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Branch, Chain, and Group Banking
HEARINGS
BEFORE TH E
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
SEVENTY-FIRST CONGRESS
S E C O N D SESSIO N
UN D ER
H. Res. 141
A U T H O R IZ IN G T H E B A N K IN G A N D C U R R E N C Y C O M M IT T E E
TO S T U D Y A N D IN V E S T IG A T E G R O U P , C H A IN
AND BRANCH
B A N K IN G
M A Y 13, 14, 15, A N D 21, 1930
VOLUME 2
Part 12
UNITED STATES
GOVERNMENT PRINTING OFFICE
1C0136
WASHINGTON: 1930
COMMITTEE ON BANKING AND CURRENCY
LOUIS T. M cFAD D EN , Pennsylvania, Chairman
JAMES O. STRONG, Kansas.
R O B E R T LUCE, Massachusetts.
E. H A R T FENN, Connecticut.
GUY E. CA M PBELL, Pennsylvania.
CA R R O L L L. BE E D Y, Maine.
JOSEPH L. HOOPER, Michigan.
G O D FRE Y G. GOODW IN, Minnesota.
F. DICKINSON LETTS, Iowa.
FR A N K L IN W. FORT, New Jersey.
BEN JAM IN M. GOLDER, Pennsylvania.
FRAN CIS SEIBERLING, Ohio.
M RS. RU TH P R A T T, New York.
JAMES W. DUN BAR, Indiana.
OTIS W INGO, Arkansas.
H E N R Y B. STEAGALL, Alabama.
CHARLES H. BRAN D , Georgia
W. F. STEVENSON, South Carolina.
T. ALAN GOLDSBOROUGH, Maryland.
ANNING S. PR ALL, New York.
JEFF BUSBY, Mississippi.
P h il ip G . T h o m p s o n , Clerk.
I
CONTENTS
Statement of—
Pase
Shull, C. G., commissioner of banking, State of Oklahoma_____ ______
1569
Reichert, Rudolph E., commissioner of banking, State of Michigan__
1607
Hovey, Roy A., commissioner of banks, State of Massachusetts______
1643
Nahm, Max B., vice president Citizens’ National Bank, Bowling
Green, K y _____________________________________________________________
1665
in
BRANCH, CHAIN, AND GROUP BANKING
T U E S D A Y , M A Y 13, 1 9 3 0
H
C
ouse
o m m it t e e
on
of
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e p r e s e n t a t iv e s ,
a n k in g
and
C
urrency,
Washington, D. C.
T h e . committee met in the committee room, Capitol, at 10.45
o ’clock a. m., Hon. James G. Strong, presiding.
Mr. S t r o n g . The committee will come to order.
We have with us this morning Mr. C. G. Shull, the commissioner
of banking of the State of Oklahoma, who will speak to us on this
question of branch, chain, and group banking.
Would you care to proceed without interruption until you have
finished? If so, the members of the committee will then want you
to answer some questions.
STATEMENT
OF C.
G. SHULL, COMMISSIONER
STATE OF OKLAHOMA
ON BANKING,
Mr. S h u l l . I might say that if you care to interrupt me, it will be
entirely satisfactory.
As a prelude to the few remarks I shall make, I want to state that
no effort was made by me to be called as a witness before the committee
and when I received the notice I was likely to be called it was quite a
surprise to me.
The question under investigation is naturally a matter of much
interest and one to which I have given a great deal of thought. How
ever, I have not had access to statistics from which I could do much
research work. I have read, rather hurriedly, with a great deal of
interest, that part of the proceedings heretofore had by your com
mittee, which was furnished me, and as I view the trend of this inves
tigation it narrows itself down to whether Congress shall extend or
enlarge branch banking privileges to national banks.
Comptroller Pole has laid the foundation of the argument favoring
further extending the privileges of branch banking to national banks
and as the remarks I shall make will be against that viewpoint,
favoring unit banking, I shall necessarily refer quite often to Comp
troller Pole’s remarks and the statistics which he has furnished, but
I desire the committee to understand that the references I do make
are for the sole purposes of throwing light on the merits of the subject
under investigation and not for the purpose of being argumentative.
I think further, in order to simplify matters, we may as well realize
that we are investigating a question as to whether the banking
business of the United States shall be carried on under the system of
branch banking or unit banking, for I believe that the discussion so
far must have convinced the committee that if branch banking privi
leges are enlarged or extended that ultimately all banking will be of
1569
1570
BRANCH, CH AIN, AND GROUP BANKING
that nature and will be nation-wide in scope. History of other
nations clearly demonstrates that fact. Canada, England, and other
branch-banking countries do not have unit banks.
The two basic reasons advanced by Comptroller Pole in advocating
branch banking are: First, that it is necessary to preserve the national
system; second, that it is necessary in order to furnish the country
banking communities, especially in agricultural sections, with
adequate banking facilities.
I disagree with him on both these points. It is true that during the
last 10 years the resources of State banks have increased more rapidly
than the resources of national banks. A large per cent of this increase
has been brought about during the last few years by reason of several
large banks in New York and Chicago merging and surrendering their
national charters and taking out State charters. This increase has
been rather spasmodic and there is no reason to expect this movement
to continue. Naturally to one in a supervisory capacity this action
on the part of those national banks was a matter of some concern, but
I hardly think anyone views with alarm the safe position and the
future growth of the national banking system in this country. I have
talked with a number of national bankers about this very point and
none of them is uneasy about the fate of the system to which they
belong, and let it be remembered that the Federal reserve system
has not lost in it's membership by reason of these conversions and in
spite of these losses of banks the system itself shows a very healthy
growth indeed and considering the enormous volume of international
business which is being transacted through our national banks I am
sure they are handling their share of banking business in this country.
Great stress is being laid by the comptroller that the national banks
are the fiscal agencies of the National Government and that the
Government can only rely on national banks in times of Nation stress
or war. I quote from a recent paper of the comptroller:
It is not criticism of the State banks and trust companies to say that the
National Government can not rely upon them to serve as instrumentalities in
the enforcement of a Federal fiscal policