automobile at the expense of the railroads has helped some communities and injured others. It is iapossible to say how any of the 163 bank
failures discussed in this study may be ascribed to location in decaying coma
munition., hut it is reasonable to assume that this factor as operative in at
least a few instances. Michigan is one of the states which now permit statewide branch banking, but as yet there has been little progress in that direction.
So long as the unit system of banks continuo, to prevail, certain individual
institutions will from time to time find themselves uneconoaically situated in
oommusities so longer able to support a bank. It is easy enough to say that
such basks should recognise the nandwritimg on the wall and proceed to liquidate.
But local pride and hope have a tendency to linger on until it is too late. For
failures due to such musses no remedy is In sight.
It must be recognised, also, that nothing is more contagious than an
epidemic of bank failures. There COM be no dosibt that among our 165 failed
hanks not a few oases can be found in shish perfectly sound and solvent banks
were forced to suspend because of hysteria engendered by failure ce other
banks in the sons teem or of banks in near-by, larger communities. In other
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Federal Reserve Bank of St. Louis
-5Oases, bankers, especially those in charge of some of the smaller inqtitutions,
made the mistake of relying too implicitAy on the advice of city correspondent*
having affiliates with bonds to sell. It is not unnatural for the small-tees
beakers to have reel respect for the kmowledge and judgment of the big cit,
teikers, and to assume that a,ivice from snail sources must be sound even whoa
it runs counter to his am b-tter judgment.
But, while indiscriminate censure of all those bakers whose institutions
failed to survive is clearly unwarranted, an overebelming percentage of our
163 failures met be ascribed to one foadamental canes—plain inaempetenee•
The leek of knowledge of what constitute* mimed and conservative memagement
has besa indicated in this study in several yam 'assassinate empitall exeessive
commitments in banking premises and real estate mortgages; unbalmmeed and
thoronghly unsound bond portfolios. TM management problem, there're, is the
one to *fah dttention /met be chiefly directed.
Two elements in our American banking systee tend to foster incompetence
in the management of individual institutions. The ems is our system of
independent unit banks. This system leads naturally to a multiplicity of
small beaks umder local control, owned locally, and operated usually by
citizens of the home community who may or *ay not have sees knowledge of the
fuadmmental principles of sound banking. Over a long period of years the
grafts' spread of branch banking on a large setae may be expected to remove
the weakest features of this situation.
The second element tending to breed incompetent bank managements is
closely related to the first. Reference is to our dual system of control. $0o
loog as state banking departments and the federal Government compete with each
other for the privilege of granting charters to promoters of new benks, the
difficulty of limiting such charters to competent persons is obvious. And so
loos as the dual system remains, it will be difficult for either side to refrain frees this competition. The resulting laxity in the granting of new
charters must be placed high in the list of muses of beak failures. The
remedy is obvious, but apparently, for political realms, it is impossible to
achieve. Whet should be done is to ASO* in federal bawds the power to grant
charters for new banks which accept lememd deposits subject to check. Control
over institutions doing solely a saving* and trust business can safely be
left with state authorities.
But incompetence in management OmMmot be eliminated by merely reserving
to the federal flovernment the right to grant bank charters. The problem extends even to tbe managements of old, well established, and highly respected
institutions. TO meet it, we must, in the first place, find ways and moans
of keeping incompetent individuals out of exeeutive positions in banks; and,
in the second plass, we must narrow the eeepe within which incompetent management may operate.
Licenses for linkers
stmt.) or federal license must be secured
The law should provide that
before an individual may qualify for an official position in any bank. Such
license should be granted only after the passing of an examination, given by
a properly constituted authority, had clearly demonstrated adequate prepare,
tion for the banking profession. ?he taking of such an examination is a
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Federal Reserve Bank of St. Louis
- 6-.
widely recognized custom in the fields of law, medicines 4emtietrrip engineerini7,
public accounting, and teaching, as well as in the skilled trades. The
banking exminations would cover the broad general principles of send banking.
They would be concermed not at all with the technical routine operations.
Presumably no bask would think of appointing an individual to an official
position in which he would have eharge of certain teibmisal operations unless
his experience clearly demonstrated his competence se far as those particular
internal operations were concerned. But able, aggressive, end industrious
individuals gradually advance from the post of assistant oashier in charge of
certain routine internal operations to high exeentive positions in which they
have control of, or at least considerrble influence in, the determination of
major loan and inveatment policies. It is with problems of general policy
such as have been discussed in this study that the state examination should
deal. The candidate should be forced to demonstrate in this examimaties his
knowledge of the importance of maintaining an adequate volume of capital in
relation to deposits; the danger of excessive commitments in non-liquid assets
such as banking premises, real estate mortgages, and non-marketable bonds; the
importance of diversification outside the home community; the need for adequate
secondary r.-servea and the composition or such reserves; the fundamental tests
of a sound bond investment; and mod methods for the analysis of commercial
risks.
The imposition of an axamiaLtion such as that just described would, in
the course of time, become an important factor in the elimination of incompetent
bank management. It would have a tendency, also, to improve the morale of the
clerical personnel and to Increase their knowleage of the broader problems of
banking. Each clerk would see clearly that, in addition to his ability to
perform well his technical routine tasks, if he was to advance to an official
position, it would be necessary for his to become a student of bank management.
Ho would be forced to learn something about the broader problems of the
profusion in which he MS engaged. In the course of time, a new generation
of veil-prepared young bankers would be coming On, and thus the whole standard
of banking woad be raised to a level befitting its importance in the modern
world.
Limiting the Scope of Operations
for Incompetent Bankers
Should a plan for the licensing of bankers be placed in force, its provisions presumably would not be effective with respect to bank officers then
holding executive positions. Furthermore, the licensing system could not be
expected to operate perfectly, any more than it does in other fields. It
would still be necessary to face the other aspect of our twofold problem.
That, it will be recalled, is to devise seems ebereby it will be possible to
narrow the scope within which incompetent management may make its influence
felt. There are three obvious lines of arproaSh to this problem: first, use
of statutory standards; second, requiring the publication of more detailed
statements of condition; third, improving the quality of bank exa,Anations by
raising the standards for examiners.
1. Stat4toryjtandards. The problem here is to reconsider a number of
statutory standards at present in the Jaws and to set up certain additional
restrictions and limitations. With respect to banking in general, the writer
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Federal Reserve Bank of St. Louis
-7has discussed this subject at some length elsewhere. As applied to the Michigan
situation in particular, it is believed that the following suggestions, if
piaeed on the statute books, would tend materially to limit the scope of inoempetence in bank management.
40 Real estate loans. Investment of savings fends in loans on the security
of reel estate should be substantially reduced from the 60-70 per cent limitation now in effect. In Table 9 it vas shown that all Michigan state banks outside Detroit had invested in real estate mortgages, on December 51, 1928, a
percentage of their savings deposits almost twice that for all Gauntry national
banks. In the soorollate, nevetheless„ the percentage of 40.7 did not even approximate that permitted by law. Is meay individual iwtances, of course, the
legal limitation was closely approached. A reduction of these maximum limitations, therefore, from the SO per sent level to one of 40 per sent would not
interfere materially with the normal operations of most banks and it would
serve to limit excesses on the part of the minority. It is obvious also that,
from the standpoint of sound and eemservative banking, a liquidation plan
should be an integral part of every mortgage loam.
Commercial banking funds, it is generally agreed, should never be loaned
on the security of real estate. Yet the Michigan law permits, upon a two..
thirds vote of the beard of directors, loans of this character not to exceed
SO per cent of the combined capital and surplus. It seems rather obvious that
no provision of this character has any place in modern banking laws.
b. Banking premises and equipment. * * * * * * It is suggested that
53-1/5 per cent be set as the maximum percentage of capital funds hereafter to
be invested in bulking premises, and that the Commissioner be given power to
waive this limit in particular instancps where it right work a hardship. * * *
•* * *•
0. Legal reserves, * * * * * * Whatever primary reserve it is desirable
to recTuire should be remired in the fore of cash in vault or as free balances
with reserve agents.
d. The bond portfolio. * * * * * * Some attempt is made to set up stIndards
Insuring soundness. * * * * * ** *
* * * **** *
* * * * * * If, in addition to the standards provided, there were to be
added a requiremmat that at least three-fourths of such issues Mould be
listed on an important steek exchange or otherwise have proves marketability,
the present statutory requirements would be fairly satisfactory. * * * * *
* *** * * **
It must be admitted that no eonceivable statutory standards can take the
place of good judgment. No laws can render it impossible for bankers to make
bad loans or purchase unsound bonds. But so far as bonds are concerned, if
their selection is limited to those which meet the tests mentioned earlier in
this study and to those now prescribed by Michigan law for eertain classes of
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Federal Reserve Bank of St. Louis
-8bonds, with the anis/moats suggested herein, the range of choioe of bad boads
is definitely narromsd. * * * * * * * *
. * ** * * ******* **
2, Kal...1421.411,1111.--AASIMALJe_.-0dit
.--JUNA
The statements of condition which banks regularly publish in the newspapers provide the natural means for informing the public about the true
state of affairs. The typical bank statement is especially deficient in
giving pertinent ietails with res7ect to earning assets. * * * * * * * * * *
* * * * ****
If the public is to be informed as to the soundness of the earning
assets and their liquidity, the amount of detailed facts nut be greatly expanded. From the standpoint of both diversification and liquidity', the
importance of adequate secondary reserves and a marketable bond portfolio
has already been emphasised. Innks should be required, therefore, to give
facts sufficient to enable the peers' public to inform itself on these
points. * * * * * * * * *
Banks could profitably sOopt the practice long followed by American
industrial and commereial corporations of publishing balance sheets in
comparative fors. Tendencies, both sound and unsound, thus stand out more
clearly. Non-financial corporations in this country also publish regularly
their operating figures, giving significant details concerning income and
expenses. Bnglish and Canadian banks follow this policy, and Ameriean
banks would do well to emulate their example.
* * * * ** * * *
S. lisbogr stippOprOg for examiner,. Michigan, like the groat majority
of other states, has failed to recognise how vitally Important the functions
of bank enaminers really are. It has been quite generally assumed that those
functions ares
a. To verify the soundness of the assets, and to require such chargeoffs and write-dowas as conditions warrant
b. To certify to an unimpaired capital structure as revealed
reports or condition called for by the State Banking Department
in the
c. To make certain that banking laws are being obeyed.
Such activities as these, it snot be admitted, are routine in character,
but their inlortaace is obvious. To perform satisfactorily each routine
functions requires training, experienee, and ability of no mean order. Bat
additional qualities are essential if the eammiaer is to 1,erform adequately
his most important feactien.advisiag the management with respect to matters
of general policy. Those additional qualities are maturity, breadth of
vision, sound judgment, and a flail comprehension of the significance of all
phases of banking policy. The mnaminer should be able to reoognize unsound
tendencies in their early stags, and advise the mmaagement that they are =mead. Too many local loans, isadeouato secondary reserves, and unbalanced
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Federal Reserve Bank of St. Louis
.
s
- 9bond portfolios—these are matters /high the competent outsider is frellently
in better position to recognise Amid appraise than are those responsible for
the menagement of an institution. /f the examiner has materity, breadth of
violist and a clear understanding of sound banking principles, it is a simple
matter for hi::: to impress this monogamist with the correctness of his viPws.
The banker who wants to go wrong nay properly be asammod to be non-existent.
it in solving the matituJe of vexatious problems abbe confront him day
after day, the Maker may be gradually and quits unconsciously steering the
whole tnstitetien in ma unsound direction. 'bat be moods is advice from some
informed, competeet, and disinterested person libom he cm trust. Who is in
better position to give this than the properly prepared examiner/
In =reel times, the niggardly salaries paid to examiners lead to a
large tarnower !n the Axnaining staff. Mem leave the staff while still young
and thus hwye no opportunity to develop the essential qualities which have
been lescribed. As a matter of fact, it is customary to look upon a place
on the examining staff of most states, not as a life position, but merely
as a stepping stone to the vice-presidency of some particular bank. If the
'male of salaries in the ordinary state banking department could be doubled
or trebled, the positions would become attractive in themselves. ?bon it
mold be possible to Jevelop a staff that could be so helpful to weak hank
managements that failures could be practically eliminated.
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Federal Reserve Bank of St. Louis
•
M. E. Bristow (Virginia)
Discussion on the Address of Mr. Hecht
Proceedings of the 34th Annual Convention
National Association of Supervisors of State Banks
Atlanta, November 1935
********
There are also two or three important banking matters which I would
like to mention which have all received attention. One of these is a
subject which I am mighty glad Mr. Hecht in his address emphasized that
situation: in my opinion a great many banking difficulties in the
recent past grew directly of the fact that some sections were overbanked.
I think today we need to be more on the alert to the organization of_new
banks more than any other one thing. The next is undercapitalization.
0T-course I realize that perhaps nothing could have been done to have
eliminated all of the banking failures during this depression, but if
we had had our banks thinned out to the number we actually needed and
required for the banking business of this country and had these been
sufficiently well capitalized we would not have had the trouble we had.
** * ***** **
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Federal Reserve Bank of St. Louis
224
Stut.
Walter Griffith (Oklahoma)
Proceedings of the 34th Annual Convention
National Association of Supervisors of State Banks
Atlanta, November, 1935.
Mr. President, we have had our troubles out in Oklahoma. We have
had some of our bankers out there who adopted the slogan "Make Our Bank
Your Bank" and some of the cowboys took that literally and did, so a
great deal of our work is liquidating banks closed prior to the banking
holiday. * * * * * * * * * * We have been fairly successful in moving
the banks from weak points to stronger points, and we feel a great
deal of the trouble in Oklahoma was due to the promiscuous granting of
banks as many states did, but that is a thing of the past. We are
endeavoring to move the banks and encourage them to get out of weak
points into points where they need banks and can support them. Indica—
tions are that conditions are getting better; one indication is that we
are getting now a great many applications for new charters. That, to
me, is an indication that things are getting better. I would like to
comment on that. V:e are very much pleased at the attitude of the federal
government in endeavoring to prevent the country from again being over—
banked and our intention is to cooperate as far as their endeavors
along that line is concerned.
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Federal Reserve Bank of St. Louis
i39
•
SOURCE:
BANKING---Dec. 1935
Report of hesolutions Committee at new Orleans Convention, Nov. 14
*
****
ON
BANK
Page 40
RESTRICTION
CHARTERS
We are also wholly in accord with President Hecht's statement, in his address before this convention Tuesday (November 12),
relative to the necessity of limiting the chartering of new banks
rigidly in accordance with the economic needs of the country. Every
effort should be made by bankers, and they should enlist the support
of public opinion, to prevent a new over-production of banks through
the indiscriminate chartering of new banks in places which are either
not large enough to support a bank or in which there already are available sufficient banking facilities to take care of their reasonable
requirements. We commend those provisions of the Banking Act of 1935 which
give the kederal Deposit Insurance Corporation new authority to determine
whether there exists an economic necessity for the creation of a new
bank before E., newly chartered institution shall be admitted to the
benefits of the Insurance Fund. We believe the banking profession
should give the Corporation the fullest cooperation in this connection
at all tilled.
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Federal Reserve Bank of St. Louis
223
110
Page 47 - Report of Economic Policy Caunission- 1935 "The Barl Chartering
History and Policies of the U.S."
•
SUMMARY AND CONCLUSIONS
1. The history of bank chartering in the United States shows that
for years prior to the depression which began in 1929 there was a widespread disregard of the proper relationship between the economic needs
of the country and the numbers and localities of banks permitted to
open for business.
2. This disregard prevailed not only among the general public
but frequently also among both state and national banking authorities
who were responsible and empowered by law to guard against unsound charter policies.
5. A major cause in the over-production of banks was the competition between the national and state banking systems to outdo each
other in respect to the numbers of banks under their jurisdictions.
4. It also became a matter of public policy in both jurisdictions
to encourage the establishment of banks with small capital in small
places as a popular political measure, mistakenly considered a means
for fostering national development, expecially in the rural sections.
•
5. These policies were persisted in despite warning voices and
the danger signals presented by a disastrous bank failure rate from
1920 to 1929, indicating clearly that the nation had become heavily
over-banked. Faster than old banks failed, new bank charters were
granted often to persons unfit to be entrusted with such responsibilities.
6. Both state and national governments progressively and competitively liberalized their charter provisions to attract new banks.
7. These conditions contributed heavily to creating a banking
structure unable to meet the stresses and strains and the destructive
shocks of depressed national conditions which began in 1929.
8. Analysis of the data shows that there is a distinct causal
relationship between the over-chartering of banks and the abnormal bank
failure conditions that prevailed from 1920 to the bank holiday in 1933.
9. It is desirable that studies be made on the basis of experience
develop
standards governing the number of banks or the volume of
to
capital
bank
which can be successfully operated.
10. Such a study would embrace the question as to whether banking
facilities can best be supplied to the rural districts by small unit
banks or by branches from banks of substantial capital in larger centers.
411
11.
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Federal Reserve Bank of St. Louis
Existing sound banks, especially the small banks in the rural
302
•
-2-
districts which are serving their communities well, should be protected
from any return of the over-banked local conditions caused in the past
by lax chartering policies, which were mainly to blame for the unfavorable record as set forth in this study.
12. An inquiry among state bank commissioners shows a preponderant opinion against increasing materially the number of banks, coupled
with the fact that present laws give them sufficient discretion to prevent a repetition of the grave errors of the past.
13. However, under prevailing abnormal conditions, with the Federal Government extensively exercising loaning powers in competition
with the banks, and with industry itself so largely supplied with funds
as to render it to a great degree independent of normal bank borrowing,
the banking structure even with its present reduced numbers, finds it
difficult to support its existing capital investment and operating personnel.
14. These are new factors, intensifying the need for highly prudent
and restrictive chartering policies.
•
15. Also, we urge the retirement of the Federal Government from
the banking business as rapidly as the return of normal business conditions warrant.
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Federal Reserve Bank of St. Louis
•
Address by Leo T. Crowley, Chairman, F. D. I. C.
Proceedings of the 34th Annual Convention
National Association of Supervisors of State Banks
Atlanta, November 1935
* * * * * * * * One of the great problems, as I see it, that is
going to face us in the next few years is the chartering of banks. In
1910 we had 30,000, and in 1933 we finished up with some 1E,000 banks,
so I realize and appreciate the pressure that will be put on you men
time after time to license or reorganize a bank which in your own judgment you know it is impractical for it to make a profit in its operation. In talking to you strictly as concerns the state banking
system, if there was one weakness of the banking system of the past it
was because you tried to put a bank in every community, and two or
three where one could not live. If banks are to have good management
they must have sufficient income to pay the management and we know
many banks today where it is potentially a case of lack of earning
capacity, and I can see no way in the immediate future of the earning
capacity being increased. We know in some smaller local banks, to be
able to survive they will have to take some of the loans in farm
credit, production credit or other financial agencies of the government in order to make a fair return on their investment and, unfortunately, when it is a bank and no one else having difficulty they
extend themselves only to make more mistakes than if they were
operating under normal conditions, and so I call attention particularly
to the auestion of chartering banks. Under the law, you must take
Into consideration many factors before you can accept a new bank in
the fund, therefore it might seem to some of you that someti.aes we are
a little hard in accepting banks in the funds, but it is done with the
broad viewpoint of trying to restrict them so there will not again be
the overbanked condition of 1930.
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Federal Reserve Bank of St. Louis
***** *** *
The Commercial & Financial Chronicle—Proceedings Convention of A.B.A.-New Orleans-Nov. 1935
THE BANKER AND THE FEDERAL DEPOSIT INSURANCE CORPORATION—SOME OF
THEIR MUTUAL INTERESTS--Leo T. Crowley, Chairman, FDIC
Pages 22 -23
* ** * **
Uneconomic
Bank to Be Insured
No
One of the best services the Corporation can render to banking
is in sternly refusing to insure banks which have no hope of surviving.
You will recall that under the old law any bank which was merely
solvent was entitled to the benefits of insurance. At that time it was
very difficult to determine solvency. Under the new law the following
factors must be taken into consideration:
1. The financial history and condition of the bank.
2. The adequacy of its capital structure.
5. Its future earnings prospects.
4. The general character of its management.
5. The convenience and needs of the community to be served
by the bank.
6. Whether or not its corporate powers are consistent with the
purposes of the law.
A fair application and consideration of these elements will do
justice not only to applying banks, but also to those which are already
insured. This new provision of the law recognizes the insurance principle
that the acceptance of too many hazardous risks reduces the soundness and
safety of the insurance afforded the good risks. It should help to
prevent a recurrence of the evil which is to be greatly feared, namely,
the return of the overbanked condition of the early twenties.
The danger of the uneconomic bank to the banking structure can
scarcely be over-emphasized. The change brought about by our vast
industrial expansion and modern methods of doing business must make us
recognize that it is false to suppose that every locality regardless of
size must have a bank. This does not mean that there is no place for
the small bank which is well managed by individuals whose independence and
interest in their community have contributed so much to the development
of the economic and business life of the country. The bank which has no
economic justification is the institution of small capital in those
communities whose business is so meager as to preclude the possibility of
profitable operation. Such banks cannot make enough money to warrant the
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Federal Reserve Bank of St. Louis
191
Leo T. Crowley
Pages 22-23
payment of the kind of salaries good management requires because the
population and business do not permit a profitable existence. The records
of the Corporation have proven this to be an established fact in all too
many cases.
For the 18 months' period from January 1,1934 to June 30, 1935,
over 1,400 new banks were licensed by supervisory authorities. Ninety
were in communities with a population of 250 or less; 169 were in
communities with a population from 250 to 500, and in some instances
there were already other banks in these very towns. I do not wish to
infer that the granting of some of these licenses was not wholly justified.
Yet these figures give a graphic picture of one of the most serious
problems confronting the Corporation, and one in which every one of you
is vitally interested. Whether or not the uneconomic unit is insured,
its influence on the general banking system cannot be anything but
destructive. The power given the Corporation to protect itself against
the risks of insuring banks which it knows are bound to fail sooner or
later only helps the Corporation. Unless State supervising authorities,
your Association, and the public discourage the organization of banks
doomed to failure, the over-banked conditions and the consequent evils
thereof are bound to return. If this be not a mutual concern of the
Corporation and of your Association, it is difficult to imagine what
problem can occupy our joint attention.
Now is the time to get rid of this danger. The public is friendly
disposed to the efforts the Corporation and your Association are making
towards bringing about an improved banking system. Once the public starts
to lose confidence in the Corporation, its faith in all banks will again
diminish. The public must be taught that a surplus of banks is no indication
of well-being.
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Federal Reserve Bank of St. Louis
Address by Charles T. Fisher, Jr., Director, R.F.C.
Proceedings of the 34th Annual Convention
Naticnal Association of Supervisors of State Banks
Atlanta, November 1935
********
Many communities are overbanked and while it is oftentimes difficult for bankers in a given community to get together on a basis whereby their problems can be settled mutually, it is possible and the duty
of the supervising authorities to work out these problems if possible,
with local co-operation.
Our Corporation is anxious and willing, in those banks where it
has investments, to co-operate with supervising authorities and a community to strengthen a local banking situation by way of merger, consolidation of branch facilities and general expense reduction for the
benefit of shareholders and for the ultimate benefit of depositors,
inasmuch as the strength of a bank is added to considerably by its
annual earnings.
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Federal Reserve Bank of St. Louis
********
1.9J
0. H. Moberly (Missouri)
Proceedings of the 34th Annual Convention
National Association of Supervisors of State Banks
Atlanta, November 1935
There is nothing unusual to report except the good,ponditions
generally reported by the supervisors of other states. Ve have perhaps
the unhappy distinction of having the largest number of state banks in
any state in the Union, the number being 629. I say "unhappy" because
I am still inclined to believe there are too many banks in the stRte.
That is one of the problems we are now trying to work out with the
supervising examiner of the FDIC--to effect the merger, sale of assets
of the small bank to larger institutions and eliminate forty, fifty or
a hundred banks. * *
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Federal Reserve Bank of St. Louis
191
•
1114 16 Basking Problems* by Dr. Gaines T. Cartiahaar, New York University
(uleurnal of the Canadian Bankers' Asso., October, 3.935)
* * * * * * * * -* *
In spite of the kameseleaniag ehleh has taken plrice, there is a large
nuaber of small institutions vhidh hove an plea* in the American banking
structure sessept as bromism of strew metrepolitem imetitetions. The
satire banking situatios meld be greatly bemefited by the gradual extension of brand bankimg so that all simemble esemmmities mould have adequate and safe bilking eervises without table the elhempe that comes ihen
small local institmtions handle the business during bad years. The rederEl
Government emmaot eafely Mow this burden throe& the FDIC. The affairs
of the latter are going alemg very nicely at present, however, became* of
the reeent heaseeleamtmg, but all such *dhow ree4h their testing time
only after year have elapsed.
* * ***** * * *
The problem if Iesee is closely connected with the type of balk emaminations required by the various authorities. Some teak emmeiners km made
it sore difficult for banks to i241414ae loans during the past tee yeere be.
cans* of ummeessearily rigid requirements. In general State examiners have
been the meet lamismt, Federal Reserve bank emamiaers quite strict but not
as severe as lettemal bank examiners. Snob a system of multiple examination
prevents banks making any loans exzept those *ice are extremely liquid and
of short
tion, mad it would appear saf's new to relax the rules somewhat.
Standardisitiem of bask examinations and concentration of such work within
one orgenisation is imperative.
The United States needs a mined bulking structure. All State Make
should be required to join the Federal BOSOM System, and as seem as as
pedient all members of the system Should be put under national 'barter. Me
tread toward unification has been seem in several respects beemmse the
present dual banking ',stem vas in no small way reeremmible for the asste
banking troubles whisk led up to the bank holiday of about two years ago.
It is significant that greater progress has been sods in releasing deposits
in ember banks than in non-meebers. The suggestion that beaks now subject
to Federal regulation eould avoid unification by beaming mmuomember State
beaks is unwise since it might cause retaliatory moderms by a Federal
Administration, which has not hesitated to introdnee radisal measure., and
terns precipitate a movement for immediate nationalisation of all basks.
*** 4 * * * * * *
The illusion that the particular age in which a given banking practise
exists is final is one that is continually being disrupted. Useriss and
practices of American banking should undergo great change. It is necessary
to recognize the fact that banks carry rinks mei suffer losses. The
hesitancy for many years of beaks to install adegmate service charges met
step. Banks realise they are entitled to this SOWS, of income but SOW
to fear the reaction on the part of their customers who might resent the
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Federal Reserve Bank of St. Louis
189
:7111rt,
34
W. 11,
t
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sr One 11, $4, es M.se $300,0000000 *ta a Angie year, Several yeszra
oseft netlea.vide esseey istlionted Viet if 4114I. esseereiel beaks
adopted a smell fleet Asses sere ibis $103,0060000 weld be slime to
at seeress is ally ow type et melee shares
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seat tat bessmon of esepetitton auditions ay m.ing exeseeive rotes of
tatopeet as time depeette• Ibisat be elmispi4 sad Muss ore indisoktlesin
that s *tat bee bees weds te,the balm is deeliss feitb an Mose problems.
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Federal Reserve Bank of St. Louis
4.10
-64 qg
V A `•
Address by J. F. O'Connor,
Proceedings of the
National Association of
Atlanta,
Comptroller of the Currency
34th Annual Convention
Supervisors of State Banks
November 1935
****
****
Those of us who are accountable for the chartering of banks have
indeed a great responsibility placed upon us. We must see that banks
are chartered only There public necessity demands, and then only when
the management is safe and experienced and the bank will operate in the
interest of the delositors. It has been the practice of the Comptroller's
office, and will continue to be, to obtain the views of the different bank
commissioners and supervisors whenever applications are made to establish
a national bank, and to give careful consideration to these opinions.
•
In one instance a national bank made application to establish a
branch of a bank i a certain town. My office made ,careful and
complete investigation of the situation and found that the state had
granted a charter to a state institution sollie months before. The
capital had been subscribed by local parties and the bank had some
t300,000 on deposit. It seemed that there was no necessity for a
competitive bank in that locality, and that there was not sufficient
public demand for two banks. The application was therefore denied.
Much to my surprise my office learned a few weeks later that the state
banking commissioner had granted to the same interests a charter for a
branch of a state bank to be located in this particular town in
competition with the state bank already in existence there. Let me
say that this sort of occurrence is the exception and not the rule.
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Federal Reserve Bank of St. Louis
** ******* **
13
•
SOURCE:
THE TARHEEL BANKER - N.C. BANKERS iiSSOCIATION PROCEEDINGS
JUNE 1935
ANNUAL ADDRESS OF THE PRESIDENT
BY Millard F. Jones
Vice Pres. & Cashier Planters Nat. Bank & Trust Co., Rocky Mount
Page 26
We are all agreed that prior to 1929 there were entirely too many
banks in this country. From 1910 to 1920 new banks were organized in
the United States at the rate of 1,000 a year; 10,000 new banks in
ten years. Banking is a business which requires the highest
qualities of sound judgment, training and experience, and it is inconceivable that capable bankers could possibly be developed in
sufficient numbers to man a thousand new banks in this country each
year. Ten yePrz ago we had in the United States approximately 30,000
banks. Today we have around 15,000.
According to Commissioner Hood, there are now no more than a half
dozen communities in North Carolina sufficiently large to justify a bank
that are not already served by at least one banking institution. He
has stated that for the present, at least, when these communities have
established banks, there will be no immediate need for organizing any
more banks in this State, and yet there is already evident a tendency
to organize a large number of new banks in NortY Carolina. Mr. Hood
states that every week applications are filed in his office for the
opening of banks in places that already have sufficient banking
facilities.
This word of caution is not prompted by a fear of healthy competition.
No banker who is operating alone in a city or town that can justify more
than one bank has any particular desire to monopolize his field. At
the same time it must be remembered that one of the fundamental requirements for operating a safe bank is to earn a sufficient amount to cover
expenses, provide adequate reserves and pay a reasonable return to
stockholders. Whenever a community attempts to have more banks than
local conditions justify, these banks must either operate at a loss or
resort to unsound practices, and either course will inevitably lead to
difficulties and bring financial ruin to the communities served.
(
In my opinion, one of the greatest problems facing us is to see that
the number of banking institutions ip_helci_to the reasonable requirements of the business and economic life of the community. The
responsibility for this, of course, does not lie with the bankers, but
with governmental authorities, and it is to be hoped that those
authorities, will not be moved by political expediency or the desire to
grant personal favors, but will keep ever in mind the ultimate protection
of the community against dangerous competition in banking, which inevitably
leads to distress and ruin.
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Federal Reserve Bank of St. Louis
1.3'T
THE TARHEFL BANKER - JUNE 1935
alillard F. Jones
Page 27
* *** **** *
Your Legislative and Executive Committees have been very attentive
in following the legislation being considered by our State Assembly,
especially that pertaining to banks. All of the bills that the
Committee recommended and endorsed have been passed. One bill that
the Association has long desired to have enacted, that of removing
double liability from bank stock, has been passed and goes into
effect on July 1 of this year. Your Association successfully
opposed a bill to abolish the office of Bank Commissioner. The establishment of this office by the 1931 Session of the General Assembly
was the culmination of the efforts of your association to have a
separate Banking Department. The value of this Department has been
fully appreciated by the banks of the State and they expressed to
their representatives their desire to see it retained.
* ********
TRENDS IN BANKING AND BANK LEGISLATION - by Robt. V. Fleming, Pres.
Riggs National Bank, Wash. D. C.
zp 40
*********
Your President in his very interesting and illuminating address cilled
to your attention the fact that the chartering of new banks was being
considered. Unless the Federal Deposit Insurance Corporation has the
right to deny membership in the Fund, and unless new banks chartered
only upon evidence that there is an economic necessity for their
existenne, we will soon find ourselves back where we were before the
depression started and before the wave of bank failures, with a lot of
banks that cannot live. They will become a drag on the Fund, and that
means money out of the pockets of the banks which are sound and which
are serving their communities in the proper way.
******** *
RECOVERY IS OBVIOUS - by Hon. Jesse H. Jones, Chairman of R.F.C.
Page 58
* *** * ****
We have had too many banks. We are too prone to establish a bank
because it will be a little more convenient for someone to have a bank
near him. We ought not have banks anywhere that cannot be operated at
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Federal Reserve Bank of St. Louis
THE TAEHEEL BANKER * JUNE 1935
Hon. Jesse H. Jones
Page 58 (contd.)
a profit. Any business that cannot be operated at a profit is a
meftice in some form and that is especially true of banks.
While we have lost many banks throughout the country--I don't
know how many thousands--we still have too many. In my own town,
for instance, we have probably fifteen or sixteen. We should have
three or four. But nobody, apparently, is willing to quit.
Bankers should bear that in mind and our leading citizens, the
people who make up our banks, should bear that in mind: we should
not establish too many banks.
********
THE SUNLIGHT OF A NEW DAY - by Hon. J.F.T.O'Connor, Comptroller of the
Currency, Washington, D. C.
Pages 68-69
********
Last year there were fewer new national banks chartered—only twenty
over the entire United States--than there were for fifteen or eighteen
years prior thereto. Seriously speaking, bankers of North Carolina,
may I say that the banking system of this nation, both state and
national, was never in its history on as firm a foundation as it is
at this moment. (Applause.) The danger now ahead is that there will
be chartered again a bank opposite every gasoline station from here
to the Pacific Coast, and that must be stopped if we are going to
save the banking structure of the country. (Applause.)
My office is cooperating with the State Banking Commissioners in
the chartering of banks because we realize the seriousness of this
situation. In one state--not your state I am glad to say--an application came to my office for a branch. A national bank cannot establish
a branch without permission of the Comptroller of the Currency. We
make the same investigation with reference to the establishment of a
branch of a national bank as we do with reference to the establishment
de novo of a national bank. Reports came to my desk from this particular
city indicating that some five months before the state had chartered
a state bank in that community. It had about $250,000 in deposits. The
capital was all subscribed to locally.
I declined to permit a branch of the national bank to go into that
community in competition with that struggling state institution which
had the support of the community, which was owned by the community, and
which mg I thought should be given an opportunity to expand, and to
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Federal Reserve Bank of St. Louis
-4--
THE TARHEEL BANKER - JUNE 1955
Hon. J.F.T.O'Connor
Pages 68-69 (contd.)
serve the community.
Imagine my surprise when a few weeks later I received information
that the same interests which had applied to me, and which owned a
state bank not far away, had petitioned the State Banking Commissioner
for a branch of that state bank, to compete with the newly established
and struggling state bank. I regret to state that the State Banking
Commissioner granted permission to establish a branch of the state
bank where I had denied ,Jermission to a national branch because I
felt the community could not support another bank.
I am trying to work with the state systems, but it is difficult to
do so under such circumstances.
The danger of overbanking is greater now than ever before. Why?
It
is greater because of the insurance of the speculative mind
to establish
deposits, which offers an invitation to banks, and say to those who
are
purchasing stock, "The bank will be insured." Secondly, it is
dangerous
because of the general trend throughout the country, toward the
elimination of the double liability on bank stock. Stock assessm
ents
are usually levied when the people of the community are least able to
pay them and frequently the stockholders are the ones who suffer most
when a bank closes.
We should pursue a sane policy. It is no matter of pride
that
12,000 banks have failed in this country. We have a chance now
to
prevent the reoccurrence of such a situation if we can get the
support of great groups like yours, backed by an intelligent public
opinion. The wheel has turned and the speculator will be on the
ground.
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Federal Reserve Bank of St. Louis
,/3j
Proceedings of the MISSOURI BANKERS ASSOCIATION
UPORT OF COMMITTEE ON RESOLUTION&
*
*
*
*
*
*
*
*
*
*
The Banking Act of 195
*
*
*
*
*
(Page 90)
sed in Title I and
4. We are in sympatay vith the purposes expres
interest of the public
Title III, believing them to be designed in tne
not-1)1e exceptions
as well as the interest of banking, and with three
Titles.
to Title I, we approve in substance taeae two
Exception No. 44
has been the
One of the basic causes of bank failures in the past
With the return
ed.
be
repeat
not
must
cnartering of too many bunks. This
bank in
ze
organi
to
nt
of business improvement we may expect a moveme
nce
influe
icul
i
bunk. Eolit
many of tact communities unable to support
of
less
regard
can be counted upon to briu,j resaure to secure caarters,
nce
Insura
it
the economic need for additional bunks.4:1 The Federal Lepo,,
the caartering
rage
to
discou
agency
other
any
than
.;
CorpOiation can do mor,
admission
for
ns
icatio
proper
qualif
liing
of too many banks by estab
into the Insurance Fund.
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Federal Reserve Bank of St. Louis
2,4
•
411
SOUECE:
THE CALIFORNIA BANKER--JUNE 1935
ADDRESS OF THE COMPTROLLER--Hon. J.F.T.O'Connor
Page 214
We are asking in Title I of the Bank Bill for the power to determine whether or not a bank should be insured, that makes application to
the corporation, new banks. We are asking for the power to investigate
the locality, to determine whether or not there is room for another bank
in that community, whether the management ismund, whether there are
prospects of thatbank succeeding in that community. Those three things
were stricken out by the House.
* ,
f
•
It is serious for this reason: That if banks can be chartered all
over this country, and those who promote them say, "You will be insured
by the Federal Deposit Insurance Corporation", and together with the general trend of eliminating bank stock from the double liability, you are
inviting speculation in new, organized banks, and if there is one thing
we have got to stop, it is the wildcat chartering of banks in this
country and we don't need a bank opposite every gasoline station in
the United States.
I mean that because last year all over the United States, how
many national banks do you think I chartered? Only 20. And some states
have chartered many more than that and some states have chartered them
where I have denied a charter. We have an opportunity to build a great
banking structure in this nation if we can have the support and cooperation
of the banking commissioners and the banking authorities in the nation.
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Federal Reserve Bank of St. Louis
121
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Federal Reserve Bank of St. Louis
SOURCE:
THE ILLINOIS BANKFAE ASSOCIATION BULLETIS--MAY 1965
COIAITTEL ON LEGISUTION
Page 76
The Committee met and organised on July 1,, 1964 and discuseed
the Leclaration of Policy of the 44th Annual Convention that an
effort be made to secure the enactment of an entirely new State Bank
Act.
As a result a ub—Comiaittee was spoointeo to prepare a tentative
draft of a bill. This Committee had mane considerable progresl. When
it was decided by the full Committee that the Auditor of Public Accounts
and other governmental officials should first be consulted for the
purpose of ascertaining their views regarding a proposed bill.
A conference was held with these officials and it developed that
provisions for administration of the Bank Act by a State banking board
and the creation of an independent banking department were not acceptable
to the Auditor of Public Accounts. Thereupon it was agreed that a
committee consisting of representatives of the Committee on Legirlation
and of the Auditor's office be apcointed to act as a conference committee
for the purpose of reconciling the divergent views, if pos. ible.
A report from the committee's representatives on tnis conference
committee disclosed the fact that there was no possibility of obtaining
the Auditor's consent to the creation of an indepencent banking dep&rtment
under tilt: administration of a State banking board but that anumber of
amendments to the Bank Act had been proposed which were submitted in a
draft of a bill prepared by the representatives of the Auditor's office.
These amendments were discussed by your Committee snd while the. were
generally acceptable a number of changes were put, ested, all of wretch
were reported back to the conference conaittee for further consideration.
It was then decided that a revised draft of such changes as could be
agreed upon by the conference committee be submitted to the Council of
Administration jointly with the Comaittee on Legislftion at its next
meeting just prior to the annual cenvention.
•
Pages
93-94
Proceedings Missouri Banters Ss ociation
==aY 14-15-16, 1934
II....Bank examinations to be effective must be made
by experienced men,free from political influnce. It.
is to be regretted that our National Departmei is so
bound un with politics." This is true in a lesser degree
of many State Departments. .... The Comptroller of the
Currency shold be selected by a nonpartisan group of
outstanding bankers, similar to the Federal Reserve Advisory Councilwithaut the consent of the Senate....I
am firmly of the belief that if you could get to the
inside of the supervising trouble in this country you
would find that nrobably 75 per cent of it was caused
by improper political influence in one way or another.
("The Future of the Unit Bank" -address by L. A. Andrew)
•
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Federal Reserve Bank of St. Louis
110
SOURCE:
THE MISSISSIPPI BANKER -- MAY 1954
ADDRESS BY HARVEY C. COUCH—Member of Board R.F.C.
Page 15:E
er*
Lpne of the greatest weaknesses in our bankin4 system has been
the over-rapid increase in the number of banks1„1 At thf, 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 deternimtion 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
121
•
•
/(
Address by L. A. Andrew, Iowa
National Asso. of Supervisors of State Banks
33rd Annual Convention, Baltimore, Md., October 1954
** * ** * **
Everyone agrees that one of the main causes of our banking trouble
was too many banks. The National Department was as much to blame, or
more than the State Departments for the excessive chartering of new institutions. I know in my own state that the Comptroller in several
cases issued charters where our survey had shown that banks were not
needed and the State Department had refused the application. The
Federal Deposit Insurance Corporation can be of immense help in this
regard by practically dictating whether they will take into the Insurance Corporation banks that may be organized. The F. D. I. C. can
also put into effect a great many rules for the better management of
banks which will, in effect, give us uniform laws for better banks.
They have done this already in one instance by setting a 3% top for
interest. * * * * * * * * *
***** ***
•
•
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Federal Reserve Bank of St. Louis
12?
SOURCE:
THE CALIFORNIA BANKER—JUNE 1934
ADDRESS OF THE PRESIDENT—William A. Kennedy,
Pres., The First National Bank of Pomona
Page 203
** * ** *
*
Other Charges
Our critics say that banks are operating with insufficient
capital and with untrained men as officers and directors. May
I ask in all fairness at whose docrthe blame should be laid? Who
made the laws and chartered the banks and approved the management?
How often have banks been licensed by state and national banking departments, when a committee of experienced and impartial bankers would
have definitely refused the charters? The matter of adequate capital
and qualified personnel has been too often of minor consideration by
those in authority
:
]
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Federal Reserve Bank of St. Louis
**** ******
12,9
•
SOURCE:
THE CALIFORNIA BANKER--JUNE 1934
BANKING AND RECOVERY--by Hon. J.F.T.O'Connor, C. of C.
Pages 247-248
!The Comptroller of the Currency makes the sole determination
as to whether or not a national bank shall be chartered in a given
community. I know of no greater power that is vested in his office
in the interests of depositors who are going to deposit in the bank, and
in the interests of the people who invest in it as stockholders
:
3
In the future you can easily expect a greater demand for federal
charters, for two reasons: First, because of the elimination of the
double liability upon stock of all newly created national banks; and,
secondly, because of the insurance feature. And, therefore, even
greater care should be exercised before a national bank is chartered.
Wild-Cat Speculation
I believe the same power of discrimination as to whether a bank
should be insured should be vested in the insurance board, so that we
cannot again have a great wave of wildcat speculation in banking,
and then permit these institutions to be insured to the detriment of the
depositors and of the general banking interests of the community.
Can I put it in another way? Some gentlemen came to my office
ago and wanted to establish a bank in a community, with a
time
some
million dollars. I asked them how much business there was in that
community and it would surprise you to know that they were not advised.
I took the reports over a ten-year period and shored them what the other
five banks had on deposit in that period and I said to these gentlemen:
"Now I will give you one-fifth of the deposits in that community.
That is fair. You cannot get one-fifth. You cannot go out in those
communities where banks have been established and confidence between
depositor and the banker has been established over a period of many years,
and get one-fifth of the deposits, but I will give them to you."
And then I showed them where they could not make any money, and I
said, "I am interested in that because if you cannot make any money you
cannot have a sound bank and the depositors suffer." They werkery fine
about it. They said they would not pursue the matter any furth6r.
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Federal Reserve Bank of St. Louis
130
Hon. J.F.T.O'Connor
Pages 247-248 (contd.)
Sound Bankiu Structure
I point that out because these things should all be determined
just on their facts. How easy it is for different interests in a
community to say, "Well, the comptroller was influenced," or, "Somebody else talked to him," or something of that kind, that is so unfair.
All we are interested in is a sound banking structure and those men had
the good sense to come first before the matter got into controversy in
the department, and they were satisfied with the results.
I do not believe it is necessary to establish a bank opposite every
gasoline station in the United States and we have a chance now to build
a sound banking structure with the cooperation of the different state
bank commissioners and of the banking interests in the nation; a better
opportunity than we have ever had before in the history of this country.
During the period 1923-1932, inclusive, 3141 banks, with $1,0971055,000 in deposits,failed in the United States during the first four
months of such years alone. The average number of bank failures throughout thib country for the combined months of January, Febrliary, aarch and
April only, during these ten years, was 314, involving an average of
C109,705,500 in deposits.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
7.`•
0RANDUM
According to The Tank Act, the Treasury Board issues charters or
certificates for banks to legin business in Canada.
No certifielte shall be given by the T elsurs, Boar6
until it has been shown to the satisfactton of the Po.a;ci,
by affidavit or otherwise, that All the relirements of
this ;et. And of the special Act of incor?ortton of bank,
ls to the subscriptions to the ca)ital stock, the pvment
of money Ly subscribers on .ccount of their subsc:].ptions,
the -Yayment required to be al.:,e to the Minister, the
electicm of directors, de oeit for security of note issue,
or other preli.Anaries, IvIve been coLaplied with, lnd that
the Minister, .4md unless
the sum so paid is then held
expenses of IncorAeration
the
that
Board
the
to
a7pears
Lt.
action 15)
(Page 7
"
reasonable.
are
n
organizato
and
"Whenever a sum not less than s50odo0 of the cad:Val
stock of the bank has been bona fide subscribed, ind payments in mone:: on account thereof have Se€11 made by the
subscril(rs, the total oC such )3ymonts making a sum not
less than t250,j00, and as soon thereafter as the provisional directors have paid thereout to the Minieter(of
fin zee) the sum of 250,000, the provisional directors
may, 1):' .)ullic notice dublished :or at least four Awoke,
and by notice with postage prepaid dled to the last
known Address of each subscriber it least 10 days )rthr
to the date of such me..ti.hg, call a meeting of the sub" (Page 6 Section 17,)
scribers to the said etock,
qUIellw.the teem of the certificate in manner hereinbefore provide , the Minister shall forthwith pay to the
bank the amount of money so de *sited with him as aforesaid, ithout interest, after deducting therefrom the s.
of 10,000 required to be de?oeited under the provisions of
curing of the notes issued L-ei. the ba.k."
this Act fr.m. th
(Page 8 Section 17)
laiAies which raut be
Although The Bank Act contains various leg l fort,
complied ,A.th before a bank can begin business in Canada, there do not appc , r
to
e any ImvestigAions wh ch the Treasuri Boarc:., the
ilister, of the
Inspector General must conduct prior to the issuance of the certificate to
begin 1-:usines
relating to such matters as integr ty of the organisers zici
.)ro.)osed lanagemeet, economic necessity for the establishment of the bank,
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Federal Reserve Bank of St. Louis
..!'aiirwsrsouggi
-2—
the effect the bAnk will /vote upon othe.- bnk8 .n coulpetLtive territory,
the eafficiPncy of the pro)osed ca t.ti1,1.11,1 the number
branches, etc.
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Federal Reserve Bank of St. Louis
nd. loction of
MEUORANLUM
The oank Act (on Canada, 19'64) page 14, states with reference
to a certificate required to be issued by te Treasury Board, approving
an increase of capital stock "(4) Nothing herein contained shall be construed
to i4reveni. the Treasurw iioLzO from refusin to
iseue Fuca certificate if it thinks best so to do."
The clause "if it thinku best so to do' seems to give the
Treasury Board considerable discretionary authority.
There is no
tabulation of the things the Treasury Board must consider in this
cannc-ction.
On page 16 of the Bank Act, with res2ect to the recuired
certificate of the Treasury Board approving a reduction of capital,
there is contained the following provision:
"(5) Nothing herein contained shall bs construed
to prevent the Treasury Board from refusing to
issue thc certificate if it thinks best ao to do."
The stating of the 1.r in Canada in this manner seems to give
open-ended authority t 'act in a discretionary manner, leuvine to the
Treasury Board the question of wnat matters it most consider in reaching
its conclusion.
This seems prefe;-able to the American style of stating
that a board should bt, required to consider enumerated things.
C.E.C.
8-6456
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Federal Reserve Bank of St. Louis
•
SOURCE:
PROCEEDINGS NEW YORK STATe BANKERS geOCIATION - 1954
Age 15 (Address of President McLaughlin)
* * * *
about legislotion. Let ue fordeal
re have heard a great
you were annoyed at the pasof
get the pest. I know many
In my own opinion, it no
Bill.
of the Branch Banking
I have always bealthough
one,
not the ideal time to pass
lieved more exteneive branch banking eould come eventue114.
But of all the bills proposed, I believe that the one that has
been enacted into law is theleast offennive. Le) I would zee:,
that we phould give our full co-operation te the authorities
who have to do with ite administration, beceuee undoubtedly
there will be some conflict between national ane &tete banks
seekieg a branch in the b4MC communities.
hddrese by Paul C. Reilly,
Pages 150-51 (ELCENT BANKING LLLILLLTION
Counsel to the Joint Legislative Committee on Banking)
A bill which evolved e great deal of comment and discus-
sion was the Stephens Bill, peruitting branch banking in
various districts of the State. It represents, on a small scale,
the so-called regional or trade area type of branch banking.
Much has been said about this subject and probably a treat
The operation of this
deal more will be saia in the future.
law will be closely watched and may have a great deal to do
with future branch banking in teis State and in the country.
I hope that the licensing authorities will sincerely and
earnestly endeavor to exercise the privileges granted under
this bill in such a manner as to prevent any undue expansion
that may bring about a return of the exceseive competition
that has been so roundly and justly condemned. I have in
mind a situation which may accuratel) foretell just how nearly
possible it is for the stele and national systems to co-operate
in a so-called gentlemen's agreement. A certain town in this
state had two banks a few years ago, a state bank and
national bank. Both of them failed. It may be said that one
of th, contributing causes to their demise was the economic
inability of the town to support more than one good institution. Within a wee* after the Stephens Bill beceme a lew,
a national bank located in a large city filed en application for
permAssion to open a branch in the town. At the same time a
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Federal Reserve Bank of St. Louis
1.6Fa
-2-
Peoceedints New York State Bankers Association - 19F4
Pages 15Q-51. (contd.)
state bank from the same city applied for permission to operate a branch in the same town. Here will come the real acid
teat. Can the systems co-operate intelligently and unselfishly
for the best interevts of the people of the torn and the ID/Inking structure as a whole, even though it may require sacrifice
upon the pert of some? Time along will tell.
Page 152
* * * It was not possible to produce an euch
"etialetion and the best that could be obtained
ance of the Comptroller of the Currency that he
°perste with the Luperinten ent of Banks in the
branch authorizations. * * *
limitetione by
Wati the assurwould comatter of
An idea has recently occurred to me that might provide
mese of the limitations sought by those who f(er competition.
I have not fully thought out its feaeibility but I believe it to
be worthy of consideration. Briefly it is this. Nearly all of
the banke in the country, beth state and nstional, are members
of the FDIC. They represent nearly all of the banking resources of the countr5. The FDIC, is not, if it is properly
administered, biased in favor of either stete or national banks
since both are members. It is vitally concerned with the welfare of every bunk in the land bemuse the welfare of the
whole eyetem is depenSent upon the welfare of every individual
member. It certeinly can have no desire to see the security
of its members az individuals or as a whole threatened by an
excess of competition. It has a vital interest in veeins that
the economic security f its members is maintained to the
fullest possible extent. The future of deposit insurance will
be largely determined by the presence or absence of a sound banking structure. The present indications are that the FDIC
will continue in some form or other as a permanent feature
of our banking policy. * * *
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Federal Reserve Bank of St. Louis
•
Proceedings of the 33rd Annual Convention
National Asso. of Supervisors of State Banks
Baltimore, October 1934
**********
E. H. Luikart (Bank Commissioner, Nebraska): * * * * * * * * * *
We have had one thing there I haven't heard much about here: we
found on the statute books an obscure statute for cooperative associations--practically a copy of the Swiss banking law, and in the towns
where they have no banks we have established these cooperative associations, and now have started 140 of them. They are practically the same
as small mutual savings banks and function in the place of banks.
These states who do not have such a law might well think of it. At
first we had a demand for small charters. In these cooperative associations every depositor is a one-tenth shareholder--a man with $1000 on
deposit is a shareholder to the extent of $100, and that carries with it
double liability. That will eventually probably be placed in all the
small towns. We will not license one in any town that has a bank or
banking facilities. There are 140 now and they are growing rapidly.
That seems to be a cure for small capitalized inconvertible banks.
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Federal Reserve Bank of St. Louis
**********
112
•
SOURCE: PROCLIDINGS NEW JERSEY BANKERS ASSOCIATION—MAY 1934
CONSIDERATION OF THE ADVIUBILITY OF ENACTING CERTAIN OF THE
PROVISIONS OF THE BANKING ACT OF 1933 INTO THE NEW JERSEY
BANKING STATUTES--by J. Fisher Anderson, Esq., Gen.
Counsel, N.J. B.A.; Dir. & Counsel, Comm. Trust Co.
of N.J.
* * * * * * ** * *
Page 205
11
To those who fear the nationalization of all the banks in
the country a proposal to increase the minimum capital required for
the organization of new banks and trust companies beyond that required under the Banking Act of 1933 for national banks, will not
be acceptable for the reason that if the minimum capital requirements of State banks and trust companies is larger than that required of national banks there would be a tendency if and when new
banks are organized to organize them as national banks. In view of
the foregoing provisions of the Banking Act of 1933 increasing the
minimum capital requirements of new national banks, it might be well
for the Bankers Association to consider the matter of attempting to
amend the State Bank Act and the State Trust Company Act to increase
the capital requirements of new State Banks and new trust companies.
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Federal Reserve Bank of St. Louis
* * * * ** * * * * *
179
Proceedings of the 33rd Annual Convention
National Asso. of Supervisors of State Bilks
Baltimore, October 1934
* **** * * **
Thomas H. Daniel (State Bank Examiner, South Carolina): * * * * *
In 1932 the minimum capital stock was reduced with certain conditions
to fl)% paid in instead of 10% and the prohibition against ownership or
real estate and prohibition of dividends until earned surplus ec.,uals
capital stock. That to some extent hA; solved the problem of the effort
to organize banks in towns where there are scarcely enough people to
support the banks. Our cash depositaries, which we do not thoroughly
approve of in that they sometimes perhaps prevent the organization of a
bank in a community—on the other hand giving banking facilities in
communities where they could not support a bank; and it might be worth
consideration of some of you gentlemen to look into the cash depotAtary
law. Briefly, the capital stock requirement is very small, only
1P.,500.00, and they make no loans under any cireumtzlnces, and the faads
are invested only in United States securities, bonds of South Carolina
or political subdivisions, and in case of voluntary liquidation the de—
positors are required to accept these bonds !It the 2rice paid for them
by the bank, so the speculative value of bonds doesn't bother the cash
depositor.
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Federal Reserve Bank of St. Louis
****
** * **
17S1
•
rA
Address by H. N. Stronck, Assistant to Director, F. D. I. C.
National Asso. of Supervisors of State Banks
33rd Annual Convention, Baltimore, Md., October 1934
All of us realize that at the present time within each state there
are numbers of banks whose deposit volume is so amall that the income
therefrom, even under normal investment policies and normal income rates,
cannot possibly meet operating expenses. If we view this on a nation—
wide basis, the problem as an aggregate assumes vast pronortions.
]
- It
is appreciated that in many states a great deal of pressure has been
browht to bear toward the reopening of banks. Generally speaking,
these reorganizations were set up on a firm basis with respect to the
value of assets assumed and the licuidity position. However, a great
many banks were reopened with such a small volume of present and
potential business that it is difficult to conceive that these banks
can stand on their own over a period of years.
Furthermore, many such were opened in communities and areas which
did not need additional banking facilities. Existing banks in those
communities had their business volume diluted by the reopening of such
additional units, and the entire brinking structure is develoiing on en
unsounJ competitive basis. Here again the regulating authorities will
face a serious problem as time goes on.
However, an earnest effort is already being made in the field of
mergers and consolidations of small, unprofitable and unnecessary units
with stronger and necessary units, but, unfortunately, this movement
has not kept pace with the reopcnings of unprofitable banking units.
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Federal Reserve Bank of St. Louis
190
•
Address by Leo T. Crowley, Chairman,
Federal Deposit Insurance Corporation
National Asso. of Supervisors of State Banks
33rd Annual Convention, Baltimore, Md., October 1934
**** *******
However, we must not lose our present gains. The history of bank
suspensions from 1920 to 1933 has proved that the country was greatly
overbanked. In that period the total number of banks has been reduced
one-half. The proportion for state banks is about the same. It has
been the most intensive weeding out process in more than sixty years.
With the gains we have made in the last year we must not fall into the
error of former days and allow new and uneconomic banks to open indiscriminately.
There are undoubtedly many situations where the state statutes
and the powers given to he supervising authorities do not enable them
to prevent the chartering of banks which are not needed and which are
economically unsound. Nevertheless every effort must be made to prevent such a tragedy--there is no other name for it.
A bank without adeauate capital, without the possibility of sufficient earnings to meet expenses and losses to provide capital management, or without a real field for service, is more likely to be a
menace than a benefit to the community.
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Federal Reserve Bank of St. Louis
**********
196
SOURCE:
PROCEEDINGS NEW YORK STATE BANKERS ASSOCIATION - 1934
Page 42 (Address by Hon. Leo T. Crowley, Chairman, FDIC - THE BENEFITS
OF DEPOSIT INSURANCE)
In our work in this State we have indeed been fortunate
in being associated with your State Superintendent of Banks,
Mr. Broderick. During his time in his present important capacity he has endeavored to strike out many weaknesses which he believed to be endangering the future of
New York banking. He foresaw the danger in too rapid
expansion in the number of banks and, so far as was possible
to him, restricted it. In that field alone the beneficial results
for New York in the recent crisis are probably incalculable.
It has been his constant aim to improve methods of superon, to encourage co-operation among New York bankers
and to lend his support in every way to those steps which
are for the betterment of your banking institutions.
In the recommendation of your Committee for Banking
Legislation the danger of indiscriminate chartering of banks
is pointed out. You, in New York, are well aware of the
consequences of such a program. We IlL
that very careful
consideration be given before any new bank is granted a
charter and before any recently failed bank is allowed to reorganize. Such consideration should be based upon the
economic need for banking institutions in the community.
The potentialities of the business in the community under
consideration should be a controlling factor limng the grant
of a new charter.
Page 151 (Address by Paul G. Reilly, counsel to the Joint Legislative
Committee on Banking- RECENT BANKING LEGISLATION)
It is this fear of competition between licensing authorities
that produced much of the opposition to the enactment of the
Stephens Bill at this time. It was urged that some means must
be found to place the same restrons upon national banks
that were to be imposed upon state banks and that the
consent of the state authority should be requisite for a
national bank to operate a branch and conversely the state bank
should be subjected to the endorsement of the national authorities.
* *
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Federal Reserve Bank of St. Louis
197
•
SOURCE:
PROCEEDINGS NEW JERSEY BANKERS ASSOCIATION--MAY 1934
Pa.ge 112 (President's Address--Carl K. Withers, Trust Officer, FirstMechanics Nat. Bk., Trenton)
Prominently in the foreground of discussion at the present
moment, is the perennial question of branch banking, which takes on a
new significance under the provisions of the Banking Act; allowing the
establishment of branches of national banks in States where branch banking
is permitted. Again, a sharp line may be drawn, and a formidable array of
argument presented both for and against this extension of individual
banking power, with all of its sinister implications of domination and
control, toward the ultimate extinction of local independent banking.
dualThere is a unanimity of opinion that one of the principal faults
of our/banking system in the past has been the competition for charters
existing between the State and National systems. The entire system was
unquestionably weakened by the competitive conditions created through the
over-establishment of banks without adequate regard to community needs.
This same objection--and danger--will apply with equal, if not greater
significance to the aver-establishment of branches. At least, this has
been the common experience wht,rever branch banking has been permitted
under comparable circumstances.
In New Jersey, should State-wide branch banking come to pass, the
possible and only logical solution, may be found in the enactment of
legislation which shall provide for the mutual approval of both State and
National authorities before the establishment of branches of either State
or National banks in any community--and then, only after careful analysis
of the normal banking needs of that community, made by the Bank Advisory
Board, or some other competent and impartial authority. To accomplish
this end--changes must be made in the Banking Act itself, for in its
present form, no restriction as to thd number of branches which may be
established is implied, other than to those States in which branch banking
is not permitted.
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Federal Reserve Bank of St. Louis
212
etion--Nev. 17, 1r4
L0ONCEs 211 CONIUNCIAL & FINANCIAL CHNONICIA—ANA Senwe
ix• President
Address of President of State Audi Divisiee, Clyde Immdr
1%ons* Valley leek. lieseturp 413/A•
ahead whisk will
The State bank Divisions has heavy program
*oily* servile** Aloft
aiterd its sumbeelhip 4111, oppOrties for
reaching thee. It Is
the mere importent objestiveo and the means for
reeemmemdads
the presermaties
1* That we sestinas to light aggresstrely for ucrat
ic ontralisatiese
burea
of
form
of the State Senking System as optima any
as may be amosoirory in order to bring
2.lhat we tabs mush
b1ai Mt of 19111, modifying it se as
Oast a 'UAW,sassikeet to the
members of the Federal
to net require massiber State beaks to beeves it taseramees sad, if
%sem Breton to order to seatimme their depos
within the ability of banks
possible, limit assesemests to a fixed modems
to pay.
t the eo-erdimation of
341 lint we use emr infinsese to bring *ben with perhaps a revision
ritiesp
examination tor the several sepervistmg amthe
of stendorie NM classifisatileoe
op better hook nomege.
4. That we sestinas to empitenioe end devel
otherwise*
met through institmtes sod eseterseues aid
ise of reassnable stepmiess
5, That we urge the prittlas into pract
ags, In order that basking
eermi
es fey
sed service sharps old seek on seers
operations may shoe a reasemehle pronto
iset State sepervieers,
46 That we emeenrege the appointment of omppo
that booking dspertmeete be removed
with adequate pg, aid that we advosate
as far as is possible from politisal influenee*
isei in the greetimg
$* That we insist es greater eare being exere
State supervisors and
the
en
os
betwe
ersti
of mew shorten, with a closer eemep
to,
the Somptroller of the Curlew with referees. there
umiferm Slate
S. that we esetimme der program if promoting mere
bashing laws*
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Federal Reserve Bank of St. Louis
21S,
•
SOURCE:
THE TARHEEL BANKER - N.C. BANKERS ASSOCIATION PROCEEDINGS
JUNE 1934
BANK MANAGEMENT PROBLEMS - by O. Howard Wolfe, Cashier, Phila Nat. Bk.
Page 57
INDEPENDENT UNIT SYSTEM OVERDONE
I believe also that the independent unit banking system has
been carried too far. Obviously banks have been organized in
places too small to support independent units, and in other
cases new banks have been permitted to be opened in communities
having no need for new banking facilities. In round figures we
have reduced the number of banks in this country within ten years
from 30,000 to 16,000, and in spite of the public attack upon bankers and our banking system, I am wondering whether 16,000 is not
enough banks, and if it is, that fact rather than loose banking
methods may have caused most of the failures. We do not insist,
for example, that every grocery store, drug store, or other business
should survive in spite of every possible kind of adverse condition,
and why should we assume that banks can be organized and succeed
beyond the limits of banking needs?
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Federal Reserve Bank of St. Louis
21'7
S•
SOURCE: PROCEEDINGS MISSOURI BANKERS ASSOCIATION--May
14-15-16, 1954
THE FUTURE OF THE UNIT BANK--address by L. A. Andrew
Pages 93-94
Everyone agrees that one of the main causes of our banking
trouble was too many banks. The National Department was to blame as
much or more than the State Departments for the excessive chartering
of new institutions. I know in my own state that the Comptroller in
several cases issued charters where our survey had shown that banks
were not needed and the State Department had refused the application.
The Federal Deposit Insurance Corporation can be of immense help
in this regard by practically dictating whether they will take into
the Insurance Corporation banks that may be organized. The FTIC can
also put into effect a great many rules for the better management of
banks which will, in effect, give us uniform laws for better banks.
They have done this already in one instance by setting a three per
cent top for interest. Bank examinations to be effective must be
made by experienced men, free from political influence. It is to be
regretted that our National Department is so bound up with politics.
This is true in a lesser degree of many State Departments. The greatest
danger in the unification of banking ides is the putting of the entire
contrcl of the banks in this country into a political bureaucracy in
Washington. We will never have proper banking supervision, natiumalor
state, until it is taken entirely away from political influence. The
Comptroller of the Currency should be selected by a nonpartisan group
of outstanding bankers, similar to the Federal Reserve Advisory Council
without the consent of the Senate. Commissioners of Banking in the
different states should be selected in a similr manner and without the
approval of any political body. I am firmly of the belief that if you
could get to the inside of the supervising trouble in this country you
would find that probably 75 per cent of it was caused by improper
political influence in one way or another.
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Federal Reserve Bank of St. Louis
i
6)4
a
a
•
a
SOURCE: PROCEEDINGS OF MISSOURI BANKERS ASSOCIATION--May 14-15-16, 1954
ANNUAL ADDRESS OF THE PRESIDENT--W. E. Carter
Pages 24-25
Let us turn back a few years and briefly review banking history.
The organization of the Federal Reserve System in 1914, followed by a
vast expansion of credit, the wartime demand and rising commodity
prices, had the effect of creating bank deposits on a larger scale than
ever before. Taking advantage of that situaticn, and a system in effect
at the time wherein almost anyone without regard to qualifications, or
the need for more banking facilities, could obtain a charter, newly
organized banks, operated not by trained bankers but in many cases by
men unacquainted with banking fundamentals as well as some who were
outri,ht promoters, soon sprang up in such numbers that at one time
there were more than 50,000 banks in the United States; all engaged in
a struggle for sufficient business upon which to exist. In many cases
officers in charge of sound, well established banks, in an effort to
retain their customers, were forced to do many things they knew to
be contrary to good banking. No wonder this unwarranted number of banks
and the attendant unwise competition led eventually to the banking
holiday of 1933, and afterward to the realization that most banks,
both large and small, had installed many unsound practices, besides
a vast amount of free service and the payment of more interest on
demand and time deposits than was justified by the returns from such
funds. Those familiar with the conditions under which many banks
operated were not surprised at their inability to earn the necessary
expense of operation and at the same time absorb current losses.
The rules embodied in the Bankers Fair Trade Practice Schedule,
adopted for Missouri under the Code of Fair Competition, are based upon
sound principles that should have been practiced by all banks, and which
have been practiced by many well managed banks for a number of years.
The schedules are designed not for the purpose of creating large profits
to those engaged in banking, at the expense of depositors, but to put
banks on a sound basis so that each account will pay its cost either by
the maintenance of an adequate deposit balance, the earnings from which
are sufficient to pay for the service rendered, or by the payment of
proper charges.
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Federal Reserve Bank of St. Louis
215
•
SOURCE: PROCEEDINGS OF MISSOURI BANKERS ASSOCIATION-MAY 14,15,16-1954
REPORT OF COMMITTEE ON RESOLUTIONS--Thornton Cooke, Chairman
Page 86
*****
III
STATE BANKING DEPARTMENT
In the year just past Missouri banks have had the advantage
of the wise supervision of 0. H. Moberly, one of the most efficient
Commissioners of Finance we have ever had. His administration of
the Banking Department has meant much to our citizens, and the banks
recognize that fact.
One of the most prolific causes of bank failures during the
period of twelve years immediately preceding 1933 was the existence
of banks in communitif's where they could not be supported. There is
increasing evidence of recent efforts to organize banks in localities
whose resources are not adequate to support a bank and to organize
banks in communities where adequate banking facilities already exist.
It is, however, the sense of this Convention that charters for new
banks should be granted only after most thorough investigation.
Supervising authorities should ascertain whether the community
affected already has adequate banking facilities; whether the
community's resources can properly support a bank, and whether management can be obtained that has had successful banking experience.
This Convention pledges the support of the Missouri Bankers
Association to the Commissioner of Finance in his efforts to produce
sound banking.
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Federal Reserve Bank of St. Louis
-;
SOURCE:
27th ANNUAL REPORT OF DIVISION OF BANKS -- STATE OF OHIO
December 31, 1934
Page 11
BANK CHARTER POLICY
Undue liberality in the granting of bank charters in many states
in the past has caused over-banked conditions in many communities
with detrimental consequences to sound banking. The fact that there are
fewer banks in Ohio now than for many years reflects the attitude of
the Division of Banks with respect to this evil. The establishment of
a new bank is not permitted by the department unless it is shown beyond
all doubt that public needs demand it. This is likewise true of a
closed bank seeking to open through reorganization. There should be no
deviation from this wise policy.
Az
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Federal Reserve Bank of St. Louis
219
Address by C. B. Axford
58th Annual Convention, Indiana Bankers Asso., May, 1934.
(The Hoosier Banker, June 1934)
******* *** * * **
Whether we can by some means so navigate nationally that the same
national follies in economics will not be repeated lgain is probably the
major problem of the banker of today.
Upon this question and its answer depends the nature of his problem
of running his bank. If we are to have another ten years of illusion
and disillusionment such as we had from 1913 to 1920 and from 19P3 to
1930, the banker has his job cut out for him.
And it is complicated by the fact that if he does not satisfy the
popu1ar demand for easy money, local development, and business ambition,
he may find the Government chartering a competitor across the street to
supplant him, or actually going into the business of financing competition with him with Federal money through Federal agencies. We have seen
something of the sort in the farm mortgage system, which came at a time
when private capital was getting tighter for farm borrowers as a result
of a realisation that farm capital and production expansion was no
longer needed in this cauntry.
Thereupon the Government stenped in to save the individual farmetws,
but in doiug 30, it ..1v4ranteed the ruin of American agriculture because
it aaintained a competitive production which w4s entirely uneconomic and
which today is still an unsolved problem.
**** * **** * ** *
The Government, answering the demands of a neople for an unearned
prosperity, will violate every economic prineple to get it, if the banker
refnses to, unless there is a vast reawakening of public intelligence
about investments and thrift, and solvency, about economy, about the good
old-fshioned virtues of sound national and private economics.
* * * * *** ***** *
Are we going to escape being ground very fine between the effects
of Government offerIng of loan money at 4 per cent. and 5 per cent. to
real estate and business borrowers, and offering guaranteed investmente
payLng 2 per cent. to 4 per cent. to our customers at the same time?
Are we going to be prepared for the effect on our banks as the
mimes of local capital and as depositories of our community's cash
reserves of the financing of vast projects in our territories, the securities of which will be held mostly in vast tax exempt estates in
the great financial ceaters? Where sill we fit in if the circuLation
of financing becomes thus from Indiana to New York rather than as it is
largely now from local borrowers to local lenders right in our own home
towns?
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Federal Reserve Bank of St. Louis
* ** ***
** ****
SOURCEs
27th ANNUAL BEPORT
01 DIVISION
OF 3AAKS
nATE OF OHIO
December 31, 1934
Page 4
CORDIAL RECIPROCAL RELATIONS
The reciprocal relations whicil the Division of Banks has with the
Federal Reserve Board, the hticonstruction Finance Corporation, and
the Federal Deposit Insurance Corporation continue to be harmonious
and helpful. The unity and co-operation existing between the rtate
supervising bank officiias and the fiscal represantstives of the
Federal government organization:7 mentioned, is productive of excellent
results. It is needles to state that the Division of Baniu, appreciates such co-ordination, which, undeniably, has aided immeasurribly
in bettering banking conditions.
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Federal Reserve Bank of St. Louis
243
PR0CE.EDING8 OF tilIa'OUEI BeRKEee: eSEJOCIATION--gee 14-15-16, 19Z4
TnE
BENEFITS OF DEPWIT INSUBANCE--paper by Leo T. Crowley
rages 107-108-109
Recently we have comPleted an anelyeie oe the banke within the
stet*, elaseifying thee be :dee. deretoforc, eize claeeificatione
hive been by the aeouat o boo. cepital or be to volume oi loin
and inveetments. We have uneartaeca to claseile the eeake eitein your
seate be the amount of tneir deeoeits, since this is the source of the
beak's funds ante since Le fund for tac beet:, for tee bankle earnings.
Whet does the picture look like?
Thc groupe which we chose ero ee follows: Banks vete deposits of
t1e0,000 or lee') were placed in tee fir:et group, bank with deceite of
4150,000 to 0000000 were placee in the second group, and bank:, with
deposite of $500,03 to ;11000,0U0 in the third, an u, on. Seeelety-eiF
per cent of all the ineuree oenke in thebt4A,e on 4.rce 5/ of tuojcar
42..d Iota cikJ,ouitti of 16EL the
J.0.). in other words, of all the
banks in the state, 76 per cent be number were in tee first two groups.
On March 311 there vere eek banks withie the etete--liceneeo banks-with deposits of leoe than *150,0001 I do not wish to appear to be
opposed to smell bunke. I believe that time have performed a valuable
function in hundreds of Aaerican communitiee whice they have served. I
believe that they have been a wonderful help in building up our countee„
and I an sure that the people of idiesouri have received an excellent
service and benefit froa the small banke within the state. But, on the
other bend, I believe that toe large 'leather of failures of small banks
point out a lesson which enould be recognized and of which we should make
good use.
In this connection let me call to your attention the result? of
another study which we recently made, and wAch very forcibly bringe
home e vitel fact concerning the future experience of banking within
the ;State of Miseouri. Of the 600 banks teach were members of the
Temporary Insurance Fund on larch 51,187 were in towns of a popmletion
of less than 500. In addition, 113 banks were in towns of between 501
and 1,000 enbabitants. In this group of towns there were 21 which had
more than one bank. In other words, there are 500 banks in towns of
lees than 1,0er; population, and of those .300 beaks, 48 are in towns
with more than one bank.
that, gentlemen, are the erofit opportunities for LI beak of this
type? I do not wish to go into detail an this particuler eubject at
this tiAe, but let me sugeest that your eseociation give it further
consideration. That this state has had so many bank susp. neians can,
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Federal Reserve Bank of St. Louis
246
Leo T. Crowley
Pages 107-108-109 (contd.)
I believe, be accounted for to a certain extent by the numb-r of very
small banks. To be sure some of the existing small institutions are
better run and enjoly better management than do some of the larger banks,
but at the s.me tine you cre ontiticd to knor that there rre more banks
in thie state with deposits of less than 0_50,000 than in any other state
in the Onion. lay I not ,;mgcest that you givc this whole setter further
study/ T am sure it merdts your consideration, and 1 an likewise sure
that it is r: point which vit=,117 conePrns all of you.
tgain let me st'Ac that I believe thrt thP smell community should
not bc deprived of th: service which is mctde available to it through
benking faciliti- s. On the other hsnd, I find it hc,rd to justify the
existence of two or threr banks in a cointinnity which can hardly afford
to support onc bank.
The unification of banks. is often 2roposed as a solution to this
problem. 1 strongly fr.vor the unit system of banking. However, for it
to amivive and to regain th zrouno lost in these later yesro, there
must°he rcmlization of the fUndamental principle that, for the unit
system to bf, successful, its individual hanks must be profitable. Oae
of the best means of adkieving this snd is to cmeolidate competing
banks where, from the profit stlIndpoint, 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 Missouri the
field for this work is :larticulrly 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 h 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 ti,e 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 caAtal.
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Federal Reserve Bank of St. Louis
I
Page 147 - "A Type Study of American Banking" 1954 - University of Minnesota.
"The Selection of Officers of Supervision. - The comptroller of the
currency is appointed by the President, with the approval of the Senate,
for a term of five years. During his term he may be removed by the
President. His position is thus entirely subject to political factors
•
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Federal Reserve Bank of St. Louis
*Pi-teary Steps for Banking Reform.
eass..w. Lonorat, of J. P. Morgan & Co.
Pr presented at the mooting or
tinAcadomy or Political Soignee*
Jonaary, 1953.
(Prommunniphod'ils Academy of Political Selenee,l. 110
* * * * * Today in the Federal Reserve System we have a thoroughly
seientifie and sound fouedation. Set the SOstemts coop. is not yet broad
emoadki, and the ills whit& the oommosity has suffered in the last three
year* Chow dearly enousb bow mob still resoles to be remedied.
* * * * * Yet what ear Immo citisms very naturally fails to 'oderstand is why, if the Federal Reserve has mob manifest virtues, it is
unable to provost the terrific weep of banking failure's which the eountr,
has 'itemised in the last desads..mad esposially in the last two yeara•
00000
Figures of Sank Failures
In that period (1921-1931) there have teen total bunk failures
aggregating 9,P85, with deposit. thus tied up or in part dissinated of
04,i114000,000. Of this total only IAN banks wore usubors of the
Federal Reserve and almost four and a half times as maw, namely 7,587
basks, were outside the wet's. In the years 1930-1931 alone the bank
failures totaled 3,643, and bore agate the proportion of sole-ember to
solber teaks was almost as four and a half to ea. It should be added
that the soot of these failuros were of small tanks, with extrema;
United capita. therefore, one should not be mislal br thaw figures.
bed as they ere, into thinking that more than a small percents.* of the
wastrels banking rooftrees was ever tied up in failure.
•* * * * The supervision shish the Federal Deserve Banks are able
to exereee over amber banks is of *puree limited. ant over nowrowabor
banks the Federal Sworn ham no control whatsoever. These asmommilber
banks are without emseptien state institutions, subjeet to groatly varp•
lug degrees and kinds of legislative requirements and of sdainintrative
supervisions So that it is no wonder that objective students of our
banking system are bewildered sad does?, it—despite the existence of
the Federal Reserve—to be no system at all.
••* * * It is a noteworthy fact that, in number, ninety per cent
of the banks which failed in the decade of 1921-1950 were legated in
ravel sommumities„ subject to all the vicissitudes of crop failures, or
or the oupsasion and deflation of business *boon.'" without any of the
protestion afforded r a parent inetitution fortified with ample cmpit4&1
ani lessawd fm, apartessol aims
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Federal Reserve Bank of St. Louis
r
The Question et areadbaleidas
Almost all the failures early this year of small saberben banks aroued
Chicago, sad almost all the resultant threats to the general tanking sttes.
ties, could have been avoitied if it had not been for the fact that the
Illinois statutes permit me brialit-baaking of any kind within the limits
of the stet*. It was quite Impossible vmder the lay for the large Chicago
banks to attempt to serve, thremgh beeashes, the important seterbe around
the sit,. The lessons of mob a siteatiea mast be glaringly obvious to
the shale esustry. Despite the development of nuceeseal ekain-besking
in a fee seettered In/tenses, there is se pessest effeetive teethed wader
VI* law by *Leh strong instituting, Is seer healing finemoiel onto* Saa
extend the temefit of their ample reserves, their ewer/ems, end oodinoray
careful aamapssent to the washer beaks is the entlyiag districts.
rertyweine Different Sets of Lave
Our chief difficulty, them, as meat be sees, has clearly been, net
leek of more extended state esotrel„ bat rather failure of organisatiem
sod coordination. r have already spasm of the esafusien resulting tree
our varlisig Peleral and state basking laws. to baktag ur essatry has
forty-nine different severeigas• And, as many peresas long age pointed
en4a constant slate of esapetitioa mists between the Oeumotrollor of
the derrener at Washingtes an4 the forty-eight %skims ikaperintenionta
of our ferty-eidbt states* Sash eme af these fortponiue officials is
desirous of havtag soemmy isstatatiees as possible registered under his
jurisdiction. The sonesquease is that, beams, of this eempetition,
laxity creeps is.
sempetitiom as amemg the various system* hes set hem ouch as
to
banking requiremmets mere oomeervative bat to sake them sore
liberal. A promotion not of better banking but of poorer basking has
been the inevitable result. This sempetition has sot only found exp.
pressioe in liberalieaties of the respective legislative requirements
governing the various Making systems, bat it has &leo resulted, as
two in administrative laxity in punting charters and in proviiing
adequate supervision of the sondaste banks]
,.
Thousands of leaks Leek Proper deffisiprodo
As to methods of sertog our troubles, esigisse ems speed hundreds
of thommodo it dollars in new hearings and publidb volume of teatimes".
But it nod have ne hope of ewer seam; to the root of the evil umtil
It realises that no booking system ean fancties adequately *hen it
somprehemds vilhie it only a limited portion of the tanking somennity•
Today sixty per seat in somber of the oountres beaks are outsiie the
strong Pedirel Reserve Wotan, and this sixty per cent comprises a
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Federal Reserve Bank of St. Louis
I1
»
total In bank's% reeserese of ewer $11,000,000,000* Those lesser hankies
inetltotian*--Ammt ISOMISte resources are nevertholoos se esmslierebl*-are un$,,hie 4r =willies to some um0er the rules of the riders' Seserve
Systems ?Imo they leak its vectritiess lad its safogusirds. And the
sloset vsteldled limos Shia these small basks be some states apparemtily
bevel outside the Federal lessewe SOstem tempts them fropeutly, as the
and sysived hug proved, to folly and disaster.
Eft flit is *sty despite the matsmsibely ximbsr of elisiseilems
have tags place, the ssintry has tear far lee am beaks. Our
•its should on the seeesso be far larger than the, are tio4y. 111:=,
ill-eapitulised iestitutteme sheeld be merged se eats gain the semi
stability, diversity, esseesty end semegement of the levier semeerms,
See 'eases for the weeknose of the small interior beak is that its
everbeed en:pewees are preportioratel7 tee beery. The beak is tempted ts
pay toe high rates of bitterest is order to attract deposits. These little
leeal balks have, booms* of the rapid growth of business units, of oemsumleattems sod of meter transport, has left in a backwater ethers the
better beelases peons this by. ?hose uposieseetry inetilmaless hem no
oppertumity to Aivuesify amid average their risks* If general coalitions
*Mot their iwriellemate Imfavoesbiro the same esmditiems are likely to
twelve then in swims losses Sem their localised Imam, ad at the
same time iisastrems deposit withdrevels. Nersever, ter too as of
these weak sod umWheltered, Jetsetter basks hem bow semeged by Immo
periameed persons desiring the satisfaetion of beembes elemhere.
Tee Ylts1 Shames. Seesesary
moat *kat mew others have tares* pointed oat, sagely, that
me thorough-ping basking referees as be beemSht about until two vital
shames have bees aleemplished6 The first is to bring all the oesserelal
beaks of the semetry, small as well as large, wader the single aegis of
the fidiewel Seam System. lits semi is to establish sensible pre»
violets ter eegtekal bremeembaskiss, the geographical limits for sash
regime te be ameetelly veiled out aid replete& Thee ve should have
semethteg 'Perth talking abseil. Seib reforms, beseght about pedmally,
ought to bogie to yield to the oeustry some measure of baking stability.
7here are seer Ouse of the bsehies sitestise that of coarse I
have aet attempted to tank gem, Mem eves this brief review, however,
it mist be apparent that the development of balking in Marisa has been
a gradual presses of eveluties *Lai has by as ..as resdhed its se&
lack of the talking arises to ihtah I have alluded hes taught the ase.
amity seise as loses% bat eagh mew diesstrr has revealed a fresh leasees to be remedied. Indeed, temkims development is this asoutry has
Use a slew sod painful growth. la pilgrim's progress sos14 have bolo
mere arduous it beset with greater pitfalls.
Ike Trust that is
pseed ii. mug Freesia System
'be prepeoltion to bring 41 the esimorsial Mao of taw migsWY
We the Plssl ROOMPV,'Fetal has sometimes bees apposed is the
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Federal Reserve Bank of St. Louis
.
4
ollogatioa that Os Ogrots. bad already premed itself to be el %my limasta,
sad that its oathoritr obasti be curtails& rather this ostosiolle As to
selh criticism it nmy be fair Is point est *et, if the Wefts had aetualli
proved itself to be empthing in the mature of a mow trust, it vas eerteloly a bemovelest aid emperetive cm, for the semi thigh I have meted
Chem that depositors is the busks mad tenet sompmmies Ihet ewe members
of the *Mos yore emermselly temente' br mehimeihmehipq mod that
eithis the 1110stemo.with its sere amd ostogairdo..4boysajapotoosuporative
imMeity from difflowilty so sewers& felt% depositor, to the bemhimirimits
whish bed foiled be tole advastop of its etremsti.
Ihe object of %Whims legielaties is not to give advantages to, or
to Impose posilties ipso, %Mks or bookers. it is to provide the roblie
with safe coney an
edit, mod safe depositaries of their fonds. In the
modems world bank ohoOks dress spinet kik deposits eirsulate as maw
aid lhe geld reserves or the Voilsoal Reserve talks ere the base epee s
'high rest net soli the toderal Seism metes issued imr the Pedestal Sod.
serve Seiko, bug the deposits of the neeher beaks end of ammomesher belle
so well, alas the Cheeks that eiresiate ogainsh those diveeits. After
the Civil 'aro state bask motes, whitb bed had sesb a deplorable reseed
of repuliation, were tamed out of existemes
oatiossi bask *otos Mb.
stashed in ow marrow pystem. Ihe refire ems issemplete, bens.. it
drat say with owe Ado of the beek's fomotien„ the mete-issuing peer,
It did met deal eith the ether side of the bmektng pieties% the poser to
metes deposits ihieh eiroulate Is the fern of cheeks aid Ohl*, 410 I
as, are sert;ertoWl woe the sane geld Wee held by the leaseel Deserve
leihs. Se mast some to repaid a bookie( Charter net 841 a privilege amp
tarred apes a Cheese roe, wives en maeolested nowt is order that they
mey usher mow with other poseies mosey; tut as a public/ trust, mad in
that seas, and in that seam say, as * new trust. It is the plate
,
it the oommunity to see to it that the tstereet of the American
Wt
people in the safe*, of their depssiiO4 Mier the thole oonntry to the
sufflelemey mad sommdmeee of OW iramidai spites, should be put before
the epeeist /stoma of ow bmik or bomber, great or small.
The leen of tie Pailerel lieserse Systims
%s hop for prowess tomerde reel soderlimess amid stability lies,
so it allows doom in them matters lams aromood aid intelligent psblie
opinion, sad is semetent study imir ;he averts of methods to stromehos
libe Morel Reserve System. Se person it istelligemee, studying the
seSeel workings of this *sten, ens have failed to be taproom' with the
immessarable besotIts which it bas bresght to Americto industry end onmares. It is bard, tee* toss. how the Goverment could moor have
serried on Its war sad peet
,
wer fiamasiag without the sew 4010tem4 Without it, inflaties es as almost disastrous seal* (witness the essuples
of the %repose esentries) might well hem boom resented to. la the
midst of tho distress theme* Chia portions of the booking
eemmmilr
have been pesetas AR those last fee years the senstimetive seseeplig
hl.
mats of our rodlowal Seserve Seeks may hairs been somewhat lest 14011
Yet without the reeeurees sod the prudent
'
farsighted handling ce Ihme
institutions our plight woad IMO been imealsulably worse than it his
hem. All twelve of thins have bees like isles of safety, Metiers of
retie to the midst of a vlolest storm.
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Federal Reserve Bank of St. Louis
40 $ IMO
lot so point out gee reseal „levelopoont or the Federal IIWow, System
*at bas abet* prowol of imam talrertalles• Up to Plehireery o1 aft,
a•Opium still ladboi, lodes tire 1.-elfo esvolois powers that it ossalled to
risillor its sew of eperollos mom elastic sod prootteabisk Ss* powers
On *petrel haulm of other oeustries have alleys pool0000d. Thron.
prowl/sides of Us alaso-101easo11 law, passed early in 19151t, ossowhot
Antler mere were provided for the 7edevel Poserve Syeterm Wader time
tbe ipotesi mow hes the authority to batting* Um orsdit oilmaties *en
then io the greetest seed. Already them ostoedod powers have saabled
the System, to lighten imeiourably the berano of VW imuomeily•
Aided by the prairies* of this Let, the Pelieret leoorwe Saks have
for the last six sestbs bees perselag with wisdom sod vigor a somcalled
epoo assiket palq. lithe boo etre* proved itoolf to be a groat factor
is allreindalt the bssdLes deflettca of arotit siod prieee Ai& is. be.
esstag is disoiotweis•
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Federal Reserve Bank of St. Louis
•
•
•*•* *•*
•
SOURCE:
ANNUAL REPORT ON BANKS OF DEPOSIT & DISCOUNT, ETC.-N.Y. 1933
Pae 10 (Recommendations for amending the Banking Law)
In submitting the foregoing recommendation, the writer does
not wish to foreclose consideration of branch banking on a more
restricted basis. Considerable support has recently been apparent
for an amendment which would permit branch banking within
so-called banking or trade areas. The writer desires to make it
clear that in his opinion the adoption of such a plan would be
extremely helpful and a step forward, provided proper consideration is given to centers of trade and population in creating such
areas or districts within the State.
Under the Banking Act of 1933, national banks are authorized
to maintain branch offices, provided the states in which they are
located grant such privileges to state institutions. In other words,
the Congress of the United States has given its approval to branch
banking but out of respect to the various states, has refrained
from permitting national banks to exercise such authority except
in those states which have also approved the principle for their
own institutions. It is fair to assume, however, that if the states
decline to adopt the necessary legislation within a reasonable time,
that the Congress will go forward with its own plan and permit
national banks to establish branches without regard to state laws.
The insurance of bank deposits is not an answer to all the banking problems of the United States. The work of strengthening the
basic structure must still go on. In this as in other states, there
are many banks that cannot afford to hire the necessary skill to
invest their surplus funds safely and with sufficient returns to
enable them to pay operating expenses and remain in business on
a profitable basis. Arguments as to whether city or country
bankers are the more ethical or competent get us nowhere. The
facts are that in many communities we have too many banks, while
n others there are none at all. Branch banking under proper
supervision offers a solution to both these problems without in any
way jeopardizing the existknce of strong, well-managed unit
Institutions.
i
f
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Federal Reserve Bank of St. Louis
166
•
*The Strutters of the ionking *ONO
by Pierre Jay, Chaim% Plaiiiikary ?not Is, of I. Y.
Paper propeated at the seetiag et
the hoadomyof Palates). Solemoop
Januvryt 1085.
(Prook-etings of the Medway of Political Osimose, V.1. 11)
•••* * * *
•
Over every individual book simputs a soperviser, national or state,
to endeavor to enforce the lair and oorroot abosoo*
,•
Mask of the entire structure stands the Morel Moservo System
a
mod
w
sorro
e)
provid
to
banks,
esepewative orgaaisatioa of the somber
*
Keno
aortal,
1110
to
411111.111
toad
mem of rodiseevatlas pow, sod aothor
Of espervisim over its asobero.
*•*•*•*•
elag
nem the boot information atitaimable someem
Ammuitlidamaso
of this elovowyear pitied, tne gemsril otimorvatiams
the biik- failores
• be sad*
Virst, the vast majority of then were dao to miesomagesent ampand difleeted prinsipally in over-lending, in exploitation by effieers
t
soopresen
The
.
ctions
restri
rector* and in sone disregard of legal
,
osarse
of
has,
1,
19t0-2
of
thA
smile daprossioa, following closely on
has
all
values
of
ion
bed an Important inquenoo, and the grokt reduct
mit
sumdsred bilking difficult for every bank. But the supporters of
of
nds
thousa
bamktag comnot petnt to the depression as an alibi, slams
strata
Ito
orpoKy noragsd basks in all parts Of the SS157 have stood
does disMten in head ethos
sad ressiaed elven sod said*
appear to bee" bean on inportamt olsMost is Wood foliar** eguispt *ere
alarly
inferior seourities had teen purtiamod for *Aril* yield, partis
s.
e
Upset
serfag
fir
rates
st
by banks paying high intere
es
The resoled observation is that about SO per seat of tho failurof
ments
invest
mid
loans
having
were theft of very mall lose' bombs,
vely en.
loss thaa 0500,000 mob. lambs as small As this are relati
pay for
sameet
?bey
passive to ororatss ?heir profits it. seigligible,
er,
Moreov
ble*
enperiesced samogorma, *won if it wore bully availa
seepss
busine
s
autesobilos„ geed seeds and the gospel toOdeaoy toward
sontration are addling to their diffisalties by taking trakilg burineso
to larger plain*.
fair
If mionomogommut goo the pristipal onus* of failures, it seems
asbe
also
'could
it
t
sorrec
to
lbat the failure of bark sapervisioa
has ocouried6
signed sow sesondary Mare in the respossibility ror at
proved, that
be
sessot
it
On the other baud, I bellows, *sulk of Nurse
novae boss
have
state,
the supervisory ecossisations4 bolli national and
the
of
share
a
as stress as is the pet desedlo. Vat in assigaiag
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Federal Reserve Bank of St. Louis
18.b.
•
t
S
reepeseibility le empervisies, it meet be as.. in mind that !with*:
%making lame sorbs* supervision is. Weir perform the positive function
of asserimg essed beik memagenned. Meek empervieers do vet mirage banks
sad, at beet, VW, wee ear' aerillora the negative tiaotioa it eritioisieS,
after the fist, the looms sad inveetmeate iihish beak memegere have sedan
end only by extreme nossures, Whish the lame seldom permit, oan they
make their oritieieme offeetivo if beak offteere sad disasters are eet
'separative. In fatness to beak saparvisioa as as *Motive elemeet Is
the basking stilarter*, it ahead sloe be observed that maw our se'partly natieeal beaks had pertly elate banks, there
milled*
haii been aijtandem, teem& sompetitive relaxation of legal restriations en benkime and teems* sempetitive mating if eharlere,
etles without due regard to the emperionee of applieente mild to existing
balking fbeilitiesi *soft 41.0141111 Weeh.beeleii please amd maser&
beehing eempetities. in addition* the ewe with 'hi* a mational bank*
if aritioised tee severely', sea senvert itself into a state beak er
oda, velese..a resew AIM wow apparriser naturally likes to avoid..
Okals further td teearde lees stria. enpervision.
\
Sere broadly, however, resat bankiag failures have ***maimed tee
iiheeent weehmeeses of the mit lesal bemk. First, that it is tee mu&
affiliated by Impel prosperity or adversity, pertiealarly in plume share
there is a Angle interest, agrioaltural or indeetrial. Adages**
in me
diveesifieatime of perlifelio is 1eakimg3 there are tee mew
are
stftasrs
bulk
the
*
plies
lose
the
smaller
the
that
Seeoud,
%sake*.
their
Is
senditiame
"relit
general
perepestive
of
to
likely
apply the
losal "Mit problem, art* realise the saseesity of a eabetemilisl
element of liquidity in the portfolios. That ease eity balk officers
beve also beset equally ihertmeighted deem' net alter Ike ease*
. The various WOMONAMP Wilk here been enumeted for this
attoattasenter Sheet two paegaemast (1) greater Iniflastioni (2)
lideepeeed beam& booking,'
(1) filsititikarradita• The most authoritative proposal for
greeter umifleatisalabaathebieg styli/tare is that Ala 'he Federal
Reeerve lonrd vasaissuely made to the bankimg oemmitteeil of Oengrema
ael Marsh Vat Mt, as follies. 'It should be Yedelleiled that efftethe
empervisies of balking is this eematry has bees seriously hampered
the sompotities between member sad nee.mesdier 'mks and that the
eetiftiailimat0•veined system if beikba, nailer national oolleevisien
is earsatial to teademental bulking redinake
?here ems be me doubt that the proposal of the Federal Reserve
lewd, if it mold be Ireaaht about* would be as inperteat step is
advemee. There are today *best MSS national beaks amd 11,620 state
Wake (other this salmel savings beaks). All state beaks with antfieleat eepital have had the optima for many years of either eenverting
late national beaks or of jointag the Federal Reserve apnea. /t is
obviates, therefore, that isaifiettien of a banking strnetere Aimee
rests go ter beak into ear history mould be brought *bent mail.
as snorted mesh torso—first whoa the
terse. We beve alms*
National Iamb AO, was passed; mad seemed, ahem the Federal leseree
Orates vtts created. lima aesemplished its immediate eadeeiive, bat
neither Ills prevented beilk filloree4
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11•111P
Federal Reserve Bank of St. Louis
It ahead also be observed that unifiestion vitas the framework
of the Nativeal Bank Act would not rem& the great mass of small state
beaks whit see have insufficient sapital to qualify as national beaks*
?heir number would be farther increased if the minims wits' of
national beaks were inereeeed from OPS,000 to t30,000 as the busking
bill mee Were Cesgress proposes* Yet these very small state busks,
as already ladiested, are the sour,* of most of our bunk failures*
Clearly, there teed be advaatageeLuumigtInticsjimismsellemel
sepervisios. It would remove priit semrtitios Nausea motional sod
state authorities resulting in lowered legal restrietiome, lees strict
sepervisios and lower standards in gseafgag awe Charters* Nevertheless
It appears to me met to ge really to this met of the tremble. For, as
arm* iodinated!, supervision is largely negative amd exerted after the
fast. 30ms the proposal of the basking bill to permit the Padieel
serve Deer& to remises officer* amd directors of bulks ekidh engage is
unsafe or ussemed preetioes does mot provide safe sad mead *Mears or
directors to take their plump, lhat is reaLy needed is something
positive, measly better balk menegsmeet. The smell banks, I as OM.meescement except throe
'dosed, OMB Imbither find eer afford better
wait thee to be operated
will
Oki*
re
a Menge in the Woking streete
as trenehes of a larger tenke
This leads directly to the 0001114
(?)
of beak failures, namely wide..
resent
proposed
toshingm This in itself would doubtless bring sheeA,
spread W.
met by terse but br eveletion„ as important measure of enifieeties• A
large beak with boemehes esuld hardly afford met to be amember of the
Federal 'seem aletem6 Moreover, the emitiestien lead peebobly osienr
largely within the framework of the national tasking system, since
the Netiomal lank Act is sepable of permittieg boodles freely to
gross stet* lines unless, Weed, snob Mira bran* legislation
dimuld stimulate some of the states to offer reciprosal bremek bank
seerteeles emeng themselves*
offer to
g o (1) It would off
Dggili
of WI
s of is.
service
the
beekleg
,
snallititelfes,ss triedirtes
aaI
es.
nt
esupete
hire
to
stitetioms sufficiently large to be able
periemsed msnagenset.
(t) The portfolios Is likisik the deposits of small semmnsitiee mould
any
be invested meld be diversified instead of mainly lied; sod under
tial
subetan
reasomably sesserestive management lbw Aimed also have a
'lemma of liquidity.
would
(t) In addition to present entside supervision, the brandies
really
be
meld
This
sies.
sepervi
be subjeet to sestimmous internal
to change
authoritative sspervisiee bemuse it would have power instantly
lead-Oriels
.
taetery
unsatis
leeel management Wherever it ems proving
at
sestrel over the larger leans shonld teed to cheek everu.emismsiess
as
rs
borrowe
lama
for
ruinous
lseel credit, stidt have primed to be as
mere
be
should
ies
ter legal beaks* And ham&sellso perebase of securit
evert mod sosservative4
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Federal Reserve Bank of St. Louis
-4(4) arnmase amid be opined tentatively is small plass* mad later
witbdrews if they proved upprofitahio. elder emit bunking, such small
local banks, oleo established, maiden withdrew except by failure.
(1) The traditioeal
Qii
£setsin
favorer the administrations by leeel beehers er leeal deposits an4 credits, mad against
allowing a distant beaker to say vibem mid how mach a local mem say
borrow.
(P) The fear that Local deposit* esly he irained sew mad leased is
larger cities.
These I believe are the objeetionsuseally advaneed6 amd they are
closely allied. In theory there is meak to be said tor both of thou
In actual experienee, however, therlargely disappear. 0 * * * * * * * *
In the main, however, banks with beessims, like emit basks, are in
besimees to make money; rates ter local credits are newly always
higlher than massy sarket rates; sled the fastest lay e bras
grew
eed bosom profitable is by saki, all the meg leial loins it 41116
Ibreever„ backed by a larger capital, the inemeh sea extend larger
individmal credits than the legal bank, and It can draw em the heed
offise for additional Node 'hen local credit requiremeats esseeti lama
deposits,
(I) Mere is this further obleeties.that if a beak with Bey eme
hamired brenehes were to fail, every ems of its *Mess meld slime,
*areas if salh of its *Mess 'ere a leeal hank, pribably • timer
smeher of this said fail. ibis, to my flied, is the ome tomdemental
eteeeties to *mesh balking ever a wide areas ?here is, of souree, US
Of amusing sound management for all balks having widespread
W. But to Shrink from bran* basking bosom of this rill! is
to yield to a somas' of dear. Both *oat MAW"' sod Canada, 'here,
as with us, deposit hawking prevails, ban had failures of banks with
brammhee4
t the pereentage of their reemerges involved has bees se
sea lees than in ear mit bank failures that the answer to this
sbiesties is reaseeehLy satiefastery. * *•* * * *
liperismee Obese that the landing and supervisory organisations
whisk heals doing asitansive Wee& banking have to maintain and can
afford tassintais esetribnis pemeettlly in themselves towards careful
essmipmend, 'Odle the wide area avowed brings diveesification of risk.
* * * * * * * * New peeps mad *eine hoes been formed &initial:
the aseeesary authority to esevert into Ilimmehesi the averse of events
but greatly veabseed the meatier or the smaller unit basks; and the
bombing eammittees of aimpose have intredmeed a bill providing that a
national bask may establish branshes within its own state sled fifly
miles beyond its borders, ?bus, as a remedy for the obvious vsehmesees
of unit bemkimg„ we smear likely seen to embark upon bran* tembiag
side by side with unit basking. If aid when we take this tendemental
step temerds a faripreanhing Cheap is air banking structure, it seems
importer% that's shed* tihe the step sot tentatively or half-heartedly
hut rally conviesed of its desirability as a national po'!icy designed
to afford better protection to deposits.
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Federal Reserve Bank of St. Louis
1
Like mew ether smarter' of unit banking,
hove
resent evente to &alp ny visas, and I no* regard tram* basking as the only fimdmmestal remedy ror the demonstrated
veihmessee of sett tanking, partieelarly is the emallET Obese* Set to
beams an *Motive imetrement of national Wig,trench
ktag should
tel permitted to develop
or conditions most favorable to its sneeess.
/bee' *seditioni invelve questions oft (1) area; (t) supf,rvision; (1)
eempotities vith unit bookie
(I) Ingo Muter the bankimg hill, a eatiomel bulk may establish
tromehes webers within the limits of its sem state sad within ego.
IIgness territory fifty elle' outside. This provisions tile a
tmemeadene step in edv-Ance, still savors of holf-heartedeess. It we are
*Mime to es this far, as night better reemgmise at the outset that
state limes awe sesally political rather this seemeniel sad that as shall
esse hero to arand the law to permit teenebes ever more natural trade
arose as enollemptroller Polo reeortly roosenended. To Okat our tree*
booking sip is forty-eight separate semportments as if it sere somethisg
we feared, is to ignore the overtones of all the other coastries of
the lead dare, as far as / knew, there is ne territorial roetirictias•
This does met mean that I mould sontemplate for the limited States, wren
Per the distant Mare, tmeneh bookies shiet cowered the entire (*wary.
Distasis end seetiseal teenage are against it; proper diversifieation
does not require it; mad obviously there oust be some limits, eat
sorely all will agree that a stato.Ons fifty oilso—uill in as eases
prove a linitatiem that hes elements or unsafeseee• In states overvhelaingly agrisaltmrel, Oer ample* state limos mill render it diffi—
cult to attain that famdmommtel requisite of brew* tenking.a diversified
portfolio. The limits, it seems to me, should he sufficiently vide, sad
mere than this, eaffieiestly elastic, to permit of weed diversifieatiom.
The twelve Federal leservo Distriete oppreamete natural trade areasi in
spite of mow arbitrarimeso, end they appear to as to be the most
pv601.0110 Units Atkin which to vosb4 But the 'Federal %serve Board,
Oki* matier the proposed bill is to authorise all brands**, Should, it
*sone to me, be empowered to allow brandies to overstep district limes
vbes wseeseary to cover trade ores or to assure diversifieation.•••*
(2)iftagaidep lideppread hrealh hawking introdacee into the
structure the poesibilitt sot of mere book failures, hot et larger meg
mere serious failures, tho tanking bill wisely provide,'kat the
setabliehmemt of ever, tens* shall be subject to the amen/ of Se
Federal leesrve Dear& This Aeon both properly emd eyearely spas the
heard amd the Pedieral Reserve Hanks the primary reepeneibllity Apr the
emend deraLspmeat of bran* teeing. It seems important that they
iheslit also have authority to prevent weak state iestitmtiess with
broalbee from booming ambers of the Iteserve System by senversios into
or comselidatica with eatiosal tasks* Whether the branch bookie, institutions vhish are permitted to develop shall be strong and semmd or
"hall merely represent 4 cross softies of misting salt beak manogement
depends, is the main, upon the steaderds which the Federal Reserve board
este up as a guide for its aetien, as/ the rigidity sad rutblessmose
with Ai& it declines to authorise tremehoo for
book "hose pest
reseed mod policies have met boom semmd sad see. Thor. Amid be me
plies in breech hmikbag for offieere or directors eh* seek to operate
banks in their own selfish intonate Ise there is me qualities that the
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Federal Reserve Bank of St. Louis
S's
public is in a mood to give full support to ruthlessnows exerted is the
public interest.
The supervision of these larger Instantiate will brims heavier
responsibilities to their super uses. Ist in the other bud, with
fewer usits to supervise, more cemeestrstod attention een be gives; amd
the ability or these larger institutiems, tooth to find aid to pay fer
seed eemagers, Should move one of the present diffisulties is the
supervision of small local beaks.
A eeeond element is the development of branch berating is the speed
ebids
with
it preened.; amd it is possible that here again the lidera.
Swerve beard vac be able to emersion a reetreining influence. Proper
orgesimatiess be memo bremeh tasking systems cannot be developed
evesuliht. Sem enestisfaetery sitmatieme would be likely to mum if
a eompetitive scramble for beenebes, suet as hes recently takes plass
in certain moos 0160004 be repeated over the seustry as a 'bele.
POrtemately the present diffiemlt period fevers mederaties is the
ppeed of establishing brenebek
k third flictor, with 'hi* me mottoes' or state appervieumr be.
yet bees able to cope, tat with whilh it is to be hoped the ftdepal
leeerve leased may find a gay to deal, is the esepetitive miss of
hi1* rates of interest as deposits, partieularly savings deposits.
lhere met controlled by elemdashisse or ether arrangements, these
rates love mite immorally led direetly to the purchase of inferior
beads with high esupems, amens Okla, en the law of averages, the
mortality is hist.
(!) Coo
14t
with
The initial establiehmest
Of branches will doubtless posassa sIájIe lines of least resistanse
ty absorbing lees' usit banks. New stress lewd beaks, however,
sir
decline to bosom bresehes amd the question will them arise 'hither•
larger institution ahead be permitted to put a branch in mob plums.
While the vise of the place sill have a %miss es the decision,
should like to express a purely personal view that as sentiment in
small plasm will materilly favor the local book, the willingness of a
stress well.mosaged bask to maintais a brew* alongside the local balk
&meld at least be an impertast presompties in favor of greeting the
applicatiom. * * * * * * *0 Provided a bask has sped memaimmemt, it
Ohem1d, in semerel, be allowed to bring its seevieee amd ademmiegie to
these plasm.'here its memagere think they or profitably operate*
This sliming thought serves to emphasise ',belief that sheave
in the basking structure &weld be approached primarily free the etas&
point of safety of deposits rather this from the stemdpoint of arum%
of audit to be extended locally. Tee often in Use past the latter
has appeared to be tho pritary objective of bookies legislaties. with
fill reesseitlem of the feet that lamas create deposits, we obeli be
in safe grommd, nevertheless, if we parePhrese the familiar Inplish
adage, ead eery 'Let us take eAre of the deposits and the loans will
take ears ef themselves.*
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Federal Reserve Bank of St. Louis
•
The California Banker--June 1933
CAUSES OF THE RECENT BANKING CRISIS AND 93GGESTIONS FOR THEIR AVOIDANCE
IN THE FUTURE--by Alden Anderson, Pres., Capital Nat. Bank, Sacramento
Pages 257-58
During all this time the record of the national banks, by
comparison, at least, was very good and with the so-called hard times
of the nineties there was a wide demand for the extension of their
facilities. In 1900 capital requirement was reduced to a Minim=
of 25,000 paid-in capital, for smaller cities and towns. The
competition of the State banks was always on, but some depositors at
iiist would only do business with national banks, so there was a
constant pressure from agricultural States or sections to perit
national banks to loan on real estate. This permission was finally
given by legislative enactment in 1913 and the Federal Reserve System
was formed. That was our banking situation at the beginning of the
World War.
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Federal Reserve Bank of St. Louis
183
(,)
SOUFCEI
Tur
CHANGING STRUCTUPE 01 AMERICAN BANKING—R. W. Goldschmidt
1953
CHAPTER XI
Some Suggestions for Refers
Pate,
241-42
ThE, ?rev-Ions chapters havo been devoted to showing, mei
other t!-Ancs, that the weekness of the American banking system OM
be attributed to nix primary cau5es:1. The absence of a sufficient safeguard against excessive
expansion of credit.
2. The existenlo of forty-nine different banking systems,
ely
n
leading to a competition in laxity and making co-ordinatio extrem
difficult.
The legal barriers to the development of a system of branch
s have mhde the
banks, which are a necessity after economic change
small else, an
very
of
y
usuall
exclusive existence of unit banks,
g system in
bankin
the
of
ility
inherent cause of weakness mod instab
greet parts of the country.
urban real
4. The excessive use of bank credit in financing
estate developments.
ty
5. The close connection of commercial banks with the securi
dependence of
markets, resulting, on the one hand, in a damascene
fad, on the
iems,
bond
and
quotat
stock
on
the valise at bank assets
bankers on the
of
nce
ment
influe
imveot
ous
other, in an equally danger
basks.
administration of eemmersial
6. The dimini.shing role that commercial banking is the strict
within the Ameriems benking system
/MOO Of She mid has esme to play
Owe
al
as a whole med WWI within the activities of letisa leaks,
Banks, and Trust Companies.
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Federal Reserve Bank of St. Louis
18S
SOURCE:
THE CALIFORNIA BANKER—JUNE l95
UMW ON THE COVEEMMFMT--address by Lane L. Webber, Vice-Pres.,
First Nat. Trust & Svgs. Bank, San Diego
ZEZ
* -* * * * * * *
If antiquated laws require pigment of exosseive interest on
public deposits and the immedite cashing of checks taker in payment
of taxes, ask" known their apparent injustice z,nc' demand their repeal
or modification. Determine for yourself: Whether or not it is rcf11,y
best that there be un140_1?A0144, through enforced membership in
isl
the Federal Reserve System or through exclusively national commerc
bankini
banking; whether tbcre should be a decentraligtion of all
;
functions or a mere segregation of commercial and savings bsnking
ies,
whether banks should have any relation whatever to the sale of securit
the underwriting of bend issues or investment banking; whether branch
within
benking should be permitted tnd exteeded throughout the nation, or
n.
decisio
then
your
voice
areas;
c
economi
the boundaries of States or
of
rates
ant
of
exorbit
payment
the
If foolish competition has led to
interest on savings or commercia accounts admit it anti stop it. The
new Glass Bill prohibits payment of any intoreat on dem:3nd deposits and
authorizes the Federal Reserve Board to regulate interest on all other
which
accounts. Discover and concede the harmful and improper practices
prevail !;tnd set about their elimination.
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Federal Reserve Bank of St. Louis
* * * * * * *•
187
•
SOURCE:
ANNUAL REPORT ON BANKS OF DEPOSIT & DISCOUNT, ETC. - N.Y. 1_933
Pate 39 (Banking Board Resolutions)
Senate Bill Introductory No. 68,_ Print 111o. 68, referred to in the
foregoing resolution, reads as follows:
(Sec) 490-a. Merger or sale of assets of banks and trust companies
in unsafe condition. If any bank or trust company is conducting
its business in an unsafe manner, or is in an unsound or unsafe
condition to transact its business, or cannot with safety and expediency continue its business, so that the superintendent is authorized to take possession thereof under the provisions of section fiftyseven, and if, in the opinion of the superintendent, the public
interest will be furthered by an immediate merger of such corporation into another corporation, or an imziediate sale of its assets
in whole or in part to another corporation, the merger or sale is
authorized as follows:
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Federal Reserve Bank of St. Louis
192
"As Applied to Rural I4,nk" - by J. A. Allen
Proceedings of 44th Annual Convention of
blinnesots Bankers Asso. - June 1933
(Ins Coigmercial West, June P4, 195)
**** * * * * *
* * * * I would like to give a 'ittle outline of banking and
lay the ground work of the small town conception of the necessity of
service charges at the present time.
I becAme injected into the banking business P6 years ago,
my former business experience had been in the mercantile field. I
started in the sank in the little ton of !.:ilaca, the community was
new, and I was new at the banking business, so we kind of grew up together, and I had the satisfaction of giving *bat little I could to
the develorment of our community. I had the idea that the banking
business was a semi-public enterprise which was meant to gather the
surplus money ia our community and loan it out where it would do the
most good. At that time we were paying 4 per cent on deposits, but
competition forced us soon to pay 5 per cent, and I ,rant to say right
here, that was the most I ever paid.
Owing to the fact that our State had no law by which new
icharters could be refused, we were blessed with an over-aboadance
of banks which divided up the business to such an extent that there
was practically no profit in the banking end of it, but we had a
good business in farm mortgages and insurance, this to some extent
offset the lack of profits in the bank itself. Our exchange was
good, and owing to the fact that we had practically no losses, we
succeeded in getting along very nicely.
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Federal Reserve Bank of St. Louis
** *** ** ***
`,-:•1 3 I
•
SOURCE:
PROCEEDINGS OF MISSOURI BANKERS ASSOCIATION—MAY 17-18-19, 1933
REPORT OF THE COMMITTEE ON RESOLUTIONS--Tom K. Smith, Chairman
Pate 105
*
1-
VI
BANK SUPERVISION
The authorities vested with the duty of supervising banking
institutions have at no previous time in our history been confronted
with more perplexing problems than those now before them. In order
1 that we ma not be visited by a recurrence of our recent banking
I! troubles, we recommend rigid supervision of existing banks and utmost
caution in granting new charters.
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Federal Reserve Bank of St. Louis
210
•
George V. McLaughlin, President,
Brooklyn Trust Company, Brooklyn, N. Y.
40th Annual Convention, New York State Bankers Asso., June 1933.
Secondly, there is no question that we have had excessive competition,
not alone between banking institutions but between the supervisory departments. I know that the Superintendent of Banks, the Comptroller of the
Currency, and the directors of the Federal Reserve Banks and members of
the Federal Reserve Board are on very friendly terms, but the record is
there and it speaks for itself. Entirely too many banks have been authorized.
The record in New York State, however, when compared with the records
of other states of the Union, I think, will stand at the top of the list.
But we can't ignore the fact that entirely too many banking institutions were
authorized in the years from 1920 through 1929. From that time on, however,
nobody wanted to be in the banking business.
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Federal Reserve Bank of St. Louis
***** ***
208
•••••••,...".
•
SOURCE:
THE CALIFORNIA BANKER--JUNE 1953
REMARKS BY EDWARD RAINEY-LState Supt. of Banks
Page 189
We have gotten rid of some banks that never should have existed.
Charters have been given a little bit too freely in years gone by
in California. I think my record is just one better than my dear friend,
Will Wood's, over hen, because he gave very few charters and I have
given none at all since I have been on the job. (Lauhter.) Tall set
the pace and I have followed. Banks were chartered because they
thought communities needed them. Communities do need banks terribly,
but the object of banking is not to develop communities; the principal
object of banking is to establish an institution where people can put
their money and get it back when they want it and where stockholders
can contribute capital and make money on its operation. The bank that
went just too far in thinking that its purpose was to develop its
community, to get apartment houses and hotels and theaters and all that
sort of thing built, to make more land, bring more land under cultivation,
to produce more crops and to produce more cattle, to bring more into the
economic basket of the country--those banks should watch their step. I
had in mind to say just what your President has said this morning, because
I have in my possession a circular to all national banks, sent out by the
Comptroller of the Currency, that this is the time to watch your dividend
policy with an eagle eye. The bank that builds up its reserve, the bank
that says, "Our undivided profit account is the thing that we are going
to watch now so that we have greater resources should further trouble come,"
is the bank that is going to do the wise thing.
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Federal Reserve Bank of St. Louis
•
SOURCE:
ASSOCIATION OF REbENVE CITY BANKFRS--Commission on Banking Law
and Practice
Bulletin No.
July 24, 1933
Pages 4-5
We believe that bankers as a whole are ready to assume their
full share of responsibility for the banking troubles which have occurred in this country in recent years. However, it is only just that
public opinion should recognize that bankers have not alone been
responsible for present conditions. It is fair to ask the people as a
whole to assume a share of the responsibility. During the past hundred
years the American people have opened up a great continent. Starting
with nothing but their courage and great natural resources, they have
built up a magnificent nation. In this joyous march from the Atlantic to
the Pacific the sinews of war consisted largely of credit. We as a people
have demanded free and bountiful credit. We have not been willing to
tolerate centralization or restriction of this credit. In developing
our cities and towns and farms, and in building our homes and our industries,
we have insisted that banks should loan liberally at all times. From the
days of Andrew Jackson and the Bank of the United States, there has been
a prejudice against undue centralization of banking, and the people have
seen to it that in ever3, one of our States the legislators granted bank
charters freely. During the period referred to we have had a number of
economic crises due to the fact that we moved too fast and had to slow
up and take breath. laut after each of these periods of depression the forward march was started again at the same pace, and banking reform has
been possible only after slow and painful effort and in all our efforts
for a better banking system in the future we must be realistic enough to
remember that human nature changes slowly. The people demand banking
service. The bankers must provide it. We must find a working compromise
between free and easy banking, which results in period distress, and a
system so loaded down with laws and regulations that, while it may be
theoretically perfect, it will in fact fail to provide the freely flowing
life blood of industry and agriculture which is its chief reason for existence.
The records show that bankers have repeatedly raised their voices
in protest against the easy granting of bank charters, but these bankers
have been in the minority and public enthusiasm has swept over them. There
is a vivid and interesting case on the records of one of our Northwestern
States in which a solid old banker of German origin refused to make what he
considered unsound loans in his community. A group of citizens gathered one
evening and painted the front of his bank a bright yellow and then visited
his home with a rope and told him that his conservative type of banking was
not desired in that community and forced him to sell his bank and leave
town. The claim is not made that all bankers have been c.nservative. Many
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Federal Reserve Bank of St. Louis
211
ijages 4-5 (contd.)
have doubtless followed the popular trend. They were Americans and
were carried along with the main current of American activity. But
there has never been lacking a conservative minority who have always
both preached and practiced sound banking in this country. * * *
The bankers also know that a very definite share of the responsibility for the present situation rests upon the Government itself. Banks
cannot be opened without obtaining Government consent through a charter.
Iederal charters have been too freely issued. Charters have been issued
in many of our forty-eight States to persons without any banking experience
and with inadequate capital. * * *
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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
Pa.Re 8
* * * Under our present system, where it has been easy for banks
to obtain charters, irrespective of adequate capital or management, and
with little prospect of successfal operation, it must be obvious that
a deposit guaranty system will further encourage the establishment of weak
institutions and tend to tear down everything that the government is now
trying to build up. It gives the banks no way to protect themselves againt
mismanagement or fraud on the part of those who.mliabilities they are
obliged to assume.
COMMENT ON DEPOSIT GUARANTY
Page 40-4Prof. E. W. Kemmerer, Research Prof., International Finance at
Princeton U. in an address before the Svgs. Bk. Assn.
of wass. on Sept. 14, 1933)
"If tne experience of guaranteeing bank deposits previously obtained
ranging over a period of 23 years in eight of our American States, in all of
which the aeposit guaranty system failed, is any criterion, the burden
upon the guilranty fund is likely to increase as time goes on, rather than
diminish. If the deposits of most depositors are as safe in one bank as
in another, by reason of the government giumanty, a continually increasing
proportion of bank customers are going tp keep their deposits and do their
banking business at those banks that are most 'liberal' in their loan policies.
For it is to be remembered that the weak banks get the same insurance as the
kinds of insurance, the bad
strong ones, and, unlike the situation IS
sIsurance than the good one. This means competition
risk pays no more for
among banks in slackness in the granting of loans. The bank willathe loose
credit policy gets the business and the bank with the careful, cautious credit
policy loses it. The slack banker dances and the conservative banker pays
the fiddler. If the conservative banker protests, the slack one invites
him to go to a warmer climate. Soon all are dancing and the fiddler, if paid
at all, must collect from the depositors or from the taxpayers."
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Federal Reserve Bank of St. Louis
214
•
/"Lip-741.7
SOURCE:
/1,..-/.-J
REPORT ON BANKS OF DEPOSIT & DISCOUNT, ETC. - N.Y. 1935
Page 5,
Central control will also enable Federal Reserve and government
authorities to bring about needed consolidations of institutions,
thus eliminating unprofitable units with resulting benefit to the
system as a whole. Likewise, it will be possible to prevent the
organization of banks in communities where no need exists.
.Pa_ge 13
12. Inter-bank Deposits
The present restriction as to the amount of deposits which a bank
or trust company may carry with another such institution should be
liberalized.
Page 24 (Banking Board)
*
*
*
It is significant that during the past year no applications have
been made for charters by banks or trust companies, or for authorizations by private bankers. It is also to be noted that applications
for licenses for new branches have been made in the present
calendar year by only three domestic banking corporations. When
and if such applications come to be filed in former numbers, the
Board, in the absence of definitive legislation, will be faced with
the problem of determining the conditions under which safe provision can be made for the extension of banking facilities to the
people of the State.
Page 42
RESOLVED, That Sections 42, 43, 153, 170, 218 and any other provisions of law relating to the rendering or publication of periodical
reports of persons or corporations subject to the supervision of
the Banking Department are hereby suspended and shall be deemed
to be inoperative until further action is taken with respect thereto
by this Board; and further, that the Superintendent of Banks is
authorized and directed to omit the usual call for such periodic
reports for the second quarter including the months of April, May
and June of the year 1933; and further, that the action of the
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Federal Reserve Bank of St. Louis
248
-2-
Report on Banks of Deposit & Discount, etc.,-N.Y. 1933
Page 42 (contd.)
Superintendent in omitting such call for the quarter including the
months of January, February and March of the year 1933, pursuant to the resolution of this Board adopted at its meeting held
March 7, 1933, is hereby ratified and approved. The said resolution, which reads,
"RESOLVED, That this Board hereby suspends, until it indicates otherwise, all provisions of the Balking Law requiring
the rendering of reports or the examinations of banking
institutions subject to the supervision of the Banking
Department."
is hereby revoked as of this date and shall be ineffective hereafter
but revocation thereof shall not affect or in any manner render
unlawful or improper any action heretofore taken thereunder.
Adopted June 8, 1933.
Page 74 (Amendments passed during regular session)
Senate Int. 1379
Senate Print 1485
This act amends the Banking Law to create Sections 101-a and
181-a of the Banking Law, providing that where a bank or trust
company is to be organized to transact business at a place occupied
by a banking institution in process of liquidation or in contemplation of liquidation, the Superintendent and the Banking Board
may act immediately upon the application for the charter without
requiring the filing and plblication of notice of intention toOrganize, which in other cases is required of the incorporators of a proposed bank or trust company.
Senate Int. 1844
Senate Print 2159
This act amends the Banking Law to create subdivisions of Sections 106, 185 and 292, which authorizes banks, trust companies
and industrial banking companies to issue capital notes or debentures when so authorized by the Superintendent of Banks.
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Federal Reserve Bank of St. Louis
-3-
Report on Banks of Deposit & Discount, etc.,-N.Y. 1935
Page 77 (Proposals for amendment to the Banking Law which failed of
enactment)
Senate Int. 68
Senate Print 68
Proposed to add new section 490-a, and to amend Section 492
of the Banking Law to permit merger or sale of assets of banking
institutions without consent of stockholders, where Superintendent
certifies an emergency exists.
Senate Int. 69
Senate Print 69
Proposed to amend Sections 108, 139, 190 and 222 of the Banking Law to prohibit the making of loans to officers of banks and
trust companies by their own institutions.
Senate Int. 70
Senate Print 70
Proposed to amend Sections 108 and 190 of the Banking liaw to
limit the extension of credit by banks and trust companies to corporations affiliated with such institutions.
Senate Int. 85
Senate Print 83
This bill proposed to amend Sections 110 and 195 of the Banking Law to authorize banks and trust companies to establish branch
offices anywhere in the county in which their principal office might
be located and in adjoining counties; and to permit banks and trust
companies having capital and surplus funds of $25,000,000 or
more to establish branches anywhere in the state. No such branch
could be authorized under this bill in towns or cities already served
by banking institutions except through the process of taking over
existing institutions.
Senate Int. 150
Senate Print 131
This bill proposed to authorize the Banking Board to impose
requirements for the segregation of thrift accounts in commercial
banks.
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Federal Reserve Bank of St. Louis
•
SOURCE:
ASSOCIATION OF RESERVE CITY BANKERS--Commission on Banking Law
and Practice
Bulletin No. 2
July 24, 1933
Page 8
,, the
:
In view of the fact that the strong banks of the countrof
a
wide
section
and
Federal Reserve Board, the Treasury Department
Your
it
pass?
did
why
plan,
public opinion was opposed to the guaranty
banking
A
faulty
thought:
Commission suggests the following line of
system was responsible. As nearly as we can appraise the opinion of
the man on the street, it is something like this. He ows that a bank
He knows
i
gency.
charter cannot be obtained except from a Government P
that when the sign "Bank" is put over a door that a Government agency has
endorsed that establishment and permitted it to accept deposits from any
man or women who may choose to enter. It is a further fact, that the
average small depositor has no basis for discriminating between a safe
bank and an unsafe bank. If we were to provide him with a statement of
ank and all the supporting documents he would still be unable to form
orrect judgment as to the safety of the institution in question. When,
a:
th°
in these circumstances, thousands of banks close, involving heavy losses
to depositors, the average man feels that a severe injustice has been
perpetrated. A man's savings are almost as important to him as life itself,
and if, through no fault of his own, his deposits are lost, he cannot be
expected to do otherwise than raise a clamor against this injustice. It
Is a public menace like unsafe grade crossings, or fire hazard, or reckless
automobile driving, from which the small depositor has a right to expect
protection from those in authority. From millions of men and women in this
situation a demand has arisen that their deposits should be protected. As
long as bank failures are permitted to continue, this demand will exist. It
is our belief that in meeting this demand present legislation has gone too
far. It attempts to protect the deposits of the wealthy man and the large
corporation, and of the Government itself, which are in a position to choose
sound banks and who are not entitled to such protection. But this does not
alter that the system has been faulty and has been the cause of great losses
and deep human misery.
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Federal Reserve Bank of St. Louis
217
&OURCE:
THE CALIFORNIA BANKil--iUNE
SORE THOUGHTS ON THE FUTURE OF AihRICLN BANKING--by Albert C. Agnew,
Legal adviser)Fed. hzs. Bank, Can Francisco
Page 194
* ** ** * *
Federal Res4.rve rwakneas
Since the lowering of capital regiuireaents for :10,1o:it:I ben1-..", in
constant race betweea t'ae State systems z,ne, the
1900, we have witnessed
national system for liberalization. Each lowering of standards on the one
hand has been met with a similar effort on the other. Nor have!tb
privileges of voluntary membersnip in the FedarL1 heserve System served to
unify banking control, for only about 7 per cent of the State institutions
have availed themselves of membership. Natioaal banks are free to leave
nks
the sistem at any ti.fie by convertini, to State charters, and Ststc
which are ,aembers mu leave on aix months' notice. All Federal Reserve
membership is thus voluntary and the authority of the Federal Reserve System is weakmmed by the fact that its members are in a position to escape
restrictions' or supervision by leaving the system.
s be root of our
odpod' p1 bankin
I submit to you that this
banks must he
commercial
all
it„
eliml,nate
difficulty and that in order to
ion under
through
compulsor_overat
hugAht under unified control either
Federal
Reserve
the
in
mpmbership
national charter or through oblikstor:y
System.
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Federal Reserve Bank of St. Louis
296
•
The California Banker—June 1953
SOME THOUGHTS ON THE FUTURE OF AMERICAN BANKING--by Albert C. Agnew,
Legal Adviser, Fed. Res. Bk., San Francisco
Page 194
One of thc first efforts of the national system to meet the
competition of State banks was the reduction in 1900 of the minimum
capital required from $50,000 to $25,000. National supervisory authorities, as well as those of most of the States, have long been empowered
to refuse charters if for any reason the proposed bank did not seem
necessary or reasonably certain of a chance to succeed. However, the
competition between the State and national systems and the solicitude
on the part of those in charge of each for the number and im_,ortance of
the banks under their respective jurisdictions, has led to laxity in
the granting of charters in the first instance and in an over-indulgent
attitude toward the conduct of the institutions after their organization.
Charters have been granted by both the State and national authorities
with little regard either for the necessity of the institutions, its
chance for earning a livelihood or the personal qualification of the
applicants. A few instances will illustrate this truth.
Far Too Many Banks
One town in Iowa, with a population of 1500, had four banks in
1921, and one in 1931. A town in South Dakota, with a population of 300,
had one State bank when the Comptroller of the Currency granted a national
charter. The result was two banks, neither of which could survive.
Another city in a midwest State, with a population of 600, had three
banks; now it has none. One county in a middlewestern State, with a
population of 10,000 had sixteen banks. It now has two. Along a railway
In Montana for a distance of one hundred miles, there was a series of
N•
towns, five or six miles apart, ranging from 250 to 100 population. With
one exception, each of these towns had two banks and several had three.
Needless to say, under these conditions, the institutions were foredoomed to
failure, with all the misery and loss of morale and confidence which attends
any bank closure.
Between 1900 and 1920 the number of banks in the United States increased 118 per cent, while the population per bank decreased 35 per cent.
In this same period the number of banks in certain sections of the country
increased over 400 per cent, whilein those same sections the population
per bank decreased 68 per cent. The capital required under the laws of SOME
States has ranged as low as $5,000, and in certain jurisdictions, until
recent years, the State authorities were without any power to deny an application for a bank charter, and having granted one, had no power of
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Federal Reserve Bank of St. Louis
29?
Albert C. t.gnew
Page 194 (contd.)
supervision whatever. What has been the logical and inevitable result
of this mad scramble for superiorit,) between the State and national systems? The birth of many institutions inadequately capitalized, inefficiently managed, without the possibility of adequate earning power, and
doomed to failure from their inception. The country has been aver-banked
through an unregulated and sporadic growth of both State and national
institutions. This in turn has been due, first, to a lack of any
nation-wide policy on the subject of banking, and second, to the unnecessary and unwarranted competition between forty-eight separate State
systems on the one hand and the national system on the other.
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Federal Reserve Bank of St. Louis
•
SOURCk:
THe CALIFORNIA BANKERe-JUNI. 19!!
SOME THOUGHTS 05 TH.' FUTURE Of AMERICAN BANKING—by Albert C. Aping
Legal Adviser, Fed. Res. Bank, an Promises
?bee 1,95
* * * *** *
Dteert.mental Bankini. "Unsmpd"
Sext, i sugceet for your celetel cansideretion the complete and
coepulsory separation of comnerelAl banking from investment banking,
coeeonly referred to es *savincs banking.* The former her to do with
liquid credit emanating from treee; the latter with capital credit
arieing from t4e eaelrege of the meeeee 'rho reek al simple and safe means
of iavesting. at iuterest their eceumuleted funer. The functions of the
two kiwis of depoeit credit ere dissetricully opporite en(' their inter:Angling in One lastitut].ons operated by cite ret of officers!, uncier the
guibe of eepertecetel banking or effilieted commerciel end savinve btinking,
aketin and etedn led tc divaster.
Experience huz rho= plainly thet a bank having deposits payable
on demand cannot eafely car/7 savings accounts without erintaining throughout E degree of liquidit5 -which, of necessitl, prehibite the investment of
funds in fixed assets and capital acceunts. The bre* doing a colitined
commercial and savinge busineee le forced either to seek, through capitel
comaitments, a high rate of return on savings funds loened in order to
compeneete for the interest paid on such depoeits, thus jeopardizing its
position in relation to its comnercial deposits payable on dement°, or, in
seeking meximus liquidity for savings as well as commercial fume, is forced
to divert capital credit from its proper function.
Separatien of Functions
The inauguration of savings accounts in national banks was an error.
The inclusion in 191 in the fictional Bank Act of provisions permittini such
banks to leed on real eatate„ even to limited extent, was a mistake; a
mistake constituting one of the various efforts to place netionel banks on
a conpetitive basis with the banks of the forty-eight State systems, under
the dual system of control, to the evils of which I have previonely referred.
The aan who makes a deposit in one of two adjoining windows, the onc
marked "Savinge" 8.114 the other marked nommercieln, fails entirely to
distinguish between the two and ooee not know nor care about the type of
investeents in which 1i. deposit will be employed. When, upon desend, he
is told that the bank h(s decided to exerciee its right of receiving notice
prior to the payment of his sevings deposit, he concludes, however wrongthat his funds ere no longer safe end the entire inetitutien, comaerciel as well as emvings, becomes
target for his attack and hi: comeente
as to its solvency. Departmental benkini end the intermingling of savings
or time accounts end comaercial deposits in one institution or in separate
institutions operated with one management and identieel or practically
./t)
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Federal Reserve Bank of St. Louis
Albert C. Agnew
Page 195 (contd.)
Identical stock control, are unwieldy, uncemomic ana
extremely unsafe
and, in my opinion, should be prohibited by strict
manobte of a uniform
law ,..overning all commercial banks.
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Federal Reserve Bank of St. Louis
SOON&
TIS CALIFORNIA BANKENe-JUME 19!7
SONS MOMS OS MR MOMS CO' AMERICA, BANVE,-by Albert C. Agnew
Legal Advisor, Fed. lea. bank, an Francisco
?ages 195-94
I have no hesitation in designating as the chief and underlying
cause of weakness a cause from wnich most of the other difficulties
encountered have flown, either directly or indirectly--the existence
of the multiplicity of State banking systems mild the conpetition between
those systems and that governing national banks. I do not intend to
inply that, upon the correction of this condition, all the other ills
to which the system has been heir termld be cured. On tho 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 z-tvtes is the louical end essential
starting point.
We have within the continental United States 48 separate and
with
distinct State banking systeme, each governed by separate laws,
in
(or
policy
differing supervisory control, each governed by separate
many instances no policy whatever), and all competing with the national
system for supremacy in number of banks end total resources.
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Federal Reserve Bank of St. Louis
295
'The Banks, the States and the Federal Government"
by Bray Hammond
Economic
Review* - December, 1953
American
'The
The assertion is frequeetly made that the federal goverameat has no constitutional right to interfere with state banks and end the pretreat rivalry of
jurisdictions by assuming exclusive oontrol of all banking. Contrary to this
assertion, the terms of the Constitution require such an assumption; for exclusive control of the monetary functions has been bestowed upon Congress and
banking is a monetary function. Before the Civil 'Mar, ,,hen note issue abuses
by the state beaks frustrated federal control of the monetary system and made
a chaos of the currency, it was commonly held by authorities that state banks
were unconstitutional. The same prectical, economic, and constitutional considerations that were involved in the question of state and federal banking
control at that time, when beak liabilities were repreeemted chiefly by
circulating notes, are involved now when bank liabilities are represented
chiefly by demand deposits.
At the Onavention of the American Bankers' Association in Los Angeles in
October, l9151:„ the state bLnkers declared theerevrs 'unalterably opposed to
the so-called unification of all banking under federal control in place of the
present dual syutem of state end national banks.' Mr. Felix McWhirter, retiring president of the State lank Division, said in his address: "You have
no doubt been astonished, as have I, to observe the thought seriously presented
that Congress has the constitutional power to prohibit state chartered
financial institutions from operating at all.... The thought, of course, is
so grotesque as to be little short of amusing.'
**** * * * *
* * * * * * National charters had to be decorated with new powers is
order to make them attractive. In 1900 the minimum capital reQuirements for
national banks were lowered to t25,000. In 1913 lower reserves were allowed
for savings deposits, permission was given to make real estate loans, and
fiduciary powers were authorised. Disturbed especially by the latter Lnvesion
of their field, the state tasks struck back with persistent litigation
purposed to break up the emercise of fiduciary rowers under national charter.
They yielded only grudgingly from their boycott of the federal reserve system
after the President of the United States haA appealed to them to support it as
a gesture of wartime loyalty, and after the pressure of war conditions had
made it apparent that the system might prove of benefit to then. And they
resisted the effort to procure for national banks the power to establish
branch offices, although in many of the states they had that power themselves.
******* *
To suppose that if there had been no rivalry between the states and the
federal government, there would have been no impairment of bank deposits, is
probably too naive; but it is madabitable that specific Amps in our banking
standards favorable to such impairmost have been the direct outgrowth of the
effort to make national charters more attractive to bankers thes state charters.
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Federal Reserve Bank of St. Louis
291
011111.
•1•110
For every practice that emperiemce has shown to have been
bad, legislative
encouragement is found. Moreover the effort to keep even with
the states
still persists; and the deposit insurance provision of the
Banking act approved
June 16, 19'53, was justified in the aind of Semator Glass,
according to the
press, only because he felt it would give the national system a
decisive
competitive advantage over the state systems. The same Act
exempts from
personal liability the stockholders of national basks organised
thereafter.
But it is doubtful if the rivalry between jurisdictions will
ever be
satisfactorily solved by enticements. This is a game two can play.
In 1929
the superintendent of banks in Massachusetts, where banking practice
and
supervision have been of no law order, acknowledged the care that was
taken
to avoid legislation that should bear too heavily on state banks. For, he
said, 'if theyttind that the state legislature is inclined to be a little
harsh on them, t will be very simple for them to convert into a
national
bank and be received with open arm!til
********
bit of course the point of constitutionality or unconstitutionality is
in the filial analysis an argument rather than a reason. The question is
not
an abstract one of jurisprudence. It is in its practical aspect
a question
of the political resistance to a chose which so far as commercial banks
are
concerned would mean the establishment of a single inescapable jurisdic
tion over
then, and so far as the states are concerned the surrender of what they
have
always considered am important element of their sovereignty.
In all likelihood the change would seem unwelcome to both, at least in
prospect—though the banks are now on record as finding modification of the
present irresponsible control 'essential no matter at what cost of impairment
of state sovereignty.' As for the states, the change should seem reasonable
to them if viewed ha a division of functions. For while demand denosits come
under the federal government on grounds of expediency and constitutionality,
because their use in monetary payments makes them a concern of the nation as a
whole, the same is not true of fiduciary business and savings banking. In the
ease of fiduciary powers, indeed, there are now no federal laws to be followed:
state laws and administrative authorities govern the exercise of such powers
even by balks which belong to Os fithoral jurisdiction. But even assuming
that there is inconvenience and loss in the administration of these functions
by the several forty-eight states, the need for unity is less taperious with
them than with the monetary function.
Accorrtinly, if the federal gevernownt monopo1ist:4 control of commercial
banking as a monetary function, and left trust business and savings banking
to the states, it would merely be conforming to the Constitution and justifying
the magmeity of the Federal Convention. The present conflict of jurisdictions
wed be avoided and the country would gain at last a homogeneous and unified
monetary system. To be sure, in the light of the errors and emissions that
have been made in the past, we ems have no confidence that when such a division
is made all difficulties will have been solved; there is for instance the
possibility of legal subterfuges with savings deposits, to say nothing of
other problems to arise NOS the evolution of economic practices in general.
But that is no reason for allowing the present misarrangement to continue.
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Federal Reserve Bank of St. Louis
Report of Harvey Couch (Director R.F.C.) as Chairman of Nonmember
Preferred Stoci:Board - November 3, 1933. (Ditto copy of reoort in Gov.
Black's capital rehabilitation file)
"(13) In a great number of states the Superintendent of Banks is
taking the position that any bank which qualifies for deposit
insurance will not be required to correct its position, the
justification for this being that the Superintendent of Banks
does not agree with the figures representing the bank's condi'ion as compiled by the F. D. I. C. Examiner."
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Federal Reserve Bank of St. Louis
289
George V. McLaughlin, President,
Brooklyn Trust Company, Brooklyn, N. Y.
40th Annual Convention, New York State Bankers Asso., June 1933.
* ***** * *
two other subjects that I know are of interest to every
There
lunit n banker—supervision and branch banking. On the first, I can may
without hesitation that I am for a unified banking system. As Joe Breerick
knows, state supervisors up to a few years ago yore opposed to it. The
was real competition between the two mystems,Lnot alone in the authorization of banks, but in their supervision. Supervision was entirely too
liberal. The Comptroller of the Currency and many or the enperintendents of
banking throughout the country have hesitated on many occasions to take
necessary action in the affairs of banks where they found practices which,
unless corrected, were certain to lead to trouble.]
I think that the trend is now the other way, but there is still room
for more united action between the Comptroller of the Currency, the superintendents of banks, the Federal Reserve Board and the Federal Reserve
Banks. I believe that if they were all to sit down around the table,
certainly in New York State we ought to be able to rork out the nearest
approach that is possible to a unified banking system.
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Federal Reserve Bank of St. Louis
*** * * * **
105
•
/1-7(--c-,4
/0/, 2/(. AiAz.
•
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Federal Reserve Bank of St. Louis
Annual aeport of the F. D. I. C.
For the Year Ending December 51, 1934.
(Pages 68 and 69)
Causes of bank susdensions. In the case of five of the nine insured banks
failini in 1954, susension wtis the direct result of criminal activities of
bank officers. The remaining four ftilures may be attributed to tx.,.d man4ement,
insufficient business to provide enough earnings for maintenance of a bank, and
internal discord. No specific information htAl been collected regarding the
reasons for the failure of the uninsured licensed bnks width suspended.
Various factors are responsible for the small number of failures of
licensed tn.nks during 1934. The Reconstruction Finance Cororation made larie
Nue available not only through purchases of ca7ital ohlitations but also
through direct loans, and other governmental agencies facilitated the re—
financing and lic:uidation of loans. FUrthermore, the suspensions Which
ed
occurred prior to and immediately submiuent to the bankinif, holiday eliminat
a large proportion of the weak banks. The declines in the volume of business,
characterietic of the downward swing in bwiness
in ?rices and in incoir
activity froa 1929 to 1955 had ceased.
Periods of recovery subsequent to banking crises have In the pest been
rate of
y
characterized by reletively few b?ink failures. The unusuall lop
.
to
continue
expected
be
failure during 19.74 cannot, therefore,
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Federal Reserve Bank of St. Louis
*** *** ****
•
SOURCE:
REPORT ON BANKS OF DEPOSIT & DISCOUNT, ETC. - N.Y. 1934
BANKING BOARD RESOLUTIONS
Page 39
Page 40
21.
Resolved, That no bank or trust company and no private banker,
investment company or New York agency of any foreign banking
corporation shall, directly or indirectly, by any device whatsoever,
pay after December 31, 1934, any interest on any deposit which is
payable on demand:
Provided, that nothing herein contained shall be construed as
prohibiting the payment of interest in accordance with the terms
of any certificate of deposit or other contract entered into in good
faith, on or before December 10, 1934, and which is in force on
that date; but no such certificate of deposit or other contract shall
be renewed or extended unless it shall be modified to conform to
this regulation, and every bank and trust company and every private
banker and New York agency of any foreign banking corporation
shall take such action as may be necessary to conform to this
regulation as soon as possible consistently with its contractual
obligations;
Demand deposits within the meaning of this regulation shall comprise all deposits payable within thirty days and all funds held
by investment companies in connection with the exercise of the
power conferred by subdivision 1 (a) of section 508 of the Banking
Law, which are payable within thirty days.
The Superintendent is authorized to construe this resolution in
such a manner as to require the persons and corporations to which
it applies to conform to the requirements imposed upon banks
which are members of the Federal Reserve System, with respect to
the non-payment of interest upon demand deposits.
Adopted December 6, 1934.
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Federal Reserve Bank of St. Louis
•
=ND
SOURCE:
ASSOCIATION NEWS BULLETIN -- Savings Banks Association of
State of Net York
OCTOBER 18-19, 1934
ADDRESS by Hon. Joseph A. Broderick
Page 16
As to methods, gentlemen, just a final thought: I think we
all realize that our appraisal methods are in need of revision.
*
Page 17
I do not think we need to hesitate to say that there are a
number of instances where there is competition between savings
banks on appraisals, that there is no general policy, there is
of
no clearing-house, there is no conference, there is no way
our
as
far
so
and
checking the capabilities of your appraisers,
to
n
a
positio
in
not
out-of-town banks are concerned, they were
local
of
nce
take advantage of the records, advice and experie
savings bank officials in taking out-of-town risks.
Quite a few of you here understand fully what I have in mind.
To be quite frank, many of our out-of-town savings banks had the
They
same difficulty that many of our commercial institutions had.
through
able
were
they
risks,
local
were fully familiar with their
s to place a
the local appraisers and their own boards of trustee
to the investcame
it
when
but
very good and fair value upon them,
other
communities.
into
go
to
ment of their surplus funds, they had
Gentlemen, is it not possible--and I have said this before, several
the local savings
years ago--to take advantage of the facilities of
to a point
coming
are
banks in the investment of your funds, as we
a
you
are
taking
where you will have funds for investment? If
it
mortgage in a smaller city or town other than your own, isn't
you cannot expect
possible to take it through the local bank? Surely
that you are
think
to
system
past
the
or
under the prevent system
you have got
of
many
What
s.
busines
the
of
going to get the cream
not
Through
did
want.
banks
local
are the mortgage loans which the
of
the
have
means
you
en,
your Savings Banks Trust Company, gentlem
ation
improving the methods used in the past. They have an organiz
there, they will be able to give advice, probably they will be able to
work out some scheme for improving appraisal methods, passing on
appraisal policy, purely in an advisory capacity. I do not think it
will be the intention of the Savings Banks Trust Company in any way to
on,
take over the management of your institutions. That is not their intenti
in
nce
experie
of
benefit
their
the
you
give
to
but it is their intention
different sections of the state.
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Federal Reserve Bank of St. Louis
Address by C. B. Axford
58th Annual Convention, Indiana Bankers Asso., May, 1934.
(The Hoosier Banker, June, 1934)
*** ***
* * * **
What of the problem of really servicing savings as savings? To me
this is a fundamental flaw in the American banking system. We attempt
to call our savings rands both an investment fund and a spending rand.
A period of national readjustment finds our banks under the combined
impact of liquidation as depositors spend their savings to save their
businesses and standards of living. They make the final readjustment
when they break the bank or go broke themselves. We thus prolong aur
depressions as long as we can afford them. We thus subject every bank
to competitive liquidation which can only end when the bank closes or
the banking system collapses, and a stoppage of liquidation ginally
brings us f'ice to face with readjustment to the basis of production unsupported by savings to cover losses. Or we may choose, as we II' ve
chosen in the world over, to depreciate our currency in order to refinance aur resistance to readjustment, until we find that is also the
way to terrible ruination.
But to my mind there is a fundamental problem in the necessity
for freeziag investment funds when we face a period of readjustment.
We cannot do it when these investment funds are in any way associated
with demaad banking. I believe that first principles are sound principles, and that the time is coming when we shall see the commercial
bankers of the United States, realizing the risk of trying to guarantee
savings funds, ready to embrace the mutual savings idea in their local
communes, both in defense of themselves and of their local wealth.
To me this is the most vital question by and large before tomorrow's
American banking. I know that the local community with a properly
operated savngs fund need not fear the terrific liquidation and
wreckage of progressively draining its banks until it has nothing
left but dregs. I know that such communes do not fool theaselves
by thinking that they can live through a depression on yesterday's
money—until they break their banks. But I wonder whether, with the
FDIC fostering the illusion that all rands are demand funds, vs can
really look for a cure of this real error in American bankiag before
the next crisis and crash.
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Federal Reserve Bank of St. Louis
** * *** * * * **
Annual Report of the F. D. I. G.
For the Year Ending Dec. 31, 1934
(Page 34)
Standards of admission. The Corporation should be given sufficient
power to protect itself against incurring excessive risks. For this
reason it should have the right to control admissions to Insurance in
accordance with standards specified in the statute and to require the
withdrawal from insurance benefits of any bank which is found to be
engaging in unsound practices. The standards of admission should
embrace the convenience and needs of the community in which the bank
is located, the capabilities and integrity of its management, the
earnings -ossibilities, and the financial and general condition of th
bEnk. The Corporation shouli not be required to insure deposits in
banks which disregard sound managerial policies.
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Federal Reserve Bank of St. Louis
SOURCE:
THL CALIIORNIA BANKER-4M 193Z
CAUSES OF THE RECENT BANKINL CRISIS ANT) SUGGESTIONS FOR THEIR AVOI:ANCE
IN THE FUTURE--by Alden Anderson, Pres., Capital Nat. Bank, Eaernmentp
Page E59
* ** * *
Build Now for te Future
I do not think we can do better than to pattern after the banking
systeta and practices of our Canadian neighbors. TIvir conditions are
very similar to oariown, only not so large. They have proved their
worth and stability in the fire of experience and have continued their
dividends and added to their surOluses. Their banking practices are
logically and economically sound and their methods end rays we should
have heretofore adopted without hz,ving had to have them show us the
e;azple. Admitting that our banks that are nov open are sound and
capably managed, we still must see thet it will not be possible for a
condition to develop in the future that coule Jroduce a repetition of
whet has happened in the last few years. If we do not do it, because
bank services are just as necessary as post-office services, someone
else will step in and do it. You know what is going on in Washington
today. * * *
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Federal Reserve Bank of St. Louis
"The Future of American Banking" - Address by A. A. Berle, Jr.,
Professor of Corporation Finance at Columbia University
40th Annual Convention, New York State Bankers Asso., June 1935.
When you look at it structurally, you become aware that this factual
unity is perfectly logical. You very well know that when there is competition among you as to credit, the results are disastrous. If I,
desiring to lend money, am very conservative and careful, and do not make
the loan, and therefore, my competitor across the street, looking at it a
little differently and relaxing the care and the caution which has previously been used, makes that loan, I, to keep my funds profitably used,
am in turn compelled to lower my standard. There can be only one result,
the result that credit is being badly distributed in that town. This we
have seen all too often. There, of course, it is obvious that the banking
mentality is perfectly able to cope with it. But is it any different when
you compete for deposits? Is there any sense in having the First Trust
Company on one side of the street competing with the Second State Bank on
the other to draw deposits from one unit to make its own unit larger?
There can be only one result. The net pool is not enlarged. That
can be done only by credit or by the slow growth of population and the
growth of production, in the particular community which you serve.
Competition between the two banks can only end in weakening one at the
expense of the other, to the advantage of neither. The cycle works itself
out when the process is completed and the weaker unit has finally come to
the point where it has to close or merge. * * * *
It is that practice of ours which makes the European look at us with
a singular and somewhat jaundiced eye. He is familiar with competition of
a sort. He is familiar with the great chains which operate in his
territory. But he is perfectly aware that those groups have formally or
informally combined upon such a policy that at no time can competition
become dangerous in relation to the whole situation.
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Federal Reserve Bank of St. Louis
* * it it.
*
SOURCE:
ANNUAL REPORT ON BANKS OF DEPOSIT & DISCOUNT, ETC. - N.Y. 1933
Page 26 (Banking Board)
COMMERCIAL BANKS-EMERGENCY MEASURES
Despite the importance of institutions organized to assemble
small savings, it must be recognized that the commercial bank is
the centerpiece of our credit structure. New bank credit comes
into being largely as a consecuence of the lending and investing
activities of commercial banks, and it is this credit which constitutes the country's principal exchange media. It is this credit
which becomes the income of the rage earners and other classes
who utilize savings institutions as depositories for their savings.
Any obstacle to the free flow of commercial bank credit must
inevitably affect the condition of all types of banking institutions.
There are not many powers of the Banking Board which may be
directly employed to prevent undesirable expansions and contractions in the total outstanding volume of commercial bank credit.
One such power was bestowed upon the Board, however, at the
date of its inception, and that is to regulate the method and standards "for the valuation of the assets" of institutions under the
supervision of the banking department. In the exercise of this
power the Board has striven to avoid the narrow definitions of
asset values that otherwise might have been employed in such a
way as to interfere with the normal flow of bank credit.
After the declaration of a bank holiday by the Governor of this
State in the early part of "'arch, other occasions arose for the
encouragement by the Board of devices to stem the tide of panic
contraction. When it appeared probable that there might be general reliance throughout the country upon scrip as an emergency
currency, the Board foresaw the danger that much of this scrip
might not circulate beyond the confines of restricted areas. At
its meeting of March 6, 1933, the Board adopted the following
resolution: "Resolved, That the Banking Board recommends
that the State be prepared, in the event that the National Government does not take care of the situation, to provide for some
medium to circulate as currency through the State at large .. . .It
By resolution of March 8, 1933, the Board approved the issuance
of an authorization certificate to "The Emergency Certificat, Corporation of New York." Fortunately, the provisions of the Bank
Conservation Act have thus far at least avoided the necessity of
the functioning of this corporation.
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Federal Reserve Bank of St. Louis
SOURCE:
BANKING—Journal of the ABA--August 197,3
Page 27
EDITORIALS
Banking Competition
ONE of the main objectives of the Federal Government in its
recovery program, is the elimination of knock-down, drag-out competition
in industry.
ofsvelt and hi
President
assured a
otnhat produceris muRoast
basis.
m
ke
any
t n
s
o
a
ed
The banking field, more than any other, requires such action, because
a strong banking system is essential to healthy industrial growth. Fortunately the machinery for cooperation among banks already exists in the verious
clearinghouse associations, the state banking associations and in the Americnn
Bankers Association.
Long before it became the stated policy of the Government at Washington
to discourage frantic, desperate competition between producers of salable
goods, the American Bankers Association was urging the organization of
clearinghouse associations for the purpose of preventing harmful competitive
practices.
PUBLIC BENEFITS
IN every locality where banks have succeeded in overcoming obstacles
and have agreed on a fair code, the public has been the chief beneficiary.
There are two excellent reasons why banks should act vtithout delay
to organize clearinghouse associations where uuch organizations are not already in existence. In the first place such ection fits the spirit of
the operation of the new
the National Recovery program and is essential to
•
bank act; and, secondly, bankers have learned the lesson of non-cooperation
from bitter experience.
There is no other .way--no better way,- at least-- to assure a sound,
profitable banking system than by united action.
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Federal Reserve Bank of St. Louis
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 43
As between savings banks and commercial banks, for instance,
there is a real problem. Where you have, as we do in several parts
of this state, one strong savings bank and two or three commercial
banks in the immediate vicinity,the instinct of the depositor would
probably be to draw out all but $2,500 from the savings bank and
distribute the balance in time or thrift accounts in the commercial
banks. Without indulging in any bias in favor of the savings banks,
feel of coursc that that is wholly unsound. It makes for a still
further mingling of the commercial with the savings banks' function,
whereas sound finance theoretically and practically calls for the
untangling of those two and their segregation so far as possible.
Again, there ought to be recognition that there is a difference
between the savings bank's money and the time or thrift account money
in a commercial bank which could be properly recognized by a
differentiation in the rate of interest.
The commercial bank ought not to be encouraged to compete with
the savings bank, just as the savings bank ought not to be encouraged
to compete either with the commercial bank or with, what is more, truly
investment money, which ought to go into the bond market. We all of
us have sinned in that respect. I feel that some of the commercial
banks have unduly asked for savings bank money which they were really
not in a position to handle. I also feel that we, during the time
of the post-boom period, accepted funds for investment which were not
properly savings bank money and that we began to compete with the bond
market. We know better now, and with the wisdom which has come with
experience, I hope that the banking community, with the kindly assistance
of the Deposit Insurance Corporation and its allied bureaus, can deal
with the situation as seems necessary.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Proceedings Missouri Bankers Association—May 1933
CONCERT OF ACTION BY COUNTRY BANKS FOR SAFETY AND PROFIT--address by
Haynes McFadden
Page 110
The faults to which I wish to call attention on the part
of country banks are faults that can be corrected. They embrace
the elimination of free services, the discontinuation of competitive
loans, and by that I mean a loan you take to keep your competitor
from getting it, the payment not only of high rates of interest
on accounts but the payment of interest on too many different kinds
of accounts, the fight for volume without profit, * * *
SOURCE: THE CALIFORNIA BANKER--JUNE 1932
RECONSTRUCTION--address by F. J. Belcher, Jr., Pres. First Nat. Tr. Rt
Svgs. Bk., San Diego
Page 298
The Sin of Poor Bank Management
And while we are confessing our faults, it may be well to
consider another criticism to which in my opinion the bankers are
subject, and of which the public knows little. That criticism is
poor bank management. We have been following another false god.
Under the spur of keen competition, bankersI during the last twenty
years, have been vying with each other in attempting to furnish the
public with almost every conceivable form of banking service, with
little or no consideration of the cost. The height of our ambition
seems to have been not to have the soundest, most conservative bank
commensurate with the best banking service, but to have the biggest
bank measured in terms of the amount of mone:,/ we owe to our depositors.
We have erected palatial banking houses, with which to impress
and serve the public. Through personal contact, intensive advertising,
often by means of elaborately planned drives, we have solicited every
form of bank account without regard to size, or activity.
Fairy Godmothers in Public Service
We furnish the public with its principal circulating medium in
the form of bank checks, we keep their books for them, handle escrows
and collections for them, we often provide them with safekeeping
facilities for securities, to say nothing of numerous minor services
which we have devised. All at no cost to the customer, but at great
expense to the bank.
In the average bank, I venture the assertion, at least fifty per
cent of all commercial accounts are carried at a loss. We are penalizing
the good bank customers and making them carry the load.
During that same time the costs of doing business have greatly increased, salaries have increased, cost of materials has increased, and
the cost of our merchandise, in the way of interest paid on bank deposits,
has increased.
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Federal Reserve Bank of St. Louis
•
SOURCE:
NEW YORK STATE BANKERS ASSOCIATION - 193
REPORT OF COMMITTEE ON REGIONAL CLEARING HOUSES
Pages 111-11-1.3
Therefore, will you bear with me while I read this paragraph
from the President's speech on the subject last January:
"I would recommend", says President Baker, "the establishment of fifteen or more regional groups or clearing house
associations which would cover the entire state. If the
clearing of checks can be expedited through these groups,
there is value in constituting them as clearing house
associations, for their mechanical usefulness will tend
to keep them alive and will be an every-day reason for
their existence during times when there are few real
problems to be dealt with. These associations should have
their own rules and regulations but their constitutions and
by-laws should be similar so that there will be uniformity
of purpose and equality of standards. The affairs of these
associations should be in the hands of committees elected by
the members, who would agree to abide by their decisions. The
associations should have the power to examine the members and
require periodic reports as to their financial condition. They
might maintain complete credit files for the use of their
members covering the borrowings in the territory and could
made investigations of commercial paper names. Detailed information in regard to securities could be assembled, and a general
service maintained to assist the members in the operation of
their bond account. I am rathbr of the opinion that the State
Banking Department and the Comptroller of the Currency would
be willing to assign examiners permanently to these associations
which would result in the closest kind of cooperation. As you
know, the American Bankers Association has been working on this
idea for some time, but you may not know that it has been in successful operation in several states in the Middle West and that
that banks report most satisfactory results. The expenses are
small. What each contributes is infinitesimal compared to what
it gains. * * *
Pages 114-15
You gentlemen will see that this involves a rather long-time
program. It can't be done too hastily. There must be a very
broad foundation laid and I believe that at the present time more
than at almost any other time, when our method of banking is so
thoroughly under attack, and when we must all acknowledge that
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Federal Reserve Bank of St. Louis
New York State Bankers Association-1932 (contd.)
Paps 114-15 (contd.)
our method of banking has broken down more than ever before,
if we measure it by the number of failures and the proportion
of failures we have had, the bankers should organize themselves for constructive work along these lines of bank management and bank co-operation.
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Federal Reserve Bank of St. Louis
THE COMMERCIAL & FINANCIAL CHRONICLE---ABA Convention--Oct.,1932
;
•..v4
(
Report of Committee on Resolutions,r,by Chmn. L. A. Andrew--Opposed
to Broadening of BrE,nch Banking Powers of National Banks as
Proposed in Glass Bill
P. 60
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Federal Reserve Bank of St. Louis
**
* * **** *
*
Amongother subjects our dual system of State and
National banking is being considered and there are
far reaching proposals affecting the status of each
system. LAs a public benefit and in the interest of
banking as a whole, we believe it is desirable at this
time that controversies between banking groups be
eliminated. We believe there should be a suspension
of all endeavors to produce by means cf legislation
competitive advantage for either 6tate or National
j
:
banks
108
Proceedings of 31st Annual Convention
National Aso, of Supervisors of State Banks
Philadelphia, July 1932
** * ******
M.
Bristow (Virginia): Mr. President: I don't know that I can
add a great deal to the discussion. I believe all those who have attended
the last several conventions know practically where I stand. I had my
say at the Boston Convention. We might as well stay at home if we are
not in favor of the state system, so, of course, any legislation which
would have the effect of undermining the state system is opposed by us.
There is one thing I would like to bring out with a little bit of
force. I want to resent--as strong as I know how--all the statistics put
out saying we had so many thousand banks in 1920, so many in 1930, 1931
and 1932, and at the end of the calculation, that we have had seven or
eight thousand failures and therefue something is radically wrong with
the underlying theory. Gentlemen,Lwe have been permitting banks to be
chartered in this country like druriken sailorp--certainly banks were
chartered which never had a chance to succeed4 Failure was written
there when they were started and there is no need in our getting exercised over a great many of these failures. Until 1929, 90% of the
bank failures were banks which should never have been chartered. I
segregate between 1929 and since then, since when conditions have arisen
to change the picture. I don't know that my state is one I could use
as typical of all, but we were carelessly chartering banks in my state
until four years ago. No one in the state had authority to refuse a
bank to organize--if our record is pretty good, it is just because we
got a break. If, at the end of this depression, our state has a fair
record it will be due to the fact it was not over-banked at the start
and since then we have been putting on the brakes to prevent too many
banks.
The number of bank failure 9 just proves one thing--we are too careless in chartering banks. Some of the banks that have failed are no
more to be charged with doing a banking business than if a grocery store
failed and you painted the work "Bank" on the door and charged it up as
a bank failure. The result of statistics has proven the unit bank is
all wrong, and I desire to resent it.
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Federal Reserve Bank of St. Louis
********
*
118
•
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Oct. 1952
Annual Address of the Pres.--H. J. Haas, VP First Nat. Bk., Phila.
* * ***** *
!Who is to blame if Government officials, in both the State
and national systems, for over a period of more than 20 years,
permitted the organization of great numbers of banks with insufficient
capital or in places where they never could be successful? In many
instances in all parts of the country this took place over the protest
of the well established banks. But what happened was this--the applicant
for a charter would get the most influential pocal sponsorship and the
protest of the well established banks was made to appear as selfishness on
their part; however, we all know now that except in rare cases they acted
for the best interests of the public. Before the depression began in 1929,
failures of the class of banks I have in mind wert zaising the mortality
ratio to a point that was causing serious public distrust against sound
banking. It is true beyond question that if a great number of uneconomic
banking units had not been allowed to enter the field, banking failures
would have been localized and would never have become a national problem.
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Federal Reserve Bank of St. Louis
119
Referenda. No. 63 on the 'sport of
the Special Oemmittee on Bamg, Part II
Chmmber of Commerce of the V. S. A.
December 9, 1952
minority Report
It is desired to specifically and emphatically dissent from the re,commendation of the committee:
National banks, unlimited by restrictions of state laws, should
be permitted by federal statute to establish statewide branches, provided that in any state continuing to prohibit statewide branches of
state banks the federal statute should not become effective for a
period of six months after its enactment,
as well as from certain supporting statements pertinent to its reeommendations.
It is obvious that those members of the Committee permitting their names to be
affixed as signing the report favor what is now known as Section 19 of the
third lraft of the Glass Bill, S. 4412. Should their recommendations become
effective through legislation national banks would be permitted to establish
statewide branches in every state, regardless of the branch powers granted
state banks--even, in fact, in states where it has been specifically declared
as the rublic policy of the sovereign state that branch banking shall be
absolutely prohibited.
This would be as flagrant an invasion of state rights in the financial
field by federal political power as has ever been attempted.
It would force almost unrestricted branch banking on the states regardless
of local sentiment.
It woulJ give such competitive advantages to national over state banks
FIR to lead definitely in the direction of a single banking system in the
country in place of the ..resent system of state and national beaks.
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Federal Reserve Bank of St. Louis
*** *****
Felix M. Mcwhirter,
Pres., Peoples State Bank (NM)
Indianapolis, Indiana.
165
•
Referendum No. 65 on the Report of
the Special Committee on Banking, Part I
Chamber of Commerce of the U. S. A.
Deleemher 9, 1932
Argpmente is the Negative
The Committee's report and reeemmeadations appear to proceed upon the
theory that for esehmesses which have appeared in the basking system of the
country the individual banks of the country have been primarily responsible
and, therefore, the remedy is to give to the federal reserve banks and the
Federal Reserve Board enlarged powers of control over national and state
banks that are members of the federal reserve system.
Unificati9n
In some quarters this point of view is developed to such an extent that
there is advocacy of federal legislation which would inaugurate a plan for
so-called *unified banking*, which would do away with state commercial banks
supervised by state authorities and cause all commercial banks in the country
to be in a national mites, controlled by the federal reserve beaks and the
Federal Reserve Board. The Governor of the Reserve Board, influential members
of the Senate Committee on Banking and Currency, and some prominent business
mm, have expressed themselves as in favor of such legislation. A business man
who is eminent for his public service said, in 1951:
leaning of Valfiaation
*If I were speaking in terms of theory * * * / would say that
all commercial depoeit banking in the United States should be
carried on under one law--that examination of banks and their controls should be under one authority. Their reserves should be
mobilised in the federal reserve system. Then we scald develop
for the country as a whole a sound banking system, and definitely fix
responsibility. That would mean that all banks of derosit, as
distinguished from savings, dhould be national banks.
Present 5itil4i011
"As it is now, banks are chartered both by the national government and by each of the forty-eight states. They are in competition,
each endeavoring to offer the most attractive charters and the most
liberal laws, to say nothing of the liberality of administrative
officials in interpreting the laws. The nationnl banking act has
to compete not only with the mest liberal ones. Consequently, there
Mae been a constant tendency to liberalize banking laws and to
meaken their administration. In such cases the argument is always
made that it is desirable to liberalire the law so as to enable the
banks to be of greater service to borrowers.
Safety pf Deposit.
PThe first question always regarding banks doing a demand-deposit
business should be the safety of the deposits and the ability of the
bank to return them to depositors blatantly uron re-uest, unless they
be time deposits. No thought of service to borrowers should be peraitted to impair the safety and security of depositors. Banks of deposit are, after all, primarily custodians of liquid Dania. Only such
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Federal Reserve Bank of St. Louis
181
- 2use of such funds should be permitted as may be oonsistent with the
interests of the depositors.
Awilogy of Currency
*In the early years of our government, our business was largely done
by currency moving fro* hand to hand. It was felt at the time, and
properly so,
so that se should have a national and uniforn sorrow. Consequently,
was given power to coin money and regulate the value
thereof. This power was made effective as to paper mummy by the National
Bank Act. Now our business is carried on mostly by transfers of bank
deposits, curromey forniag only a small part of our maw transfers. If
control of our currency were necessary in the beginning by the federal
government, control of our beak deposits by it now would seem desirable.
re have transferred, either affirmatively or by acquiescence, many powers
to the federsl government which ought not to be there. I an bitterly
opposed to the impairment of the rights of the states in their appropriate
field. It lees seem strange, however, that in the face of Each gravitation toward federal authority we shoild have retained divided rather than
unified power over our deposit banking slyotea.
*Except for the currency in our poChets, sur banka of de?osit hold
the liquid capital of the people of the United States. The transfer of
this capital from one of us to another, promptly and safely, should be
facilitated. That means, however, that every bank of deposit is truly
engaged in a national business. Its soundness and safety is of concern
to our people everywhere. Our business of deposit banks is not local in
character; it is, and aboald be, national. Therefore, in my iudgnent, it
should be governed by the national law.
In*ediate Step
now, I realize that of the 24,000 banks of deposit doing basisess
in the United States only about 7,000 of them are national banks sod
17,000 are state banks. Under these cirSumstances, we probably ennmet
hope, immediately at least, for the surrender by the states of their
right to great banking charters. Nor een we expect reincorporation
rapidly of state banks under national darters. The practical question
is, therefore, what, if anything, can we or should we do now? I think
it would be highly desirable that all beaks of deposit holding them,
selves out to the public to do a national or international business
should be required to be members of the federal reserve system, as
national banks now are. This would at ones mobolise all of our banking
reserves into one central votes, which is as it should be. * * *
Otiler Banks
*I have spoken only of banks of deposit, as distinguished from
banks for savings. I believe that banks for savings and for the administration of trusts or other special time funds should be state
banks, and that these posers should not be included in national bulking
charters. * * * * * * * *
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Federal Reserve Bank of St. Louis
* * * * * * **
- 3Prtmarir Responsibility
The Committee itself does not discuss or advocate *unified banking*, nor
does it make the essential distinction, emphasised in the quotation set ant
above, between deposit banking and other kinds of banking and service offered
by basks, immt adoption of the Committees reeemmendatione would necessarily
lead in the direction ef 'unified basking,' since both the Committees rimsmendatimme med proposals for unified Main, rest upon increased control by
federal reser,* balks sad the Federal Reserve Board, or other federal banking
authorities, o'er the banks of the country. This could be justified only if
it were demonstratoi that the country's unfortunate experience in book failures
was primarily dme to mismanagement on the part of the banks themselves and that
the nurse pursued by the federal reserve banks and the Federal leserve Board
had been much as to warrant greater dependence upon them.
An analysis of the facts, it can be fairly contended, discloses that
banks were forced into conditions not of their own making and that the
policies of the federal reserve banks and the Federal Reserve Board were
primarily responsible for these conditions. It would seem to follow that no
enlarged powers should nor be conferred upon the reserve banks end the Reserve
Board. * * * * * *
****** * *
By early fthrmary, 1929, the Federal Reserve Board was making extreme
statements to books, in which it was talkinb about their 'speculative loans.'
This was tantamount to an attempt to transfer the primary responsibility for
what had happened, and what was to occur, from those with whom in fact it lay,
to the banks. As for this responsibility, the member of the Federal Peserve
Board quoted above said:
*I do not think anything that the federal reserve system could
have done, either by omission or commission in 1927, could have
avoided a crisis of some sort eventually. The causes of the present
crisis and depression go far deeper than the stock market. The
stodk market crash was symptomatic of ruptures and dislocations
running all through the financial and economic structure of the
world, which sooner or later mould have exerted their effects. But
if there had been greater aware of what was involved in the
eeOMemic disorganisation left after the Great ear, the federal regorge system mould have pursued more temperate policies, with the
result that, Aim the crisis came, it would have been far less in- 7vre, and devb1stating and the resulting depression less
toms, s..
overekelming and prolonged.'
Departure from Original Purpose
In the events which .lave been outlined above, there was departure of a
fundamental kind from the purposes of the Federal Reserve Act. /t was intended
that there shield be no central banks for the United States and that the twelve
regional rassios banks should be institutions for rediscount, with their operations, amid their curremmr, rising and falling with the needs of business.
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-4Instead, they were operated as one institution and for pur)oses foreign to the
*Federal Reserve Act as it stands, with disastrous oonsequences. In the final
analysis, there was interference on a great scale and in most essential ways
with the banking business of the comatry and all of those Whom it affects.
Instead of being responsive to the needs of the banks and of business—the object
for which the reserve system MS created--fedorml reserve authorities undertook
to use power, not given to then for such a purpose, to create conditions directly affectimg banking and business. In other words, it was an attempt at
government ammagoment. Logically, the esperiesee Mitch fallen** would BOOR to
afford no resew for conferring added peliagfl AIM the reserve banks and the
rederal Reserve Board.
A 40ne.tarY Crisip
That the depression in the United States has been caused by monetary
factors, and has been prolonged through deflationary processes that could be
checked and corrected, has beim vassatty declared by a well-known European
economist. * * * * * * *
Tntroduction of Deflation
'The deflation MO introduced by the cam7aign against stockexchange speculation Ibieh the federal reserve system, in the
defiance of all earnings, took up from the spring of 1928. This
campaign included a restriction of credits, which handicapped
productivity and started the fall in commodity prices which was
afterwards to befall so disastrous. But the nest far-reaching
consequence of this eampaign was tftt it set public opinion in
the direction of deflation. * * * A fall of prices caused by
momeiery factors thus gives rise to profound disturbances in the
easeemic equilibrium. In view of these disturbances, people in
America endeavored to restore equilibrium by pressing down other
prices to a level with those which had already fallen furthest.
People were blind to the fact that this method could never restore
equilibrium at all, but could only result in the continuation of
the general process of defaltion. * * *
American Bang Legislation
'The bank legislation of the United States in conjunction
with the prevalent view in the country of private banks in relation to the federal reserve banks had set the whole course of
development in the direction of deflation. Attention had previously been is absorbed in preventing amq possible inflation that
the door had been left wide open for deflation, without any
suspicion of the anger that lurked therein. * * * The very
structure of **sited States banking system entailed the automatic accentuation of the deflation with aecumulAing strength.
disastrous movement could have been checked only by
a determined policy of anti-deflation on the part of the federal
reserve banks, and by their active intervention with a view to
the extension of the effective supply of aesse of payment. * * *
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Federal Reserve Bank of St. Louis
4
-5It would not seem to follow that current conditions, including eompetition
between national banks and state banks, make meeesserr ability of national
balks to have bank affiliates snob as savings immiolp eavsmised under state law.
In quotations which are printed above, there ie disoassiaa of provisions *id'
would emable national banks to wahine a sartado lomminess with their commercial
busing** without the disadvantages which are semetimes cited as reasons for a
oeperate savings institution.
In feet, empiasis upon any need for a national bank to h. ye affiliates of
any kind tarns attention in the wrong direction—the direetion of addition of
various kinds of business enterprise, becoming more and mere remote from commercial banking, on the ground that national hanks must receive opportunities
for competition with state banks as the latter are by state legislation given
increasingly liberal powers. Particularly when federal legislation is under
consideration, attention should be directed in the opposite direction—toward
roturatag the national banks and all banks admitted to membership in the
federal reserve system exclusively to true commercial boaktai sad to 1108~04
vhiCh will permit commercial banking to assume the velune end the activitt the
country greatly needs and will make semmercial banking aids suceessful fors
of enterprise, and to restoration of the federal reserve books to their proper
falsettos' as great institutions of rediscount 'or commercial boast with the
earreng they supply for the country founded directly upon the eemmercial
activity of the country.
**** * * * *
The real question is whether or not investment banking should be allowed
to be an adjunct of banks that are members of the federal reserve system,
which was intended, and should be osatiamad, to provide facilities for the
commerce of the country. Investmeet Wilkie( has a very different function-the function of providing the capital requirements of industry in all of its
forms. Considerations Atoll have been mentioned above accordingly seem to
require that investment tanking should mot be related in any may to commercial
banking.
*** * * * * *
It might be added, as another argument against security affiliates, that
almost inevitably mach affiliates are in a position of special opportunity to
sell securities to 1110, smaller banks that are correspondents of the parent
bank. So long as the present eysten sestinnes—and it has an important place
in our banking system—whereby large talks in irportant centers have great
numbers of correspondent banks in smaller places, the relations should be
wholly of a banking nature and the bank in the large center should not have
a special interest, even indirectly, in selling particular securities to its
correspondent beaks.
** * * * * **
There is the enrther objection that there seems to he an asOmmption that
men trained to semmercial banking are ipso facto, competent to emote in inveetment banking. In fact, the functions In the three types of balking are
so different, mad the bases for successful judgment and docisioa are often no
diverse that the aSenmption is unsound. bcperience in roost roars goes to
indicate that invomboomt banking can best be left to those the devote all of
their time and attention to it.
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Federal Reserve Bank of St. Louis
-6Secretary's place on Board
There are sound business reasons for coatinuiug the membership of the
an Congress enacted
Secretary of the Treasury on the Federal Reserve Board.
the Federal Reserve Let it provided specifieally for es-.officio membership on
the Board of the Secretary of the Treasury as an enpressien of its desire that
there be a close cooperation between the Treasury and the federal reserve hmeking authorities.
Fiscal Agencies
Under the Act, the Secretary of the Treasury ow um the reserve banks as
the government's fiscal agents. This permission has been utilised since the
beginming of 1916. It is not necessary to refer now to the services of the
reserve banks in the war financing. Mem the extent of the government's present
floometal operations are considered, the entent and value of the services performed by the reserve banks, without cost to the government, are obvious.
It is therefore appropriate, and in aeserdanoe with good bootees@ practice,
that the Treasury should have representation in the direction of the Nimrod
reserve system. It is to be remembered, too, that there is publio advantage
in having the fisoel operatins of the government handled by the reserve banks
and that, if the Secretary of the Treasury ceased to be a member of the Federal
Reserve Board, he might refuse to continue this arrangement. There is farther
reason in the circumstance that the notes issued by the reserve banks are
obligations of the United States government. With six appointed members and
only two ox-officio--the Secretary of the Treasury and the Comptroller of the
Currency—the Board is sertainly in a position to base its desisions upon
consideration of the gemeral public interest. A further reason of vital
importance is that the honks of the country have a very direst interest in
the governmental financial policies, and membership 0' the iseretsry of the
Treasury on the Board may afford means for expression and discussion of that
interest.
Removal of Bank Offj,cers 60,0 Directors
The proposal to give to reserve banks or to the Federal Reserve Bowd
power to remove officers and directors of banks that are members of the reserve system merely when there may be a disagreement as to policy in management of a book, or about the soundness of a loan in itself perfectly legal,
at once involves a violation of principle and contains no assurance of benefit
for anyone. * * * * * *
Nature of Banking Dustless
It east always be remembered that hankie' is a private business subjected
to public rego1atien4 The capital of a beak is contributed by private stockholders and helmet to them, They sleet directors and the directors in turn
elect the officers, at the same tine, in contemplation of law, remaining in
close touch with the mmnagement of the bank. Regulatory legislation could
properly prescribe NW qualifications renuired in directors and in officers,
but there is a departure frost the principles of regulation when there is
proposal that, instead of accountability of officers being to directors and
accountability of directors being to stockholders, both should be accountable
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Federal Reserve Bank of St. Louis
-7to agencies crested by the Mora government. This would be testi:must to
public authority taking &OW 00110 of the most essential functions of management. Parenthetically, it may be added that, as is usual when public
authorities propose to take over functions of maaagemest, they do met hers
contemplate that they will assume any of the responsibilities of memagemeat.
* * * * * * **
atallauttlAIlma
The federal reserve banks beer mmek the OMOO relation to member banks as
umber books do to their own custocre. 'hese are business relationships.
Aside from the purely business matters of dismounting, chee< collection, re,
emd redemption of notes, and certain rights
lations OS to reiervee, the is
100erve Act is silent on the powers
Federal
as to periodic esamimations, the
exercised by reserve Intake over their memberom This business relationship is
analagous to that thich exists ordinarily beton' commercial organisations.
The introduction or essercive forces other them would arise naturally through
business interactions maid be entirely ineemsistent with the spirit of this
relationship. It has boo found that persuasive powers of the reserve banks
is encouraging conservative practioe0 on the part of member basks has been
effective and it is evident that in the exercise of this fleaction the reserve
banks have gone as far as it is wise in projecting themselves tate the management of individual banks.
In the privilege of periodic examinations, to determine loan practices and
general operations, sad the right to use reasonable and basiness-like discretion
in the granting of credit aseommodation, the reserve beaks have a real degree
of control and one that does not partake unduly of patemmaliea.
The Federal ResPrve Board in Its relation with the booking system, acts
through the twelve federal reserve banks. Because of the wide administrative
nature of its duties there is ordinarily no direct contact with member banks.
Its general duties are the giving of broad financial advice and the development of large financial policies which are carried out throlgh the instrumentality of the federal reserve banks. To introduce tato this deliberative
body the added duties of bearing and dooidiag npea eases of malpractice of
member banks reported to it is umfair as well as imesaeistemt with its duties.
It would involve the some interference in local memsgsmost as would be the
ease if such peelers were given to the federal remoras teska.
A lialtinsreint of View
The views of the Economic Policy Commission of the American Bankers
Association on the 2roposal with respect to removal of officers and directors
were earlier this year expressed as follows:
"Basking, being a semi-public business, most neoessarily be controlled by strict laws governing its operations. Nevertheless,
banking in its actual operAiens cannot be conducted by statute, nor
is it feasible to substitute rigid rules enforced by public officials
fer inditidual initiative and responsibility.
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Federal Reserve Bank of St. Louis
*** *****
* * * * * * It Berms not likely, however, that the sere transfer of the responsibility from one set of human beings, that is, the
officers of banks, to another set of human beings, that is, the
officials in Washington, will prove a panacea for our financial ills
or be a guarantee against a repetition of the same errors of human
judgment in the Mum
'Admittedly the federal reserve authorities should have broad
powers of supervision over the general fimmmaial policies of bash,
and to some extent over their practical operations. But it is
extremely doubtful that the enactment of such a law as now proposed
which largely centralises control over detailed operlting tonctisiS
of banks in the hands of government officials in Washington wom14
improve the situation.
*After all it must be remembered that not a few of our business
leaders and bankers have heretofore expressed the view that such of
the blame for the modes speculation and consecuent later collapse of
1929 attaOhes to the 'easy moose policy of the Federal Reserve Board
then in office. It matters not whether we agree with that criticism;
it is mentioned solely to emphasize the fact that officials in
Washini:ton are no less subject to errors of jujoimmt them are beakers
is NW Tork or elsewhere, and consequently a fsrthor increase of the
pow of government officials over the viAnking structure is not
moommarily a guarantee for better banking.'
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Federal Reserve Bank of St. Louis
* * * * * * ** *
Referendum 1s4 es on the Report of
the Speeial Oessittee ea lookiegi Part II
Chamber of *sneers* of the% S. A.
Decesbor 9, lOSO
Argemosets in the Negative
** * * * * * * *
▪ * * * * * It is sew propeosdp hnower, that the larger oettiesal %who
In emeh and every state ow operate broolbee through's' their several states,
upon obtaining permiseioa few the Poilloroillooerve SOMA. That the people
of the state had by letiolatiss declared they malteds* boom* banking of wir
kind within thetr borders eenld set make amy differowel be
boas meld
be throatily** thee regardless of their elehee.
*** ** * * **
* * * * * On Oeteber 4, 1052. the State *sal Division of the Imerioes
'Where Association adopted resolutions expressing determined opposition to
the prevision* of the as pill °abide meld give state-vide brew* basking
powers to natiesal banhe in all states regordlew of restrictions as to beam*
bershing on state beihe by state lens.' the mantis& addhids *This is a
deliberate attempt to evorthrov the eworetoty of ow states; it is sontrarr
to the ;Noltø? uhidk hes built up this republie and genii load to a system of
moilwa..miie trona bashing,'
National bombe themselves, particularly the smaller wee owl those outside large sestere, weld be eepesed to competition of a leitmotiv* kind
egaiovt Ishieb they are new fairly well pretested* if the provisions of the
Glass Bill mere emoted; for a branch of a large natioaal tank of another
city aigbt he opened next door. The Onnittse suggest* oortain reetrietiono
but, if edipted, theme restriatiems weld sot prevent a we tars of esepetitime for aatimal boohoo in sealLer tattoo, et* the homage that are set up
possibly taking sow Ineisese free lesg-estalelshed and wend benks4
It tots be sowebesed that there are divsrsitj• is woegnstal abilities
among large netiomal banks as well as In *them fields of eadesser, sad there
is no asswesse, mod in the antaro of things atm be no assoresees that the
only large national hooks to operate bramehes will be toss that are owcervatively awl semed/y neseaged. * * * 0 * *
Wareritr famehumathaa
Si opposisi the par" or the ewe Pill relating to arena booking. ate
Itoority *mhos, or the Swat* asseeittes as Banking end %mow *aids
*All things oonsidered, the Amortise system' has held up
esederfelly well.
?here ti a movensat as foot to metro' the
basking industry of the United Statei
sentralisation. •. Of
late years this evremeat hske boon beessitsig sere evident. •
Oar
deal system of Inshing has hew oao at the greatest aestivating
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Federal Reserve Bank of St. Louis
t
theta.*
faking the Unitod States the outstanding sommtry that it
is today: Our asuatry la too largo, tee widely diversified te ezpoet ono lisalting proton to be ee versatile as to deal with se marten
a situation offiolemtly, ?be Amortise people are indiwidnalirtio end
se shoull be our hamblog structure, • • • aft* placing of ear bomillig,
structure with the sew over-burdeaed haressamar in rftoblastaa Is In
clirect violation of the principle it shale vtglits.*
DIetinraimhs4
It to evident that up to the rassce of the 1e1Paddis 10-t thfre some hoe
bees soy lispesitlec to alter the original emeepttea er the matiemal book
system as a it orstem4 lvea the provisioas of the 141Pg4den hat alleged
only tetra-city bemmghes in =Oh states as permit brew& Winn
or their
as lawns ?be operation of odditlems1 'Memo within the limits of the city
is which the paint book is legated is met te be looked lupus strictly is
been* bashing
'It is a %seal teem ad semtelne se elemeate of daager to
the basking "stem of the oomatry. Theigmeo.city brava it simply a moist
of furnishing a sesvernIemt serviee to easterner, and gives to astissal Mae
a means of competing is easterner eseemmedatlea elth ether beaks vilhis lhe
eity.
It I. is the Weeder applleaties of the principle of brow& banking to
state-wide areas that grave dossers arise. A single balk eperatiag a amber
of branches in sany parts of a state is in a position to control the basking
facilities of entire oommonitios mod bring ruinous competition to the smaller
independent baths,
**** * * **
Oonferdratles 9f Contr4
Proposed seassres fir the enteasies of bremeh.beakisr privilerer to
astlonal ad stet* nombor banks itfl hews the offset of materially understating the gait system od'emetrol end emmeogmeatly the indivilualiss in
operation which to famdmasetallo, adapted to diversified conditioas in the
United States. Brea& booking is maumpilistie is teadwacy. It ftrnishes
the mamas of osseentratinf the reeouroos of a nuabsr of localities in the
heeds of a fay Individuals, As have in their control the relardation or
the development, an their interests dictate, of in1ivilual onnmon!tiee or
business amtorpetsee. It Unreason, abeeatme operation, free from legal
pride or responsibility, and SR appertirnity for the 'muting barium to be
seadrneted entirely in the Interests of rrofito to outs140 iseasessso
•*•*•
•
•*
* * * * * Bat it is in this lemur sod mere desirable bastaese that
the sempetition of brume Making system eases Into conflict with the
indepemdeat beekeer. These deemed, the tram& banker CA mat more mainly
awl aau direetly. The milt Is that the ladeprnadent beaker seald he ford
gradient to rely as the mmaIler erna lege iesirible bustmems or ultimately to
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am eat ar wastaies.
Federal Reserve Bank of St. Louis
ms'ip o the federal r.e.rs qsti. La Tb.
jMt1y of
$ lars
w of tniivinl t*nkini *uits s4sr ast.
sat sitat.d
in *11 sastissi 0r the
try. Tb. .trssgth d tilt if the ey.tma fr .sti°i
* wids v
it diwersiftad ioa4ttiq* kpssds i. the i$*$a
of a hesad
assbtp i.d the ise-dtaatisa of wiispsad iadtv11 tstset.. £
b.
atsatlal vsttsa at the
bar of .spt.sattoad bsaka sad stats bank. in
the yet
a siLdation end sasid Into Wsa, wenid .t1.at1y
pveee ltait*ttasa
sod the I.tts* ps
,sr.tftad vpI..estsV
in so
distriet. The rt
statewide basa butai wenid aensadwably have th.
resolt of tbasvieg the stf.ettv. asstrd of the satire systis Late the P,.an1s of
a ?*l4tiT*t7 fee Interests. 00 * *0 *
0*0*0000
Isiding .srsate. do t tst *o1.r fader1b stat&t.s, sa o the iaattoosl
bask. end thefl reserve bask.. Holdi eenLa.
at nd.ir state 1tW
r their d*rt.r psesee &. sstad by the at&t.. they aey
capital atesk,
is, n*ttl and stats, bat di. in other esrpsv.tiana.
at saly in
a bsldia
btag oce
peessads t. essbs
.tssk it a ates
of banks,
eltta thea ba a isaus] seated direeti.a,
a
is ths pablic *tiltty field ssrwtr.. the steaks •f sittLn .ssatas
• d isbjesb
to $
i* direetisa,
sites. if, iateees the
£ qeestlas at
peess with akiak awisttaj
kols1 esni.a psatlai beaks aq' bows hs
s.d, sad
twea
tist. bassfits they sap bows baaogjbt tap..s usia, i1ssbtp d sea
s' beak aenbers of' the fwdel rosin. qtsa is
tIWi dth the bait. if
the ayetss---s out.. ef t*depsst
d
:1 sad
t perusal
responsibility
be safsid.
*0 00 * * * *0
JItLsa at: R.ulttoit
pseetatiens of the Sass U nut tt
re the
dirri ti..
Is regoltIag th. bold
aseaies is the bsakin& 'told a. were *S
with esak oeeat.s in ether fisili, he laterstat. C.wa.re. Coiut
sdwssit.d legislattas akiak etU oak.
zsble to it heling conpeat.s ssing
steak In raileside. tn the Field *f pakftc utilities there are oststtng
of reg$stiam by the stiue
proli
I*g ii like WrpaI..s
asioas.
in the 1.14 of ratlresd trsispsrlatt mad is the pobtto ztUtt field, in
that it is r.p.rly bIJSItnd to vsl.ttes by pablie t'tty.
ak
U.. is seasasarily prssiisd upas r.spensible iagaest sad
aktp that
• be readily idsatifted sad vss. The Initias if a asrp.r*t. davies,
szrtng beth aerakip end amssmenst, is in pv1aipl. Iaitsteat with
adesit. end prepsr replatiens.
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Federal Reserve Bank of St. Louis
4
The differs's*, chi* appear ewes in these brief outlilse of iter pomp
briag sat the stroametanee that mesh has bean aeolded to most the esalltions
in it. area. Par inetemse„ the grasp is the mortheestoom state, doss an
effort to guard agalast the ettmits of adverse senditions in eme or mere of
the states, throngh 'nebulae of se* a, umber of states that it is stiviessly
hoped that afters, sonditions will net 'mist is all at the sena tine. La
ealh ease, the seneeptien is of strew austral argamisatien, ably aummed
with seasoned snporiense of the hilliest *moo afferied tn the areas this
esstrel orgealsotima preridbig sot way advice sad expert assists's*, tat
also floandisl aids, %Oh a developmeat may well be in its initial stages,
mad =Ail there ars intesard tastliorte, smeh as is fact do wet sem yot to
have bakspassd, legiolstism Obsuld net hamper the benefit. 'hill low be tesught
to se 4,0a eh4Nre bsohlag stability is, MO! arrest seaditionso nest bight/
deeirable• In other vests, the eltessativos mead sees to be either an
effort to prevent Mr Wiling complain is the banking flail, for =Oh room
as has beim saggosted shore, or freedom for the development of group heaktig
in ego that tor greatly Misfit agriceltural sad Indestrial areas whieh have
bed tremble* of a disastrous kind with *bony independent banks.
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Federal Reserve Bank of St. Louis
•
THE BANNING SITUATION IN TILE UNITED St4,215
(National Industrial Conference Board--l9)
•
•
WAFTER I - TUE AaaICAN BAMING b/STAM
•
*
*
/ /
*
(Pages f'..6 and 27)
Influows of LOC4:4 G1,4#40 Woct4t19-41
Locally, many independent unit banks ars so-ordineted rith other banks
in the community through clearings associations, of which there are 255
in the various cities of the country. Organised for the purpose of performing a mechanical function, the clearing of caecks, and thus facilitating the commanit's business payments and the circulation of bank deposits,
the clearings association has come to embrace usually auca broader functions
of co-ordination and to contribute materially to the systematisation of
the American banking organisation. It is through the local clearings
association that community banking problems are ol;eniy discussed among
bankers and taat local banking policies and easagement acquire some uniformity of standards. In frequent installs's* regulations are adopted
regarding discount, interest, and banking service charges, ead rules laid
dawn regarding local loan policies. Fartheraore, in a few large cities
clearings association examinations of aelber banks are accepted as a
necessary adjunct to the maintenance of local banking stability, talc's
enables clearings association members to act togetaer to avert failure
had to prevent the growth of a general :Local distrust of bankiN, conditions in the event of any local banking weakness.
CAAPTER II - STRUCTURAI. CHAIIGE6 IN Ti AAIhICAN FUMING SIbTEA
_bos 44 ana 45)
Causes of Failure
The CaUSOF of bank failures are both specific and general. They
are specific in the sense that in each bunk failure particular internal
causes may have had a part in bringing about insolvency. Bank failures
in individual cases may be assigned to such causes as: (1) the overaccumulation of doubtful, slot, or past-due paper; (0 heavy withdrawals
of deposits compelling the default of payments to avoid liquidation of
ammid assets at sacrifice terms; (5) general all-around poor saaagemeat4
(4) an unexpectedly large depreciation of security investments; (5) large
loans to officers and directors; (6) defalcation or enbesslement; (7)
excessive 10411S to businesses in which officers or directors are interested;
(8) the failure of a banking correspondezt vita whoa funds have bean deposited; and
tae failure of any other large aebtor. At least tare*
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Federal Reserve Bank of St. Louis
252
-2of these particular causes, the first, fifth, and seventa, night be
grouped together under bad management, but the others are quite beyond
the complete control of bank management. Tne latter are external and aerge
with a 'thole series of other estraneons influences operating to bring
about banking difficulties.
then bank failures occur sporadically, it is no doubt proper to
analyze them in terns of indiviaual causes. Then they occur sore generally in large numbers, hoeever, It is sore likely that a real insight
into the reasons for the failure may be gained from a consideration of
general factors affecting banking conditions, even though individual
failures are mainly precipitated by such more specific causes as are
listed above. The general factors are to be found, an the one aand,
in the subtle, imperceptible change* in the social aao economic structure of society, occurring, for example, as
consequenee of the aevelopment of transportation facilities; in the growing concentration of industry ana eonmerce; in innovations of widespread influence in the
tecnnique of production in industry and agriculture; aria in the reorganization of methods of distribution. They are to be found, on the
other naiad, in changes in the metdode of business financing that occur
partly in response to the cuaages of a physical character described
above, but which nay be partly coincidental with, or in anticipation of,
those changes. The policies and practices of the banks tammselves,
similarly in part responsive to, and in part concomitant vita or in
advance of, caanges in the economic fabric of society, are also an important factor affecting banking conditions.
*
*
*
*
(Page 66)
The Problvm of F9deral Reserve 2embere4p
It should be recognized at the outset that, generally speaking, it
is not necessary for the effective operation of a central banking system,
such as the Federal Reserve System, that all private banking institutions be aeabers of that system, nave access to its discount facilities,
and keep their reserves with it. As long as the majority of tne larger
banks, having the bulk of bane resources, are related to it and as long
as it possesses adequate open-market porers, its influence, if administered efficiently, should ordinarily suffice to maintain sound credit
conditions, although its maximum effectiveness is to some degree diainialied
by its inability to deal directly eita non-aeaber banks. The important
thing, it would appear, is the aold that the Federal fieserve bysteaas
an its member banks; that is, tae extent to tilict the latter, of necessity or of c;loice, largely remain a permanent adjunct of the byatea.
Character of Changes in
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Federal Reserve Menbersaio
(Pages 8.-J and 70)
The fact that the mortality of member banks saould have caused a
loss in membership of 1,106 banks is very significant. This figure
was over 10% of tne total members active at the end of 1921 and 15%
of all bank fallureu during the veriod. It ewes that access to the
resources of the Federal Reserve Systen torough membership nas boom
insufficient in many cases to uvert bank suspension. Doubtless, this
has been a factor in retarding any exteasion of membership in the Eystea.
Effects on Federal Reserve byatem
The net effects of recent structural cages in the bauxint system
of the c,)antry on the Federtd neserve 6ystem have been: first, a sift
in the composition of its membership, the proportion of compuleory members
or national banks rising frcm 85i in 12 to 87% in 1950 end that of
voluntary member or state member banes deelining from 17% to 16,44
second, a shift in the relative control of banking resources neld within
the System, the saare manc:ged by national banks diminishing from 85%
to 81%, and the suare controlled by state member banes increasing from
65S to 5,9%. There aae been virtually no change in the position of the
Federal Reserve byetem in relation to tne p
- roportion of all banes and
all bank resources encompassed by it. The shifts within the System are
suggestive. They inaicate the high degree of sensitivity of benking
institutions to tne coaparative liberality of the conflicting baneing
codes, national or state, under which they say operate. 4ature/1y, the
choice between national ana state government coarter ,inges on estimated
net advantages. Competition bittvess state and nationnl banking codes
might conceivably go to such extremes as to bring about a relasation of
statutory restraints extregiely detrimental to the maintenance of the
bank liquidity required to protect the interests of bank depositors and
to ensure the successful operation of the Federal Reserve System:.
Certainly the history of past developaents, as the following caapter till
suggest, intimates the possibility of this consequence. Furthermore,
eaould the national banking code prove loss responeive in the competitive
race, the Federal heserve System would be left with a national banking
membersoip controlling a small percentage of the country's banxing resources and a vacillating membership of state banks controlling a majority
of banking resources. The witadrziwal of the latter in numbers 'dint easily
leaci to e aangeroue pyramiding of commercial banking reserves.
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_4_
GENMIs Ram
*
•
*
(Pages 148 and 149)
Adjustments to
Changed Conditions
According to the facts assembled in the present study, banking
today is a quite different type of business from what it is commonly
conceived to be. It fundamental functions are no longer primarily
the mediatorial financing of a purely local industry and trade. In
consequence of the depressed state of American agriculture 'And uew conditions of agricultural production, tue altered organization and concentration of American industry and trade, significant cnanges in the
character of bank deposits, and rapid expansion of deeosits because of
ampie gold reserves, the functions of banks have become far more intimately integrated with the central money and security markets than
ever before. As a. result, a modern banking institution assumes a larger
direct risk or carries a much narrater margin of protection ana is dependent on the play of a mucn 'older range of economic forces ts,an the typical
American banking institution of even a decade ago, with its broad local
interests and participation in local industry ana trade. hence, the
bank of today requires a new type of management, a different type of
organization, and a more integrated type of governmental supervision.
Moreover, because of the growing interaependence of national &townie
life, the American banking system would seem to resuire greater geogra*
ical consolidation or unification than exists at the present time and
standards of bans.ing practice OS nearly uniform as it is possible to
attain.
This statsment does not ignore tufa fact that aany banks have made
adjustments in their management and organisation according to the requirements of changing conditions in the past; the city banks, especially
the large city banks, have undoubtedly dons so. Nor does it imply that
banking laws nave not been altered from time to time to meet tn.° needs
of cuanged conditions. It recognises, however, that many banking institutions neglected to make the adjustments required or could not make
them readily because of EiSO or location, in view of tae restrictions
or limitations of the prevailing banking late - a fact amply attested
by the unprecedented succession of bank failures not only in 12.50 and
19Z1 but in the entire period followint„ 1920. It is 6 de2ressini„; commentary on the American banking system that a concentration of banking
facilities in order to render effective banking servicea in a cllangiag
economic environment has had to proceed so largely through the destructive process of banking failure.
Because failures were mainly confined to mall banks, the lag in
banking adjustment to the needs of agriculture, industry, and trade may
be said to have been principally restricted to such bands, but with
grave consequences for large banks in the end. Great importance aunt
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Federal Reserve Bank of St. Louis
-5..
therefore be attributed to tAe existence of banking laws directed to the
preservation of the local independent unit bask as a large factor in the
inability of banking enterprise to adapt itself to all phases of cilanging
economic conditions. Mcreover, owing to the geographical distribution
of banking fatalities and the greater mortality rate for state than for
national banks, weight must also be given to the harmful and often emmtradictory multiplicity of banking laws and the coorietition betreem state
and national banking codes for bank incorporation, leading to a gradaal
lowering of standards of booking for the whole banking votes. The
ability of the Federal Reserve System to meet a critical banking situation
arising out of severe business depression and to contribute to recovery
is inevitably hampered hy the existence of these conditions.
-Fatere-44--aamitimg*
*
*
*
(Pages 150 and 151)
The Prokken of Watrak
Must not the problem be famed whether a satiefaettery beating system
ems be attained with legislative and adainistrative control of bank
establishment and bank operation vested not only in the Mational Government but in the states as well? Experience nas shorn taat the national
banking system establisaed in 166S and the Federal ikestIrvo System established in 1914 have been unrible to bring about a unification of the
.Anking system. Both sought this and by *eking their provisions attractive to *w,,,aks operating under state charters. If unification of legisLative and administrative control is to be attained, must Were not be
a resort to some meosure of coapulsion? These rho anEter this question
affirmatively are not deterred by the obvious objection that national
action to this end night be in contravention of rights reserved to the
states by the Federal Constitution. They nold that there is ample lei*
authority lor the Federal Government to take over the control of all
banking institutions and sake clear tut, if the Supreme Court of the
United States should not uphold this view, tae way of constitutional
amendment remains oiien.
Ills fact that the Federal Reserve board is actively studying ways
of bringing a11 the banks of the United btates withost excepmeans
anti
its jurisdiction is encouraging to those rho believe auch
under
tion
course to be a first ste; toward the attainment of satisfactory banking
conditions.
Div Problem at iteautzemvt
Would unity in legislative and administrative control serve by
itself to establish unity of action and high standards of performance
for the banks of the United States? In other words, can upward of
.5,000 managerial units be brought into harmony of action? The unit
,
banking system of the United States, wnether controlled by national or
state law, has been extolled because it aas facilitated the extension
of basking facilities throughout the country. Such a result is highly
commendable, but independent unit banks are not the only leans of
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attaining it. The economic demand is for honking facilities, not necessarily for banks.
des not the time come to aim for a very material reduction in tne
total number of bank managements ritnout reducing banking facilities?
Could not equally ample, more useful, and less expensive banking accommodation be offered to the American people by a relatively snail number of
banks vith a relatively large number of offices? Branca banking ano in
a lesser degree cuain or group banking south in large measure substitute
the services of professionals for tacse of amateurs in banking management. ditherto taste forme of concentration in banking have been tolerated
rather than promoted. Should not all barriers to the development of
these banking forms be seept away and their progress facilitated? Placing
all banking under the jurisdiction of the Federal Government would prepare
the vay for such a policy if it vete deemed in the 2ublic interest.
The Problems of Regulation
A system of banks to take the place of the aggregate of institutions
now at best loosely .nit together could obviously be built up only alosly.
After tile organism nud Peen created and its Leope of operation defined,
various „)roblems of regulation would arise. In many matters of bank
administration the public would be wholly unwilling to trust to the
discretion of tue banters. It would 4fiL itself whetter means could not
be found to prevent in the future such develovaents as ao.d ?roved harmful in the past. It would as saether means could not be found W limit
loans as real estate or securities v.uen conditions threatened unwise
and speculative expansion. Could the Federal Reserve baaka, br; witnaolding rediscount privileges, chasten unruly and guide inencerienced
member banks? Could law or administration adopt rules that would prevent
the banks lending aid to speculation at the expense of productive enterprises? Snould there not be a more definite segregation of demand and
time deposits? Or should, as the Committee on Binic Reserves of the
Federal Reserve System recommends, the banks be required to hold reserves
in proportion to the activity of their deposits regardless of their classification as time or derAand de?osito?
Innumerable questione of detail would vithoat doubt arise in any
radical reconstruction of our bameing system. The fundamental questions
remain: dave we too diverse a control of bent:lag institutions? dave
we too many banks?
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Federal Reserve Bank of St. Louis
•
SONO&
AMMICAS 1001101110 SZTIEW„ VOL. 22 (1952)
pArraft in immlimus stimusialater Llipahr, VA. University
Oftinnica at OVAge 2'14 thru 1.46
It iv instructive es well as interesting to note that is
Canada, by way of sontrast, bank failures appear to have very little
relation to oammeraial failures. The remarkably few failures which
have taken plaits Is that country indicate that the branch banking
'Wan there is mmeh better qualified to resist the strain of business
fluctuations than our system of unit bookie( is able to withsUnd the
effects of business fluctuations in this eatntry. Her business
fluctuations are not as severe as ours and one contributing factor
must be found in the fact that her banks are able to stand W cad
assist business in times of need. It say be noted, also, that bask
failures are almost ushaseu in lagland, altho4gh, she has her besissos
fluctuations. It would appear, therefore, that a reodameatal emplanation
of the causes of bank failures in this country is to be found, partly at
least, in the mbare of our banking structure.
Siggingems.opini tros the
statistic& of bspt fallurtm. Before
proceeding to a farther esalisis of the causes, problems, and possible
correctives ee bulk thi3ores, it may be helpfUl to summarise the essential
ocuolusiome at elhisb es haws arrived after an analysis of our statistical
data,
(1) lhe beeviast failures, absolutely and relatively, are among
the state basks; (2) the failures are greatest among banks with small
capitalisation; (3) they are heaviest in small towns and villages, (4)
they are heaviest among banks
tside the Federal Bow's systea; (5) they
have been uniformly heavier than failures of commercial enterprises since
1920 but not during the period 1892-1920; (6) they seeempsey very closely
the rise and fall in aommercia1 failures usually reaching the peak at
the same time; (7) they are not only eases& by business reftwoleme bet
contribute to unsaved business aemditione; and (6) they are sere
pewees's& than in amy ether country in the world even in fairly serum'
end prosperous times, which would seem to indicate that there are some
femiameutal and organic defects in Alr banking structure that require
morrectiew.
AgAsaIrsXs of Qv sepses of bank faUureg. If the preceding Memp.
elusions are osrrectly deduced from the available statistical rvtdemee, it
would atom that logic compels us to attach the problem of incressisi
book failures by exuaining what appear to be the most outstanding se&
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Federal Reserve Bank of St. Louis
251
fundemeatal defects of emr bankimg structure which heve contributed
to the present embalm situation, as well as those factors that lie
outside the field of annitimg.
le *mil consider the problems and possible correctives umder
the following main hem**
1, Ihe defeets iiheremt in the organic structure of our
semmeretal banks and banking system'.
2. Theme des to the immdesmate cqntrol of our credit structure
by the /okra Iknerve system 'hick, in turn, result fres two limitatiems,
(i) those inherent in the stracture of the Federal Reserve system, amd
(b) the inability or Feinstein.* of the Reserve authorities to devise end
apply adequate principles of eredit oontrol.
3. These mass* lying outside the banking field.
the manic sjogture 9f our conswreial
Ca) Is have an unnecessary and an unwise
bombs into natiemal and state banks with
dt4tdaii of eer
fertpeine legislative bodies regulating sad greaties special privileces
to their respective banks. For a long time state books sessived
privileges not mosorded natiomal banks; then the matiemal benkimg law
ems liberalised to place natiomal hanks on an equality with state books,
with the result that this sempetitive liberalisation of bank laws bee led
as to permit the emetics et smsenad banks and the indulger's* at Inseamd
basking prastiees. Sea a epsime4 with its fortroine different
jerlsdietiemal authorities emd forty-nine sets of laws, by its very abtare
involves lalk of unifornity is legislation, in standards of honking, in
rates of progress, sad in supervision. Them ecmditiome have been permitted
to prevail for no better reason than as a semeeseion to historical precedent
sad the doctrine of states' rights. Commercial banking is, sad cannot be
wain else than, interstate in nature and, tura result, there is no
legieal basis oa which to defied the present classifisation of our backs
into both national and state with the prevtilimg lack of uniformity in
basks and banking practises.
Wads Ighinst
(b) is fume Us many bamks.-especially toe som smell bombes The
otatisties of the failures plass this eonteatien beyond dispute. Coapetitive liberalisation of our veriems state and national lams has been primarily respeasible for this situation. The lemismae en the part of our lawmakers doubtless has been due to the prevalent:, of the dootrime of laisses
fair. in matters relating to besimess enterprise. As a part of this same
destrints, sash soasunity has desired its beak and, preferably, more
then one bank in order to sears tbe fall fruits of the eompetitive wet,
Ihe securing of one or more leeal boas was facilitated by the low capital requirements and the ease with Web the lam permitted the eharterimg of beaks. *early half of the banking **sour** of the gauntry are in
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Federal Reserve Bank of St. Louis
the htnds 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 $ew !ark City alone have a capitaliz.,
tion almost equal to that of 20,008 country bankt eitutted in towns of
10,000 population or less.01)
(e) Too many banks are outside the Federal Rescrve systeN with
the result thLt the Reserve authorities are not in a position to regulate
or aid them. The unfortunate aspects resulting from this eituatien reveal
themselves in s vtrikint, manner during criseE likr those of -11110 end 1922.
Of the 6987 national end state banks which failed during the doodle, 83
per cent were nemmeiber amd 1? per cent member banks. The lasses Is be
drais from this widen°, Sheuld be obvious.
do not or cannot secure the proper diversi(d) Small it beam of
the fact, perhal)s, that they are in
to
dms
fication of their portfolios
activities predominate and
industrial
or
comaunitiea in *id' a few seeps
of Li certain type, with
of
paper
provide then with ma endue proportion
the result that the welfare of the bank depends almost entirely upon the
4rosperity of the local semmunity. Parthermere, with the increened use
of the automobile awl ether means of comennication, such of the important
business of local eammonitios has gone to the larger centers with the
banks teed to hold only the unimportant local busiresult that small to
ness.
(e) It smears that the proportion of piper eligible for rediscount
with the Yederal %serve bombe is toe 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 commerlial 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 oemmercial
banks are shifting more and more from the financing of commercial townsactiena and are devoting an increasing proportion of their resources to
the financing of fixed car:ital. These changing proportions contributed
to the lack of liquidity in the resources of nomeereial banks and
probably reveal a contributing factor to the inereased number of bank
f&ilures. This changing proportion hes an even greater significance
when oansidered in connection with the small unit banks 'shish invest
such a lamp properties of their resources in local mortgages. Table II
will mbee esmething of the trend.
(g) Directly aseociated with the (4uestion of the increased preporti
of investments sod leses en investment paper and mortgages by SOOMMIP—
cial banks are these quotations relating to the increneed umber of inveatmeat End other non-eennercial banking affiliates which have teen etteched
*Mt
to commercial banks, particularly in metropolitan centers, in recent years.
City,
lark
New
It was reported that when the !Mak of the United States, in
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) Bearings on Branch, Chain, and Group Banking, Vol. I, Pt.
pp.22-25)
•
-4-
(h) Another fector which has contributed to the veakmeing of
our oommerciel banking structure has been the steady ingresss in the
proportion of time as against dememd deposits. On the basis of the
average percentages for the years 19194..5, we And tilt demarui deposits
a.Aounted to 50 per oent, and time deposits to12.5 per oast, of the
earning assets of the member banks of this commtry, while, on Jun. Ws
11)60, dememd deposits amounted to 52 per ceut and time deposits to 3B
p#tr cent of the earning Moots. Aviust those time deposits, 'high have
increased absolutely amd relatively during recent years, a remains et
may 5 per cent is held despite the fact that the cash derived from these
time depovito is treated like the cash received from demand deposits
against which a mach higher reserve suet be kept. This situatiom has
presented an inviting, although a dangerous, opportunity to semeereial
beat. It has been inviting to commercial bank* bee/awn it has been
MOM profitable for them to expand their looms and inveetments and reap
sweater profits. It h4s been a dangerous factor for the honks since
they have bees led into making loanr end investments of a type not
appropriate for beaks engaged in A slivings banking businees, and also
0
in the foot thet their reserve ratio Against
ties. ?rem
iLab
required
egeinst
that
below
fall
to
leaded
has
s been
tics
thee!
,
depositor
savings
the
of
view
the petmt of
not afforded
con
Oss
noseivedLi
he
has
although
Stmdimemimily bad,
to withable
has
bees
he
instanees
In
meet
bly the maim swim's Unice.
not
if
quite
efts*,
d
notice,an
drew his time dopeelts without prise
usually, his commercial bosh has been more owasmiiimgy located than the
nearest savings tank. against theme earviess, hemmer; is the fast that
his deposits have not boss and are sot properly secured by reserves and
invsotsmato as well an the fact that in the event of a rum en a bank the
time depositor can be made to welt at least thirty days to present his
claims Ohne his funds are being paid over the scouter to most the slams
of the demand depositors. If the interests of depositors are to be 0011sidered seriously in connection with bank failures, meld if the small
scver it to be given the pro;.,er protection dee him, thee here ie another
problem whisb Seeds sink cnd correction.
(i) The whit coals in our great maltitode of small banks are
relatively high amd the as mimes are very lov. The prevalence of
ostentatious buildings sod equipment is no small factor in this situation.
An anplysie by the comptroller of the currency of bank earmings shooed
that a large proportion of the banks outside of metropolitan motors
were not earning ems,* to justify their existence. This was true eves
in such relatively prosperous ycars as 1925, 1926p end 191.1. In 1927
nearly 966 national banks were operating at a Lass, sod an additioeal
2000 were earning less thsn 5 per cent. this ougatituted about 56 per
cent of all netionza bunks in the United etates.k4) The situation anomg
the state banks was svma worse.
(j) Another defect of cur unit banking system, esposially of our
'mall banks, is found in the poor sasagsment whims gemerally Character-
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Federal Reserve Bank of St. Louis
(4) Moorings on Breach, Chain, & Group Banking, Vol. I, Pt.
p. 5.)
a
-5isee thou In merely the officers are of ae inferior sort. Perhaps
the osehler, sad a few others in the bank, has had some formal Waist's(
in bashing premolare and principles, but the training of the president
and ethers responsible for running the bank has probably been along
different lime. the lemding eitiong in most asmenaitios 'smelly hopes
to oompleto amd polish off his business serene, Whether be be the
escoessful grocer or botcher, by townies the presideot of the legal
beak, This phememenso is a traditional sad a yeemlier characteristic
of inerioes life. SOOlg nen ordinarily are imdividealists amd resist
noseperatima. They are Weal enoll-temo men, oftso sailed hard.hooded
tesimess nen mad the beekhose of eur nation. In the proper sense of the
term, heeerwer, taw usually are not bankers. They may hoes oomethimg of
the technique of booking but little of its fundaneetal emd far-reaching
principles. they are insii yell acquainted with the literature on banking,
with the tendencies, anrrest problems, sad possible solutions which should
be of interest to the's. thik resist the eollecting sad filing of dats
en lewd end mere general businees eenditions which affect their book;
they resist mederaisieg methods; they often permit sentimeat to play too
large a part in the naive of local leans; the directorate* ammally are
filled with local temineae nee who Saw little about hooking emd often
&re indifferent regarding the hamkos affairs. bwerveme, of °arse,
recogaiSOO that there are many fins exceptions to theee gemeralisetiems;
nevertheless ember refloating most impress ome with the general aceurecy
of the picture mod with the fast that the type of management eharecterisin,
a large part of our emit beskimg system is an important fastor te beak
failures. For =staple, the somptroller of the oarremey, in analyzing the
eamees of the failures of the natiossal banks in charge of receivers an
October Bl, 1950, listed then as tonalities (5)
Per emit
A. incompetent
00400rvoqpio SO
Bo
DiehalleitYVVINO04,0.4041416,414,04,moor ***** 4•••••414104,4pOelles•
C. Local fimmosial depression from agricultural or
industrial
SO
D. Receiver appointed to levy and collect stock aSOMM1181.• nesering detioisopy in value of assets sold... !
E. lempernry
***** sesoemirmiripasorsilio• 1
* ****** *
(k) Finally, we nor asstiam the fact that the problem of inadequate
bank supervision is still with us. Dee frogmeetly to the youth and
relative inexperience of momy of our beak examiners, it becomes a fairly
simple matter for sharp beak officers to outwit them. Usually the staffs
of examiners and of examination departments are imedequate and poorly
paid. The great number of failures is evidence of the fact that they are
enable to nye with the situation. In addition, we hove the problems
oriole' frea the conflict of authority, if not a total lack of authority,
with respect% to the =animation of chalk and group bombe amd the asap
banking holding sompaming that are sometime* a part of theme matins.
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Federal Reserve Bank of St. Louis
(S) Amonal Report of the Comptroller of the Currency
(Doe. 1, 1953), pp.307-321.
-6-
I. also still find diffienities in the may of quiet and effective
satiao on the ?art of the somptrollor of the serremay is serrocting
emsernd banking practisee dmo to bed menegemost an the pert et 01flews and directors of bode.
2. Inedipauste control of jogilit by ogrlhoftgaAmmerve suthorXties.
Another feadmmostal explamation f our phenomenal number of bunk failuree
is to in found in the lasksputte sentrol of credit, with partiamlar
refersmes to the besieges vela,'Mob ehereeterinee sur Folarel Eeeervc
system. This is due be the limitatioss pimead wpm the poosibilities of
wait sontrcl been.. eir the structural shanetariatics of the h.serve
system wad to the izssbtlt an lemit of ability of these in charge to
devise the principles mad neebesies that are effective within the limits
which the structure of the system permits. * *•
The amount of credit in use which is hoped the control of the
Federal Reserve estberitica, and yet affects bossiness seeditiesa sad t
pries level, is entfieiest to upset their best laid plans* Is may IOW
mention the tronalhemiseenat of credit need in the eteik market, the
capacity of the Ardleral Fain Loam system be extent tea mak srsdit to
farmers, mei the inetteue ether ses-oessereial Waking system est enterprises lqieg eldiable the aellerve Metes to appreciate the significance
of this pales is the apsimites of credit control.
Besegnisimg, hornever, these organic limitations inherent in the
nature of the MOOorvo systeat it is believed that aueh more could be done
than ht-41 been done to control credit in the interest of price level
stability. * 0*
• Alf•logardIssa of the present state of individual opinion on
those palter, the fast most to apparent to all that since the inauguration
ef the hirsima Nevem mites as hove witmeeeed the grpliktest fluctsatiens
in the prise level sad the greeteit maw of beak failures for the years
involve4 that this esinstr7 bee ever sees. Irvin these texts the lesson
met be slow that tilt system Least sestimg present-day deaends propICU sad that some well-cosaiderod corrortiems should bt made.
5. Maga lying lari els odd& thp bolgag field.•*
*0*
If as are to attempt to correct the structural defects of our acemartial basking system the evidence would moo to imdicate that all consortial basks Should be brought within the Federal beserve system if
it is to exercise gamine control over sommorcia/ credit, perform its other
funetions properly, amd provide the proper aid amd protection to sonsmnrisl basks. Fartheinera, sines seemerciel basking is interstate in
nature, it appears posterable to asseurt all oommarcial banks into ea-
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Federal Reserve Bank of St. Louis
-7-
tional banks, leaving for the st!,te hanks the savings bank and trust
company business in so far 86 possible, although it would not seem advisable to deny these functions to national ocemerciel 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 nesescery services to
the people. The questions of states' rights and constitutional limitations
do not present imsurmountable difficulties. When a business becomes interstate in nature or becomes an instrumentality vital to the free movement
of interstate commerce, the business is asthma in character and should
be brought ender natismal jurisdiction. In snob cases the steUs have no
rights that demand protection since the *Ale wall-being is at stake.
As to the emestitutional aspect of the question, it is quitk - doubtful
whether there are my wastitutional difficulties involved. * * *
A farther argument in favor of nationalising all commercial banks
rests upon tilt fact tiut it is hardly rational to expeet much progress,
and certainly not uniform program, by waiting for forty-nine different legislative bodies to agree upon and pass sound and progressive legislation.
A fundamental purpose of tbe federal Reserve system was to provide us
with a national policy mod system but it cannot be meae effective with the
pr.:moat ergaaimation of our commercial beakimg structure. We can acnational law. Business cycles are naconplisk these things
tional in as as are the problems of eredit control; commerce is interstate and tatermatiomal in nature; the probleas of a proper reserve etrueture are natiemal sad even international in their ramifications, and such
questions sem be dealt with adequately only by a governmental body with
the proper jurisdictional mathority. It is an interesting fact that 'bile
careful reflection should have convinced us long ago that a nation most
have a national eemmorcial basking system and policy, since this is ensemtial to national well-being, so have continued to permit a scattered
lips of banking with the acoompenying diffusion of authority that 11..s
smile an effective national policy impossible. Too much democracy in
MOAN has been a devastating factor in our economic life.
It appears sise that bremeh banking should be provided for in order
to enable hanks to assure the proper diversity in their portfolios; to
eliminate the problems now aesociated with small unit banking; to provide
adequate capitalisation so that the banks can engage, not only in local
financing, wnicn today is often beyond the capacity of the local bank,
but in a wider type of commercial financing; to insure a better grade
of somagemeat; eel to eliminate some of the dangers now associated with
chain and group benkimg. It seems logical, also, for such branch banking
to be as side as the Federal Mseerve districts, if not nation-wide, in
order to assure proper diversifieation, and the other virtues that appear
to aseempemy yell-organised brim& banking. Under such a system, branch
offices mould and should be °poised 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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establish branches in the far corners of the world, we have been um,willing to permit them to establish brrnchra within the countr7 despite
the fret that about 90 per cent of our trade is national rtIther than
internntional and despite the fact that we could regulate dnnestic
branches more effectively than the foreign.
IM 80 far as unit banking continuos, the minimum capitaliretion
Units would be raised.
$t44 should be given to the gmesties of the properties of redimenestabla paper wilich member basks should hold as sell es to the
prepertiems or other 'kypes or paper, especially investment smill mortgage
peper, *Adak might be issamded with safety in their portfolios. In s
similar ear, sto4, might be given profitably to the possibility of
devisinc a seisms ter imereasimg the margin of collateral required as
security for loans *ea the price level is rising.
There also appears to be considerable merit in the proposall eade
to aid, through the creation of central mortvge rediscount banks, th.
various institution& which hold real estz, te mortgage paper.
bince good central banking appears to depend upon the osiotosooso
of Wuidity, extreme oars should be taken is admitting any new type el
leh might impair this
paper to the portfolios of the heserve beak
liquidity. The attempt to give a central basking ',stir' wide powers of
credit control seems to conflict at certain points with thP sttrapt to
maintain its liquidity.
Non-courcial banking affiliate, doubtless Should be brought misr
strict control of amd 106 amsnined by the proper commercial banking
authorities, if, imdeed, the' should sot be sewered from eommereiel
booking tastitutiams. CarefUl consideration should be elven Faso to the
possibilities of placing strict limit* upon the totel amount of lone which
eemmercial basks mey make to their affiliate in the event they ere not
owered fres the commumial banks.
?Jae deposits, espesiallar those of. thrift or savings mature, should
be under the same restrictions as to imvestmest as savings deposits in
sowings banks and the reassures. segregated, or the reserves *West those
deposits should be the SOW as against assand deposits. Pelimps so
effective combination of both ideas scald be devised.
every reasonable step should be token to improve the system of bank
reports, examimatiems, and methods of dealing with recalcitrant book
directors and allegro. Until a thorough overhauling of our semmereial
benkint structure is effected, tht Comptroller's Office ehould be given
authority to examine and exact reports froa every unit in the chain
and group bt..nkiag systems 'Which are interet te in chRracter or in which
k national bank is one of the mite.
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Federal Reserve Bank of St. Louis
dI1411.0
bteps should be taken to remove all obstacles to eentrol 'hie are inhurent in the etrueture of the Federal R.strve system, anc whicu not
hamper our Beeerve authoritius.
That cur butking system is out of joirt and iv ueod of overhauling
seems else.r• It is also well emdarstood that out of every besieges oasis
arse domisads for revision at ear bankimg lame. It is a national habit
detyits trier fact thaA us Mew ye hlready hove ear bankers in legal strait.
jackets wnea olsopmrod with the freedom given to bankers In bush a country
es Engl&m,
. Nevestholees, this seems to be the only ftteciible *ay to
correct **lilting detests, Anse we sumo* afford to perpetuate our system
of little unit belmhe, with its amateur bombers, with its inability to
cope with seders balminess problems satisfactorily, emd with ite
meadows gnaw of bunk failures *doh hove soused ummessureS lessee nod
untold misery for millions of depositors, bcrromers, stookholdere, allows, and directors, who have striven valiantly to aseumulate a little
perpime which will afford then security in the evening time of their lives.
The Comptroller of the Corremoy, before the Currency Committee at the
HOW* at Representative* investigatimg Oroup, chain, 1.,nd branch beaskize•
plated the pieture vividly when he maid (in February, 1930)t More is
no note dietreosimg sight tame a pomp of citizens, moo sad mama, *lamerimg before the &wooed doors at a beak bewailing the loss of their wigs.
Thom lasses fall upon the boot sad moot sebstantial citizens In the
essmamity omd many of then sever symovcr their previous finuncial coed/.
time. MultipXy this lama event by nearly 8,300 end smatter it throughout
the great agriaalturel states of the %ion end the megnitelde of its effects
roaches astounding preportiome.
'It is estimated that 7,264,067 depositors halm oautributed to the
greet total of sore them $1,700,000,000 of deposits in failed hialltv during
the past sine years and that so les# than 114,000 ahara416k,re Lave suffered
lessee throegh thee. esopmmaions.' 0) * *
The tragedies of depositor, and others today, in u oountrl that is
@opposed to know oenothlog Omit hew to devise laws to protect the moody
against umsound social institutions am6 devices, are c sufficient answer in
theneelvoi to those oho insist thrt the lems do sot need revieies. It is
eartaimly high time that those Interested in the welfare of the depositors,
the soma OM end scactal and th44 pohlie in genera/00-4W this NW* the
legislator% the press, the osaial seilemtists, and those outilanding bookers
who ass the booking business ta no proper pettiep—ohould join hoods emd do
all things pssaible to °arrest present defects so thEt tht losses amd
tragedies which Ohmrseterise cur preempt banking Eytitem will speetay and
definite4 beCOMO wevats of history without orcbability of returns's*
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Federal Reserve Bank of St. Louis
($) Vol. Iwo
Pt. I, pp. 1!-14.
MOAN
Predkreisk 11. aradforti...
In Profesaer apakes analysis of the causes of bank failmres,
I feel that he has failed sufficiently to distinguish between those
ammo *hie are of fu'-reeching importance and these which are of
minor or secondary significano. Thus, in the dissuasion of the
defeats whiws are inherent is the organic structure of ger esumercial
banks and basking system, no particolar streae is laid on amy one or
more of the eleven defects deseribed, yet it seems apparent to me
that the poor quality of the memagemeat, of the mallar beaks espeais14,
is of entstaadiag signifies's*, While the variety ef larisdictisas wader
which our Wake operate, the easeasive member of beak., emit, in some
states, the inferior brume of bank supervision, are also mare inpartaat
them the other omen detests. If thee* meationed could be remedied, the
others mould largely take ears of themselves* I have little sympathy,
for example, with the notion that it ie impossible for a bank in a ewecrop resins to diversify its basinsosg War somad saaageseat mash a
beak would insist on holdings fair prepertiam of its resourees in *pen
market paper sod high-grade, marketable beide, ladle eonfiming its legal
lamas to the wen best risks. I also (pasties the increase in investaasti.:,
per is, as a legitimate cause of bank failures. So long as the isireetammt4
are in local mortgages, the bank does not, it is tree, strengthen it.
position, but probably weakens it. Investment in high-grade, marketable
securities, however, mersAy by helping to attain diversification, would
have tended to diereses rather than to increase the somber of small
country beak failures &trim tbe period prior to MO. Finally, although
I as quite aware of the defter of investment affiliates of eommereial
banks, I Moot convineed that they have plejed any great part in the
recent debacle of beak failures, except in the ease of the Bank of the
United Staise.
Iaadelmatc control of credit by the Federalism's authorities-.
/*stems, Sparse seemed mejer souse of bank failareso..cemas to Me to
have teem semenbat overemphasised. * * *
With regard to the possible eerrectives of the umsatisfastory basking situation in this smeary, it mime to me that permissive breech
Woking on a rather wide seals and higher aapital requirements for ..it
books are mere empedient Una the Ober Osage. which Professor Spahr has
suggested emi mad probably empire ths destred results. Imow tire Of
Olertieg Harilmy Withers, to the efts.* that *geed banking is predmeed, not
1017 Said lams, but by geed haabers.• lima the hembare of this eometry,
taken in the aggregate, leers that their first duty is to their depositors,
met their hemmers
'
mod that no lesser inveetment which jeopardise* the
safety of their depesitme0 fade it justified, there will be comparatively
few failures, whatever the bookimg laws Apr be.
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Federal Reserve Bank of St. Louis
lbserOtieelly, the analleet unit brake an be sommdly run, but often,
in profitless, they are net. It would seam desirable, therefore, u,
permit brans* banking and to raise the minimum capital requirememtE
for unit beaks as the most probably sad expedieat methods of securi
by legislatisa the type of bank amassment which is essmatial to a
good banking systaa.
/*ea if we insist that banks should be able to weather any sort
of condition that cones, it is only fair to them as it is to other members
of our economic organization that sound and affective mechanisms be devised
for the stabilisation of busiaess at home mad that the closest international
fiammoial co-operation be fostered' 4"1- ene +hat external dist-& ner
may be reduced to a minimum.
I quite agree with the two papers, however, that even vitt) a stablA
sasmomic roviromemat our banking system needs considerable improveammt.
lowest not, however, fall to worshipping mechanism* smeb as laws,
regulations, and externk,1 supervision. The only dispendable method for
achieving better banking is to develop better beakers. Sound beaks sr(
net aesessergy member banks, national banks, breach banks, or large
banks. Oben all of tbe acts of the present booking tragedy have bees
written it will be fommd that no type or system of bLnking one free from
the recklessness, greed, stupidity, and dishonesty widen have beim proosnt
is the existing situation. It goes without saying that a bank with larger
resources, more careful supervision, greater opportunity to diversify
risks, amd ability to command better aerial talent, other thimgs being
equal, will be better able to asether storms but even swab an institution
will subject the stockholders mmd patrons to heavy Imam molest it is
wisely and honestly managed. The ability, conservatism, sod highly develop
seas* at stSeeSdship of the English banks are stabling them to weather enperturbed stems WOW more violent than air sea Wake are emeouaterimc.
Ibile there is mask to be said for a atagie mational astem of beaks
the ease is not quite as eae-aided as Dr. Spear would have us believe. We
have already dumped upea the 'antral government so many of oar local
problems that it is emabla to grapple with them effectively. While some
of our state laws and Supervision systems are not quite up to the standard,
of the national grates I have found that the plane upon which banking is
done in may given sommmmity 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 Warshaw of ideas, has resulted in greater
progress. As has beat the case with state-wide browse banking, ems state,
California, has served as the laboratory without the whole country having
been subject to the nasessity of amperimeating with a new type of banking
structure.
I quite apse with Dr. Spahr that the small bank should be eliminated,
branch bookies be given a semembat freer hand, that stricter, as well as
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Federal Reserve Bank of St. Louis
-12more seleatifieslAy devised, regulations be made with respect to loan,
deposits amd reserves, end that a better type of supervision be provided.
It if still desirable to emphasise the fact, however, the.t the best of
regulations amd the ablest of supervision will not aske our banks failureproof in the fase of stupid and dishammstammagement.
Dr. Spahr's iasistemee that every oommersial busk should belemg to
the reder*1 Reserve mysten meets with my approval provided he sonfinee the
tern %mak' to those imotitatioas that are esemereiel is fist as well
as is use. deny of thole basks that are still outside of the tastes de
se small a velem of commersial banking as scarcely to *arrest Seeerve
beak memberships
•
As for the stricter regulation of the investment departments and
investment affiliates of beak*, I would go a step further and insist that
unless this type of financial service eau be remdered without brimgimg
distrist upon the whole iastitutiem it might better be dolled to emr books.
The depertmemt store idea in fiammse is in itself a thereaghly sommemdable
one and I see no fumdameatal reason for doilies to either qualified mew
tional or state institutions the right to engage in the whole oast of
financial services, provided that a mmiformly high standard is maintaimed
in every depertmeut.
Sr conclusion is that we should perfect our haeklng lows and the quality
of supervision to the highest degree but thtt we should regard these as say
of minor inortnc Is oar quest for a failurepipmmottembing system. This
latter condition we onset achieve until we have pissed emly geed beakers
in charge of all of car banking imstitutions.
* * * I Walk that the 'meat smggested ohmage& in
reserve requirements of banks, however helpful they may be, can at beet
he only a temporary relief. The are attempts to sure only one part of
a dissamed body, when probably the entire ernes seeds meditate' atteatioa.
Profemeer 110ahr's paper on beak failures builds•very strong case for
beak ream It is Mel:" that we shall pelt three& this preseat
depressioa in a year or as and shall them feel that our bookies system is
not so bad after all. However, the reamed of the past tam years will stead
Ls 4 menumEnt to costly emperimmatatiaa. IS hove mitmessed the immdslmear
of our banking 14va to meet natiomal emergemeimm. I an well *were that,
as has bees pointed out, banking lees do not Asko geed banking, but that
geed honking is attributable to the beakers tbemselves. Yet we tlftve
drama up for the bankers elaborate sedge which leuld attempt to set strict
limits en the honkers. That these limits have been overstayed is common
knowledge. The owe paramemat object to be desired in my banking system
is adequate and safe boatel,. It is hard to conceive floe this can be
achieved with forty-eight different experimemt stations, each with its
emm individual laws, as we have in this country. I an in accord with
Profeseer Spahres coateation that a system of branch banking is a selutloa.
I do met believe that breach banking is a pusses, yet I feel that it would
provide a united front whisk 'Light offer an opportunity for emifermity of
control. Banking, as new serried on, is essentially interstate is
Amt.11667--
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Federal Reserve Bank of St. Louis
iftemeter, We hove hoes altogether too imdividuelistie and easeeperative in this hesimees, MS is witnessed la practically every teals(
cemmmaity of the entire country. I feel that the price which is see
beim paid is altogether too high for e perpetuation and continuation,
*tour present outly system* * * *
101111UL1211111* * It is tree, hemmer, as Pretoreer Sell has is ably brought
out in his analyst* of the mature end slessifieetion et bank deposits,
that time deposits are by seesaw houngemeeme. A mend segregation
la* should limit the proteetlea to sevings soommts sod should mot
include all elesseo of tine deposits, *lob mmy imelude large es?ital
amounts, are than teem* risers of imperious have eonvimood the
public and most beakers la feliforaie and Oregoa of the advantages of
segrecation ewes uhes beediempped b7 tamstiefactory elassifieetion of
secalate.
The proposal to bring all sommereini aaka lager astismoi esetrel
ie not new, hut ems brought into prominence some *maths elm ihea
advouted by easa 11. Temes bee*, the Smoak iimmittee ea Simbiag mod
Ow-row. It mut be admitted that areshouss law has operated in the
field et banking. nose hes bon open to bombers the shaft of two
codes valor whisk they might operate their bombs. Tee Winos they hat4
chow* the see with lower capital requirements or lesser supervision.
Oer everhanked eandition in semy states ou he attributed to laxity in
lava amd the competition for umber, under tme systems. Against this
Motto loot the seine fron a developmental point of view of esperimeatati
and freedom from monopolistic osstrol of teals% resemrees.
LA
If we semeede that COMS,0041 has the power to establish a stogie bukiag
system, we out still reeognise that mmOk straw most he threshed before
such a farereaehies proposal ems tome the law of the load. Meantime, as
4 practical propositivo, it seems lest desireAlc to mime Is the direction
of a single erste' through stemdardimation of state banking legislatila
end supervisiam4 *
isisting booking modes in the seem states sompristag the ?eolith
Modena Meeerwe District are barely a quarter et a outcry old. lbssome
eceditioso with modificatiem5 is typical gemerally. Is meat years the
treed of state legislation sad empervisisa has bees toward desidedly higher
standards. The old competitive spirit has disappeared. In Its stoma we
find so-eperstion with tho eemptrollerfs department odd a desire te bring
the lams up to the best standards of the matismal beebimg cit. In the
matter of eapital clue, states hews adepied the minimum regvirements of
the setional law,
In MY own 'tato of laohington the past deemde has witmeeeed a
distinct tread toward esoolatinetion of anakimg palsy* ?whops mere real
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Federal Reserve Bank of St. Louis
-14-
presrems mew be made by emnsentratimg mar mew upon bringing up
the stmmderd et state bemhimg than In lookimg tossed tbs Well but
semsedask distant and emsertain goal of a single nstiamal system et
emmemmtbablemking•
Professor MOdes proposal ter bees& basking deserves smpperte
Aoreover, so Sheol& establish a national volley upon be
mad
banking. 'he Wadden Act in animalism.* deslared against is
ty
brunch boils, sod left our national banks object to state legislation
in the establishment of city bromehes. The result is that in moor
otitis chore brook banking is illogal, e.g., Beattie, peep bembior
hes bosoms the demieent form. It is gensrally eoaseded that bees&
buskimg would be mere esomonic if permitted. the resat at the present
lt.na is to give es poops, now of which 1410 wouivalest to bramehee•
It iv inevitable, hiceseer, that the agrieultural esetiome et the
United &tater mod Goad& eill hove a larger ammiacr et banking etfiess4
Despite the lideming at the trade area V/ improved reeds mad the ese et
the automobile, the small tome is still the easter et besieges sod
eooial life to & largo properties et sir rural pepmiatien.
twiny,
tai anoet double the slumber tot biAnklmg allies per espita that we heft
in the %it'd Otateo. 4 br&aeL bank sun be maintaisec fax sere
WidincricL14 then an independent beak. This point* IA) bramehea as a
method of providing bamkimg servioes to small toying. Sem* states, e.g.,
Issa„ have already authorised brag& *banklets--brunehes say in tomes
ilire no indepc-adent honk is in operative.
Odle remegainine the antoseien of branch banking as inevitable and
desirable, an smalTeiv of the ra.emt past onueste that we neat pr0000d
Witt camtiem. koneh end grew iyiteme have hew throes together too
repidly. Protons htve beat eatendel fester Una the emits semlA b6
intagliated. Life-lemg uniAlbsuhere be,. bees tempted lir Ugh pries ter
tour basks sad htiber seleries thee they have dared to pay themselves to
part of t gremp or brush myetem4 Mat they emanet adjust ever..
to thE new order of thins.
11;:r
Today Ile may find bruaci systems UMW sith heavy overhead, emmtrolled ty sbeentec oemers, unable to lolly and so-ordiaate the Asnagememt
and 09e-otiose. The mating over of a system of unit baokiog into brawl*
bemiring will bring in itr train aravt ?a-Asians. It sill require decades,
not yrntr, tct aceomylieb it eueessefully•
desmar or lster Con...a suet decide * national polio reE4rdiag
bromOk and group b-Aking. the informetioe obtained at the 1150 aid 19S1
hearing of the amuse end Minato flommittoes will souk be supplemented
lir the findings st the Federal Melmerve %Odes Co:eines as lreenit *see,
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Federal Reserve Bank of St. Louis
-15ank, Chain Bunking. lath this :,ad other available inforestion a *egad
poi:Lew shoal..4 bL fosmulatod. In te foraul.tion of this poliey bankers
gnat assist, but not dictate. Sem-,tor Glees hes sale thAt all of tivl
opposition to br4ach banking htlt, c-Ale fron bankers and bAnkersf organisation*.
Perhaps the first branch benkint 4,l uestion to mettle in the area
over 'thick a book ms,y sztem# its branches. City bramble, should be
allowed umiversally sithout revrd to ante lc*. Me Orem of nationvide beam& banking ig over. Probebly the first step should be to
limit IcrumcbusL gt.Lt‘ linct or c-12tiguour territory. Trade area
brunch** niki b fa‘siblt if the trade tree le nerrowly defined at first.
IA axt event, launch =pension Should bc subject to restriction and
control.
Gro4 bunklat, shoule be brought strictly under the supervision of
the coaptirollgs where
rtnbor f thc group le s motional beak. bound1,) managed gircaaps add ctrength. Thc evils of unmoved mmmarememt have
boas demonatmtsd in such group Ls the annkerre Nolan Corneration of
4.att1oo er the Caldwell moo at Nashville. Thee* empurtraoes
demmmotratod tilz.t, group immisamitafmmy bc ci eissstrons liability toe
SeSneut lama bkAnk drawl Int. well&
peetth tiv aempeny through
growtu
TimmlAiro / would nixec herztlAy v9ith the ?review/ speaker, vb. hove
*tressed memememmat as a solution or bank felon's. tbensands of it
tanks bsve OugelossfUlly weethered the storm and stress of 19Z0 and 1951
year* whoae toles/LIG failures have brlaht errldennatiea upon our preeemt
systea. At the MOOtis, poorlydainirtered bream* sod grow) systems
have game doon vit4 disastrous results. A shengod %MIN structure alums,
tnerefor*, c4u1d not be t gueremtee of stability.
The state bombise dipartmemt is kashington ha* adopted a immoral
pilaw of fewer amd strummer books. (The majority of mall bombs were
state Chartered.)
esmstruotively ups. this policy, the
east has bees able to eemplete may three isterceemmmity mergers. It
would mot be a serious bardobip is mmmy mere eases to merge beaks so that
they woad be limited to trade areas of euttieient size to rapport a
bank adequately.
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Federal Reserve Bank of St. Louis
Hearings before the Subcommittee of the Committee
and Currency of the House on H. R. (10241) 11362
Banking
on
March and April, 1932
Statement of Ronald Ransom, President of the Georgia Bankers Asso...., Atlanta
******* * **
Mr. Ransom. I always thought double liability was a pretty good thing.
It makes stockholders pay some attention to the bank.
** ** ***
'
**
Statement of William S. Elliott, Vice Pres. of The Bank of Canton
Canton, Ga.
Mr. Elliott. Mr. Chairman, if you will permit me to say so, I think
requiring a minimum capital of $50,000 is a forward step, and
provision
the
I approve it so far as relating to future organized banks is concerned. I
would not want to do anything to disturb these banks that are growing up;
but in my opinion newly-organi7ed banks have hard enough sledding as it is,
and it seems to me that in a community where there can not be raised
t50,000 capital to put in a new bank, that community ought to avail itself
of adjacent banking facilities to take care of the situation; and I believe
with that explanation that your provision is a good one.
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Federal Reserve Bank of St. Louis
** ****** ***
•
SOURCE:
MID-CONTINENT BANKER---FEB. 1932 (Folder 3260)
WHERE DO WE GO FROM HERE?--by S. J. Anderson
Page 11
There is no doubt that too many banks have been chartered in the
past. But the present tendency is away from that direction by both the
state and the national banking departments. It is to be hoped that it
does not swing to the other extreme, and make capital requirements so
high as to be out of reach of some of the communities which may now or
at some future time be in need of banking facilities. Some banking
authorities have suggested a minimum capital reouirement of $100,000 as
a solution of the problem of safety. To a trained observer on the outside looking in, the list of failures the past few months indicate, if
anything, that "the bigger they are the harder they fall."
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Federal Reserve Bank of St. Louis
114
•
SOURCE:
NFT YORK STATE BANKERS ASSOCIATION - 1932
THE WAY OUT-- Address by Henry I. Harriman, Pres. of the Chamber of
Commerce of the U.S., Wash., D.C.
*
*
*
Pages 256-57
Third--Strengthen our banking system by raising the minimum
capital of banks to fifty thousand dollars, providing for branch
banking within state limits, creating a liquidating corporation
for closed banks in order that depositors may more quickly receive
at least a part of their deposits that are thus locked up, and
giving to the Federal Reserve Board reasonable control over credit
-1L. speculaexpansion to prevent undue credit inflation in
%.
Possibly
tion and undue credit deflation in times of
at the present time, a very carefully controlled inflation may be
needed to help restore the commodity price level.
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Federal Reserve Bank of St. Louis
113
SOURCE:
25th ANNUAL REPORT OF THE DIVISION OF BANKS - STATE OF OHIO
DEPARTMENT OF COMMERCE, DIV. OF BANKS
December 51, 1952
Page 9
VARIOUS LEGISLATIVE MEASURES
Another important legislative proposal which will be before the
General Assembly for consideration will be one to double the minimum
capital of banks. The enactment of this measure would increase the
minimum capital from t25,000 to $50,000. Such action would be instrumental in reducing the number of banks, with the resultant effect
of strengthening the remaining banks. Such a, change undoubtedly
would be a big factor in reducing bank closings. Another proposal which
it is expected will be submitted, will be one clothing the Superintendent
of Banks with authority to investigate and examine affiliated corporations of banks as well as the banks themselves. There has been considerable sentiment throughout the Nation in favor of national legislation of
such a nature, and the Congress of the United States may provide for
such a regulation,
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Federal Reserve Bank of St. Louis
177
SOURCE:
THE CALIFORNIA BANKER—JUNE 193.q.
ADDRESS OF THE PRESIDENT—Herbert H. ,Smock
Page 218
* * * ****
PROBLEM:. MUST BE NET OUTSPOKENLY
There are two parts to the problem, one relating to the form
and structure of banks and the other having to do with their mea,agement and operation. The first element of the problem relatPs to
our syetLa of banking in this country, or rather our lack of a
uniform system. It is difficult for one in Ay pos!tion to be
specific either in criticise or approbation. We have several kinds
of banks represented in our ;ssociation, and it might be considered
unbecoming for the Preeident, who it selected to represent them all,
to make any expressions of discrimination s between different forms
of structure. One of the greatest obstacles, however, in the way of
improving our banking structure has been, and is, the reluctance ca
the pert of leading bankers, for policy reamoms, to express themselves
frankly. How are these problems to be solved unless we have the guidance of those in high authority? While I shall not attempt te euiges.
a remedy for all of the problems confronting us, I should feel remiss
in fulfilling uy responsibilities if I refrained from expressing some
of my own convictions.
flED FOF, MUM BANKING SYSTEA
I am firmly convinced that a large part of our difficulties, from
the point of view of structure, comes from the lack of a unified system of banking. We bee, in effect, forty-nine different banking
systems in the United States, embracing the national banking system
and the banking systems of the forty-eight individual states. It is
bad enough in any event to have this sort of diversity, but-whem it is
realized that tilt systems differ in each of the fort:-eight states ant:
that it is possible in some states for a small group of men, whatever
their qualifications or lack of them, to organize a bank in normal times
with small capital and operate it under practically no adequate regulation,
it is not necessary to go much further to find the reason for banking
difficulties and failures in times of business adversity. It is no doubt
true that many suspensions were caused by the action of an moreasonably
frightened public whose peremptory demands it was not possible for even
well-mired institutions to withstand. But it is impossible to contemplate the number of bank suspensions in the United States during the pest
ten years without coming to the conclusion thEt something requires correction in our banking structure. We may differ as to the splpific remedy
for such a condition but we must all give thought to the necessity of findiig
some remedy, no matter what may be the obstacles, constitutional or otherwise. The attempts to bring about uniformity in banking organization and
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Federal Reserve Bank of St. Louis
183
-2-
Merbert H. 6sock
Page 218 (contd.)
functionr have largely been made in relationship to our national
currency system, but it must speedily be recognized that the bankisc
and commercial credit of the United States transgresses all State lines
and is nation-wide in scope; that the banking structure of the country
must be related not onl; to the requirements of a sound and adequate
currency but also to the commercial credit needs of the nation, and that
it will not be sttisfactory until in its for it parallels thc Leope and
character of the nation's credit.
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Federal Reserve Bank of St. Louis
We must f.-ce the question of unift,d banking. * * *
•
Proceedings of 31st Annual Convention
National Asso. of Supervisors of State Banks
Philadelphia, July 1932
President Love (Miss.):
The next subject "Charters of New Banks": I believe 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 v'e find a community needs
some kind of banking facilities, yet has not sufficient business to
justify the organization of a new bank, the thought is that this community can be best 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, PS 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.
M. F. Bristow (Virginia): I presented some thaughts the other
day. I see by the records where I said, according to the American
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
20'3
•
SOURCE:
THE CALIFORNIA BANKER—JUNF 1932
REMARKS BY EDWARL RAINEY—State Supt. of Banks of the State of Calif.
Pee
2O
Possibly you want to know some of the things that our department has done during the time which has elapsed since I had the
pleasure of meeting you at your last convention.
Possibly one of the things we have not done is more interesting
than some of the things we have done. We have not granted any new
charters for banks (applause) and I say that after having had a number
of applications, for instance, a new trust company to be formed in
San francisco, a new bank desired in Long Beach and another bank
desired in Los Angeles. I do not know how my Los Angeles friends feel
about it, but I think they have enough banks there at this time. We
have made it a policy, even with the number of applications made to
the
the department, to say, "No, we think we have enough banks for
are."
moment. Let us go through as we
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Federal Reserve Bank of St. Louis
SOURCE:
NEW YORK STATE BANKERS ASSOCIATION - 1932
EXTENSION OF THE CLEARING HOUSE PRINCIPLE- ADDRESS BY W. A.
Mc Donnell, Executive Vice. Pres., Bankers Tr. Co.,
Little Rock, Arkansas
*
*
*
Page 141
Le, us go one step further and suppose that as the public
grasped the idea, it became impossible for a bank to retain
public confidence without membership in the association (clearing house); that state commissioners could not be appointed
without its approval, and that new charters would not be
granted without its sanction, and so on and so on. Just
imagine the strength of such an organization in times of
stress. As a result of sound supervised practices, each
bank would have adequate earnings, would be able to build up
adequate reserves.
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Federal Reserve Bank of St. Louis
205
•
asSibations Committee Report
36th Annual assWettion, Indiana Bankers Asito., May 1932
(rbo iliesier Banker, Jams 1952)
•* * * * * * * *
Operating Policies
WHEREAS, Bank earnings at the beet are oomtimuing at low obb with
no immediate prospect of an upward treed; sod,
ARSREAS, The preservation of a sound roeition for our banks makes
it imperative that we have a onfficient margin of net *amino: to protect the inereased credit hazards which are inevitable in times such as
these;
NOW, TREMOR!. BT IT RrSOLVTD„ That we reaffirm the stand already
taken by our Association that the maxima rate to be paid on ti-.1e deposits should not be in =eons of three per cent;
BY IT !FURTHER RESOLVED, That we urge upon our membership the
importance of an acrate knowledge of their opertiting cost
d the
establisbnotnt of reasonable charges for services rendered.
*** ** * * V *
Onarentss of Bank Deposit0
Toms, Periods of upset economic conditions SMilt as that through
*hick we are nom passing make the rroblem of the debtorw-ereditor relationship more acute, ghee involving a limited number of banks in the movessity of having le suppeed current payments to de-ositorst and,
WHOM, there Slump* splay %I at such tines a popular lemand 20,
guarantee of bank deposits; smd
MORMAI, Amber of States have masted laws to this end; and the
sabeequest experiemSo te these States has been without exception disastrous;
MMUS, In the very rmture of the 0400 it puts bad banking at a
premien and good banking at a discount; and.
WHERRAS, In the last analysis, barring unforeseeable oatastrophies,
the saseess or failure of banking operations lies in the management
ffteter, and the management can not be legislated into bulking institutions;
1101. TRIMORS6 IX IT RESOLVED, That it be the sense of this Aseociaties Viet in are emend to the principle involved in the guarantee of
bank deposits in way term;
BE IT ma= ISSOLVED, That in our judgment the oily emend legislative approach to oar banking problem tat
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Federal Reserve Bank of St. Louis
- 2(a) To provide such restrictive legislation as will enable our supervieing authorities to curb unwise banking policies and to eliminate dishonest banking practices,
(b) To provide adequate funds and adequate personnel to insure
intelligent supervision ay our banking authorities, and,
(c) To require a high degree of discrimination in the issuanee of
bank charters, tints avoiding overlooked conditions on the one hand end
insuring safficient patronage on the other, to justify u cafe and conservetive eperat,_ng policy.
!MIAS, The Reconstruction Yinanos Corporation Act and the Glf‘ssSteagell Act, which were enacted ea enorsmosy nessnres to reinforce
the financial structure of our country during a period of teln7orary
stress have already demonstrated lvoir efficacy; and,
MMUS, In our opinion the 10006600 of these two acts render
farther temporary banking legislation superfluous; mud,
MMUS, Any banking lo!rislation littended to be permanent in
character should be approached with a &ogres of deliberation, inposeible
before the adjournnent of the pretwIt Congress;
NOW, WITRE7ORP0 St IT RTSOLVM„ That this Association favors the
post7onement ef any further Federal banking legislation until a later
Oessiem of Congress;
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Federal Reserve Bank of St. Louis
4
&OURCE:
REPORT OF THE C/C----1932
Page 4
In considering those cnuser responsible for benk failures
in this country, it is significant to note the repid increase in
the number of banks chartered during the 20-year period beginning
June ZO, 1900. On this date the total of all reporting banks was
10,382, while ;: years later, June SO, 1920, the total was b0,139,
representing an increase of 19,757 chartered banks, or an average
yearly increase of 988. Ahile these figures are net and therefore
short of the actual number of chartered banks by the number of
suspensions, voluntary liquidations, consolidations, etc., the;, are,
nevertheless, large enough to reveal the effects of the relaxation of
requiremente 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 capiteli.etion of nationel banks
from $50,000 to #25,0000 facilitated the organization of thousands of
small banks in small towns, perticulerly in egricultural sections
throughout the country, While rising prices and increasing prosperity
made it possible for there 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 rcali2e the danger in permitting the organization of mall 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 tere orgeniec(i. Of all
suspended banks since 1920, 65.7 per cent have had capital of lerr than
t50,000.
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Federal Reserve Bank of St. Louis
236
•
LOUFCF:
Feport of Banks of Deposit & Discount, etc., N.Y. l93.
Page 5_
Banks are quasi-public institutions, created for the purpose of
promoting the advantage and the convenience of the public. They
are permitted to receive deposits and are expected to finance the
orderly processes of business and the legitimate needs of trade
and c()mmerce. It was never intended that banking institutions,
receiving deposits from the public, should supply permanent capital to private corporations, or speculate, or finance speculative
activities. Such fields should be left to private investors.
Late11
During the last half of this year, email loan facilities in the
State have beea substantially widened as a result of the repeal of
the former Article 3 of the Banking Law, and the substitution
therefor of a statute modelled after the Uniform Lma,11 Loan Act,
now in effect in 26 states. Formerly, smell loan companies in this
State operated as moneyed corporations and as a consequence were
subject to certain restrictions which prevented their natural end
proper development. Under the present law, an ordinary business
corporation may engage in this line of business upon obtaining a
license from the Superintendent of Banks.
The present statute is predicated upon the theory that a need
for small loans exists; that this demand should be serviced with
profit to the lender and that the borrower is best protected from
prohibitive charges by establishing licensed loan offices whose
charges are limited by law to a rate that permits the fullest extension of credit and reasonable profit to the lender. It provides fur
periodic investigations of the loan offices by this Department to
determine their observance of the statutory restrictions and contemplates that licenses be issued only to those applicants whose
moral and financial responsibility warrant belief that the business
will be fairly and honestly conducted in communities wherein
exists a need for such facilities.
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Federal Reserve Bank of St. Louis
SOURCE:
Report of Banks of Deposit & Discount, etc., N.Y. 193.
Page 16_
Charters and Licenses
No charters for banks or trust companies, or authorizations to
private bankers, have been granted under the authority of the Board
since its organization on lay 11, 1932.
The Superintendent of Banks, acknowledging the spirit rather
than the letter of the statute, has seen fit to make a practice of
submitting for the ceinsideration and approval of this Board, applications for licenses to foreign banking corporations for leave to do
business in this State, and applications for licenses to engage in
the business of licensed lenders. As a further development el this
spirit of the statute, the Superintendent has believed that a fundamental feature of new banking includes new branches as well as
charters for new institutions, and in consequence has recently
established a policy to submit to this Board all applications
of
moneyed corporations for new branches in this State.
Page 46
Senate Int. 106.
Senate Print 109.
This Act amends Section 30 to clarify the authority of the Superintendent to make examinations of banks and trust companies twice
in each calendar year upon such dates as he may select. It also
provides that in the case of an institution which is a member of the
New York Clearing House Association, the Superintendent may,
in his discretien, accept in lieu of a Department examination the
report of examination of the Clearing House.
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Federal Reserve Bank of St. Louis
•
SOURCE: 19th ANNUAL REPORT OF
U. RES. BD.--1932
,Page 26
RECOMMENDATIONS CONCERNING LEGISLATION
"It should be recognized that effective supervision of
banking in this country has been seriously hampered by the
competition between member and nonmember banks, and that the
establishment of a unified system of banking under national
supervision is essential to fundamental banking reform."
During his testimony on the bill the Governor of the Federal
Reserve Board called attention to the last paragraph of the fore—
going statement and stressed the fact that "effective supervision of
banking in this country has been seriously affected by competition
between member and nonmember banks", and that "competition between
the State and national banking systems has resulted in weakening both
steadily."
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Federal Reserve Bank of St. Louis
* **** * * *
290
SOURCE:
ECONOMIC CONDITIONS, GOVERNAENTAL FINANCE, U.S. SECURITIES
(The Nat. City i:lank of N.I.)
I'age 4--(Jan. 1951)
The rise of comaodit: prices and of wage.l. resulted directly from
the war, anki put the country upda a mew basis of va.ues, which ZS people
became accustomed to it seemed to be real and permAnent. Wheat west above
15.00 per bushel in Chicago in the early part of 19200 corn above 1E.00
per bushel, *lick: stimulated & demLnd for fara land& and caused an active
turnover at rising prices. These farm transfer& were financed largely
on credit, and the census reports show that in many L'tates the aggregate
of farm mortgage indebtedness doubled in the ten years from 1910 to 19;0.
This imereasse, of course, was not significant of distre&s at the tine but
of confidence and eagerness to use credit. It was due to a misinterpretation
of conditions, and ultimately produced th conditions with which the rural
hanks have been struggling ever einee.
For a period of fifty years 1mmd baleen htld been generally rising, and
public opinion was inclined to accept the war-promoted rise as mere1y a sore
pronouneed development of a natural tendency. The rnrhl banks become involved in loans which directly or indirectly were based on these lamd vtaws.
It tabs since developA that while the war gave a temporary stimulus to,Sarm
prodection, with the result that farm groducts are back now to pre-war prices,
leaving tau new indebtedness without adeeuate support. This is a plain
IL
stateMmmt
of the grave situstion with which the banks whotie business is largely
with farmers have had to contend. Another fastor 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 businesso say nothing of experience with such conditions
as were then ?revng. 'the country becsae over-banked, and the banks overexpanded on the basis of inflated prices.
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Federal Reserve Bank of St. Louis
to
the prices of farm i)roducts, it gave a permanent stimulus
'237
Committee on Betaking
Chamber of Coaaerce of the United States
Preliminary Material - Meeting in Chicago
October 31, 1931
* * **** **
The Development of Smaller Banks. 1900 to 1915
As we have seen, immediately following the panic of 1893, the number of
national banks decreased. Whether or not this resulted entirely from the
panic is open to question. It ray well be that the development of state banks
and trust companies, having as they did the privilege of organizing with a
lower capital, and having developed as they did various types of banking service, many of which eere not commercial in character, such as trust functions,
savings departments, dealing in investment securities and loaning money on
real estate, operated to make the organization of a state bank and trust
company more attractive in many places than the organization of a national
bank. There was felt at this time the necessity of permitting national banks
to organize in cities and towns at a capitalization less than the previous
tF0,000 minimum recruirement. In 1900, an act was passed by Congress permitting the organization in towns of less than 3,000 population of national
banks capitalized at t250000. There was an almost instantaneous response in
the growth of national banks in the less populous and less realthy portions
of the country. Whereas during the five years preceding 1900 there had been
a net yearly decrease of 28 in the number of national banks in operation,
there was during the five years, 1900 to 1904, an average net yearly increase
of 390 national banks. Indeed, the period from 1900 to 1913 has been referred
to as the "golden age' of national bank organization. No othr period has
been so prolific in the organization of national banks. But state banks and
trust companies were making even more rapid strides during this period. The
relative numbers of trust companies, state banks and national banks in the
years 1900 and 1915 are shown below:
Trust Companies
Number
1900
1913
290
1,515
State Banks
Resources
(in millions)
Number
Resources
(in millions)
t1,330
5,123
4,569
14,011
$1,759
4,143
National Banks
Number
3,732
7,473
Resources
(in millions)
t4,944
11,036
It was during this period that national and state banks case into direct
competition with each other in practically all sections of the country, and
that the more liberal powers and privileges of state banks began to react in
a definitely unfavorable way upon the national banks. Yet, the above chart
shore that the relative position of the to classes of banks as regards their
control of the banking resources was not materially altered in the thirteenyear period.
Under the Federal Reserve System - The development of Branch Bankin
When the %inking system of the country was reorganized in 1913 by the
pb.ssage of the Federal. Reserve Act, it was recognized that state banks and
trust companies, especially the latter, 111...d developed a field of banking
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Federal Reserve Bank of St. Louis
251
activity which was not open to national banks, and in order to enable the latte,
more successfully to compete with the former, certain additional powers were
given national banks. By the act and amendments thereto, national banks are
now permitted, upon approval of the Federal Reserve Board, to serve in the
capacity of trustee, executor, administrator, registrar of stocks and bonds,
guardian of assets, assignee, receiver, committee of estates of lunatics, and
in any other fiduciary capacity which by state law is permitted to state institutions in the same place. Further, in the small cities national banks are
permitted to act as insurance agent and as real estate loan broker. State
banks had enjoyed an advantage in their power to loan on real estate security,
and had developed in some of the agricultural regions at the expense of national
banks. This advantage was partly dissipated by the Federal Reserve Act which
permitted such loans within restricted limits. These added trust and fiduciary
functions were a recognition ot: the competition of state banks. There is at
no place in the National Bank Act or the Federal Reserve Act any express
authority for the operation of a savirws department in a national bank.
Prior to 1911, such departments could not be operated except through an
affiliated savings bank organi7ed under otate law, but the distinction made
in the Federal Reserve Act between demand and time deposits and the requirement of a specified reserve to be maintained against time deposits has been
interpreted as permitting the direct operation of savings departments by
national banks. Their only savings function, however, is the payment of
interest on such savings deposits.
National banks were made compulsory members of the federal reserve
system from the outset encl. state banks and trust companies permitted to
join under certain conditions. There has been a gradual liberalization of
the terms of admission for state banks to membership and there was until
LY2 a steady increase in the number of such banks which entered the system.
On June 30, 19!"-4, there were 1,570 state bank members of the system with
13,221,983,000 in resources. Seven years later, on June 30, 1951 the
number of state bank members had decreased by 588 to 982, but their resources
had increased by $4,468,005,000 to t17,689,988,000, while the number of
national banks had decreased by 1,280 to C,800 and their resources had increased by '5,045,527,000 to '27,598,600,000. * * * * *
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** ** * ***
7Itanc. Department, Chmber of
..)f the UrLit$0 Statts, Washington, D.
Ncm-BInker
. 0L±tin, Pres.,
)11 Shelf/mut Mak,
"toton, Masa,
Waltwl L. CriAlker, Pres.,
John Hancock Mut. Life Ins. Co.
Boston, Mass.
M. Warburg, Chrm. of Board,
7Lternation41 Acceptance Bank,
40 Wv11 St., fif,w York, N. Y.
David M. Goodrich, Ohm. of Bo4ru,
The B. F. Goodrich Co.,
250 Park Ave., New York, I. Y.
Hc,nari A. Loeb, Chairman,
TriviesKents Ndttcrial Bank &
(Trrat Co.
Alba B. Johnson,
1521 Packard Building,
PhilfAelphia, Pa.
W. K. Baldwin, Pres.,
The Union Trust Co.,
Cleveland, Ohio.
George T. Ladd, Pres.,
United tngineering & Foundry
Pittsbure..t, Pa.
John M. Miller, Jr., Pres.,
First & Merchnts Natl. Bank,
Richmond, Va
JUniUA
Oliver G. Lucas, Pres.,
laual Bank & Trust Co.,
Aew Orleans, La.
P. G. Shook,
Shook Fletcher Supply Co.,
Birmingham, Ala.
Felix M. Mahirter, Pres.,
The Peoples State Bank,
Indianapolis, Ind.
J. Paul Clayton, View Pres.,
Central Illinois Pnb1
Srrv.
Springfield, Ill.
Lansdale, Pres.,
4ercantile-Commerce Bank &
m*. Louis, Mo.
(Trust Co.
Paul Dillard, Pre3.p
L. W. Decker, Pres.,
Northwestern Bancorporation,
linneapolis, Minn.
William J. Dean, Prea.,
Nichols, Dean & Gregg,
St. Paul, Minn.
I. b. McLucas, Chrm. of Board,
Sommerce Trust Co.,
Kansas City, Mo.
1%, L. Petrikin, Chsirmul„
The Great Western Sugar ao.,
Denver, Colo.
Nathan Adams, Pres.,
American rxchqnge N.tl. Bank,
J. J. Culbertson, Vice Prdte..
Southland Cot*-- f/41 "Faris. Texas.
'ienlf M.
_ ,
Ch,1-10in,
Security-First Natl.
J. B. Levison, Pro.
lirenente ?and
San Francisco, Calif
•Tohn
3t. Louis
,
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Federal Reserve Bank of St. Louis
P. lishburn, Pres.,
Times-World Corporation,
Roanoke, Va.
pinard & coffin go.,
Keaphis, Tenn.
ency
Annual Report of the Comptroller of the Curr
1930
December 1,
Pages 1 to 10
the subject of branch,
Since the publication or my 1929 annual report
iderable attention. Bankers and
group and chain banking has received cons
e, the press, and the public
their associations, both national and Stat
subject to a greater degree than
generally have evidenced an Interest in the
largely to the increasing number of
ever before. This interest has been due
itions which have brought hitherto
country bank failures an the changing cond
with the commercial centers. These
Isolated rural districts into closer touch
in prompting my suggestions to the
developments were also important rotators
ed
5155 of the Revised Statutes of the Unit
Seventy-first Congress that section
Comp
the
banks, with the approval of
States be amended to permit national
branches within the regional trade areas
h
troller of the Currency, to establis
ate.
of the commercial centers in which they oper
Banking and Currency Committee of the
At the last session of Congress the
y of House Resolution 141, conducted
House of Representatives, under authorit
ch, group and chain banking. During
extended hearings on the subject of bran
before the committee a number of
the course of these hearings there appeared
ers and others, representing unit as cell
prominent Government officials, bank
iple banking in many sections of the
as the different forms of so-called mult
ce in their respective spheres, and
country. They testified from experien
placed in possession of a Paid of
through their testimony the committee was
this date the committee has not
first hand and valuable information. At
materialised during these hearings nor
rendered its report. Nothing, however,
change in my attitude. Developments
has anything arisen since to justify any
strengthened ay belief that the type
of the last year have, on the contrary,
sound and that such an ameniment to the
of branch banking put forward by me is
law should be enacted.
fiscal year ended June 50, 1930,
?allures have not abated. During the
national banks and 558 State banks.
there were 640 failures, SP of rhich were
during the fiscal year ended June 30,
as compared to a total of 549 failures
480 state baaks.
1929, comprising 69 national banks and
the current year shows that the trend
An analysis of the bank failures for
l country banks in the agricultural
toward the gradual elimination of smal
during the past decade, is still very
sections, which h',s been prevalent
pronounced.
occurred in the agricultural States of
Nearly 96 per cent or these failures
in the more densely populated industrial
the South, Middle West, and West, while
Pacific Coast States, where a greater
areas of New England and the Eastern and
, the number of failures hae been
diversification of business is possible
negligible.
Western States) did the total
In only one section of the country (the
1930 fall below that of the prenumber of bank failures for the fiscal year
banks failud during the fiscal year
ceding fiscal year. In that section 165
This exception was, however, due solely
1930 as oompared to 183 dur;ng 1929.
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Federal Reserve Bank of St. Louis
292
- 2to the situation in Nebraska, where, following the collapse of the guaranty of
deposits law, 106 State banks closed their doors durilg the fiscal year of
1929, while only 50 failed during the comparable period of 1950.
Illinois, a State wherein antibraneh-banking sentiment is quite pronounced,
suffered a striking increase in bank failures during the past year. During the
fiscal year 1929 only 8 State banks and 1 national bank in Illinois closed
their doors, while in 1930 no less than 42 State-chartered institutions and 11
national associations, a tot91 of 55., were placed In receivership.
Other States contributing largely to the increase in bank failures during
the last fiscal year were Alabama, with only 5 failures in 1929 and 25 in 1950;
Oklahoma, also with 5 failures in 1929 and 26 in 1950; and Missouri, with 19
failures in 1929 compared to 50 in 1930. In each of these States, following the
general trend for the entire country, the grpat bulk of the failures was made up
of banks with limited capital, located in communities of the type which, in my
opinion, can be adequately served only by branches of the larger banks in the
nearest large commercial centers.
Since T have discussed the subject of bank failures at some length in
previous nubile utterances and in my annual report to Congress for 1929, I
shall ask your further indulgence on this occasion merely to point out that
the failure of about 5,600 banks in the past 10 years, tying up deposits of
nearly tP,000,000,000, constitutes one of the main factors responsible for the
crystallisation of a strong sentiment in favor of some change in our banking
structure which will bring to our rural districts, where more than four-fifths
of these failures have occurred, the benefits and protection of the strong
well-managed banks now operating in our commercial centers. It should not be
overlooked that those who have suffered most in these failures were persons of
small seans--commtry business MIS, farmers, and savings der,ositors in farming
communities. That remedial legislation along this line is of great present
importance is strikingly emphasised by V..,e latest rigures availablelehich ahem
that up to October 51 of this year no less than 742 banks, with deposits of
about $500,000,000, have closed their doors, as compared to a total of 522
suspensions, with deposits of $200,0001000, during the same period last year.
In the absence of legislation permitting the extension of branch banking
facilities to thee. rural communities, a type of multiple banking waled group
banking, oractically unknown at the time of the enactment of the McFadden bill,
has been evolved. That the development of group banking has been remarkably
rapid during the past two years is attested by the feet that on June 50, 1930,
there were in existence in this 'country 289 group and chain banking organisations, controlling 2,144 banks, with loans and investments of approximately
sir000,000,000, or nearly 21 per cent of the total loans and investments of
all the banks in the country.
In not a few instances a highly constructive service has been rendered by
group systems in taking over smaller banks which have found themselves in a
position where they could no longer function profitably or safely ender the
conditions with which they were confronted. However, it is a rather significant
fact that both group and chain banking have had their greatest development in
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the States 'where branch banking is prohibited. A recent survey discloses that
in the 9 States and the District of Columbia, wherein state-wide branch banking
is permitted, there were 86 banks in group and dots systems and 847 branches
located outside of the head office cities, besides 461 breed*s located in bead
office cities. In the 22 States in which state-wide branch banking is prohibited,
however, there were 1,242 banks in group and chain systs. In these 22 States
there were 25 branches located outside of the head office cities and 27 in head
office cities, all of which were established prior to prohibitory legislation.
A highly inrortant advantage possessed by branch bankieg over group bankine
is the adaptability of the former system for extension into the most remote
hamlets, while, generally speaking, group banking facilities are enjoyed only
by those oommmmities whit* are able to support a well-managed independent bank.
My observation has been that group banking, instead of alleviating the rural
banking situation, has as a rule taken over only the stronger local banks in
prosperous communities, leaving the weaker institutions struggling for a meager
existence. Failures of these reaker banks have left many communities wholly
without local banking facilities, which, however, could readily be supplied by
branches of the larger city banks, with but a minimum of overhead expense to
the latter institutions.
It does not seem desirable to give sufficiently broad branch banking
powers to national beaks to enable them to embrace in a single branch system
the entire geographical area now embraced by several of the larger group bank
systems. Group banking in the main is in capable hands', and includes some of
the beat-managed banks in the country. However, the field of group banking is
now open to evere type of operator or promoter who eay be able to purchase
bank stocks. This constitutes a source of potential danger. In order to
facilitate the supervision of grour banking, in those cases where the Federal
Government has any responsibility, it is my view that no national bank should
be permitted to become a eonstituent of each a group, except upon the condition
that all other hanks in the group are also national banks. The Comptroller of
the Currency under these conditions could more effectively (mediae and supervise the entire group operntions. It is therefore my view that group banking,
should be brought umder the visitorial powers of the Federal Government in
those cases vkiero membership in the group is composed in whole or in part of
national or State member banks of the Federal reserve system. Legislation
along these lines seems to be necessary in the public interest.
With reference to my recommendation that national banks rituated in important commercial cities be permitted to extend branch banking facilities into
the trade area of such cities, it has bees suggested that any each national
legislation would give to notional banks ms a.vantage over State chartered
institutions in those cities, the trade areas of which embrace territory in
more than one State. There are many such cities in the United States. The
proposal has, therefore, been made that national banks be given only those
branch banking polers which the State legislatures oan give to State tanks.
Such a procedure would seem to be an abdication of a netionsl breast basking
poney in favor of the policies of the various States and is open to too
serious objections, one economic and the other constitutional.
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Federal Reserve Bank of St. Louis
-4The theory of trade area branch banking rests upon economic grounds. Its
aim is to permit strong city banks to carry their banking facilities to the
eommunity surrounding such city to a distance which is governed by the predominant flow of business and trade to and from the city as a trade center. It
is designed to give to the rural communities, which have for years been suffering from a lack of safe and adequate banking facilities, the high type of
banking and the security from bank failures which residents of the large cities
have generally enjoyed. If Congress therefore adopts the policy of withholding
from national banks the power to cross State lines with branches in those cases
where the trade area of the city clearly does cross the State line, the ebole
theory and plan of establishing in the rural communities a well-rounded mad
sound branch banking system is broken down.
The State policy theory is objectionable upon the constitutional ground
that Congress alone is responsible for the establishment and maintenance of
the system of national basks as an instrumentality of the Federal Government.
These banks were established purely in the exercise of the legislative power
of Congress and solely upen it national policy. It gave to the United States
a uniform system of banking beyond tbs control of the States.
It is not a valid objection to the national legislation here proposed
that Congress would be conferring upon national banks banking porers more extensive than those which lay within the power of the State legislatures to
give to State banks. For many year, we have witnessed what any be regardeu
as the reverse of this situation. 'Mile Congress has at all times had the
constitutional power to give to the national banks oharter advantages which
could not be acexired by State beaks, it has nevertheless been extremely
reluctant to exercise this power, although to do so in the manner herein recoup.
mended would strengthen our whole banking et ucture. On the other head, however, State legislatures hive conferred upon State chartered institutions,
particularly upon trust companies, banking powers which national banks did not
at the time enjoy. is a consequence, the nationnl banking system has within
recent years declined in size, importance, and influence, and has become thereby relatively less effective as an instrumentality of the Federal Goverment.
Through the diversion of commercial banking from the national to the various
State banking systems, Congress has lost coatra ewer the major portion of the
commercial banking resources in the United States.
Upon the enactment of the McFadden bill the conversion into national banks
of several larger State branch banking institutions and the consolidation of
several State banks with national hanks under the national charter gave rise
to the hope that the national banking system would reclaim the most important
banks which had left it to operate under State charters. However, this hope
was short lived, for there soon followed through State legislative or State
judicial action new advantages for State banks, particularly with respect to
the operation of the trust business and desertions from the national charter
In favor of those offered by the States began to increase. That the disparity
between the two systems of banks is preeemmeed is evidenced by the fact that
whereas in 1886 the national banks held 75 per cent of the total commercial
banking resources of the country, the latest compiled figures indicate that
this pronortion has now shrunk to leas than 40 per cent.
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Federal Reserve Bank of St. Louis
-5ley advantage therefore which might accrue to the matiomal banking system
through trade-area branch banking around those cities situated mear State
boundary lines could fittingly be taken by Congress as am oppertmmity to
strengthen Its control over a natiem-wide system of commercial honking such as
was established under the original national bank act.
In view of the foregoing considerations, it is recommended that the act
of February 25, 1927, otherwise known as the McFadden Act, be amended to incor:orate the following banking policy:
(1) That a committee composed of the Secretary of the Treasury, the
Governor of the Federal Reserve Board, and the Comptroller of the Currency be
authorized to select the various cities which are commercial centers in the
United States and to map out their trade areas.
(2) That the tern "trade area" be defined to embrace the regional flow of
business and trade to and from such cities and that State boundary lines be not
considered in determining the territorial limits thereof.
(3) That national banks situated in such cities be permitted, with the
approval of the Comptroller of the Currency, to establish branches within the
limits of such regional trade areas.
(4) That the paid-in capital stock of mob a national bank shall be not
less then 04000,000 and that the ratio of capital and surplus to deposits
shall be maintained at not less than 1 to 10. The Comptroller of the Currency
would in his discretion require a larger capitalisation.
(5) That the national bank consolidation act be amended so as to permit
any banks aituated within the trade area to consolidate, with the approval of
the Comptroller of the Currency, todor the national charter, but the Comptroller
of the Currency should be specifleally empowered to disapprove any such consolidation upon the ground that it might reeult in an undue concentration of
banking capital within the trade area.
(6) That there be oenferrod upon the Comptroller of the Currency such
visitorial power* as sir enable his to examine into the affairs of any corporation which owns or controls the majority of the stock of any national bank.
(7) That no corporation be permitted to own the majority of the stock of
any national bank if it at the same time owns the majority of the stock of a
State bank.
(8) That no national bank be permitted to make a loan upon the security
of the stook of a corporation which may own the majority of the stock of such
national bank.
During the past 12 months I have discussed at length the question of the
trade area as the logical basis for the development of branch banking in the
rural oommmnities. Particularly at my appearance before the House Committee
on Banking and Currency last spring detailed considerPtion was given to easy
aspects of the trade area in connection with the question of the extension of
the branch banking powers of the national banks. It may be desirable at this
time to summarize these discussions.
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Federal Reserve Bank of St. Louis
-6In defining the trade area it is essential that we keep in mind the chief
purpose of proposed amendments to the national bank set with respect to the
establishment of bronehee. It is not the primary consideration that the large
city bank should be planed in a position further to develop its business with
attendant greater profits and wider influence notwithstanding this would and
should follow, as a matter of course, through the extension of branches to the
rural sections tributary to the city in which it is located. The primary
purpose is the strengthening of rural banking itself through the influenee ipt
strongly capitalized and well-managed city baaks of which the rural bank might
become an integral part. It is, therefore, necessary to consider the tradearea question from the point of view of the rural-bank situation rather that
from that of the city bank.
The difficulty in defining a trade area in the abstract is well recognized.
The subject has been studied by experts in many phases. ramacmiatrixtumcbsam
simutingbdoymulnirtaximxmaargthamsmx The country has bees laid out into trade
areas from the standpoint of the manufacturers of nationally advertised am.
medities, the manufacturers of more localized products, wholesale distributors,
retailers and newspaper circulation. The present problem deals with a
different type of trade area--one which requires that the viewpoint be taken
from the rim of the area vtther than from the hub,
The aim is the establishment in the rural oomunnities of a sound system
el banking which will give to the country depositor a reasonable assurance of
safety and will offer to those requiring banking accommodation more adequate
facilities then is at present available to then. Those requirements esn be
met only through the establishment of branches by city banks into the surrounding =immunities which have as to such a city as their principal market and
financial center. It is this smrrounding area which I have termed the regional
trade area. It is the zone of the city's predominant gnomonic Influence in
the sense that in that zone the city is both the trade mad eredit
There can be no formula which would determine in advance the exact sise
of any such trade area, but as has been frequently pointed out there is one
trolling significance. Wary city
economic principle of fundamental and
trade area must be of such importance
a
which may be selected as the center of
as a trade center for the surreanding geographical territory as to draw to it
a volume and a diversity of trade sufficient to form the potential basis for a
well-balanced branch banking system. This is what I have termed the requirewont for economic diversification. By this it is meant that the loans made by
the bank to its customers in the trade area aust rest upon the security of a
wide range of business enterprises and industrial pursuits. The bank should
be able to draw its business from the production of natural resources, agriculture, livestock, manufacturing, transportation by land and water, distribution, and communication. In each of these activities there would be further
subdivisions of diversification as, for example, the production of natural
resources would include the various types of mining, oil, gas, timber, hydroelectric power and so on. The essential weakness of rural banking as we now
have it lies in the danger of its complete dependence upon just one such
economic activity. By virtue of the small geographical area of its operations
its loans rest principally upon one type of security. There is an insufficient
economic diversification of its loan portfolio. This objective can be attained
in a brand' system of banking which taps a number of different types of security.
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Federal Reserve Bank of St. Louis
-7 It has been euggeoted that proper diversification can be obtained through
the purchase of investment securities on the gemeral market. This proceAure
faces two obstacles. It presupposes a technical equipment which the rural
bank does not possess end it would draw the funds of the bank in too ;Teat a
proportion aim, rose the local field of the bankle operations to the detriment
of its legitimate berresers.
In some sections of the country where industrial activity is emaematrated
and where the population is dense there ere offered a number of different
mmonomic pursuits of relative independence, the one of the other. in such a
ease the physical extent of the trade area of a commercial center may be small
as eompared with another city in the more sparsely settled sections of the
acentry where a greater territory may have to he embraced in order to gain
the required diversification. bury city indeed, no matter how small, has a
regional or local trade area but every such trade area would not be a suitable
field for branch banking. Under the plan herein recommended it would be
necessary for the committee proceeding under a general authority from Congress
to select those cities the trade areas of whim meet the requirements for
economic diversification. In this respect the eammittee would be dealing
with an economic situation very much similar to that presented to the committr
which under similar authority laid out the Federal reserve districts. The
Federal reserve districts vary in sire according to the density of population
and the physical concentration of commercial and business activity.
It will be recalled that Congress designated the Secretary of the Treasury,
the Secretary of Agriculture, and the Comptroller of the Currency as a eonmittee to lay out the Federal reserve districts under instructions to have ude
regard to the convenience and customary course of bueness and shall not
necessarily be coterminous with any State or States. The districts thus
created may be readjusted and new districts may from time to time be created
by the Federal Reserve Board, not to exceed twelve in all.' This ammittee
experienced ne great difficulty in carrying out these Instructions of Congress.
There appears no reason to doubt the ability of a similar committee, such as I
have recommended, to map out the trade areas around the -rincipal cities in
the United States.
These trade areas might be termed regional economic or trade zones to
distinguish them from the wider geeeraphleal area with which the business
enterprises of such city have contact. Beaks and business generally in every
lane city may from time to time have trade relations and business transactior...
extending to every part of the country and indeed over the whole world. In
contrast to this wider field there is SD immediate geographical territory
surrounding every large city and reeehimi out into the outlying rural communities, a definite area whim can be determined by bouniary lines embracing
a population having customary assess to such a city as the principal market.
Such a trade area eight in some cases overlap an adjacent trade area of
another commercial center. If upon a determination of fact it be found that
the business of a given community flowo in substantial volume to more than
one city as a financial and business center, it might be found desirable to
put such a community in more than one trade area. It would seem sound to
permit the establishment of branches to follow the natural flow of regional
commerce sad trade, and cases of such overlapping would simply mean that a
few esommaittes might have branches emanating from more than one trade area
seater,
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Federal Reserve Bank of St. Louis
-.8 As contrasted with the propos."' for county-wide branch banhinc, tradearea branch banking would follow oennenic rather than political boundary
lines. County-wide branch blinking could never form a sound economic basis
for a national policy in bankimg.
comity seat is often not the most
important city in the county and in mow MOes it is more convenient for trade
to flow to an adjoining comity. In a few oases it might be found that the
county seat is in fact an important center of trade but in web eases it will
ordinarily have a stronger trade influence in the adjoining counties than any
city situated within think County--wide branch basking would force banking
into artificial chamois and would be econemiCally unsound in those cases
where the parent bank ens of insufficient si?4, to offer adequate banking
facilities and safety to deTlositors or was situated in a county which did
not permit of a diversification in the banking business available to it.
There seems, therefore, no escape from the conclusion that rural bras&
banking, in order to offer an improvement over the present system of rural
banking, must proceed from a parent bank situated in a sity of sufficient
economic importance to sustain, by virtue of the commerce and trade within
it and its surrounding economic zone, a rell-mansged bank of not less than
#1,000,000 capital.
The suggestion for State-wide branch banking appears aloe economically
unsound as the basis for a national policy. In many States there say be
found citieo 'boss regional trade areas are embraced within the boundary
lines of the State* On the other hand, however, there will be found a great
number of important cities situated in such close proximity to State bounlary
lines that a prohibition against crossing the State line would result in a
one-sided brandh-banking system for the banks in such a city. The trade
area here under discuseini le a geographical area for banking purposes. It
has no direct political signifieence. Business and industry pay no heed to
State linps in the use of bookies facilities. The normal business of a bank
in a city situated near the boundary line of more than one State flows over
such lines in respow=e to the impulse of convenient communication and transportation. De7,ositors and borrowers in one State have no prejudices in
crossing over the State lines to gain access to their bank. To deny such a
bank, under these circumstances, the poser to establish branches to meet the
convenience of its customers across State lines while at the same time permitting it to establish branches in another direction into the territory of
an satire State—in many eases extending far beyond its normal trade area-would set up a system of branch banking under national authority which would
appear unworkable and indefensible.
In the consideration of the type or aims of a city which would be chosen
as the center of a trade area adequate for breach bribing purposes, regard
must be bad fir the general banking situation in any given eommunity. If the
city be inportaat seem* to have strong, oneneasful national books and is
surrounded Iv a eummunity having a number of country banks obese principal
bank sorrespeudest is in such a city, that city might be made the center of
a regional trade area. In emir such eases the geographical are* involved
might be not only less than that of a Federal reserve district bat less in
area than the State in which the city is situated. There may be found a
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A
.;;;.
-9sufficient economic justification for severhl trade areas whose principal
territory is within a single State. Ravimg regard for Ilhe situation that
branch banking by national banks began with the bran* banking limited to the
city in which the bank is situated, it would seem the logical *canonic development to peratit a natural growth of these branch-banking systems into the
territory where their influence in banking is predominant rather than to
proceed solely from the greatest metropolitan centers of the country, which
would give to relatively a few great metropolitan banks the exclusive privilege
of branch banking in the country districts and lesser cities. It would be
highly desirable to preserve as much as possible the element of local autonomy
in the establishment of trade areas provided the areas are not so small as to
sacrifice the principle of economic diversification.
It is not meant to imply that trade area branch bankinc should be confined
to those States in which branch banking by national banks is now permitted
within the city limits. Tbe mew policy of branch banking should be uniform in
its operation throughout the nation, thereby giving to every rural omemmaity
an opportunity of access to strong city banking facilities under national
supervision and control.
It nay, therefore, be said that the following elenents contribute to the
definition of trade area branch banking:
(1) The principal objective is to strengthen banking operations in the
rural conmunitiea.
(2) A secondary but not less positive result would be a strengthening of
the entire banking structure of the country.
(B) The surrounding ?eographical territory economically tributary to a
city and for which such city provides the chief market and financial center,
may be described as its trade area.
(4) Every city may be said to have a trade area but not every trade area
is suitable for branch banking purposes.
(5) In order to lay the basis for a sound system of branch banking a
trade area should embrace within its physical limits a diversification of
economic activities in order that a bank operating branches throughout its
extent may also acquire a diversification in the security for its loans.
(6) ?or branch banking purposes, therefore, only those trade areas ihould
be chosen which surround cities important enough to be the ammmercial easter
or a territory sufficient to meet the requirement of economic diversification.
(7)Sinoe the trade area under discussion is a regional economic area for
banking purr oses the status of the banks in a given city will furnish a guide
to its character and extent, particularly the number and location of the
surrounding country banks for which they are the principal bank correspon.lents.
(8) It would not be a difficult undertaking for a committee conposed of
of the Treasury, the Governor of the redaral Reserve Beard and
Secretary
the
of the Currency to select the principal commercial misters in
Comptroller
the
the limited States for branch banking purposes.
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Federal Reserve Bank of St. Louis
411
-10(9) Upon the selection of such a city the determination of the boundary
limits of its trade area would be a question of fact and could easily be discovered through a study of its banking operations and its general trade
influence and position.
Small Gauntry banks need have no fear thot they Iould be driven out of
business Wen* theastablisheent in their communities of de novo branches by
city tanks. Such a procedure would be highly abnormal and it is inconceivable
to me that any Comptroller of the Currency would lend his office to it.s
support. The natural development of rural branch baniriag would occur through
the consoliiation with or purchase of country banks by the city branch banking
institutions upon such terms as would be asreeable to each. The conversion of
the local bank into a branch of the city bank in this manner would have no
disturbing effect upon the local banking situation.
The type of branch banking here recommended would, as compared with the
present System of unit banking, lead to a decentralisation of banking resources.
Within each trade area there would be a concentration of local or regional
banking capital and the best interests of the branch banking systems would
compel the employment of such capital in the various communities throughout the
trade area. The present tendency under our system of a large number of very
small banks and a small number of very large and strong banks is for the bulk
of the banking resources of the country to be concentrated in a few great
metropolitan centers. Under trade area branch banking there would undoubtedly
arise in the inland commercial centers regional banks of sufficient strength
to hold the banking business originating within their trade areas.
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Federal Reserve Bank of St. Louis
** * * * * * *
k
•
Source:
Page 121 - Proceedings - 28th Annual Convention, NationalAssociation
of Supervisors of State Banks - San Francisco - September, 1929.
Dan V. Stephens, President of Fremont State Bank, Fremont, Nebraska, and
Vice-President of the State Bank Division of the American Bankers
Association.
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Federal Reserve Bank of St. Louis
"My personal contention has been that the influence of politics on the banking departments of
the Middle West, especially, has been the prime
factor in chartering too many banks, and, second,
after chartering them, permitting them to be inadequately supervised. This is a result of inadequate laws and political control of bank administration.
The State Bank Division has sought for years legislation extending the term of Bank Commissioners to
six years, and to remove his office from political
control, but progress has been very slow. Obstacles
that have been all hut insurmountable were set up by
politicians who jealoulay guard their prerogative
to control all appointees to office. As a rule those
who have the appointive power never willingly relinquish it. The constant change of Governors of
states, carrying wtth them the Bank Commissioners,
has kept the State Banking Department of many states
in a constant state of change, if not chaos. The
average state has a two-year term for its Governor.
Its Governor has the appointive power of the Bank
Commissioner. The Bank Commissioner bee mes a
political lieutenant of the Governor in spite of all
he can do because he goes in with the Governor and
he goes out with him at the end of his term. His
political destiny is wrapped up with the Governor's
destiny and therefore he must politically sink or
swim with him. There are exceptions to the rule, of
course. The result of this alliance is that the Bank
Commissionership becomes under such conditions a
purely political office and its holder must respond to
the whims of the people in exactly the same manner
that the Governor responds or suffer himself to be
removed from office. This has been so palpably true
in my state that we have concluded beyond a question
of doubt that most of our troubles have arisen from
the fact that our Banking Department has been helpless in the hands of the ,-)olitical machine. Whenever
an effort was made to correct a banking situation, it
was calculated to cause a disturbance or less prestige
for the machine, the correction was not made and matters
were permitted to drift. The natural thing for a
277
Dan V. Stephens (Cont'd)
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Federal Reserve Bank of St. Louis
Governor to do in order to keep peace in all of the
various conflicting elements in society is to have his
administration run along with as little trouble as
possible, and if the Banking Department attempts to
clean up this mess or that mess, that is gnawing at
the vitals of the banking business, the Governor is
loath to permit it and the Bank Commissioner is loath
to commence it if, in doing so, it is going to endanger the political life of his administration.
"We have preached for years in our state the removal of the Banking Department from politics and
last winter we made the hardest fight of all to bring
about that situation and we did succeed in extending
the length of term of the Bank Commissioner to six
years, but, unfortunately, we were unable to remove
his appointment from political influence. The gain we
have made is in having the Bank Commissioner appointed
for a six-year term and, naturally, his term will outlast the Governor who appointed him by four years and
the hope is that by that time he will be more or less
free from political entanglements although his superior
officer, the Secretary of the Department of Trade and
Commerce, is still a political app intee of the Governor and his term of office extends only two years.
"Dank commissioners should be free and independent
after their appointment from any political influence
whatsoever. They should be free to do their duty as
they see it without the sense of being in any way obligated to maintain the political machine in power that
appointed them. If such a condition cannot be brought
about then there isn't very much hope of materially
improving bank supervision."
Source:
Page 85 - Proceedings of the twenty-eighth Annual Convention of
the National Association of Supervisors of State Banks - San
Francisco - September 25, 26, 27, 1929.
Mr. R. A. Hovey Massachusetts Commissioner of Banks.
" ... What steps are to be taken to protect the state
banking system? I am a firm believer in harmony and I dislike to see the question always arising as to how the national
banks can win friends from the state banking system, and on
the other hand, how the state banks can get ahead of the
national banks. I wish the question cou_d be settled, so the
banks could attend solely to the business in which they are
engaged
"We are also careful in passing state legislation that
nothing will be done to drive out the state banks Vat are
now doing a good and legitimate business. If they find that
the State Legislature is inclined to be a little harsh on
them, it will be very simple for them to convect into a
national bank and be received with open arms. 'We have had
cases where banks under state supervision have converted
into national banks because they were dissatisfied or rather,
didn't want to comply with the terms of the supervising
officials, and owing to the condition of those banks we didn't
regret their leaving the state system."
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Federal Reserve Bank of St. Louis
25'*
•
ciation
Source:- Page 79 - Proceedings - 28th Annual Convention,Natliana1Asso
of Supervisors of State Banks - San Francisco - September, 1929.
C. G. Shull, Bank Commissioner, Oklahoma:
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Federal Reserve Bank of St. Louis
"Re now have forty-eight supervising units of the state
the greatbanking system of America, and to my mind one of
bring about
could
isors
Superv
est accomplishments that we as
more unihaving
of
method
would be to devise some practical
several state
our
by
passed
form and standardized state banking laws
have
will
we
when
legislatures, and perhaps the day will come
more standardized supervision.
In my judgment, one of the greatest advantages of the
mity
national system is its uniformity, and if the unifor
de
of our state systems could be increased, leaving latitu
place
to meet local needs, much would be accomplished to
ct
transa
to
on
positi
ble
favora
more
our state banks in a
ter.
charac
-wide
nation
ss'of
or
busine
interstate business
* *** * **** *
*
I feel any
I wouldn't want the impression to get out that
it is
think
I
antagonism to the Federal Reserve System.
the
think
one of the finest enacted by any country. I
l
Federa
practices that have been put into effect by the
ure,
Reserve has increased efficiency of our banking struct
both state and national. Perhaps there has been some
dable.
abuse practiced, but as a system it is wholely commen
27i
•
SOURCE:
RURAL CREDITS--Hearings--S. 4280 (H.B.13033) Committee on Banking and
1923
Currency
Page 56 (Mr. Eugene Meyer, Jr., Managing Director War Finance Corp.)
***
*****
There are necessarily many difficulties involved in our dual system
of banking. We have a State banking system, a national banking system, and
a Federal reserve system, the latter having a membership derived from both
the State and the national systems. The State banking departments supervise
the State banks, and the Comptroller of the Currency supervises thc national
banks, while the Federal reserve system has a supervision of its own for the
member banks, and there has been at times some disposition to competition
between the State and the national banking systems.
The State banking laws frequently permit practices which national banks
can not legally engage in. This is creating competition between the two systems which can not be regarded as wholesome and may lead to the gradual
weakening of both. The question of branch banking is one that is causing
considerable discussion at the present time. Some of the States permit branch
banking on an unlimited scale. As a result, agitation is now going on for an
amendment to the national banking act to put national banks on a par with State
banks in that respect. I do not propose to discuss the subject of branch
banking here. Branch banking may be good or it may be bad. It may be good if
carried on in a limited way and bad if permitted on an extensive scale. But
whether it is good or whether it is bad, branch banking should be considered
on its merits and should not be the product of competition in the endeavor to
expand either the State or the national banking organizations. The competition
that exists at the present time between State and national banks cannot fail
to remind one of the competition that prevailed a generation ago among the
various States seeking to become domiciles for corporations--a
mpetition that
was based upon the laxity of the laws governing incorporation. LNothing could
be more disastrous than competition between the State and national banking groups
based upon competition in laxity.
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Federal Reserve Bank of St. Louis
* ** * * * * * *
109
Page 160 - "A Type Study of American Banking"
1934 - University of Michigan
Loans to Directors and Officers. - Wherever it is perzlitted,
a fruitful cause of financial embarrassment if not of disaster to
the bank is the borrowing by directors and officers from their own
bank. Sound banking as well as sound ethics demand the elimination
of this practice. Congress has led the way by forbidding, under
severe penalties, all loans by member banks to their own executive
officers. If an executive officer of a member bank borrows at any
other bank he is required to report to his own board of directors
all facts concerning the loan, including date, amount, the security
pledged, and the purpose of the loan. The state of Minnesota can
do no less than follow the standard set by the federal stttute and
the law of such progressive states as California and New York.
Responsibility for the management of a bank is clearly shared
by directors and by officers; "It is their (the direct) duty to
use ordinary diligence in ascertaining the condition of its (the bank's)
business, and to exercise reasonable control and supervision of its
officers"; but "the bank may act by 'duly authorized officers or
agents', in respect to matters of current business and detail that
may be properly intrusted to them by the directors." The sound
handling of "matters of current business and detail" involves a
high degree of skill in the application of an extensive body of technical
knowledge to individual problems as they arise. Clearly the accurate
control of such proficiencies is beyond the possibilities of state
supervision except occasional sampling by examiners. Hence, it is of
utmost importance to select well-trained officers of proved integrity
through a carefully planned system of licensing. Prevention of error
is less expensive than punishment.
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Page 152 - "A Type Study of American Banking"
1934 - University of Michigan.
"Dangers of Overvaluation of Bank Assets. - A serious obstruction
to the objective determination of the solvency of a bank lies in the
overvaluation of doubtful assets. In this study of bank failures
the conclusion is clear that leniency in this respect breeds disaster, whether practiced by the bank's officers or by the banking
department.
This situation would be largely remedied were the
commissioner authorized by law to compel an institution to charge
off bad and doubtful assets, or to set up adequate reserves, or both.
For protection of the bank against unreasonable exercise of such
power, the law
might permit a board of directors to override such
an order by a two-thirds vote."
Air
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Federal Reserve Bank of St. Louis
Page 152 - "A Type Study of American Banking"
1934 - University of Michigan.
"Removal of Officers and Directors. - Because of the far-reaching
effects of the suspension of a bank it appears to be desirable that
the banking department be provided with means less abrupt and cataclysmic for the protection of the public interest.
The Glass Act
provides that any officer or director of a member institution who
violates the law or who continues unsound practices in conducting
the business of such an institution after being warned by the comptroller or by the Federal Reserve agent may be called before the Federal
Reserve Board for a hearing. If found guilty he may be removed from
office by order of the board.
A penalty of $5,000 and/or five years'
imprisonment may be imposed for infraction of the order. Full information concerning the charges and the text of the order is given to the
AP
bank concerned.
No facts are published unless the order is violated.
The New York superintendent of banks recommended in 1951 that he be
given legal power to remove from office directors or officers of
banking institutions who were guilty of persistent violations of the
banking law or of a continuance of unsafe and unsound policies and
practices, with the provision that a board of directors upon twothirds vote might reinstate any officers or directors removed.
Similar powers should be authorized as an aid to bank supervision in
Minnesota."
40,
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Federal Reserve Bank of St. Louis
"Branches of National Banks: Additional Capital Required. - For every
new branch it opens, a national bank must have additional capital equal to
the amount required for an independent national bank in the same location.
A capital of $500,000 is required before branches may be opened outside
the home city, with these exceptions: (1) in states of less than 1,000,000
population, having no city of more than 100,000, the minimum capital required is $250,000; and (2) in states of less than 500,000, having no city
of more than 50,000 population, the minimum requirement is $100,000.
"In California the minimum legal capital for state banks is $50,000 in
cities of less than 25,000 population; $1000000 if the population is between
25,000 and 100,000; $200,000 in cities of between 100,000 and 200,000
population; and $300,000 if the population is 200,000 or
over. In addition, the proportion of capital funds to deposit liabilities
•
must not fall below one to ten for the first $1,000,000 or below one to
twenty for all deposits in excess of $1,000,000.
The same requirement holds
for branches, calculated on the basis of a separate total for each city in
which a branch is located. If the capital falls below the legal minimum the
superintendent shall require the necessary increase to be made up within
sixty days on penalty of closing the bank.
While most states (including
Minnesota) and the federal law require a surplus of 20 per cent of capital,
California enforces a 25 per cent minimum.
•
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Federal Reserve Bank of St. Louis
•
Page 142 - "A Type Study of American Banking" 1934 - University of Minnesota.
French bankers learned from the failure of the old
Credit Mobilier (1853-1866) that it was unsafe to combine
speculation with banking. Shortage of capital in Germany
doubtless explains the development of "department store
banking" in that country. No such explanation is tenable in
the United States. Rather, it has been "competition in laxity"
between federal and state authorities that has brought about
the combination of commercial, fiduciary, savings, and investment activities under one management without, at the same time,
due segregation of the assets of the different departments.
In fact, the multiplicity of activities and profits aimed at
has very naturally confused the exact nature of the risks
undertaken. In consequence, the character of the assets
carried has not been in harmony with the risks, and suspension
has frequently resulted.
•
•
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Federal Reserve Bank of St. Louis
The following excerpts, takes !Tom a letter written by Jr. Ben DuBois,
.)‘
secretary of the Independent Bankers Association, to the members of the
Independent Bankers Association, are taken from a news item in the
American Banker, February 17, 1937:
"The Federal Reserve Board is known, of course," Mr. DuBois
says, "to be pro-branch banking. They are opposed to our dual
system. If they can establish regulations that will eventually
bring about pr clearance, they will have dried up the earnings
of many small banks and will have paved the way for the destruction of our system of State chartered institutions and will have
gone a long way toward bringing about branch banking. This
regulation which they intended to Tut into effect February I
would, in itself, have little bearing on the banks of the Northwest but it was an entering Redge and it is to the interests of
independent banking to oppose it.
"Fortunately, the views held by the directors of the Fgdend
Deposit Insurance Corp. were at variance with the views held by
the Federal Reserve Board. Our alignment was with the Federal
Deposit Insurance Corp. and it was in their board room that we
held our meeting."
"Our recent conference in Washington was one of the best
that we hve ever attended. The Southern bankrs are militant,
they will do their part, and there seems to be a general
realization of the seriousness of the situation that confronts
us. Independent banking will prevail.*
Mete excerpts support previous arguments that bankers and other supervisory agencies may not always be expected to agree with the Board in its
policy matters and that in such cases the Board might expect to be *ganged".
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Federal Reserve Bank of St. Louis
"Elimination of Double Liability"
by S. H. Squire, State Superintendent of Banks
46th Annual Convention
Ohio Bankers Aso., 1956
(The Ohio Banker, June 1936)
****** * * * *
In carrying out the law in the collection of double liability in so
many of our closed banks, homes have been sold of the widow and the fatherless, estimable people thrown into bankruptcy, untold suffering to our
citizens, and the net result of composite collections yielding but a small
percentage as a dividend upon the 500 million deposit liabilities. Our
legal duty in this regard is not an enviable one.
We all agree that the banks should be made safe for the depositor but
the time has come when double liability need no longer be considered as a
necessary factor.
Twenty-two states of the Union are without laws on the subject--some
never imposed double liability and others who had it have done away with
it.
Last year the great State of New York by a vote of three to one
eliminated this feature from its Constitution.
The time has come, in my judgment, for definite action. On the one
hand we witness a situation unusual in our history, where there is
practically no market for stock of our institutions--no longer can the
banker successfully offer to the potential customer the opportunity of
becoming one of the owners of the bank--the difficulty of filling vacancies
on the board of directors is becoaing more of a problem--the double liability
stands in the way.
Bank earnings may, for a continued period, if present conditions
obtain, be so low as not to afford any great inducement to the prospective
investor, yet on the other hand the factor of safety and appreciation is
now generally being considered in relation to the long time investment and
bank stock has a chance to one more gain in popular favor.
You bankers are paying 3i to 4% on your debentures on 51i millions of
dollars in Ohio State Banks--debentures sold to the Government—this comes
directly out of earnings.
It seems wiser, does it not, to retire your debentures by the sale of
common stock and instead of paying interest to the Government, declare a
dividend to your home people.
The market for common capital depends on the elimination of the burden
of the double assessment.
A tremendous task has been accomplished by the Department of Banks and
the officers and committees of the Ohio Bankers Association. The General
Assembly has been in special session--the law provides that the Assembly
consider only such subjects as the Governor's call provides, or such subjects
as he may message to them while in session.
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Federal Reserve Bank of St. Louis
***** *****
Remarks by John H. McCoy
President, Ohio Bankers Association,
46th Annual Convention
Ohio Bankers Asso., 1936
(The Ohio Banker, June 1936)
**********
In our state legislative work at Columbus, we have been very fortunate
in being able to present our side of the case to the legislators. We are
gradually having better laws placed on the statute books and while only a
few new bills have been passed during the year, they have all been con—
structive. The most outstanding piece of legislation, of course, is the
Act authorizing the people to vote this fall on the elimination of the
double liability of state bank stockholders. I need not stress its
imnortance to this audience because with the national banks being relieved
in 1937, our state banks will be severely handicapped in providing new
capital unless they are gut on an equal basis.
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Federal Reserve Bank of St. Louis
* * ********
•
Report of the Legislative Committee
46th Annual Convention
Ohio Bankers Asso., 1936
(The Ohio Banker, June 1036)
**** *****
Outstanding among the legislative happenings of the year was the
action of the Legislature in submitting to a vote of the people at the
November election, the question of elimination of double liability on
the stock of state banks. With the active and able cooperative of Superintendent of Banks Squire and his associates, we were able to get legislative approval of a resolution which places on the November ballot a
constitutional amendment removing the requirement for double liability.
In obtaining legislative acceptance of this proposition we received
outstanding cooperation from Association members--both state and national.
Had it not been for their contacting legislators and explaining the need
for a change in the double liability situation, the Assembly would not have
acted favorably. However, this was only a very minor accomplishment. The
big and important task is to obtain enough favorable votes in November.
There is only one way in which this can be accom61ished. That is for every
officer, director, employe and stockholder to contact as many voters as
possible and explain to them the need and justification for the desired
constitutional amendment.
As bankers we know that national banks are to be freed from double
liability by Congressional act as of July 1, 1937. We know that state banks,
without removal of this liability, will be unable to sell additional stock
which would strengthen the capital structures and protect the interests of
depositors. We know that ninety-nine per cent of accounts are insured under
the FDIC. But voters do not know these things and they must be informed if
they are to cast their ballots favorably.
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Federal Reserve Bank of St. Louis
* ** *** * * *
Resolutions Adopted
46th Annual Convention
Ohio Bankers Asso., 1936
(The Ohio Banker, June 1936)
There will appear on the ballot at the November election a proposal to
strike from the constitution of Ohio the requirement that shares of stock
of state banks be subject to double liability.
We recognize the need of adequate capital as a protection to our de—
positors. Since it is almost impossible to provide new banking capital
with the double liability provision in the constitution and since national
banks are relieved of this double liability by the Federal statutes as of
July 1, 1936, we hereby endorse the prorosed constitutional amendment and
urge all bankers to work for its approval.
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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, 19f4.
paKe 13
Cection 1M1, which Sse added to the sank Act in October, lig!,
bbolishes stockholders' liability on bank stock subsequently issued by
banks "whose deposits hre iwurad by the Federal Deposit incurLnce
Corporation pur5wint to the FederU Fieserve Act Lt alitEnde:d.' This
section discriminates against any bank not desiring to be bound by
the provision of thii Get cretine the Federrl Ieposit Insurance Corporation. Thc Lirlhture s'r,oule: give scrioLIE consideratIm tc the
elimination cf this discriminnAon.
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Federal Reserve Bank of St. Louis
3
SOURCE:
REPORT OF THE BANK COMMILiLIONER OF THE STATE OF UTAH-June 1954
Page 1,
1. Section 18 of Article 12 of the Constitution of this State
provides that the stockholders in every banking corporation, in addition to the amount of capital stock subscribed and fully paid by
them, shall be individually responsible for an additional amount
equal to the amount of their stock in such corporation for all its
debts and liabilities of every kind.
Unless and until this provision of the Constitution be amended,
it is impossible for banks in this State to issue preferred stock which
may be purchased by Reconstruction Finance Corporation, or to
conform our laws respecting double liability of stockholders in
banks generally to the provisions of the Federal Banking Act of
1933. It is therefore suglested thbt consideration be given to the
question of proposing an amendment to the Constitution, and in the
event of such amendment becoming effective, that Section 7-8-16,
R.S. 1933, providing for double liability of stockholders in banks,
be repealed.
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Federal Reserve Bank of St. Louis
1...•11.••••0
SOURCE:
THE TARHEEL BANKER - N.C. BANKERS ASSOCIATION PROCEEDINGS October 1933
Report of the Secretary - Paul P. Brown LEGISLATION
Page 27
An extremely important piece of legislation which passed was
H.B. 555 introduced by Representative Aycock. The Executive
Committee had previously adopted a suggestion made by the
Secretary and others that some other form of security be substituted
for the double liability of bank stockholders. The Aycock Bill as
passed provided for the payment into new banks which are organized
of a permanent surplus fund equal to 50 per cent of the capital
which must be invested in United States or North Carolina bonds.
This fund is to be held for the protection of depositors and the
payment of it will relieve the stockholders of double liability.
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Federal Reserve Bank of St. Louis
SOURCE:
REPORT ON BANKS OF DEPOSIT & DISCOUNT, ETC. - N.Y.
1934
Page 11
(5) Double Liability on Bank Stocks. * * k Vdth respect
to
recommendation, it will be recalled that on November 2,
1933,
following resolution, which is contained in the annual
report
this Department for the year 1933, was adopted by the Bankin
g
this
the
of
Board:
"WHEREAS, The Federal Banking Act of 1933 abolishes
the
double liability which has heretofore attached to
national bank
stocks, and
WHEREAS, Based on experience, this double
liability has
proved to be of little protection to depositors
of state banks, and
WHEREAS, The double liability clause of the
Constitution
of the State of New York precludes the banks
of this State
from obtaining federal funds in the form
of preferred stock,
which would increase the protection of
depositors in State
institutions, and
WHEREAS, The protection of depositors can
be much morc
effectually provided through legislation which
might increase
capital or surplus requirements or by the
cre-tion of other
safeguards, rather than to depend upon the uncert
ain double
liability of stockholders, now, therefore, be it
Resolved, That this Board urge the Governor and the Legislature of this State to take immediate steps to bring
about the
repeal of the double liability clause of the New York State
Constitution."
RENEWED RECOMMENDATIONS
Page 13 (Savings Banks)
Perhaps even more important was the enactment of Article VI-A
of the Banking Law authorizing savings banks to enter into a
mutual agreement for the insurance and protection of deposits.
Pursuant to such enactment an agreement was entered into and
became effective about June 1, 1934, providing for the creation of
a
fund for the purposes of the Act and appointing Savings Banks
Trust Company as trustee for its administration. When the plan
became operative, the savings banks of this State with a few exceptions withdrew from membership in the Federal Deposit Insurance
Corporation and became participants in the fund so established.
The operation of this plan since its inception has been satisfactory
.
It has one distinct advantage, since in addition to providing for
payment of depositors in full upon liquidation, it also permits the
strengthening of going institutions whose condition may for any
reason have become unsatisfactory.
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Federal Reserve Bank of St. Louis
-2Report of Banks of Deposit & Discount, etc. - N.Y. 1934
Renewed Recommendations
Page 13 - (Savings Banks) contd.
The facilities of the savings bank fund can also be used to good
advantage in expediting consolidations designed to strengthen
individual cases and to eliminate unnecessary duplication of services. It has been recognized for a number of years that the
savings bank system as a whole can be strengthened and improved
by the elimLnation of unprofitable or poorly managed units through
mergers with stronger institutions. During the past four years considerable progress has been made in this direction. It remaimfor
the Banking Department and savings banks through their state
association and the Savings Banks Trust Company to carry this
work forward in order that the system as a whole may continue
worthy of the confidence which it has commanded in the past.
NEED FOR CONTINUANCE OF CERTAIN POWERS
Page 23 (Banking Board)
****** * *
The establishment by the Federal Reserve board and the Banking
Board of uniform maximum rates of interest has had a salutary
effect upon the banking institutions of this State. In the past, the
tendency to solicit new deposits by competing in the payment of
interest has led to unsound developments. Expenses and losses
occurring in the usual course of business must be met from earnings. On the basis of past experience, it is apparent that provision
for proper reserves and the creation of adequate surplus funds can
only be Obtained by obviating unsound competition in the payment
of interest rates. This matter Ls one which has a very direct bearing upon depositors and the public generally, since the individual's
relationship with an institution, either as a debtor or creditor, can
only be secure if the institution with which he deals is safely and
soundly conducted. Conditions which have existed during the past
four years have required a downward trend in interest rates. Income realized by institutions on such assets as short-term Treasury
Certificates has fallen to record low, with the consequence of decreased bank earnings. Moreover, the tremendous scope of the
liquidation brought on by the depression has required that banks
be placed in a position to reduce rates on mortgage and other
loans.
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Federal Reserve Bank of St. Louis
****** ** ***
-3-
Report on Banks of Deposit & Discount, etc. - N.Y. 1934
PREFERRED AND SECURED DEPOSITS
Page 26
*********
With reference to deposits of funds of the Federal Government
it is recommended that the banking institutions of this btate be
empowered to give security in the same form and amount as national
banks are required to give under federal laws. The new result of
such legislation will be to place state banking institutions and
national banks on an equal footing with respect to deposits of
funds of the National Government.
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Federal Reserve Bank of St. Louis
-
SOURCE:
THE ILLINOIS BANKERS ASSOCIATION BULLETIN—May 1935
ADDRESS OF THE PRESIDENT—H. A. Brinkman, Retiring Pres., Ill. B.A.
Puke 22
There is one piece of state legislation, however, which is
very important and which, if not passed at the present session
of the legislature, should be pushed at each succeeding session
until it becomes an accomplished fact. I refer to the resolution
for a constitutional amendment to remove the provision for double
liability which now rests upon the holders of state bank stock,
past and present. In view of the fact that the double liability has
been removed from new issues of national bank stocks, it is evident
that the number of new state banks to be opened in the State of
Illinois in the future must be negligible. Capital for new banks
is extremely scarce in any event, and such as is available will
naturally shy from the contingent risk involved in organizing a state
bank.
In no other line of business does this double liability exist
and now that the deposits of the great majority of depositors are
fully insured, it is reasonable to believe that the voters would
endorse the repeal of that section of the constitution providing
for the double liability.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
MISC MLANEOUS
EMPIRE FOLDER
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Send your Orth r to t!
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Representatives c:- t-; our Home efEcc
ma:n racxlcs anzlIlwerf:c:s
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
REPORT
OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION
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Federal Reserve Bank of St. Louis
AS OF JUNE 30, 1937
TO INSURED BANKS
WASHINGTON, D. C.
To BANKS INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION:
A report relating to the activities of the Federal Deposit Insurance
Corporation during the six months ended June 30, 1937, with additional
information for the entire period of operation of the Corporation, is
herewith submitted by the Board of Directors. This report also includes
a Statement of Assets and Liabilities as of June 30, 1937, and an Analysis of Surplus for the six months ended on that date.
Operations
The income of the Corporation amounted to $23,774,815.78 for the
six months ended June 30, 1937, including assessments of $19,336,829.99
paid by insured banks and interest of $4,437,985.79, less provision for
amortization of premiums, earned on securities owned. Expenses and
losses during this period amounted to $2,855,909.03, of which $1,333,862.95
represented administrative expenses and $1,522,046.08 represented deposit
insurance losses and expenses.
As of June 30, 1937, the surplus of the Corporation resulting from an
excess of income over total expenses and losses was $74,850,140.82.
Total income from the beginning of deposit insurance amounted to
$95,280,762.03, of which $66,379,510.79 was derived from assessments
paid by insured banks and $28,901,251.24 represented earnings and
profits on securities, after making provision for amortization of premiums.
Charges against surplus for this period amounted to $20,430,621.21 and
included $30,357,536.46 representing disbursements actually made or
pending to depositors of closed insured banks in settlement of their claims
and to merging banks for loans and purchases of assets and expenses,
and other charges of $431,126.66 incident thereto, less estimated recoveries
of $21,053,670.38; and administrative expenses and other charges of
$10,695,628.47.
Closed Insolvent Insured Banks
During the six months ended June 30, 1937, 29 insured banks closed
because of insolvency. Of these banks 21, with deposits of $4,214,000,
suspended and were placed in receivership, and 8 with deposits of
$4,341,000 were merged or consolidated with other banks with the aid
of loans or purchases of assets by the Corporation. The suspended
and merged banks had 32,020 depositors, all but 45 of whom in the
suspended banks were fully protected from loss. In the 21 suspended
banks $4,077,000 of deposits were protected by insurance, offset, pledge
of security, or preferment.
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Federal Reserve Bank of St. Louis
'From the beginning of deposit insurance to June 30, 1937, 132 insolvent insured banks were placed in receivership or merged with the aid
of loans by the Corporation. The 179,601 depositors in these banks
having total deposits of $51,755,000 were protected to the extent of
$47,598,000, or more than 90% of their claims, by insurance, offset,
pledge of security, preferment, or through loans and purchases of assets
by the Corporation. All but 488, or less than one-half of 1%, of the
depositors in the suspended banks, were fully protected against loss.
Of the 132 banks 96, with deposits of $26,358,000, were placed in receivership and 36, with deposits of $25,397,000, were merged with other
banks with the aid of loans and purchases of assets by the Corporation
amounting to $11,845,000.
Membership
On June 30, 1937, 13,887 operating commercial banks were insured
with the Federal Deposit Insurance Corporation, a reduction of 86 for
the six months ended on that date. The decrease in the number of
insured banks resulted principally from definite programs of eliminating
insolvent or weak banks, either by closing them or by merging them with
sound banks with aid from the Corporation where necessary, and from
discouraging the chartering of unwarranted new banks. During the
six months ended June 30, 1937, 123 insured banks were eliminated by
closing, merger or consolidation, or voluntary liquidation, and the insured
status of one bank was terminated. Of the 38 banks admitted to insurance, 17 were banks first opened for business during the year and 21
were banks in operation or successors to uninsured banks in operation
at the beginning of the year. These changes, which are summarized in
Table I, do not include cases in which insured banks were succeeded by
other insured banks.
Various supervisory officials have cooperated fully with the Corporation in exercising a careful control over an unwarranted expansion of the
banking system by chartering only banks for which there is a justification.
These officials are aware of the dangers of the organization of new banks
in communities having adequate banking facilities or in localities unable
to support a bank. In addition, they believe that the effectiveness of
deposit insurance is extended and the strength of the banking system is
increased by their refusal to charter banks which cannot qualify or do
not apply for deposit insurance. As a result, only 7 banks were chartered
during the six months ended June 30, 1937, which on that date were not
insured by the Corporation.
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Federal Reserve Bank of St. Louis
-447:levozo
Elimination of Unsound Banks
\ 1 cc/
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In cooperation with responsible supervisory authorities the Corporation has diligently pursued its policy of maintaining a sound banking
system by establishing standards for determining conservatively the
soundness of banks and by taking appropriate action where unsound
banks are discovered. It is now cooperating with several supervisory
authorities in making a complete survey of the banks under their supervision with a view to determining what corrective steps can be taken
with regard to weak and unsound banks.
In every case where it appears desirable to continue the operation of
a bank found to have insufficient capital it is only logical that stockholders
or others served by the bank furnish the funds necessary for recapitalization. If this cannot be accomplished, the bank should be merged with
a sound bank.
If there appears to be no justification for a continuance of the unsound bank or if all possibilities of rehabilitation have been exhausted,
the Corporation insists that the bank be closed or that its insurance be
terminated in order that further losses may be avoided. In the pursuance of this policy the Corporation notified the appropriate bank
supervisory authorities of the continuance of unsafe or unsound practices
or of violations of law or regulations in the case of 19 banks during the
six months ended June 30, 1937. Since the Banking Act of 1935 became
effective a total of 41 banks have been similarly cited.
It is essential for the protection of the Corporation, of all sound
insured banks, and of incompletely insured depositors and other creditors
of unsound banks, that an active program for the elimination of weak
and unsound banks be continued. If banks are unsound or insolvent
during and following a period of several years of increasing prosperity,
there can be little hope for their survival during a period of decreasing
prosperity.
By order of the Board of Directors,
LEO T. CROWLEY, Chairman.
WASHINGTON, D. C.
July 31, 1937.
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Federal Reserve Bank of St. Louis
"s4P2'set
TABLE I
ANALYSIS OF CHANGES IN THE NUMBER OF OPERATING INSURED BANKS,
JANUARY 1-JUNE 30, 1937, UNITED STATES AND POSSESSIONS
Commercial banks
Members F. R.
System
Number of banks—June 30, 1937
Number of banks—December 31, 1936
Net change
Additions—total
Previously operating banks becoming insured'
Banks commencing operations during first six
months 1937 insured at close of period
Reductions—total
Insolvent banks suspended'
Insolvent banks absorbed by other banks with
aid of FDIC loans—net decrease'
Other mergers, consolidations, absorptions and
voluntary liquidations
Insurance terminated by FDIC
Successions and changes in classification—net change
All
banks
Total
National
State
13,943
14,029
-86
38
13,887
13,973
-86
38
5,293
5,325
-32
4
1,064
1,051
+13
1
21
21
17
124
17
124
21
21
6
6
3
96
1
96
1
35
10
+2
+22
7,530
7,597
-67
33
21
4
38
1
10
12
76
21
'Includes two successors to noninsured banks.
'Excluding one which reopened within the six-month period.
'Excluding two banks to which loans were made which merged with newly organized successor banks.
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Federal Reserve Bank of St. Louis
Not
members
F. R.
System
3
51
1
-24
Mutual
savings
banks
56
56
FEDERAL DEPOSIT INSURANCE CORPORATION
STATEMENT OF ASSETS AND LIABILITIES—June 30, 1937
ASSETS
$ 12,003,041.35
CASH ON HAND AND ON DEPOSIT
UNITED STATES GOVERNMENT SECURITIES
(cost less reserve for amortization of premiums)
AND ACCRUED INTEREST RECEIVABLE . . 343,961,164.66 $355,964,206.01
ASSETS ACQUIRED THROUGH BANK SUSPENSIONS AND MERGERS:
Subrogated claims of depositors against closed
$ 11,430,192.93
insured banks
Net balances of depositors in closed insured banks,
pending settlement or not claimed, to be
1,602,692.71
subrogated when paid—contra
Loans to merging banks to avert deposit insurance
7,971,115.79
losses
Assets purchased from merging banks to avert
992,188.48
deposit insurance losses
$ 21,996,189.91
12,512,450.52
9,483,739.39
Less: Reserve for losses
1.00
FURNITURE, FIXTURES AND EQUIPMENT
44,703.41
DEFERRED CHARGES AND MISCELLANEOUS ASSETS
$368,521,360.94
TOTAL ASSETS
LIABILITIES
CURRENT LIABILITIES:
Accounts and assessment rebates payable
Net balances of depositors in closed insured banks,
pending settlement or not claimed—contra. . .
UNUSED CREDITS FOR ASSESSMENTS PAID
TO TEMPORARY FEDERAL DEPOSIT INSURANCE FUNDS AND PREPAID ASSESSMENTS
RESERVE FOR'UNDETERMINED EXPENSES
AND LOSSES
TOTAL LIABILITIES
75,203.87
1,602,692.71 $ 1,677,896.58
CAPITAL
CAPITAL STOCK
SURPLUS:
Balance December 31, 1936
$ 54,105,323.78
Less adjustments applicable to periods prior to
174,089.71
January 1, 1937
Balance as adjusted December 31, 1936
$ 53,931,234.07
Surplus for the six months ending June 30, 1937:
Additions:
Deposit insurance assessments
$ 19,336,829.99
Interest earned (less provision for amortization of
premiums)
4,437,985.79
$ 23,774,815.78
Deductions:
Deposit insurance losses
and expenses
$ 1,522,046.08
1,300,807.98
Administrative expenses..
Furniture, fixtures and equipment
purchased
and
33,054.97
charged off
$ 2,855,909.03 $ 20,918,906.75
TOTAL CAPITAL
TOTAL LIABILITIES AND CAPITAL
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Federal Reserve Bank of St. Louis
2,624,249.31
69,617.24
$ 4,371,663.13
$289,299,556.99
$ 74,860,140.82
$364,149,697.81
$368,521,360.94
DIRECTORS
OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION
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Federal Reserve Bank of St. Louis
WASHINGTON, D. C.
LEO T. CROWLEY
Chairman
PHILLIPS LEE GOLDSBOROUGH
J. F. T. O'CONNOR
Comptroller of the Currency
April 5, 1937.
Files
C. E. Cagle
Excerptsfrom Mr. Sargent's letter to Mr. Pauler re examinations of
State member banks:
"In compliance with Board's letter of November 5, 1954,
1-9011, it has been o, r endeavor to conduct at least one regular examination of each State member bank, including its Trust
Department, durinp each calendar year jointly with the State
Rankine authorities wherever 7,ossible."
"A complete examination of these banks each calendar year
jointly rith State authorities is becoming rather difficult
under existing conditions. The problem primarily centers in
the five largest Calirornia banks due to the examination dates
fixed by the State Banking Department and the fact that the
Department concentrates its entire staff for these examinations.
* * * * lember banks being only about 10% of the total aumber,
and having over half of the total resources, the StAe Department is not always able to arrange examination schedules to
suit our convenience. 'Then examination dates are fixed by the
California Derartment, they often conflict with our examinations
In other states so that it is not always Tossible for us to
call in our examiners fr7x the various branch districts for an
examination in California. The expense involved does not
warrant the maintenance of an adequate staff to match the State
examiners in the important assicalents necessary in the examination of a large Eink. As a result, there is duplication of
work, delays, confusion and inconvenience to the bank under
examination.
"We believe that we could examine these five banks independently of the State with much loss confusion to all concerned, more speedily and at less cost. Of course, In an independent examination of the American Trust Company or the
California Bank, we could not make simultaneous entrance and
would cover only the larger and more imrortant branches.
Simultaneous entrance and coverage of all branches, however,
is not considered necessary as we would have a report of the
examination of the State, which is required to make a complete
examination of each bank and all branches once each year and
is not permitted under the law to accept our examinations in
lieu of the same.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
have made every effort ossible to get the Cali-7ornia
authorities to :Ake a :ore even spread of the larger examinations throughout the year and they have cooperated to the best
of their ability, but it will be noted from the enclosed list
that the two most difficult examiwItions were not started in
19F6 until the close of the year. These examinations are just
now being completed so we are late in getting started on our
1937 schedule and will have difficulty in completing it within
the calendar year.
"There appear to be two solutions, either one or both of
which could be employed: (1) Conduct independent examlnations
of some of the larger banks on dates that will fit into our
own schedule, and/or (2) examine two or three of the larger
banks once every other year, accepting the State reports for
the odd years."
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
MEMORANDUM
In re chartering:
Get from agents list of banks chartered by Stataswhere
Comptroller of the Currency refused; show subsequent history
thereof.
Get similar data re national banks chartered but refused by
states.
(The difficulty expected here is that the Comptroller of the
Currency perhaps granted charters because he knew if he
refused the states would grant them and vice versa.)
With respect to weak examinations and/or lax policies:
Obtain a list of State banks which have failed since they
were insured by FDIC and ascertain from FDIC
examination
reports and files the causes of failure, etc.
This may
indicate weak examinations, weak policies and/or questionable
certifications for the State authorities.
C.E.C.
8-14-56
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
It has been the practice for the FederEl Reserve Agent to
investigate and make his recommendation in connection with the bpplicatio
for chatter by each national bank in his district.
does not require such procedure.
The law
Apparently it has been deemed by the
Comptroller desirable to obtain the Agent's analysis and recommendltien
in such cases beclimse,through the operations of the Reserve banks, the
statistical information they develop and the information of a general
economic nature in the district puts them in a much better position to
determine the economic necessity for the bank than the Comptroller's
office in Washington, or even the Comptroller's representatives in thc.
district, namely, the district chief nAionel bank examiner and the
field examiners.
This is another indication of the fact that the
machinery of the Federal Reserve bystem is more adequ te or would more
readily lend itself to the supervision of all banks tha
body.
CEC
8-1-36
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
any other one
In Mr. A. P. Giannini's letter to E. H. Gough, Deputy
Comptroller, dated December 24, 1936, replying to Mr. Gough's
letter of December 15 relating principally to the inadequacy
of capital of Bank of America, N. T. & S. A., Mr. Giannini
stated:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
"We had thought that we should be commended for
what we had done, but if, as a national bank, we are
to be continually harassed and discriminated against,
then it seems to me we should give serious consideration to the possibility of operating under a State
charter, which I should be most reluctant to do. As
you know, in the past at least one prejudiced re-port
originated from local sources. I wonder if it is
possible that the staff of your department may have
been rendered unduly skeptical by this or similar reports which do not give expression to the present
condition of our bank or the progress that has been
made,
Subject:
Adequacy of Examining Staffs.
March 23, 1937.
The Budget Report for the State of Iowa indicates that for
the year ended June 30, 1936, the Banking Department's total
salaries aggregated $48,500, of which amount $26,000 represents
salaries paid to examiners and assistant examiners (apparently
of banks).
The aggregate included an item of $3,600 represent-
ing salaries of small loan examiners.
Traveling expenses of
the Department aggregated Al2,800.
The State had 545 banks with total resources of approximately $386,000,000.
This figure does not include 133 "offices".
The State also had 169 credit unions with total assets of
$1,200,000.
These figures indicate that no argument is necessary in
connection with the statement that inefficiency in the bank
supervision of the State of Iowa must have been marked. It may
be recallcd that Iowa has had its share of bank failures.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statutory Competition and Laxity:
In looking over annual reports of State superintendents of
banks, reports of study commissions, resolutions of State bankers
associations, etc., it has been noted in several instances that
recommendations have been made for legislation in the states with
the view to imposing restrictions and legislations in such states on
certain matters, such as loan limits, removal of executive officers,
etc., somewhat in line with the eliminations and provisions in the
Federal laws.
The sponsors of such recommendations have stated in
substance that the Federal provisions are as good and should be set
up in the State laws.
However, in some cases it is noted that such
recommendations were not enacted and in many other cases it is possible
that a search of the State law would prove that the recommended laws were
not enacted. It is probable that the legislators were influenced not to
enact the recommended laws because of pressure brought to bear either by
politicians or political-minded bankers, and it is possible, if not
probable, that if the truth were known, arguments were advanced that
the recommended laws would cause the State banks to lose their competitive
advantage over the State banks or even the State banks operating under the
Federal Reserve System. (See report of the Special Commission for Investigation and Study of the Banking Structure--Mass. January 1934--beginning
at page 38.)
CEC
7-27-36
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
fr-4
,
Memorandum to Mr. Paulger
From
Glenn K. Goodman
(AtJ6 FQROAARAMDUM:
April 22, 1,66./._
Sajoct: The cost of bank
exaninatirm work.
In accordance with your instructions, a sty has been made
in order to determine, if ?ostible, the cost of conducting the bank examination
work in the Fecieral lieserve Systcn since the Inauguration of its activities in
1914. In this study, no consideratIon hAb betyc given to the activities and ax.
pauses of this Division with reference to either examinations of the Reserve banks
or direct and/or indirect lioervision of examinations of member banks.
pIscpssals:
The Feder%1 Reserve Act provided origivall,y that the CowAroller of
the Currency shoulc a2oint examiners to examiue every member bank at leaet twice
each year. It was lrovided, however, that the Foard might authorise examinations
by State tuthoritief; to tc accepted in the caee of State weber banks and eight
direct the holding of g?ecial examinations of btate member banks. The expense of
examinations wtt to be assessed by the Comptroller upon the banks examined in pro,.lortion to the assets of the banks unon examination date. IL addition to examinations
made 1.7 the Comptroller, every MONOWle bank could provide for apecial ex-
by
aminations of member banks with the expense of such examinations to be borne
the bank examined. In this co:inaction, reference is made to the following excerpt
froa the Annual Re3ort of the ComAroller of the Currency for the year 1916 (dated
December 6, 1910:
"Section 21 of the Federal reserve act abolished the old fee
system in cotInection with national-bark examinations ana yubstituted
the salary basis.
Moder the present system national-bank examinations are being
made more thoroudhiy and effectively th7in ever before, 'nil jale beneficAX
d
be'
w
.1
off c 0
t
fiUt.La
&Brent
anez
ia isureired
be ref cted beri
eeering eupp
Astion-il barks.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
,.
• P1,10%,
,,' • ^
Memorandum to Mr. Paulger
402.0
"Under the old fee system a natianai-bank examiner was allowed
only a fee of $5 for the examination of a bank with $200,300 capital,
although its assets :Atm be in excese of $10,303,400, and fron the aS
fee so paid he wee required to reinburee himself for his traveling expenses and. toard. In such n, case the exa.miner neepesarily made eithor
a very euperficial and hasty exaaination of the bat* or remained for
clooer consideration, at his own expense, to 2erform a gratuitous service
for the Goverment. Under the present ZAI4ni systex nntEntalmibank examiners are t.nstructed nnd required to devote such Um. Lnd attention
to each individual bank as MAy be moons* to acquire a thorough
knowledge of its condition, and to take time to discuos it& affairs with
its officers and directors end correct .Tuch defects or faults as sai be
found."
II
Thia etate,Aent indicates that effective am thorough examirmtiono of national
banks 1.'ere really not inaugurated until .fter the :as5,s,ge of the FeL.eral Reserve
act.
After having reviewed pertinent sections of this annual reoorts of the ComPsince 1914
trollerg the annual reports of the Reserve banks (and, althou4b not s,vcifically
nelated to the liectien, the pobliaked reports of the F.D.I.C.), and having mode
inouiry of certain
of the Board's titer, it is concluded that the readily
avAilable data ,oertaining to the cost of bank examination work are too -6eoger to
permit satiefactor5, com,arisons between Federal Aemerwe Districts= or between the
Coat of examining nation,1 tan)c
it
thc cost of oulootaiag State rileober tlnks.
Roomer, the data presented in this memorandum may be of some value in determining
trends and aaking paeral com,airisons between various Federal Reserve Districts.
0
•
,
0,k
•
;
B
The functional 'Apia's re2orts (Form F) of the Reserve banim were inaugurated
in the iaht half of the year lAk. Inquiry of the Division of sank oieretione revealed that prier to this date information ia not availle as to the expenses of
the bank exanInntion ac;lartAnatt, of the Reoerve bamxs.
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Federal Reserve Bank of St. Louis
Memorandum to Ur. Paulger
The operatims of the bank exam nation departments of the Reserim backs are
listed in the Manual of Instructions (April 1, 1935), covering thp ,
,reparation of
functional expense reports, as follows:
4404i14401111
bmoinations or crefAt investigations of:
liober banks
Affiliater of member banks
State banks (including affiliated organizations) apAying for membership
All other work inotdent to examinations or credit investigations of
member bankr„ state banks alfilying for melberrhip, sne affiiiatf!r!
organisations
fultimstaimust
Inveetigatiese mede is sennsetien with applicat,ons for national bank
Charters
Investigations made in comncatioL with sviPlicatiNis of national banks for
authorisation to exercise fiduciary :40were
All other field investigations (not coLnected rith examinations or folleeup of examinations) incident to the work of the *1-Ank EXamination" function
441;ysis aps! 47iew
Review end preparatton for aubmistoll to the FeCeral Reserve Pcard of:
Appliestlems of national banks for fiduciary powerb
Applisations for acceptance powers u2 to 100 percent
AppliSatiens for acceptance ?avers for dollar excitants
Applications for voting ',emits by holding company affiliates of
neiber banks
Applieations to e:A4.4blisib branebes
Applisations for degrease i
apital stock of teezber banks
Applications under Clayton Act
Appltoations for permits under section 52 of the Balking Act or 1935
Applicati.on for issue, eurmnder, or adjuctment of Pederal Reserve Bank
Ste&
Preparation of recozrendations to the Comptroller of the Currency on
applications to organise national banks
Anmaysis of reports of few/Lingo ant. dividens
Amaixsis of call reperta of condition
national and state banks
Preparatior of correspondence in connection with mergers, liquidations, etc.
Analysis of bank examiners' ?el:torts.
The functional expense reports do not contain 'nformatlon as to the cost of
Performing the various operations conduated by the department. The expense accounts
art listed in the reports
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
SW
follows:
Saeorandam to Mr. Paulger
am
b.
a.
d.
al,
f.
g.
h.
A.
Salaries- Officer*
Salariet - Xmlloyees
Contribltion. - Retirement systole
Traveling expenses
Printing, atetionsry, and other srup7lies
Telephone and telegraph
National bank essolmersi reorte
State beak examiners' rwt)ortl
All other
In viva of the preponderance .;f: national banks in the Systez, the total ex,enseit of the bank eneminAton departments sweet be used as the cost of oxamining
bteU Gelber beaks even though individually State meiher banks receive more attention from these departments than do national balks. Mere is no readily available
information to incase** diet proportion of the total expense of the departments
is AlL>04&le to examination work related pole4 to &tat* acober banks. (Inform..
tion saNitted by Asalstant Agent Sargent ander date of April f, i,Indicated
that the cost of examination. of State neeber beaks (Ineluding Ionst de2artments
and affiliates) in the iian Francisco rietrict for the year 1355 megregated 457,7Z1.
(Includes tbe cost of typing reports but exclude* the cost of office supervision
And analysits, Mere two examinations :acre nade during the year, the cost of the
first was not fl,cluded.) The arto4zit reporte4 reresented 41% of the total expenre
of tho :trtnt for the year 136f, (92,073).)
Tht following pages present statistics tibia base boss primed tram the
F7Inctriun'1 Expense Reports as emptied by the Division
fro various published reports et Os Issed:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
at sink oporetuai sid
leenrommium to Vr. Pau14er
.
11160010
,L4tAbit maw.REsim Lep axibDua
*
Cost of
rbroopleit
1922
1923
1924
1926
1926
1#27
192$
1929
I.
1910.
1992
1056
lational
ToUl =peace
Number of number bauks
MA Nat*
lass Wet Of
eV elidesi
;
-S& g
/kik latikatal
1111111116. exam% r4Arts
$ 295,109* (set
4A1,128
available)
S50,80t $ 99,4240
534,$40
163,946
4860386
55JAN
Ltil#681
1020996
1060121
1000449
now.
82d10
74919
7:#257
43:4)16
476,345
488,582
808,515
7118,T90
1134
/95b
1,230,143
la87 173
69,750
-
51179Q
$ 296,105
4914126
461077
8200676
1920206
4140247
460,135
4010912
snow
414043
431,2616
447,506
1,1414300
1.222413
&JAWS
411.
0
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1111y 1 to Dsosibar 51.
First quartar not available.
1,695
1,544
8,179
8,043
9,774
9,587
4441
1,364
0,048
4489
7,'40C
7,75v
7,629
70'3:5
7,033
8,368
9,280
0,334
8,837
8,3
7,246
8011
60616
5,1b4
6,311
6,44E
:6.347
1,276
4238
1,I1J
1,019
878
805
957
980
50462
3.00).
51,38/3
.14g3n8niti2gi'g
W, ip0 tea
.te v, 40 ,
'
No- we
14
r4
.ZS 2it Vi 4 ric
g ;5 ggs PI WI .1
2R :3"
.1
:3 t;.0 .1
•
(Ni
elliMillf,M.
IIsiiiiii4ii:ti'rsi
11411111111111
.4
OD
Cb CA ?A 01 CA OD CO
t-
e-
Al 41
1r c).4 41 CO Ct
OD
MI 41
OD ul
,V4 04
eAD V% 11%* tg. t- te- 0 to tO OD CD
;4 .4
liMMS"1-11A
•
UtgSPVcgggR25
r4
r4 44
04
uNi
OD
V)
21-4.0
^% 03 OD t- O*40
It 0 r4 ti) ,7.7
1150111111111
•
iItkkiglAktA,. 191113111
1
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Nerflomm'llm to L. Paulger
Total
Cleveland
1922
1925
1924
1.925
1926
1927
1928
1.929
1950
1951
1952
1955
1954
1955
a
20,878 *
55,332
41,298
43,628
44,169
52,489
UAW
47,IOS
49,661
51,104
53,100
71,862
151,270
105.292
Number of member banks
jsa of xpar end
OMR national Total
118
119
116
111
139
104
99
92
70
68
76
99
99
749
752
747
745
726
712
696
665
585
562
468
528
523
877
871
865
856
835
816
795
757
655
650
544
627
622
* Jul,y 1 to Demmilber 51.
"AMNIA,
1.922
$ 20,414 *
1923
54,428
1924
39,291
55,025
1926
50,228
1926
1927
30,819
1926
52,524
1929
29,875
1930
51,855
1951
51,72,
1952
50,906
1956
55,952
1934
79,594
1955
821L934
66
62
L',6
56
62
48
41
53
52
55
57
61
65
561
555
548
527
512
4119
419
431
371
559
316
559
339
627
617
604
585
564
547
514
470
405
392
575
400
404
* July 1 to December 31.
4t1.askta
1922
4 15,104*
1925
24,954
1924
25,576
1925
26,201
1926
24,519
1927
24,487
1928
23,216
1929
17,805
1950
21,689
1931
18,441
1952
19,592
1.913
20,101
1954
45,550
1955
,I1 i7
140
128
116
97
84
76
62
49
44
58
54
55
55
385
582
379
578
580
577
566
541
505
285
265
277
273
525
510
49
475
464
455
428
390
549
523
3,19
552
328
Mailli
* Jul: 1 to December 51.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
0/,
TL
L9
9L
98
96
201
gOT
TIT
On
091
321
LZT
03V
012
gel
272
6.4,2
LI,
99,
311P
211,
ROW
861.
407
My
06S
TeS
7.92
611
,
391'
212
TLS
L8,3
Kg
609
SZ9
'38
119
89
69
09
TI,
Ot,
III
02
9S*
19
Zi,
29
OCT
601
22,
99t
3flt
XY3
623
109
229
299
,L9
Z69
let/.
28L
128
TC3
tZ3
303
Tr,
eL3
3V9
289
BTL
22L
1V91.
638
288
0*6
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
'Ts asqueoaci ol T Ptur *
380 PI
Tai3L
084/3
,
9C0d9Z
3It4,2
L604k3
aL42Z
Ma ga
9g6d gZ
9LetU
02064
8L6402
T38424
* 01,
9491 t
2261
,26T
226T
326T
1261
0261
6461
1036T
9;361
g36T
1361
stioeltaunu
*T2 sectimaosa ol
?XL
aes
2CC
1801
98T1
TZg
eTg
T1*,17,9
8ZL
T9£
tee
0611
299T
Pcc1
80f,T
L3,1
Z8€
2101
TgOT
gq0T
MT
181
991
C.q3
88Z
802
012
LtS
2C72
692
T-'101 raft:1114i
pua leer 4O
exmq Jogrow Jo mown*
9261
32L•
n61
8L8493
2261
6t6427
32CT
*MT
111361,21
19Z491
t2'T
6361
9014n
936T
81241i:
436T
821.422
9361:
LtS492
209412
tan
8L2g93
UST
* VT9g21 $
3ZOT
°T2 asquaoaa o.
0194TqT
CTC‘tf
:71rc*/0
TSegf
968'91.
2gLiet
Le6829
LT9#Z19
L684TS
Vier
Men
0S848S
* Z914/.2 t
isalluooleg
gees,
Irtnoq
Rtnf *
2261
IF.26T
2261
326T
1261
0261
616T
8ZCT
LUT
53FT
61
I361
402/TtVa •rpj o
way%
TIVIVP.101190
Memoranc4111 to Ir. Paulger
Total
!tenses City
1922
.1.925
1924
1.925
1926
1027
1028
1929
1950
1951
195%
1955
1954
1956
4532St-Sa
°
4 18,185
56,654
45,2.54
44,544
42,212
$1,176
50,814
25,956
22,505
22,169
24,012
55,191
15,256
6405§
N,Imber of member banks
as of year clact
Etats Wationul Tota4
56
5$
35
27
27
21
21
41
%
25
23
89
48
50
1066
1055
J14
955
941
911
872
850
8)1
766
SO
686
f376
1122
1068
1027
'492
968
952
395
871
824
735
708
754
726
190
185
127
111
46
92
64
77
67
411)
b4
GJ
5:i
659
645
725
716
701
688
662
607
550
524
465
4i#5
451
849
8k8
65:Z
827
7411
760
746
664
617
6.84
537
555
550
195
182
165
1$3
152
129
120
111
96
78
66
60
78
607
564
575
!
,
.86
5Z6
496
487
470
426
571
504
;..9
272
802
766
740
721
68
627
607
581
522
449
572
579
550
igpOr4e,
*
* July 1 to December
DigAaa
1922
1923
1924
194"
1928
1927
1%.J1
1929
1930
1931
195L
.&. '-'a
1934
193L
* July 1 to December
644 Fr44civ90 192k
7
,1*
20,419
2rj,418
siad
564,40L
0,4J6
2,4,72L
19,751:
16,483
18,67
16,237
261094
S5,46L
0 ck'
4 47,726*
1923
1924
192E
1926
1927
1928
102:3
1930
1951
1951:
1936
1954
1955
* Jul
1 to December 31.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
62,761
63,740
82,526
49,204
72,106
66,699
56,600
45,680
58,107
54,604
61,075
95,959
92,075,
Meeorandum to Mr. Paulger
-10-
An amendment to the Federal Reserve Act on June 21. 1917, took awa:v from
the Comptroller of the Currency the power granted to examine State member banks,
but provided that such banks should be subject to examinations by direction of
the Board or of the Reserve banks by examiners selecte6 or approved by the
Board.
Likewise, it 'es provided that examinations 1:y State authoritiee, when
approved by the Reserve bank, might be acce7ted in lieu of the examinations by
examiners approved by the Board. Oa January 24, 1918, the board advised the
Reserve banks to have an examiner available at all time. It was indicated that
an examinAion should he made of each State somber tank at least once each year,
either by. the &tate authorities or by examiners ap?rovec by the Board. Subsequently, on tecember 24, 1918„ the Board 5uggeste(j that a department of examine.
tion be organised at each Reserve bank, effective January 1, 1919, and outlined
the work to be ILigned to Wm department.
It ap?ears that the Aiwa, °Alined by the Board continued in effect until
February 14, 192, 'hen the fterd outlined an
defined the powers and duties of
the Reserve banks regarOing the natter of member Wink supervision atui expresaed
its views with reference to the a3propriate authoritz, to take corrective zeasures.
Although the functional expense reports were not inaugurated until the last half
of 19, cost data are available covering almost the entire. perioc', during which
the 4stem has maintained a relatively close supervisory relationship over State
member banks.
In November, 1926, the Board employed Claude Gilbert, than serving as Assistant Federal Reserve Agent at Atlanta, as Supervisor of Examinatime to make a sur6vey atu'i report as to the efficiency and thoroughness of the examinations and credit
inveotigations made by each Reserve bank and by the State banking departments.
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Federal Reserve Bank of St. Louis
Memorandum to Mr. Paulger
-11-
Whi1e the trends in the cost data are not conclusive, it appears that there was
some increase in expenses during the years 1927 and 1328. (Mr. Gilbert was
visiting various Reserve banks and completing the preparation of standard forms
of report of examination and analysis of examination report.)
On December -1 1928, the Board voted to abolish the Department of State Beta
Examination, Whidh was under the direct -'n of Mt. Gilbert, effective February 1,
1929.
Accordingly, the Agents were advised that (1) the State reports could be
relied upon in the great majority of cases but that, if the State reports were
not satisfactory, a comolete examination should be made; (2) if officers and directors of State member banks had had their attention called to violations of law
and unsound banking practices by State authorities, it was not necessary to duplicate this work; and (3) they should discontinue furnishing the Board with reports
of examinations of State member banks except in the cases -where they wished advice
or requested the Board to cancel the membership, and furnish, in lieu thereof, an
analysis of each such re-Port. The expense reports of all the banks except Boston
Showed lower bank examination department ex s)enses in 1929 than in the previous
year, Indicating that the examination activities with respect to State membe
banks were decreased.
The Information reviewed indicates that in the years prior to 1933 there was
considerable lack of uniformity in policy among the Reserve banks relative to the
scope of examination work.
Some banks made "credit investigations' while others
usually made "examinations. The difference between a credit Investigation and
an exameation as actually condgcted was more fancied than real in many instances.
On December 7, 1333, the Board advised all Agents, relative to the examine,
tion of State member banks in connection with certification to the Federal Deposit
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Federal Reserve Bank of St. Louis
lemorand'um to qr. 'allger
—12—
Insurance Corporation, that a coly ,)f the re.:Jort of each examination made in
con—
nection therewith, together with an analyEis thereof, should be forward0, to the
Board.
This procedure hv.s been continued and Is lin effect at this time.
Oonse-
quont4,.am might be expected, the expensee, of the tank examiaation departments
took a decided jump mpumve in 19U, and have continued at conJuratively high
figures during the years 1934 and 1935. The hitiest expense on record
was recorded
by seven of the heeerve minks La 1934 sad by five of the Reservr, banks in 1955;
however, the combined expenses of all the Seserve banks reached the highest
figure
in the year 1935. It ehould be noted in passing th!it all of the increase
in exam.
tuition expanses of the Reserve banks should not lie attributed to the require
ment
that complete reports of examinations be forwarded to the Board; the Banking
Act
of 1955 placed aiadef.j responribilitieE upon these departments with respect
to the
exaninAion of private banks, investigations in connection with permits under the
provisions of the Clayton Act and of Section 3k of the Banking Act of 1953, and
axaminAions anc investigations of holding company affiliates and affilistes of
:zember banks,
Inasmuch as data are not available as to the prooortion of the expenses of
the various bank examinatIon departmemte which are chargeable to State
somber
bank activities, no attempt has been made to arrive at the
cost of examinations
on a "per bank basis" or upon the basis of the total resources of such
banks.
P4RTAIHT WE
or THE
WIRENCT BUREAU
second
It will be noted from the statistics shown on the/following '.1age
that total
Regular Boll salaries of the Currency Bureau for the fiscal years 1314
through
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Federal Reserve Bank of St. Louis
11c1;orandu!, to Jr. Paulger
1335 aggregated t4s 81,077.92„ general ex?ensez, acgregated 41s594,790.23, and assetamentE on account cf naticnal bank exmintng aervicc Add IV tanks agiXegatc-il
40,399,004.30. If the expense3 7:aid bc bemke for examining Merv/cos for the
years 1385 to 1915, inclusive, amounting to $8,558,444.05, were added, the total
amount 7aid for such aervIce would be ;749,547,448.054,
assaosments uses re-
ported. for the yeare 1864 to 1694 although the report of the Comptroller of the
Currency for the year 1884 (Dated December Is 1884) containee this statements
"It has been custolaary from the establishment of the 4stem to have a regularly
axviate42. examiner visit each national bank at least :mice a year, in many cases
twice a year, and when deemed necesary, even more frecuently.l)
In compiling the following figures, an attempt has been made to exclude
salariea of the Natianal Currency heimbursable Roll, the Federal Reserve Issue
hedemption tivision Roll, and the insolvent Eatilnal
Livision Roll.
Expenses directly connected with the currency issues tad 7)ostaze and Lnsurnce
on the shi?ments of such issues have been excluded. General ex7.)en6es include
so-.11.e expenses whiCh were reiAibureed by banks but no adlustment has been made
therein.
Certain contingent expenses have beer.: excludeth
For the )urooee of
this otudy, it is believed that the data hereinafter shown are reazonahly reliable and, if the salary roll includes amounts WhiCh could have been allocated to
currengy functions, it will be noted that the aggregate of salaries included is
slightly less than 10% of the total 'pertinent* expenses.
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Federal Reserve Bank of St. Louis
BANK EXAMINATIOV IXPOBOE6 07 CUERENCY PUREAU
FISCAL YEARS :my sot 191445
(Compiled frog! Reports of the Comptroller of the Currency)
Salaries,
regular roll,
Including
retir9011A
General.
'ALMASee
National ben1c
elantning
ANITIcer**
Total
pertinent
ex,Jenme,
No. of
Average
national east per
ban144#, ....kialk
Avr
Total
cost oer
assets on $1033,300
9a11 date
of aboDtf
(Millions)
$11,482
$ 57.25
11,796
57.55
13,927
52.4)
16,151
62.40
17,840
64.97
405800
61.62
22,197
66.58
19,638
105.11
00,706
116.00
21,512
112.44
22,566
115.44
24,351
101.58
25,516
95.13
26,562
96.48
28,508
91.06
27,440
98.60
29,117
98.30
27,645
109.05
22,388
159.30
20,860
157.39
23,902
113,19
26,061
122.03
1914
$ 136,729.440
$ 620,607.46 $ 657,866.92
7525
$ 87.35
1915
140,L51.9(
556,299.70
676,451.60
7606
88.95
1916
issows.s00
577,762.84
751,096.30
7579
96.46
1917
156,431.810
849,815.96
1,007,817.77
7604
132.54
1918
164,468.01$
994,626.18
1,159,094.19
7705
150.43
19190
179,511.64 $
51,255.46
1,050,977.38
1,281,722.48
7785
164.64
19231
168,928.70
82,787.55
1,184,026.78
1,465,743.01
8050
181.29
1921
189,698.53
105,326.77
1,769,594.79
2,064,120.09
8184
253.14
1922
236,509.02
47,208.75
2,159,549.99
2,445,227.76
8240
296.12
1925
229,376.66
44,032.64
2,145,391.85
2,418,801.15
8241
295.51
1924
221,760.15
44,514.71
2,295,544.54
2,559,819.58
8085
316.61
1925
223,9)9.40
49,292.42
2,199,807.48
2,473,309.28
8072
306.37
1926
217,831.20
48,776.70
2,141,700.16
2,408,368.36
7978
501.88
1927
217,391.77
55,778.06
2,291,406.48
2,564,578.31
7796
528.96
1928
254,422.56
53,870.11
2,308,250.08
2,596,542.75
7691
557.61
1929
250,126.54
45,536.13
2,409,858.47
2,705,520.94
7536
559.01
1950
274,562.59
51,580.49
2,553,703.97
2,879,647.05
7252
397.08
256,515.52
1931
70,860.48
2,687,115.22
3,014,489.a
6805
442.98
1952
261,794.62
116,151.70
2,757,897.15
3,115,843.57
6150
506.64
1933
251,238.11
139,284.93
1095,406.82
2,865,931.86
4902*
584.65
1954
198,424.15
188,074.70
k,519,067.56
2,705,586.39
5422*
499.00
1935
218..55446
2t762_.810.40.
200.779.65
3.180.1414187
5451*
585.55
"A.581.077.92 et1.594.780* 23 $40.9894:13400 46d04.682.95
Salariez not segregated as to general activities, currency operations, etc.
Fiscal year ending October 31, except aseeeements for national bank examining services
as of June 50.
As of on or about June 30.
Licensed.
The assestrlent figures for the years 1314 to 1925, tnclusive, as reported in the
Report of the
Co -'t rollerof thc Currency for 1925.
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Federal Reserve Bank of St. Louis
Memorandum to Mr. Paulger
As indicated earlier in this oommemootmo, the &wester of the examinations
made ty natioual tank eYaminers has ohanged materially since the early years of
the Federal Reeervs Cyrtem. In this connectioa„ the following excerpt from the
Annual Report of the Comptroller of the Currency for the rear /916 (dated Leeember
4, 1916) is of interest:
"Wring the
at year the Comptroller inaugurated, for the
first tire, the 7ian of furnishing each natUmal bank, after each examinatiov, a com:arehensive copy of the examiner's report, showing in
detail the condition of the bank, with notation of Irregularities and
matters criticised. leosh examiner, furthermore, after every examinsition, also furnishes to the Comptroller's Office a special suia4ementar;
report containing data sere or less confidential, with such special
recommendations as the situation seems to call for.
'This departure from ,Irevious lractice has been strongly approved by the banks generally; and advices received indicate that the
plan of providing blnks with copies of the reports of examinations has
resulted, in thousands of cases, in giving to the eirectors of banks, as
well as officers, a clearer insight as to the bolhis condition, and a
better comprehension of Its management and operettas* an they ever had
before; aad has also effected a 3ateria1 saving to tow books by mobling
them to dispeese with costly examinations, which sore of them have heretofore boom receiving ..)eriodicall4y frau special moommatants."
Although the average annual cost of examinations pair book hoe increased from
$87.35 in 1A4 to :,535.55 in 193L, it will be observed that total assets of all
national banks, a6 of June 50, have increased from $11,482,000„a30 in 1314 to
426,061,000,000 in 193, or an increase in examination cost per million dollars
of assets froN 457.25 in 1914 to
l22.3
La 1935.
oonsideration has Leon given
to the amount of fees included in these assessments to cover the cost of examining
trust deplrtments. (It is understood that it is the practice of the Comptroller
of the Currency to ts7sess a bivic charge 0: 0.00 for each ememiaation of a national
bank ancl to ad,
',0.01:5 per $1,000 of assets In excess of Z26,000. A $1,000,310
bank would be assessed $129.25.)
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Federal Reserve Bank of St. Louis
Memorandum to Mr. Paulger
-16-
()MATING IIPM$U OF THE IlDtp44. DINSIT INSURANCE COTIPORATION
During the period September 11, 1933, to June SO, 1934, 11,791 examlwitions
were made ano during the 3eriod July 1, 1954, to June $O, 1935„ 4284 examinations
were made, a total of 21,075 examinAions.
Although there are activities of the F.1J.I.C. ehlek are related to national
banks a:Yi State member banks, for the wrpose of this sted, all the operat_ng
expenses of the Corporation (exclusive of deposit tnsurance Losses end ex,enses)
have bean considered an costs allocable to nonmember banks.
OFIRATING MINIM OF THE FEDERAL DEPOSIT =UBANGI. CORPORATION
MAUL TIMMS JUNI 110, 1j34-35
(Compiled from Reports of
the Corporation)
Total
onerating
ex 3eusltit
1934
1935
N9. ban4st
2O45,475.09
'-:.83Lk22702
$5.677.732.91
763Y11*
7852
* Deposit insures.s loosen and 0=00100 not included.
ftclusive of usobers Federal Reserve System.
40* Excludes 169 mutual savings banks which terzinated
insuranes as of July 1, 1934.
Gpnculetop:
While it is not ?ossitle to arrive at the actual cost of bank exam-
ination and supervision under Federal direction s.:xice the organisation of the
System, it has been 4t least 461,5b6.523. This amount wa, arrived at as follows:
EINIMMoss all Federal reserve banks 7-1-22 to 12-31-36
Pertinent expenses of ComAroller of the Currency
7-1-111, to 6-30-35
Operating expenees of F.D.I.C. to 6-30-55
i Actually covers a Alriod prior to oassage of
Federal Reserve Act.
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Federal Reserve Bank of St. Louis
$ 6,693,957
48,964.863
5.677
- -1
Memsrandun to Hr. PAulger
47...
In spite oi the inherent weaknesses in the tiata includeo 1.1n this sismorandus,
it Is believec that the stkitl.stic, whicla indic4te IncreazIng costt, of examination
wont under Yeoeral dirbction, will be provocative of thought.
It may be stated that the work of the exaxiination do?artmentits of the Federal
reserve banks and that
or
the Federal Deposit Insurance Cor7oration duplicate* in
some degree a supervisory relationship which id basically, at least, vested in the
State su„)ervibory authoritieul.
ate the qualitzi o
.ttot the Airlxme of thib temorsaidus to realm.
the exwaination work performed by the State supervisory authori.
tie*; ner to justify the neceesity for the
by the Fe3erai authorities in the
WWI
erformance of any suaervisory functions
of State banks.
No study hn.z, teerl given to the possibility of an iaverbe corrolatiort existing
between bans failures and adequate examination work.
the devalopsentr la the
However, it is doubtec, if
at twenty-one years could substantiate Comptroller John
aalton 4111.1/siazt ex?ectations as stated in his annual ra?ort for 1916: "... The
beneficial effect of the thoroughness with *Itch the work
is
now being done Should
be reflected hereafter in iTa:)roved msnameeent and fewer failures of national banks.'
In this c)nilection„ the folloein„; statement of Professor 04 16 I. MOrmvie in on
article in the April, 1327, issue of American Bankers Association Jeurnal, entitled
"The Causes of Bank Failures", is of interests
'No doubt bank examinations might be improved, an in eoie states
very asterially la ,roved, but Lnoomplete information about thc ennditim
of tho banks is not the most seriout defect in existing supervisory arrange4ents. The opinion may be ventured that, *slue from a few InsUnces
of emeeptionelly skillful dishonesty, and tne iecial. situation created
by attains of bank, ameceesiv* examinations )receding failure have regularly disclosed an inerensingly unsatisfactory condition. But in making
eaective use of this Information, almost insurnountal-le obstacles are
encountered. Governmental authorities nag criticise unwise 3olicies, but
they can only take action when statutes are violated, or upon clear evidence of iLipairment of capital or insalvosiv. Moreover, even within the
field *f violations or Etatutes, effective administration is hampered by
the coraion failure of legislation to -rectde penalties other then the
celisation of bnetnes6 or a receiverghi00
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Federal Reserve Bank of St. Louis
Memorandum to Mr. ?aulger
-18-
Legis1at1o.! enacted in recent years has providecl the boar, the uom2trolier,
the F.L.I.C. with considerable ,ower with Which to make "effective use of this
information" as disclosed by reports of examination.
•
EIUGWTM: In the event that it is deemed advisahle to obtain detailed tnd
curate figures at to the cost of bank examinstion work in the United States by all
authoritiev, it is suggested that it coqld best be obtained in the following manner:
1. Request the Agents to comoile figures ab to the cost of examination work accofting to the various flnctions by years since the
organisation of the Federal Reserve S:ytem.
2. Request the Agents to ascertain from each State banking department the cost of examinatio, work by years since January 1, 1914.
5.
Request the Comotrolier oz the Currency to furnish data by years
since January 1, 1914, az to the actual cost of examinations as
distinguishea from assessments mace against the banks examined,
nequest the F.D.I.C. to furnish data by years since its organists,
tion as to the cost of examination work.
Respectfully submitted,
aeon N. Good,
Ixaminer.
raw
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Federal Reserve Bank of St. Louis
MEMORANDUM
In connection with the chartering of Federal Savings and
Loan Associations, the enabling act stipulates that
"No charter shall be granted except to persons
of good character and responsibility, nor unless in
the judgment of the Board a necessity exists for such
an institution in the community to be served, nor
unless there is a reasonable probability of its usefulness
and success, nor unless the same can be established without undue injury to properly conducted existing local
thrift and home-financing institutions."
(Taken from address of I. J. Roberts, Asst. Cashier of Riggs Nat. Bk.,
Washington, D.C., -convention of American Institute of Banking,
Seattle, Washington--June 9, 1956)
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Federal Reserve Bank of St. Louis
301
MEMORANDUM
The "Banking Law" of Puerto Rico, approved May
11, 1953, contains
the following;
Section $9
P. 5Z
"One year after the approval of this Act, every foreign bank,
not including in this term and for these purposes, banks of the
United Ctetes of America, that ie engagea in banking operations
in Puerto .1.co, ehail be obliged to retain in Puerto Rico, either
as loans or in cash an amount equal to the amount of its deposits
in Puerto Bios); and ever;, deposit of money made in Puerto Rico
shall appear as such. The violation of this provision ehall be
sufficient reason for the cancellation of its license."
Section 58
P. 30
"Every bank or foreign bank at present doing business in Puerto
Rico or that mey hereafter be established in Puerto Rico shall
obtain from the Treasurer of Puerto Pico, on or before the thirtyfirst day of Lecember of each cclendar year, c special license
to do business in Puerto Rico during the succeeding calendar year,
Upon payment of the corresponding quotas according to the following
schedule:
Paid-in capital and reserve fund
Over *1,000,000 shall pay
500,000 to *1,000,00u
100,000 to
530,000
Less than
100,000
200.00
100.00
50.00"
(Foreign banks doing business in Puerto Rico must pay $250.00)
Legal reserves ere stipulated on page 14.
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Federal Reserve Bank of St. Louis
306
a
General files 014.
Commerce Department
American-Oriental Banking Corporation, Shanghai, Chine, a Connecticut
Corporation failed in 1935.
Under sate of August 12, 1935, the
Secretary of Commerce wrote the Board that American prestige and
business in China was bound to suffer severely with its failure and
stated that "the situation seems to point to the desirability of steps
being taken to prohibit American banks and finance companies from
operating abroad under American jurisdiction without inspection and
audit such as applies in the case of national and state banks within
the United States".
In its reply of August 24, 1935, the Board advised
that it did not appear the corporation was in anyway subject to any
Federal supervision and that while he had not had an opportunity to
make an extensive study of this subject, the Board's General Counsel
doubted "that Congress would have the Constitutional power to prohibit
American banks and finance companies organized under State law from
operating abroad without supervision and examination."
Note;
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Federal Reserve Bank of St. Louis
Here is a situation in which a State issues a charter to a
banking corporation operating abroad apparently without any
supervision from the chartering authority.
307
I
BRANCH BANKING -- Benj. Caplan
In granting a charter for a new bank or a branch, a body
should consider the need for new or additional banking facilities
in the town, the need for diversification of assets of the current
bank, in the case of establishment of a branch, the effect upon
the financial condition of the banks in the town as well as upon
the head office, in case a branch is being chartered, and the
general public interest. In addition, the effects of a new
branch on the insurance risks of the parent bank and other banks
in the locality should be considered from the standpoint of
protection of the F.D.I.C., incidentally. I say incidentally
because the matter of chartering banks or branches, as well as
managing and operating those established, should be considered
upon the basis of sound assets, policies and management primarily;
and if these factors are sound, the matter of protecting the
F.D.I.C. will be inconsequential or incidental.
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Federal Reserve Bank of St. Louis
•
Page 61 — "Closed and Distressed Banks"
U2ljam and Lamke
"Before tne creation of a corps of speciLlists
in liquidating closed banks, the office of the Comptroller
of the Currency accepted Congressional suggestions as to
receivers4p appointments, always with the understanding,
of course, that a person with the necessary qualifications
was proposed. This practice has been revived recently since
the bank fatalities have been so numerous that the professional
staff of the Comptroller cannot handle them all. It would be
too much to hope that this system is free from abuse, and there
has been much criticism in the press of appointments smacking
of political favoritism." (1)
•
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Federal Reserve Bank of St. Louis
"(1) For an inside glance into some of the difficulties
which at one time, at least, surrounded the appoint—
ment of receivers for national banks, and the attempt
to get away from politics, see Thomas P. Kane's
Romance and Tragedy of Banking, pp. 501-07. For
discussion of recent practice, see Cong. Record,
Mar. 20, 1934, Vol. 78, p. 5076."
28
ME AMERICAN ADAD7LIY Or .?0LITICAL
A:= SOCIAL SCI=CE * January lt
and T ansPortation Problems',
Articles"The A:;:erican Bpn:Idnr Problem" F. Cyril James, Asst. Professor of
Finance - Univ. of Pennsylvania.
"Lessons of Foreign Experience"
A.S.J.Baster, Lecturer on Economics,
University Collece of Southwestern 17n7lnd.
"National versus State B,AI:s"
Ray B. 77esterfield, Professor of Political
Economy, Yale University.
"Branc:i. Banl:s versus Unit Ban.:"
,rtinhour, Asst. Prof. of FinanceG. T. Ct,
School of ComiAerce, Finance and Accounts,
Yorlc University.
"Better Bafll 1,:nnage:aent: An Analysis of Fift:7BmAlc FAilures"
Robert Weidenhanner, Asst. Professor of Econol:Lios,
University of Ian esota
"S,feguarding the Denositor"
T. Bruce Robb, Professor of Statistics and Business
RAsenrch, University of :ebrasi:a.
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Federal Reserve Bank of St. Louis
1171LS OFTH.71 A.:MICA:. ACADEMY OF POLITICAL AD
SOCIAL SCIFZCE e LILY 19211.
(Pages 357 - T1 inc.)
"Securin,7,: Co....roetency in Ban:: Exa..dners" by
by Peter G. CLron , Secrctary of 3171:17,,
Co'..1..onweal.th of Pennsylvar
ITeed
— trainin7, ex)erience
for L-Ico.,,)ctenc: of 'pal: e::a.111-lers
Securing ccunetent exa.Aners
I:ILLcquate standards with res--)ect to annointments
Sc7.1sic s
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Federal Reserve Bank of St. Louis
strnclrnas
L.11 .
c::.racter
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Federal Reserve Bank of St. Louis
6/
THE KIPLINGER WASHINGTON LETTER
CIRCULATED PRIVATELY TO BUSINESS EXECUTIVES
THE KIPLINGER WASHINGTON AGENCY
NATIONAL PRESS BLDG., WASHINGTON, D. C.
Dear Sir:
Washington, Saturday, August 15, 1936.
White House tax frantics this week were staged to help Harrison
in close senatorial primary in Mississippi.
But there IS a serious tax and business phase of this maneuver,
although many calloused Washington observers see only political comics.
Serious side is that business prospects ARE definitely brighter,
revenues ARE gaining steadily. The administration COULD balance budget,
avoid additional taxes, and maybe cut taxes just a little next year,
IF a strong economy policy were to be followed.
Don't expect real tax relief next year. This is cold advice to
taxpayers who should not be kidded. Fact well known here is that these
flimsy no-new-taxes dramatics are largely part of campaign stage setting.
Perhaps it is justifiable politics to play up rising revenues
and business gains, and to talk of FUTURE tax relief. But note -No definite _promises are made. It is IF-and-MAYBE proposition,
just as budget messages for 2 years have promised "no new taxes, — IF."
Business forecast now is not much above forecast in June
when Roosevelt was putting on heat to pass a tax bill patently filled
with the very inequities and administrative difficulties which Morgenthau
now wants to remove. In June the President wanted all present taxes
PLUS 600 millions of additional taxes. Two months later, Treasury
says in effect the 600 millions were not needed and that certain taxes
might be eliminated. Yet no major change in the outlook has occurred.
Tax difficulties were added just last week by Treasury
in regulations which seem strict in spots where they could have been eased.
Government still is running a DEFICIT, will show a deficit for
1937 fiscal year, and relief costs are not shrinking.
Certain administrative tax revisions will be made next year,
of course, as was indicated from time the complicated, loosely drawn
undistributed profits tax bill was hurried through Congress.
But any reductions would be minor, — actual increases are more
likely than substantial cuts.. (This assumes Roosevelt's reelection.)
Business outlook justifies hopes of tax reduction in more distant
future. Here is consensus of non-political Washington analysts:
1936, — industrial production index will average 100. Was 90 in 1935.
1937, — index will be somewhere around 110, good but not sensational.
LonE_Tange, — recovery cycle will run at least for three years more,
approaching the boom stage. This does not allow for war hazards.
Durable goods industries with better than average prospects:
Construction, — residential, non-residential, public utility projects.
Machinery, tools, aircraft, chemicals, — much of these for export, war.
Electrical goods, — both light and heavy. Power companies will benefit.
Farm implements up despite drought. Railway equipment, big next year.
Steel and copper industries will cash in on all these gains, of course.
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COPYRIGHT,
1938,
K.
W.
A.
Railroads are favored by business trend, according to reliable
Washington opinion. Earnings will jump faster than gross income
due to large bonded debts which operate as a high leverage factor.
Carloadings next year are expected to average more than 1070 above 1936.
No new important receiverships are expected. But working out
of present receiverships will be very slow. Officials here criticize
creditor-banker groups for holding out for too much in reorganizations.
Washington pressure is to scale debts sharply, against next depression.
Fact that tax law favors receiverships will delay some reorganizations.
Freight rates: ICC probably will not allow blanket rate boosts
after emergency rates expire Jan. 1, 1937. ICC will consider petitions
for raising rates in specific cases, but is not likely to permit boosts
except in very few instances.
Passenger fares: ICC thinks it showed better judgment than
railroads in forcing railroads to adopt 20 fare. Railroads contend
that most of the current revenue gains are due to rising business trend.
Neutral opinion seems to be that 20 fare will help roads over long pull.
Tax on railroads for pensions, blocked temporarily by injunction:
Majority of legal authorities believe Supreme Court will invalidate law.
Wheeler railroad investigation: Lowenthal staff is loading up
with ammunition against railroad holding company abuses. These will be
publicized at Senate hearings next January. Example: Mid-America Corp
Legislation in next Congress: Railroads probably will get the
water carrier bill and long-and-short-haul bill, but not much else.
Ass'n of Am. Railroads is doin better, building railroad morale,
selling railroads to public, sweetening relations with rail employes.
Government officials still criticize lack of needed coordination efforts.
allege AAR
Some smaller railroads are disgruntled by AAR policies, —
oad schism.
intra-railr
into
discrimination against them. This may grow
Trucks: ICC regulation has put truck lines on big-business basis.
Truck competition, getting keener, will put railroads on their toes.
New head of Air Commerce Bureau to succeed Vidal: Successor will
be Roper's man or Copeland's man. Rivalry delays Vidal's resignation.
Maritime Authority: Members of new regulatory body will be named
in next few days. Best guess now is that Authority will include one
representative of shipping labor, one from Dept. of Com., one from Navy.
Other two may be named after election, — political rewards.
St. Lawrence treaty: Will not be ratified by Senate next session.
Canadians are sour on it, - will suggest changes not acceptable to U.S.
World Power Conference: Government sponsors of conference here
in Sept. asked and got contribution from power companies to finance this
meeting to "educate the public mind on power." Previous power company
contributions for "educational" activities horrified New Deal reformers.
Power companies are a bit suspicious of government ownership propaganda,
are lukewarm, but didn't dare refuse government's request for money.
TVA is in dilemma. It cancelled contracts for sale of TVA power
to private power companies. Now wants new contracts but companies will
wait and see if TVA is constitutional. TVA has much power, few markets.
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Federal Reserve Bank of St. Louis
Antitrust suits in campaign year: The impression is growing
that Justice Department is playing politics. Cummings and Dickinson
are responsible for the antitrust suits which appear to be staged
to meet political exigencies. This doesn't mean that wholesale punitive
antitrust drive will be made. But the suits which will be pressed now
are apt to appear motivated by campaign strategy.
Government contracts: Some manufacturers will refuse to bid on
government business, rather than comply with Walsh-Healey Act provisions.
Others will sell to brokers who will bid on contracts as independents.
Certain government agencies are grumbling because they find it impossible
or difficult to get bids on certain products which they very much need.
This situation may lead to amendment of law, but probably not next year.
Price discrimination law: FTC officials can't agree among
themselves on some important points. So there still is no clear official
guidance on interpretation of the act.
Officials show desire to be
Attitude of FTC is excellent.
reasonable, to avoid punitive action, to give alleged violators full
opportunity to be heard in private where good faith is shown.
Test cases to speed clarification of law will be started soon,
FTC.
through FTC proceedings. Court cases will follow on appeal from
Voluntary trade practice codes are being framed by several
to work
industries, meanwhile, under FTC supervision. Such codes promise
.
organized
is
it
how
and
industry
of
type
on
in some cases, depending
Telephone hearings will be resumed about Oct. 1, will continue
intermittently until Jan. FCC will ask for more appropriations to continue
investigation another year. Thus no legislation next session.
Investment trust objectives of SEC are indicated in part by
will stress:
line of questioning at hearings. Report next Jan. probably
for
devices
(1) Need for curbs on the misuse of investment trusts as
few insiders.
financial control and manipulation for advantage of a
ly bad.
necessari
not
is
size
large,
s,
structure
(2) Need for simple
firms.
brokerage
with
relations
(3) Need for regulation of
rules of
(There are hints of split brokerage fees in violation of
y.)
cautiousl
proceed
will
SEC
stock exchange. This is ticklish, can
trusts
that
is
View
SEC is not anti-investment trust.
n.
regulatio
public
need
perform needed service for small investors, but
testify,
to
Investment counsel firms may be given chance
to show how skillfully they manage clients' money.
Increased reserve requirements for banks, effective today:
Officials expect no flurry in money market, except slight rise in rates
for short term paper, no tightening of commercial bank credit.
Ransom's designation as Deputy Chairman of Fed. Reserve Board
has no special policy significance, despite reports that it was gesture
toward Am. Bankers Ass'n and Glass. Ransom and Eccles cooperate well.
Eccles' influence in the administration on banking, monetary,
c policies is,CWC.L4:4V.,V,,„thaa....44..timaq.
Paa"
O'Connor, Comptroller of Currency,t4p thorn in the flesh of FRB,
FDIC, Treasury. But Ois firmly intrenched by law and by politics.
will
Intra-administration proposals for abolishing Comptroller's office
job.
the
wants
not get anywhere so long as O'Connor
and eco
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Federal Reserve Bank of St. Louis
288
Presidential campaign influences, shifts and countershifts,
are still indecisive. But they will form a definite trend next month.
Immediate effects on business seem relatively small, since
BOTH candidates are avoiding highly controversial business issues, are trying to please everybody.
Later, when and if election can be foretold, business sentiment
will tend to reflect fears or hopes of the next administration.
Landon seems to have made no measurable gains in past few days.
Relative strength of candidates seems about what it was a month ago.
Landon's speeches during next 2 weeks MAY make or break him.
If he says the wrong things, his chances to win will shrink sharply.
If he makes good, race will be close, uncertain up to the finish.
He is being urged by some to take personal charge of his campaign.
This is advice of friends who think his moderation and reasonableness
are more effective than the tirading tactics of Hamilton, Knox, et al.
Roosevelt, meanwhile, will "do things", pointed official acts, flood and drought tours, happy gestures here and there.
statements,
tax
(Some seasoned advisers counseled against flood and drought trips.)
Strategy of both camps is to hold their fire, await the breaks.
Republicans seem to want Roosevelt activity, expect to capitalize slips.
Democrats want Landon to take the offensive so they can shoot at him.
But Republican labor slogan,
Labor will lean pro-Roosevelt.
"Vote for Roosevelt is vote for Lewis," registers with many laborites.
Gallup poll shows Roosevelt labor vote less than most previous guesses.
Roosevelt walked into a trap this week. He publicly endorsed
Berry-Lewis League which plans a separate labor party movement in 1940.
Republicans will use this among Jeffersonian Democrats who resent
the substitution of the New Deal for traditional Democratic Party.
League is running its own campaign, is not taking orders from Farley.
War veterans lean slightly pro-Landon. Both Landon and Knox
are war veterans. Landon would be first World War veteran president.
The most ardent bonusites still resent Roosevelt's bonus vetoes.
Note that Landon has not mentioned his war service.
Farmers will - lit their votinp stren th, roughly on party lines.
winning many Republican farmers who left Hoover for Roosevelt.
is
Landon
Lowden will go the limit for Landon; Peek probably will help later.
Roosevelt may adopt crop insurance plan during his drought area tour.
Roosevelt's next administration would follow New Deal outlines.
Those who expect a sharp turn to the right probably misunderstand current
campaign soothing tactics. The Roosevelt program is far from completed.
During next 10 weeks before election Roosevelt will minimize
moves which might shock business confidence.
In future Letters we shall project Landon policies as they
would affect business.
Yours very truly,
THE KIPLINGER WASHINGTON AGENCY.
August 15, 1936.
-71"-4
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MATERIAL IS PROTECTED BY COPYRIGHT AND IS NOT TO BE DUPLICATED IN WHOLE OR IN PART IN ANY FORM WHATSOEVER.
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EMPIRE FOLDER
Better folders for better files
306S
Send your Ordcr 11) t:.:s nearest "Y and E"
u our Home Office
Representative3
111AWIVIAN AND Ear 7.7.. rilFG.
Main Facteries ad Executive OM:as
ROCHCSTER, N. Y.
Branches and Agents in all Principal Cities
NEW JERSEY BANKERS AS
S.A.Linnekin, First National Bank,
Jersey City, Chairman, Convention
Publicity Committee.
Released for Evening Papers
Saturday, May 23
Annual Address of the President
Leslie G. McDouall
Delivered at the convention of the New Jersey Bankers
Association at the Ambassador gotel, Atlantic City,
Saturday morning, May 23, 1936. Mr. McDouall is VicePresident and Trust Officer of the Fidelity Union
Trust Company, Newark, N. J.
We have come to that part of our program where I am called upon to give an
account of my stewardship.
I am glad to be able to report with regard to one of
the most active years in the history of the New Jersey Bankers Association.
activity of the past
still.
year
The
is indeed gratifying as we can never successfully stand
We either go forward or backward.
Through the united effort of our officers,
committees and membership we have added materially to our stature.
We may not have
shaken the Universe but we have refreshed a corner of it and, as this organization
continues to grow, historians in the future will add to the details of our recorded
work, they will correct inaccuracies and revise the interpretation of our time.
Not only have we added to our membership roll so that we now have 503
banks, and 7 A. I. B. Chapters but more vital than mere material growth, we have
seen the flowering of a spirit in our organization which augurs well for the future.
The present high morale of our Association is the accumulation of the years,
crystalized by the activities of the present year.
Whatever has been added, has
been through the efforts of your officers and other leaders who personally carried
the Association, during the past months, to its membership.
PRESIDENT'S REPORT
As your President, it has been my privilege during the year to have
attended 66 meetings, to 41 of which I brought a message in the interest of banking.
Of the 68 meetings attended, 18 have been of county bankers associations, 4 of
A. I. B. chapters, 6 of civic and service clubs and 17 of various other organizations representing a wide variety of interests and occupations.
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Federal Reserve Bank of St. Louis
2
GOOD WILL TOUR
You doubtless read in the ANERICAN BANKER and the NEW JERSEY BANKER of the
Good-Will Tours made by your officers.
repeating the story of these tours.
I shall not attempt to gild the lily by
A long time ago, I threatened that if I ever
became President of the New Jersey Bankers Association I would undertake to carry
the Association to its members in their own backyards, to those outlying counties
with whose bankers we have infrequent contact.
I was not allowed by my associate
officers to forget my threat.
From this evolved the Good-Will Tours.
Giving up part of our vacations,
we took the hottest week last July to tour the southern tier of counties, but were
more fortunate in having a delightful autumn day for our one-day tour of Warren
County.
We called on 150 banks in 10 counties, addressed 4 county bankers associa-
tions and met with and addressed 5 service clubs preaching always the doctrine that
"Banking to be sound must be profitable," or to express it another way, "Banking
to be profitable must be sound."
Those on the South Jersey Tour with me were our Vice President, Garret A.
Denise of Freehold; our Treasurer, Ferd I. Collins of Bound Brook; our Secretary,
Armitt H. Coate of Moorestown; Carl Crispin of Swedesboro who acted sometimes as
host, always as guide and introducer; and Lester Gibson, Associated Editor of the
AMERICAN BANKER who kept us on the front page each day, not only of the AMERICAN
BANKER but of the general press, as we went along.
Garret Denise and Carl Crispin were unable to accompany us on the Warren
County Tour and their places were taken by our Trust Committee Chairman, Douglas
Davis of Plainfield, and Charles Barton and Jacob Kushner of Paterson.
These trips
were unforgetable experiences which paid ample dividends in personal satisfaction,
in friendships and in strength to the Association.
I even venture to say that part
of the fine attendance at this Convention and the spirit that pervades it are reflections of these Good-Will Tours.
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- 3ADDRESS BEFORE STATE BAR ASSOCIATION
I consider as one of the high-lights of my administration the invitation
which I received from the State Bar Association to be the guest speaker at its
Golden Jubilee Celebration which was held in honor of its members who had practiced
law fifty years or more.
At this meeting, held in Newark on February first, I spoke
on "The Bar and the Corporate Fiduciary."
Many requests were received for copies
of this address which was therefore printed and without expense to the Association.
Ten thousand copies were mailed to members of the Bar of this State and other States
and also to the members of this Association.
I cannot conceive of any more definite testimony to the happy relations
between our banhing institutions and the members of the legal profession than this
graceful tribute extended to the bankers of New Jersey through their president.
IMPROVED BANKING CONDITIONS
What has been said about the morale of our Association may likewise be
said of the banks of this State.
Only last January our Commissioner of Banking and
Insurance declared that "they have never been in a more solvent or liquid position,
that they have cleared their portfolios of doubtful assets, strengthened their
capital structures where needed, curbed expenses in keeping with reduced income and
at the same time met every legitimate local demand for credit.
Tue people of New
Jersey have every reason to feel confident of the banking structure of their State."
No one can doubt that banking conditions are happier.
One has only to
look at the increased volume of deposits held by our banks to have dispelled any
doubts which may have been entertained.
Regardless of the initial origin of these
deposits, they are made by business organizations and individuals who have confidence in our banks.
The eternal pressure of depositor fear is gone.
abated.
The legislative attack has
For the first time since 1931, we are at peace with Congress.
peace with us?
We have one of the highest bond markets of all time.
Or is it at
We have
enjoyed lare recoveries from some of our investments which the authorities once
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Federal Reserve Bank of St. Louis
- 4forced us to write down as bad or off as worthless.
Although we have much for
which to be thankful, the pressure of low earnings remains.
selves be deceived into complacency.
come down.
We must not let our-
Whatever goes up must come down--and will
In the present situation, it is largely to the bond account that we
look for earnings and we are in a position where we may be tempted to reach out for
a little higher yield to meet that need for earnings.
IMPROVEMENT IN BUSINESS
Although we have been living in a period of economic mysticism, in Which
no one has been quite sure what the ultimate effect would be, I now say with conviction that business is better.
A banker who is wise will not attempt to forecast
too far into the future, realizing that to do so makes for greater possibility, nay
probability, of error.
Even so, the business indices all clearly indicate a sub-
stantial improvement in business conditions, which should mean a like improvement
for our banking institutions.
In the management of our banks, we must not forget
that much of the improvement is the result of artificial stimulation due to the
governmental spending.
With any agency pumping several billion dollars of spending
money into the market, business cannot help rising.
At all times keep this fact in
mind when trying to appraise conditions.
But there is a balancing side to this ledger.
Much of the money borrowed
by thc Government is in the form of bank credit or, to be perfectly clear, in the
form of bonds largely held by the banks.
checks are drawn against them.
which interest must be paid.
paid.
Bonds are deposited in the banks and
They add up to something called the public debt on
Indeed, it is assumed that the debt itself will be
It is expected that as business continues to improve government spending will
decline until the budget is balanced.
one can tell.
follow.
When this happy victory will be achieved, no
It is possible that, continued long enough, unhanpy results may
Despite the difficulties and hardships of the hesitating depression years,
we are well placed in America to go forward to greater heights than heretofore.
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Federal Reserve Bank of St. Louis
- 5MUTUAL UNDERSTANDING
A great and vital change has come over banking which is not entirely reflected in the statistics.
public.
It is a better understanding between the banks and the
Gone are the antagonisms of a few years ago.
Bankers are more conscious of the public nature of their institutions and
the public, on its part, is more conscious of the limitations imposed by sound
banking.
Out of the travail of depression has come a better understanding of banks
and an increased appreciation of their function in the community.
This has, however, not been entirely automatic, for bankers have made a
conscious effort to present the case of bankin,;.
-
One of the outstanding movements
in banking today is the program of personnoleducation and training in better customer relations to equip bank employees and officers with a better knowledge of their
business, to give them a deeper respect for their jobs and to prepare them to better
interpret banking to the public.
EMPLOY77 TRAINING
Our employees are the front line in our contact with the public.
For every
opportunity that you and I have to interpret our business and our institutions, they
have, collectively, maybe a thousand.
A happy, loyal and informed staff is the
foundation of a sound customer relationship.
I need not recite to you the thousands of employee training conferences
held over the land under the auspices of the constructive customer relations program
of the Auerican Institute of Banking.
have conducted some in your own banks.
You already know about them.
Doubtless you
I do believe they are bearing fruit.
One
word of caution--you have an ever changing public and a somewhat changing staff.
Don't let this program drop.
Adapt and enlarge it, but above all keep it going.
No business in the world has an educational program comparable to banking.
The standard and post-standard courses of the American Institute of Banking have
long been considered the outstanding example of practical and successful adult
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Federal Reserve Bank of St. Louis
- G education in this and every other country.
Now it has gone a step further with the
Graduate School of Banking at Rutgers University.
The Program contemplates similar
schools in other sections of the country as experience shows the way.
Could any-
thing more definitely demonstrate the serious purpose of the banking fraternity to
build up sound banking for this country?
So far we have dealt, in this matter, chiefly with our subordinates, the
rank and file of our employees.
educated to interpret banking.
Presumably our bank officers are sufficiently
That may or may not be true.
However, many of them
might profit by training in the psychology of better customer relations.
STATE-WIDE PUBLIC RELATIONS PROGRAM
A good public relations program includes educational effort both within
and without the bank, verbal and written.
it was with this thought in mind that
our Committee on Publicity, after a careful and thorough study brought into being
one of the first state-wide constructive customer relations programs adopted by a
state bankers association in America.
I do not want to burden you with the details other than to tell you that
the master booklet in this series was entitled
STANDPOINT.
BANKING RELATIONS FROM THE CUSTOMERS'
Over 25 thousand copies have already been distributed to date, not only
by individual members but by clearing house groups in certain cities and in one instance the program has been undertaken by a county association; namely, the Gloucester Bankers Association.
I am optimistic enough to feel that our Association
has again led the way for others to follow.
One more evidence of a real service to
and for our members.
CHARTERED BANKING SYSTEM
There is one phase of our public relations program which, however, has
been too ion
neglected.
banking system.
7e have not explained to the public the nature of our
In our public utterances and in our advertising; indeed wherever
and whenever possible, we ought to explain to the public that ours is not a private
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Federal Reserve Bank of St. Louis
7
banking system but a chartered banking system.
are chartered b
We should make clear that our banks
either our State or Federal Government, are continued by their
sufferance and. regulated and supervised more than any other type of business, yes,
even more than the railroads.
The conduct of their business is far from private.
7e should explain that private bankers include stock brohers, investment
houses, department stores and others.
Only recently have any of these been brought
under any measure of governmental supervision.
MATCHING INVESTMENTS WITH DEPOSITS
Perhaps nothing is more important in banking today than the thought being
given and the discussion being devoted to the question of matching investment
maturities with deposit maturities.
greatest change in banking in the last
decade and a half has been the great increase in long term investments which have
not been matched with any chan6es in the character of deposits.
An equally signi-
ficant change has been the great increase in time deposits as against demand deposits.
Call them what you will, in many instances time deposits are actually demand deposits under our banking practice.
The time depositor can demand his deposits im-
mediately just as the demand depositor may demand his.
Now we have the Federal Government fostering a policy of long term loans
by banks while at the same time fostering a panic proof demand deposit banking
system.
The guaranty of a panic proof banking system will depend for its effectiveness on monetary management by an omniscient Washington Administration and, if that
fails, on printing-press money, most likely the latter.
It is a hopeful sign that bankers are thinking about the development of a
system where investment maturities are matched by comparative deposit maturities.
If our banking system -16 to be saved, it must be rescued from the status of guarantying every mans investments.
Remember that twenty years ago the Federal Reserve System was supposed to
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Federal Reserve Bank of St. Louis
8
have banished banking panics in this country forever.
in 1931.
This illusion was destroyed
Now we are supposed to have another impregnable system, .But have we?
No system can take the savings of the people and invest them in long term assets
and be able to repay them all on demand.
It is time that we in New Jersey bent our
thought toward facing the realities of banking and lent our influence to the development of a realistic system that will treat the funds committed to our care
for what they are.
BANK CHARTERS
There is no need in banking as important as the preservation of banking
from another scourge of excessive bank chartering.
tions which brought our banking system down.
There were many economic condi-
But there was a cancer in banking it-
self that could have been avoided and which, if it had been avoided, would have
enabled our banks to withstand the shocks with much greater strength.
the excessive chartering of banks.
fault of bankers.
developed.
It was entirely unjustified.
I refer to
It was not a
Indeed, if their counsel had been considered it never would have
The business men of every community must stand indicted for the evil,
for it was they who demanded the surplus banks.
It was the bank whose charter was obtained through political pressure, by
either promoters or by business men who were dissatisfied with the sound and conservative management of the banks in their communities and who wanted to organize
another and generally unnecessary bank to make credit easier in their communities,
which first felt the strain.
Not only did. they produce banks which could not stand
the strain of adversity, but banks which alsc pulled their strorwer neighbors down
with them.
Our own State has been no exception to this practice.
Until two years Pgo
we were practically without any means for dealing directly with this problem.
Happily, however, in the Law creating our Banking Advisory Board we were able to
have included a provision which requires that all charter applications be submitted
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Federal Reserve Bank of St. Louis
4
9
by the Commissioner to the Board.
If the Commissioner disagrees with the recommen-
dation of the Board, he is required to make public the Board's recommendation before
takin
final action on the charter a-olelication.
Our aim, for the first time in the
history of New Jersey, was to focus pitiless publicity on bank charter applications.
Bankers should propose the appropriate safeguards againsc the abuses of
the bank charter privilee.
It would be a splendid thing if this Association would
sponsor the broadeninE. of the Law creating the Banking Advisory Board to meet this
Situation.
FEDERAL COMPETITION
Any consideration of this matter mus
take into account the practice of
the Federal Government in charterins institutions of deposit other than banks which
are absolutely beyond our control.
The Federal Home Loan 3ar12 Board boasted in
March 1936 that it had chartered ale.oroximatel7 1000 Federal Savings and Loan Associations, only 400 of which had converted froLa state associations to federal
charters.
In other words, about 600 new charters have been granted in two years
and the campaign is still being vigorously pushed.
creased since then.
The figure has undoubtedly in-
This Association would do well to study the competitive lending
and deposit institutions created by the Federal Government and I commend such a
study to any committee which may be appointed.
TAXATION
The theme of this Convention has been service to the State and hence the
people of New Jersey.
Last night I proposed definite activities to which this
Association might well direct its effort in the interest of the citizens of this
State.
I do not think that the members of this Association have been entirely
remiss in this respect.
La:t year we advocated and insisted upon genuine economy
in government before attempting the levying of additional taxes to meet our relief
needs.
Upon this premise we insisted that the Legislature of this State exhaust
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Federal Reserve Bank of St. Louis
- 10 every means of finding funds by this method.
Then, if still in need of funds, we
were ready to approve new and additional taxes--expressing a prefetence for a
Sales Tax.
This was in line with one of the recommendations made by the Governor
in his inaugural address.
This is still our position.
When the sales tax was inaugurated last summer, we undertook to facilitate
its collection with the utmost economy.
Great was the alarm over the prospect of
the cost of the collecting eating up a disproportionate share of the tax.
In order
that the maximum amount might be made available for the purpose for which the tax
was assessed; namely, the relief of the destitute, the banks of this state offered
to act as collection stations without cost to the state and to bear themselves whatever expense was entailed.
During the short time that the tax was on our statute
books, the banks collected more than half of the total.
RELIEF PROBLPM MAY NOT BE SO SERIOUS
Recent events have indicated, as many long expected, that the relief
problem and the inability of the local communities to take care of it were greatly
exaggerated.
The recent legislative impasse in respect to relief legislation may
prove to have been a blessing in disguise by demonstrating that not as
much money
was needed for this purpose as was supposed.
There has been entirely too much looking to Santa Claus in this relief
business.
It is time that local communities shared more of their local burdens.
They will find it much harder to spend their own money than that which is
obtained
from the state government or from Uncle Sam.
ELIMINATION OF TAX BOARDS
Other matters referred to last year were the excessive cost of our tax
departments and the need for a simplification in the methods employed by the tax
assessing and collectirv, organizations.
It was proposed that the 500 odd boards
of tax assessors be reduced to 21 in number, one for each county, and we expressed
the hope that this might eventually lead to a further reduction in number of boards,
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Federal Reserve Bank of St. Louis
- 11 number of employees and a wholesome standardization of tax assessing and collecting
methods.
Henry Ford said in a recent magazine article.
"The trouble with govern-
ment and finance is that our servants have set up as our masters, and they have
not proved to be very wise masters. ',To government can guarantee security.
It can
only tax production, distribution and service and gradually crush the power to pay
taxes.
That settles nothing.
It only uses up the gains of the past and postpones
the developments of the future.
The emphasis is wrong."
YlNACE OF THE TAX EATER
The most menacing spectre in all this land ia the "tax eater" who sits at
every one's table.
The men whom we have elected to office in these recent years
have all been elected on pledges of economy in government.
They have all denounced
the extravagance of their predecessors and promised to reverse the process.
But
once in office they have torn un their promises as so many scraps of paper and increased the extravagance, swayed by their desire for re-election.
money is nobody's money.
Everybody's
And the people who represent us in 7oublic office spend it
in that spirit.
If the bankers are going to take the lead in anything, they should assume
this responsibility in the matter of curing the evils of taxation.
By virtue of
our exl)erience and )eculiar knowledge we are perhaps the best fitted of all business men for this task.
Taxation is a national challenge.
It is also a state challenge.
begin most effectively riht here in our own home state.
minds to be directed toward practicel ends.
We can
It is time for practical
If we would serve oar state, let us
take the leadership in putting our tax house in order.
DUES
I stated last night that I would today take up other matters to which I
believe this Association should direct its attention.
appears to me to be important.
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Federal Reserve Bank of St. Louis
I nova offer a sue. estion that
- 12 This Association will never reach its full effectiveness until it has an
income sufficient for that purpose.
In reviewing a survey made reqently of the
incomes of state bankers associations in this country, I found that the state
bankers associations of the 48 states, some thickly populated and some sparsely
populated, collect dues slightly in excess of $500,000 and in addition something
over $88,000 in commissions earned on insurance policies and other incidental services.
The total annual dues range anywhere from $500 for the tiny state of Rhode
Island to $46,000 for the State of New York.
These figures are fnr commercial
bankers associations.
You may be surprised to learn that the budget of the Savings Banks Association of New York State, with only 135 members, amounts to $90,000 per year.
Leaving that out, however, we find that the average dues per bank in New York State
are something in excess of $50 per year, while in New Jersey they are about $29 a
years
It is remarkable that we have been able to maintain such an effective
association on the small income of $15,000 a year contributed by our 510 members.
If we are to render an adequate service, then we should have a schedule of dues
consistent with such a program.
Make no mistake about it, the activities and ser-
vices expected by our members in the future will increase and not decrease.
If we are to render adequate service in the field of legislation, publicity,
research and other numerous activities, we cannot hope to maintain them on
effective
standards on our present income.
In terms of what other state bankers associations
of comparable size do, we ought to have an income almost double our present one.
I
can visualize the ease with which such an income could be realized by a chant;e
in
the schedule of dues presently being paid.
I am hopeful that our Executive Commit-
tee will appoint a special committee to consider this matter and report its findings.
To illustrate:
President's expenses.
efforts.
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Federal Reserve Bank of St. Louis
There should be an adequate appropriation to cover the
Suitable contributions should be made to and for our publicity
I can think of two committees which should have an appropriation to carry
- 13 on their work.
The committee which is now engaged in making a survey and study of
the various statutes dealing with investments for trust funds and savings banks of
this State should have at its disposal sufficient funds to retain an expert to advise upon and draft the legislation required to put their findings into effect.
All of this would be helpful in rendering a complete report to the Executive Committee and offering suggested legislation which our Counsel would then pass upon.
I know that the Committee on Pension Plans would have been greatly handicapped in the very splendid work they have been able tc do for our members had it
not been for the fact that the Prudential Insurance Company placed at their disposal
the services of their experts and have rendered tc us actuarial work which, if it
had been paid for, would have cost the Association well in excess of $5,000.
CONCLUSION
I want you to know how grateful and appreciative I am for the splendid cooperation given to me by the officers, committees and members during my term as
President.
I cannot speak too highly of the invaluable service rendered by our ever
willing and efficient Secretary, Armitt H. Coate.
And finally, I cannot close with-
out expressing to Mr. 3acheller, my chief, and to my other associates at the
Fidelity Union Trust Company my appreciation for their having made it possible for
me to serve as your president.
Without their continued encouragement and help I
could not have successfully completed my duties as your president.
When I assumed the office of President of this Association a year ago, I
did so with no illusions and fully realizing the magnitude of the task.
I have at
all times tried to remember that anyboay can wreck an edifice and that it is the
building that sometimes exhausts the faculties of man.
I can only hope that the
work done during my administration has contributed in a small way to the building of
an edifice that will stand for years to come.
As the year closes, I can truthfully say,
1,o1
I am weary of my job, like the bee that hath collected too
much honey."
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#14
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A SOUND PUBLIC POLICY IN CHARTERING BANKS
I hope that I may not be considered as presuming, or be
misunderstood in expressing the opinion that few luestions bearing
on the future stability and security of our banking systems loom
more impertant for your consideration than that of a sound policy
to be pursued in the charterin- of banks.
Review briefly, if you will, the history of banking in this
country, from the establis'ment of the first Bank of the United
States in 1791, when the clement of charter competition was first
injected into the field previously occupied exclusively by several
of the states -- right on dawn through 1929, and oven into 1932,
and you will find unmistakable evidence of most of our banking
troubles, aside from any economic consideration or growth in
wealth and population, either starting or ending with the ceaseless "Battle of the Charters".
Between 1791 and 1836, we find jurisdiction over banking
divaded between the states and the national government, with
the lino of battle sharply drawn between the Hamiltonian
philosophy, which favored the centralization of banking and
currency under strict government control, and the followers of
Jaskson, who fought equally hard for decentralization under state
control. There were heated debates on questions of constitutionality which find r;flection in current day events; later followed
by decisions of the Supreme Court, upholding the power of
Congress to charter banks, and to protect them from harmful
legislation by the States. All of which,onded, first in the
failure of Congress to renew the charter of the First Bank of
the United States, and finally in the downfall of the second
Bank, which had boon chartered in 1816, leaving thc state systems
for the first time since 1791 in complete control of the situation.
—ith Federal Competition thus eliminated, the number of
state banks more than doubled within the comparatively few years
between 1836 and 1863; principally by reason of the abandon with
which charters wore granted, and the ease with which individual
currency issuing privileges were secured. Altho some of the
more desirable 'eatures of later Incrican banking had their
origin during this period, loose, almost no regulation; coupled
with widespread counterfeiting, brought most of the banks, and
practically all of the currency into such low esteem, that in
a number of the states specie payment was suspended, and banking
itself actually prohibited.
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Federal Reserve Bank of St. Louis
-2-
Then came the National Banking 3ystom in 1863; born of one
war, and strrting, or rather renewing another, for with the
imposition of a ton percent tax on state bank notes in 1865,
obviously levied for thl: purpose of driving them out of existe
nce,
there was an immediate ,codus of banks from the state system
s
into the National. It began to look like the doom of the
State
Banks, for by 1868, there were more than seven times as many
national as state banks. The cony, rsion was made easier by
allowing State Banks to simply add the word "National" to
their
titl(s.
Thus, in t'-e, first chanter of our review of "The Battle
of
the Charters" we soc the complete domination of banking
by the
states after the failure of two bitterly controv.rsial attemp
ts
at Federal control. In the second chapt r, the order
is reversed
by the rhol sale, almost universal conversion of state
banks into
the national system. Up to this point, th, battle
is a draw,
with plenty of casualties and wreckage from both sides
strown
along the way.
In the third chapter, we find both the opposi
ng forces
mending their lin - s with defensive legislation;
replenishing
their ranks and preparing for renewed b ttic, which
varied in
force with the trend of economic conditions. During
this period,
the expansion of the national system was retard
ed by higher
capital requirements, and the necessity for regula
tions capable
of broader application than demanded in many
of the states, and
by the extended debate and sectional diff',
rencus which were
brought to bear upon Congress whenever modifi
cations were suggested.
Every time a change was made in the Nation
al Banking Act, the
states immediltely proceeded to go one
stop, or a jump farther.
The inevitable result was, that by 1910
the number of state
chartered banks and trust comnnies had
reached a total of 13,257
as against 7,100 national bunks.
I have already mentioned the highr capital requir
ements of
the national system than those prevailing
in many of the states.
By 1900 the demand upon Congress for a reduct
ion became so insistont that the minimum requirement was lowere
d, and with the
reduction there came an immediate rush of applic
ations, not only
for ncw charters, but for conv_rsion from
state banks as well.
This brought about the addition o another
2,000 banks to the
national system under th- reduced capital requir
ement, and a
thousand or more under th- higher capital bracke
ts. For a time
it looked as though the tide of battle had definitely
and permanently shifted to th_ side of thu national
system.
Added to this, in 1913, the Federal Reserve System
came
along, stopped between the lines in th, role
of mediator, and
sought to harmonize by membership privilege and
regulation the
best features of both centralized and decdntralized
control.
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Federal Reserve Bank of St. Louis
-3But all of this was not accomplished without a strugP.le, for
several of the states - seeking still further advantage - passed
deposit guar.nty laws in an effort to stem the tide and make their
respective charters Trelre attractive. The immediate result orpeared
favorable in the number of new banks chartered and in those converting from the national system, but the end, as we all plow, was
disastrous, as witnessed by the complete failure of aver y one of
the state guaranty plans.
But still the battle for supremacy continued on both fronts.
Failure to secure a state charter, or the reverse, meant little or
nothing. There was always recourse to the other, with more than
reasonable chance of seccess; particularly when politic] pressure
was brought to bear, or when it was made known that the new bank
Was to become directly competitive with one chartered under the
other system. The inevitcb'e result was
tremendously overbanked condition, with the total in 1921 reaching an all-time high
of nearly 23,000 st-te, and more than 8,000 national banks.
17or was there any apparent letup in what had become an almost
farcical, and 1 -ter, tragic scramble for new charters; this notwithstanding the failure of more than 5,000 banks during end immed'etely following depressed business conditions of 1921. Both
state and rational authorities ignored all warnings evidenced by
this disastrous experience, and between 1921 and 1j429 granter more
than 6,000 new charters, exclusive of conversions and branches;
presumably, as in regular combat, to replace casualties SO that
the enemy would not think they were losing ground.
Then came the dawn; the complete collapse of both systems1L
an armistice, represented by the Banking Holiday in Wrch of 1.93'
after tl'ie failure within ten years of nearly 11,000 banks with
resources of more than five billions of dollars. Not until the
smoke of battle had somewhat cleared and the wreckage surveyed was
it realized what damage really had been wrought; no alone to those
who were in the thickest of the fight, but, as always seems to
happen in battle, the innocent behind the lines who were in no wise
responsible.
That such may never -.gain occur is our fervent hone, and it
is 7 thin the power or the bankers of America themselves to prevent;
not -lone through the future conduct of their own institutions, but
even more important, throw!h their elected st-fe and Congressiorel
representetivcs.
There fre those advocates of central banking who will attribute
the collapse to our dual banking system; others, !rith equal conviction, to economic disturbances, and stili others, end all of them
Lou' lly sincere, to the rapid expansion of our comm,rce and population,
or to events beyond our shores.
GreLting them all quarter, none vii11 deny, thet vhetever the cause,
this country was, and in many sections Etna is, o.eurbanked, and that
aside freei any other conslderation, ecenoLie or ot:or:ise, this condition
was brought about largely through an unwie, uafiere, and unthinking
charter policy, fltcrueting between the steie arid national systems, which
has marked and hrmp,red bcnking progress in this country since its very
inception.
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Federal Reserve Bank of St. Louis
-4Accordingly, in attempting to outline any sound public policy
looking toward the future security of our banking structure, we must
first seek to remedy those policie& and practices which, in the light
of bitter experience, have proven unsound.
First among these, as I have tried to illustrate in brief
historical review, is the competition which has always existed between the state and the national systems. Born with the first Bank
of the United States, it has continued through the years in hand
with the age-old struggle for power and control as between the States
and the Federal government. In itself, this competition is no reason
for the elimination of either one system or the other. There is
room for competitive banking in this country under proper regulation
and with unselfish cooperation, and it is largely because of some
eleme-ts of these, in the backing and filling processes of the
years, that our system of banking as a whole has advanced. It has
gradually been made more orderly. Every panic, every depression,
has brought some corrections, with the result that our nresent day
system is better integrated and more efficient than ever before.
Comnetition in itself, when clean and wholesome, lends zest and
stability to progress, but when tinged with politics, or flavored
with the lust for power or control on the part of either individual
or government, it is dangerous;
Thus, it has been, and may again become unless you, the
bankers of today, and those who follow in your stead, lend the best
of your efforts toward the end of forever removing th's basic
business of trust and dependence from either influence.
I fear no contradiction when I remind you of the part
played by political expediency in the accumulation of many of our
bunking troubles. There are few of you here who have not, at one
time or another during your banking experience, felt, or at least
observed its influence; seldom for rood, and more often for persoral advantage. "Charters for votes" had an altogether too familiar ring in the not too distant nast.
I revere that champion of sound banking, the venerable
Senator from Virginia, Carter Glass, in his remarks before the
United States Senate last July, when he said:-
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-5-
"Then you wreck the banking institutions of this country,
you wr,ck the business of this country, b,,cause the credits offered by the banking institutions touch every home, every
fireside, and every business in the country. For that reason,
I have always ont rtained an unuttyrablo contempt for any
man who would bring politce; into the consideration of banking
legislation."
i'md your own immediate past president, Rudolph Hecht,
speaking before the Mississippi 73anicrs ssociation last
May, sounded a clarion call for the complete divorcement
of politics from banking when ho said:"I think we can all agree that we arc unequivocally
opposed to any political control of banking. I an sure we fool
this way whatcv r our party leanings, and whether the application
of such political control were to cora about under the present
administration, or under any other party or administration. Our
objectives spring from consideration of sound banking polici:'s
for the common good, and from tho firm conviction that banking
is simply not the field for politics of any denomination."
while both of these statements were undoubtedly inspired
by the imp.nding drive at the time for domination of the
banking structure of the Country by the Federal Governm,nt,
they apply with equal significance to whatever degree of
political control may be , xtant or threatened within the
States them lves. Were the evidence readily available, volumes
could be written on this phase of the subject alone. Sufficient
to add, that political influence has no more place in banking
th..n it has in the deliberations of our highest tribunal - The
Supremo Court of tho United States. Until this is recognized
and brought into being within both our state and national
systems, we may never fec)l safe aginst the shifting sands of
political expedience and favor. Failing in this, we nced only
to hazard a guess as to when the next setback or collapse may
occur. I need ntt remini you, however, that in this, the
suggestion is far easier than the accomplishment.
—s to the clement of sometimes ridiculous competition
heretofore existing between the statc, and national systems,
much may be said in favor of the progress made within recent
years, and particulnrly,sincc the advent of deposit insurance,
and the Banking —cts of 1933 and 1935. In many states there
exists a practical working agreement between local supervising
authorities, the Federal Deposit Insurance Corporation and the
Comptroller, whereby all charter applications are mutually
considered on a basis af community need rather than competitive
advantage as between systems. In some stat s this arrangement
goes oven furthrr in the refusal of the one authority to oven
consider a charter while pending with the oth r as applying to
the same trade area.
1
-6_
'flhile in the light of history, it might appear as approachine the millenium to suggest a law or regulation which would not
permit of a nation'l charter being granted for a particular community without the final approval of the local state atithority,
and vice versa, there is no harm in wishing that such might be possible. Certainly, had this been the previous oractice, with actual
community need the final determining factor, many of our banking
troubles would never have come to -pass, and each system would have
been the stronger for it.
Aside from the broader comnetitive and political aspects of
our future charter policy, there are several others more intimately
individual and local which merit consideration. Among these may
prominently be mentioned:- First, Honesty of Purpose; Second,
Community Need; Third, The Ch.rcter of Management, end Fourth,
Adecuacy of Capiti 1. To some of you, this may appear to be reversing the old order under which capital was usually considered
of first importance, or rather the ease with which it could be
raised, and the various other factors then following in the order
of greatest expedience to the founders.
Then there is the "spite bank" chartered through the efforts
of an individual or a group of disgruntled borrowers; the bank converted from state to national system, or the reverse, simply because
of some minor charter advantage, or other fancied ineouality; and
the institution founded primarily for the purpose of monopoly or
control. A sound charter policy will look for and discover these
objectives which may never be found in the application itself unless
searching inquiry is made to find the motive back of the application;
the amount of commissions or fees to be paid in promotion, and the
character and reputation of the incorporators.
Most state laws make reference to the "Chartcter, responsibility r,rd fitness" of the incorpor-tors of a new bank, but none, so
far as I know, in the past have delved very deeply into the motive
behind the application for a charter. So important do I conceive
this factor to be, that I have intentionally placed it first among
those for consideration, for unless the motive is sound, honest and
sincere, there is little nkelihood that the resultant institution
in its service to the community will reflect other than the spirit of
its founders.
Too often in the past have charters been granted to promoters
pure and simple - not always pure, and by no means simple; with fees
or commissions the first and only objective. The country Was dotted
with such, in individual communities and in groups and chains stretching across entire states. The experience has been costly, and it is
to be hoped, the lesson well learned, not only by charter - granting
authorities, but by the general public as well.
MuCi may be said concerning the second factor - Community Ne,ed.
Gone, it is hoped, are the fclys when the question most frequently
-sked was not "Does the Town need a new bank?" but "Can the town
stand another?"
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A
-7-
Time was when the av'ra -o bofnk in the average community
Ind oven in the largx city, was a department store of finance.
It was hcadquart_rs for ,:ry local credit nood, as w.11 as thc
ropository of most of the liquid funds of the community. But
that was boforc there wore some thirty odd Federal qoncics in
direct and indirect competition; before the advent of th- small
loan and finance company; the rapid growth of the building and
loan and credit union; the expansion of insurance into annuities;
the inv,stmont trust; the stock markets, mortgage pools and last
but no means least, the Irish sweepstakes. Thus, w must come
to the inevitable conclusion that many of the avonure of profit
oprn to new institutions in the old days have boon woo-nod away,
or become so limited as to volume and compotition 12 to make
profitable op-ration well niOrbut of the quostion.
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Federal Reserve Bank of St. Louis
Today, with metropolitan cnntors and modern facilities of
collection and exchange brought so close, we find borrowers
socking the larger market for a lower discount rate; the homecdoral aid, or the building and loan, and the
builder
occasional borrower in need of a few hundred dollars, seeking
the small loon or finance company, rath-r than subject himself to all of the detail and searching inquiry demanded by
most commercial institutions.
There arc those who believe that ohartrrs should be
regulated by population. To this I do not agree, for a population of 10,000 3n some sections of the South or west might
well r_.pr sent a half doz -n towns scattered over an area of
fifty square miles and ach require banking facilities, if
only as a matt r of protection. The same number in New York
City might easily be employed in a single building, or live
within two city squares and be adequately served by a single
branch oi a larg.r institution.
The per capita w alth of a community might be also
considered a factor but not an important one, as witnessed
by the exclusive colony of a feu hundred citizens representing
millions, if not billions in total wealth, 's opposed to the
thickly populated iniustri,1 center with its thousands of
thrifty workers and their small savings accounts.
i\Tor whould we consider town or city limits as a boundary,
without which a now chartering orca is automatically created.
In some states you can travel through as many as a dozen towns
within an hour, and in each find a compotitivo banking situation,
c-cn though the competing banks in adjoining towns TriL,y be less
than a mile apart.
Then thoro is the all too fr 'vont commercial rivalry
which exists between two towns or citi s on opposite sides of
the rvor, or just over the state or county lino. To all intents and purposes they are in the same competitive trade area,
but nevertheless they carry civic pride beyond their public
works into the stores and shops and, un ortunatoly, many times
into the banks thomsolvos in bidding for advantage.
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Federal Reserve Bank of St. Louis
8
The foregoing are only a few of the reasons which may be
advanced tc:ainst repulatior alone, per capita wealth, or rlysical
boundaries as factors in determining cornunity need. To my way
of thini-ine4 the soundest basis upon which ci-arters-may be granted,
are those of trade area, and volume of trade as represented by the
average demand for credit, the number of potential depositors and
clearings.
There are other factors to be considered - almost too numerous
to mention, but amonL; them, the most important:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
rumber of institutions already serving the area
The record of earnings of existin;: institutions
The number of failures since 1920, and the reasons therefor
Public convenience and advantage
The reasonable prospects for growth of the community
Expectation of profitable operation, and
Could a branch of an existing institution serve as well?
Sound public policy demands that no new banks be chartered
unless there is a definite, necessitous and permanent need.
Too often in the past have banks been chartered more RS R matter
of clnvenience. There should invariably be apparert enough business
of a profitable nature to not only pay its own way, but of equal
importance, to create a sufficient reserve to absorb all shocks likely
to occur. Too many of the banks which failed during the past decade
hare been "fair-weather" institutions with no anchor to the windward
when the inevitable storm came.
Once old practices became revived, and the ball started rolling again, there will be no stopping until history has repeated
itself in the evils and results of past experiences. Rather than
heedlessly increase the number of individual banks, even during
periods of increased business activity, or new development, our
present institutions should aim to build a capital structure and a
management so flexible, as well RS reserves so stronc, as to be able
tc readily absorb any reasonable demands made upon them for increased accommodation.
Sound mergers, consolidations and the sensible extension of
branch bankinr are much to be preferred to any general movement
toward a flood of new charters. But here ae;ain we must guard carefully against monopoly ir unbridled branch competition, either of
which might become as dangerous RS the organization of new banIrs.
Next, we came to Management as a determination of sound charter
policy. Unquestionably, given every other consideration, unless
the mdnagemert is first honest, then capalle and sincere, the institution is foredoomed to failure, or at best, to but mediocre
success and uncertain existence.
Charter granting authorities should consider, as never before
the individual qualifications; not only of fcunders of a new institution, which, RS Previously expressed, should include their
motive, but the training and experience of those who will manage
and safeguard depositors and stockholders interests.
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amillin•••••••••
Federal Reserve Bank of St. Louis
- 9
No longer should the chief requisite of a bank president be
his winnin; smile, or the fact that he runs the largest broom
factory in town. T:e should, first of all be a banker by experience, or at least have a knowledge of finance extendifig beyond the
care of his cam check book. He should enjoy the fullest confidence and respect of every element in the community, and be in
a position to devote, if not his entire time, at least enough to
efficiently discharge the responsibilities of his office.
Junior officers, while not ordinarily considered as important
in the granting of charters, are mi;hty essential to the success
of not only a new but any institulelon, kti-orities may accordinkly well consider the individual qualifications of those who are
to be charged 11511 the responsibility of actually running the
bank. Let us not forget, that a chain is no stronger than its
weakest link., and that most or th_ disagreeable happenings in
banks are usually the result of inadequate, irresponsible supervision.
Directors should be selected with particular thought as to
character, responsibility and fitness, with especial vigilance
taken to see that the board as a thole is not too preponderantly
representative of any one industry or interest.
Directors not actuated by a spirit of community service above
self-irterest, may sooner or later be the cause of regret in their
selection.
The problow of sound capital requirement has been largely
solved by recent -unendments both to Federal statutes and in many
of the states which had previously held tenaciously to their low
capital acivantage much to their sorrow.
I should like to belie-e it nossible to gauge the amount of
capital reauired for a new institution in a community, by the
average of deposits and credit needs over a prescribed period; the
amount to be increased as the capital ratio and the growth of the
institution demanded. But I realize the prectcal difficulties
of any such arrangement, and compromise my theory in favor of the
more practical arrangement of requiring capital in prorortion to
population, with the amount doubled for the exercise of trust
powers. Minimum capital should in no event be less than 350,000
for a community with a population up to 5,000 and thereafter
progressively increased according to a reasonable appraisal of
local credit demands.
Further, I favor an initial surplus account, as required in
Pennsylvania, equal to at least fifty percent of the subscribed
capital, and in addition an expense fund sefleee' to cover
organization expenses and estimated cost of operetDon for the first
year of charter existence; which amount should not be less than
capital. Capital, surplus and
five percent of the new
operating requirements should, of course be paid in cash before
opening is permitted.
- 10 Charter granting authorities might well consider also the
proposed investment in new acquired banking quarters; not only
frowninr: upon expensive, one-purpose buildings but likewise
exorcising crution should the pvrchase of low yield office
buildings or other real estate be contemplated.
Yore I to suggest as the result of study a uniform workable
policy, it would be embraced in the following genert.1 procedure,
the majority of the steps in iNhich have proven their adrptebility
under the Provisions of a recent amendment to the Ranking Laws
of Yew Jersey:-
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Federal Reserve Bank of St. Louis
1. Receive application, naming incorporators end disclosing rll fees or commissions involved for organization.
2. Designate a time and place for hearing.
3. Publish notice of applicrtion noriodically within the
trade area and require incorporators to rail copy of notice
of tpnlication to every institution within two r'les of proposed location, also to the CalPtroller and other supervising
authorities interested.
4. Cause survey to be made of competing territory and
rronosed management.
5. Hold hearing and refer findings to Advisory Board.
6. Grant or reject charter, and advise all parties at
interest, including other supervising authorities.
In this discussion, it has been somewhat difficult for me to
separate my previous experience and observations as a banker from
those of the present as a supervising authority. fly conclusion
is, that both in the prst have been guilty of almost unconscionable
errors - let us say - of judgrent, rather than purpose, in the
case of a banker, and pressure from sources many times beyond
his control in the case of the sup( rvisor.
I repeat my first assertion, that no probler looms more
formidable, or less easy of solution to the future security and
stability of our banking structure, unless there be sincere
cooperation between all the supervising authorities, than that
of a sound public policy in chartering banks.
A
D
I
RESS
By
ciaL
K. WITHERS
C044I$SI3NER OF BANKING ANL INEURANCE
§TATE 9I NEW JERSZI
PENNSYLVAIA BANKERS, AbSOCIATION
TRAYUORE H3TEL
AMANTIC CITY
FRIDAY — MAI 22, 1976
Release 144e
Not before 11 A. M.
Friday, .lay 22, 1936
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Federal Reserve Bank of St. Louis
5-diERVISIjN
HAT
INI: ANL HOW MUCH?
By
Carl K. Withers
Colmissioner of Banking ane, Insurance
Nev Jersey
At the recent mid—wintn. conference of the American Bankers' Association
in Philadelphia, I prefaced my reaarks with the rather brow', statement "that
few questions bearing on the stability and security of our banking system
loom more important *** than that of a sound policy to be pursued in the
chartering of banks."
This I believe to be true.
Nevertheless, it it; not for the iamediato
,resent, our most pressing problem, as evidenced by the fact that fewer
charters, other than those resulting from consolidation and reorganisation
have been granted riurink the past year than during any of the present century,
this with the possible exception of the period immeniately following the
Banking Holiday in l9F,S.
But there is another question of more immediate and intimate concern;
aot only to you as bankers, but to those responsible for the supervision, and
in a large leasure, trio safe conduct of your respective institutions.
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Federal Reserve Bank of St. Louis
— 2 —
It lc to a discussion of this problem that I shall devote the time allotted
to me this morning.
In approaching the subject, I do so with something of a knowledge born
of experience
on both sides of the face.' I have been among the legion of
thee who have walked to work of a morning, with head high and whistling a merry
tune; at odds with no one, and at peace with the world; only to enter tae bank
and find the tellers cages occupied by strangers, and others equally strange
running around pastinc stickers an everything in sight but the inkwells.
I
have spent restless nights and anxious days, woncering, as you yourselves no
doubt have often wondered, just what the report of examination would reveal;
knowing full well in my heart and conscience that nothing could be found that
was intentionally wrong, but appreheneive, nevertheless, for never have I seen a
report of examination that admitted of a perfect institution.
Like tie farmer,
when he saw a giraffe for the first time at a circus, I have long since become
convinced, th&A, at leaet throueh the eyes of an examiner — "there ain't no
such animal."
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6rg_
Federal Reserve Bank of St. Louis
- 3-
It is now my duty to look at these examinations from the other side of
the fence; through the eyes of a supervising authority, and every day I can see
more clearly the practical necessity for it all; a need arising, not from
mistrust either of the integrity or ability of the individual banker, or his
board of directors, but from the responsibility which devolves upon the State
or Federal authority to see to it, as a matter of public trust, that the fin-
ancial institutions under their respective supervision are (=ducted in a safe
and conservative manner.
("But," you may ask, and well within your right; "Granted that some sort
of supervision is necessary; are we not entitled to demand that it be skilled
an
experienced, and free from any subversive influence?
And must we continue
to be subject to joint, multiple and several examinations, questionaires and
regulations, when the supposed objective, whatever the supervising agency or
yardstick, is one and the same; namely - a oafs institution?"
No one with even a limited knowledge of its history will deny that the
development of banking in this country has been haphazard, and one of alter..
nating cycles of competitive trial and error; not so much of competition
between individual institutions, as between gysteas and different schools of
thought.
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Federal Reserve Bank of St. Louis
-4-
From the charterinr of
he F
, ank of the United States shmrtly after th
Revolution, right on throuTh the successive stages of our
'anomic develop
we see an almost constant ebb and flow of sentiment - or g)ressure, iftisiative
or otherwise
banking.
ior or against the national as opposed to the state systems of
We see the line of battle, in the early days, sharply drawn betwep
the Ramiltontan philosophy Which favored centralisatIon, both of bf'.nkirr- end
7urrency, and the followers of Jackson, Who fought equally harc for
decentralisation um:er thw control and supervision of the several states.
There were heated debates on questions of constitutionality, which find
refleCtIon in the headliner of todays news; followed later by recisions of t
Supreme Court, upholding the power lf the Federal Government to charter banks,
and to protect them from harmful legislation oy the severai states.
see next the failure of Congress to renew the charter of the First
Bank of the United States; the downfall of the Second Bank chartered in 1816,
and shortly thereafter, with competition thus removed, the state systems in
complete control of the situation.
As sight reasonably be expected, the advantage thus created in favor of state
banking was quite generally abused, with the result that the number of state
banks doubled within the comparatively few years between 18F6 and 186Z.
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Federal Reserve Bank of St. Louis
- 6.
While some of the more desirable features of later American banking had their
origin during this period; loose, almost no regulation, coupled with widespread
counterfeiting arising out of the individual currency issuing privilege
granted in a majority of the States, brought most of the banks, and practically
all of the currency into such low esteem, that in a number of the states specie
payment Was suspended, and banking itself was actually prohibited.
Then came the National Banking System in l8615 - born of one war, and
starting another, for with the imposition of a ten percent tax on the issuArcr
of state bank notes, there was an immediate exodus from the State into the
National system; so much so, that within the short space of five years, the
situation was reversed, and there were more than seven times as many national
as there were state banks.
The struggle then began in earnest; let me emphasise &clan - not so much
between individual institutions or competitive areas - as between systems.
Laws within the states, regulations, and even supervision were relaxed, and
charters granted with abandon; always with the threat that if the proposed new
institution was not welcome in the state system, it would be in the national,
and vice versa.
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Federal Reserve Bank of St. Louis
— 6 —
Then followed a lowering of the minimum capital requirement for national
banks, and with it an immediate rush of applications) not only for new charters,
but for conversion from state banks as well. anal again, the national system
rose to the ascendancy, and for a time it looked very much as if the trend
had definitely and permanently shifted against the control of bankinc- by states.
In 191B, the Federal Reserve System came into being, and sought to
harmonize by membership privilege ane regulation, the beet features of both
centralized and decentralised control; recognising the element of competition
in each, and extending to both a comprehensive plan of cooperation, together
with the machinery for a more elastic currency and flexible credit baae.
But in spite of all this, the battle raged on. Several of the states
passed individual guaranty laws in an effort to stem the tide and make their
respective charters more attractive. The immediate result appeared favorable
in the number of new banks created, but the end, as we all know, was even more
disastrous than the currency issuing privilege of a previoua era.
Thus continued the farcical, and later tragic scramble for new charters;
this notwithstanding the outright failure of more than 6,000 banks during the
period shortly following depressed business conditions in 1921.
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Federal Reserve Bank of St. Louis
-7-
Both State and National authorities ignored all warnings evidenced by this
disastrous experience, and between them granted more than 6,000 new charters,
exclusive of branches and conversions, during the hnlf dozen years intervening
before the complete collapse of both systems early in l9t3.
There are those advocates of central banking who will attribute this
downfall to the fact that we have a dual banking system; others, with equal
conviction, to economic disturbances which were beyond our control, and still
others; (and all of them sincere), to the rapid expansion of our commerce and
population, or to events beyond our shores.
Granting them all quarter as
contributing factors, few will deny the basic faults as being; First, an
unwarranted race for supremacy as between systems, which led to; Second, an
unwise, unsafe and unthinking charter policy, and resulted in; Third,
discrimination, and a laxity in regulation and supervision that was bound to be
marked by more than a fair degree of political expeciency.
But now to get back to the question of supervision.
During the backing
and filling processes of the various stages in the development of our present
system of banking which I have just outlined, we find the first serious attempt
at supervision made in New
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Federal Reserve Bank of St. Louis
IL
ngland at the beginning of the Nineteenth Century.
Thereafter unfortunately, but little effort was exteaded in that direction
until the financial emergency created by the Civil War which resulted in the
passage of the National Bank Act. Then, for the first time was established,
although not specifically provided in the act itself, the requirement for a
regular report of condition at stated intervals, and later a physical
examination of assets of every national bank at least annually.
Awakened by this attempt on tne part of the Federal system to bring into
the conduct of National banka some semblance of orderly regulation, the etstee;
reluctantly at first, and with no definite planning, one by one, created some
sort of supervisory agency, and at least made a gesture in the right direction
by requiring annual statemInts to be filed, and eventually followed the example
of the national authorities, by making actual examinations, such as they were.
Thus, again we see a progressive development born of competitive necessity,
rather than through foresighted planning, with the result, that even today, after
the tragic lesson of the immediate past, we find a system, or rather systems of
supervision an
reDdation individual to each of the states and the various
agencies of the Federal Government, and devoid of much real semblance of
uniformity, even though the objective of each is presumably the same; namely, a
sound banking structure.
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Federal Reserve Bank of St. Louis
-9.
Granted, and let us hope that we may continue to have competitive bankinF
in this country. Competition in itself is no reason for the elirination of
either one system or the other.
There is room for healthy and reasonable
competition under proper regulation and with unselfish cooperation.
Every
panic, every depression through which this country has passed, has brought some
corrections, with the result that our bankinr structure today is better
integrated and more efficient - even if less profitable - thar ever
before.
Competition in itself, when clean and wholesore, lends zest and stability to
Progress, but wnen tinged wit: politics - whether local or national - or flavored
with the lust for power or control on the part of either individual or government,
It is dangerous i
Thus it has been, and may again booms, unless you, the bankers
of today, and these who follow in your stead, lend the best of your efforts
toward the end of forever removing this basic business of trust and dependenoe
fror either influence.
How beet to do this is easier of suggestion than accomplishment.
The
first step may well be taken within tl-e states themselves, by means of a definite
demand on the part of bankers everywhere through their accredited organizations
such as this, first; that the department responsible for the supervision of their
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Federal Reserve Bank of St. Louis
.10.
banks be completely divorce from politioal influence, and second, that their
supervisory authority and examining staff be selected strictly on an experience
and merit basis, and paid sessiOnsurate with their ability.
1
figures compiled by the State Bank Division of the American Bankers
ASSoeiation in 1934 reveal, that in only one state in the Union is the banking
eammissioner selected by civil service examination.
In 41 of the 47 states covered by this very able survey, the supervisor
is still appointed by the Governor, with or without the advice, consent or
approval of one of the state legislative bodies, and generally, without any
specified qualification either as to experience or ability along the line of the
institutions, the safety of which is dependant, to a greater degree than you may
6110000, on his direction.
One state alone requires that the supervising
officer be recommended by the state bankers assoeiation; seventeen require only
the equivalent of five years of banking or accounting experience; while fifteen
states specify no qualifications whatever for their supervisors of banking.
Further than this, the term of offinc of the average omumissioner or
superintendent of banks is much too Short to enable him either to properly equip
himself for the duties of his °frit)°, even if experienced, or to aocomplish even
to a fair degree his responsibility for supervision.
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Federal Reserve Bank of St. Louis
0.
1 was struek by the fore* of this fact while attending the State Supervisors
Convention last lovenber in Atlanta.
The roll *all revealed a turnover of
more than thirty penal* sine. the previous convention. With an approxtmately
equal pereentage attending for the first tine, and a like number among the
absent by reason of the expiration of their terns of °fries, there was left a
meager one-third of those with experience to carry on the important woe, of the
association. All of which leads me to suggest that the term of this important
offiee be for a minimum of five and preferably seven years, and that there be
demanded definite qualifieatione of experience aNd ability, to be compensated
for by a salary which, aside from any question of prestige or honor attached
to the appointment should be ample to make it attractive to an executive of
the highest calibre.
Farther than this, the duties and responsibility devolving upon a bank
superviser under present conditions are such that he should not be called upon
or expected to have an experience sufficiently broad to supervise every other
type of financial institution under state control. In Pennsylvania, you have
partially solved this problem by separating your departmenisof banking and
insurance. In many other states, the Commissioner or Superintendent is
responsible for the supervision of not only statesichartered banks, tryst
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Federal Reserve Bank of St. Louis
1
eenpanies and savings institutieni4 bet as well, municipalities and corpora-
tions; insurance companies chartered or lieensed to do business within the
State, build in
and loan associations, personal loan agencies, eredit unions,
mutual Unbent Societies, pannbrokers, title and mortgage guaranty eampanies,
asi 0,484 emostory assooiations: Aside from any possible conflict of
interest as between these various classes or einetimes eonpetitive institutions,
there is a diversity which should have the benefit of individual and spesialised
attention.
In like manner, deputies arid examiners, upon whose shoulders in the final
analysis, rests actual emanation of the banks and reaommendation for the
ry
o,
correction of unsound practices, should be selected only on the basis of their
experience, and compensated on a strictly merit basis according to their ability.
I find that in only six states are the onnaining forces selected from civil
service ranks after competitive exanination, while in 31 of the states, the
supervisors have full power within themselves to select their awn emniners.
The Signifieanee and consequences of this latter privilege law well be reckoned
in these state, where the appointment of supervisor is made in return for party
service, and damps with litm adsinistration in power.
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Federal Reserve Bank of St. Louis
Bank supervisors might generally, and with propriety be given wider
latitude in the granting or rejeation of oharters; the authority to order
discontinued unsound practices when revealed by exmnination, and even the
right, after proper hearing, to direct changes in management and to remove
offleers when their conduct is found detrimental to the lafety and welfare
of an institution.
These broader powers are of course predicated on the mow
ommendations previously made looking tow -.rd greater stability and wider experienoe
in bank supervisiSM.
Generally speaking, the supervision of national banks, by reason of longer
and wider experience, has been made' more uniform than evident in many of the
states.
The disadvantage, if may, would rest in the .ractical difficulty of
attempting to enforce standards of regulation and conduct for all national
banks thoughout the country, without due regard to local or sectional
differences in conditions and development. Supervisors and examiners, on the
other hand, for the most part are "Career' men, and derive their experience from
the examination of institutions over wider areas than emmetimes possible within
the confines of a single state.
So far we have oonsidered principally the kind of sapervision to which
our various Glasses of financial institutions have been subjected during the
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Federal Reserve Bank of St. Louis
history of our benking development, tegebkor with aortal* sargestiens ?Sr a
more =Atom and effhelemt system for tke !Ours*,
3,1t *hat 801111111 of store JIMA LAO 401110ers to balers genendly, is, hos
ansh supervision and reolatlen is really assessary to assure the publie
et
assed biakfts otamilmett
I mead set seggest to at of you partlealarly these of the state system
hated tab ether severamsntal assmsiesa of the poesibilitys thigh in order to
z,
assure safe banking, no nay have pne semenhat to the ether extreme: Aid
that inevitably ino must rein,* to e reeognition of the fast that the safety
ot OM SMOtitution after all 4.111111100 OOPS SR the akereeter and ability of its
asmnissant thin it does upsnahatt *Ian warn Oaperwleing 1141116.14161 seek
of uhlah enunises end regulates soserding Is its sea preassmestred stsmderds•
know that Joey of you attending this eesysatien WOneU rameiber that
night be obarooterised as litho Kood old days". abet, ehethor yours yore a state
or s national bask9 yen reanived a yearly visit frail the bank essainsres spent
a flaw* alnsys tee pleasant days vdtk Wimp aonseientiossly reviewed the
report with your board of direstelles eade the required &sages and adijostisubs
awl this wont to* to tankfAK• Ando lot re toll you, they more she amid fag awe:
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Federal Reserve Bank of St. Louis
Ink
But what do we find today?
Superimposed upon these basis agencies, and the
uirements for membership in the Federal Reserve System; we have the Federal
posit Insurance Corporation; in numerous institutions, the Reeonstruction
Inane. Corporation, and most recently, the Securities Exehange Commission *doh
seeks, with sweeping powers, to regulate all dealings in securities; no matter
how far removed friar actual trading or sale.
Add to this, the usual roquiremeuts in most states for I:feria:1i° examination
by directors, occasional independent outside audits and regulations promulgated
by advisory boards or commissions, and you have a situation as confusing as it
is unnecessary.
Let us assume that all of this regulation is needed to satisfy the require-
ments of each supervising agency.
Is there any logical reason why it should not
be !rade uniform, inaenueh as the objective sought to be aceomplished is the same;
namely, a safe institution?
Can we possibly justify, for instance, one set of regulations regarding the
payment of interest on savings deposits for one class of institution, as against
a different set for another, when both are subjeet,be the save supervis1404
even though by different agencies.
Then, what of that class of institutieme
subject to neither, and depending solely on the state for guidance?
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Federal Reserve Bank of St. Louis
Is it reasonable that there should be three different rtandards within the caw,
fines of a single state by Thiel% the pals** et interest should be detersiaedt)
The sate variance applies to published reports of condition, with frequently
the same report appearing twioe in the sane edition of a single paper, but
slightly dhanged in fern, to satisfy either the law or t'le requirements of the
respective agencies. It applies also to the mutter of investments, and even to
the examination of the institutions themselves, vbsre frequently there is a
&Merano() of as much as a half million dollars in the findings of the respective
examiners in an institution of just above average size. Covering letters, and
later deenands following the emanations disallowances, the appraisal of banking
house, sthor real estate and assets are in turn so far apart
WI
to appear to t
banker. who really know his institution and the worth of his borrowers and losal
real estate, not only confusing but ridiculous.
Certainl-, there eannot be, or should not be, such a wide variance of opinior
as to what constitutes a sound institution.
No one with any knowledge of foot will deny that we have indeed progressed
a long way toward the desired goal of a stronger banking structure. But the
journey is by no means at an end, ard the present me time to drop by the wayside and be lulled into complaoency and a general feeling, that all is well."
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Federal Reserve Bank of St. Louis
- 17 -
luch has been done to overcome the unsoundness of previous practices.
Strong banks have survived and continued to serve well their respective
communities; while the weak have largely been eliminated.
But there are still, in many sections of the country, too many banks, and
the weeding-out process must inevitably continue.
Sound mergers; consolidations,
and even the sensible extension of branch banking, may help in the solution
of thin problem, which looms next nost important in the program of recon-
struction.
I firmly believe and have faith in the American system of dual banking,
under which this country has grown and prospered; a faith which has not been
shakes even by the disastrous consequences of the recent past.
At the same time, I am not unmindful of the dangers inherent to any
system which will in effect permit of forty-eight, or rather, including the
National, forty-nine different banking systems; each with its own laws,
supervision and control.
I accordingly believe, that with all its virtues, if our dual banking
system is to survive, there must sooner or later be brought about a greater
degree of uniformity and efficiency; not only in the laws of the several states,
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Federal Reserve Bank of St. Louis
1E1
- 18 -
but in their standards of supervision and practice.
Acid to this, a coordination
of the requirements and objectives of the various Federal agencies, and you will
find much of the uncertainty and confusion of the present situation eliminated,
and the American syetem of banking well on its way to permanent stability.
In aiming toward this objective, the responsibility in a large measure
rests upon your shoulders. Individually, you must look beyond your own vcAlt
doors; and as an association, both within and beyond the borders of your own
state; view the banking structure of the country as a whole, and lend the
best of your effort toward its accomplishment.
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Federal Reserve Bank of St. Louis
@FedFRASER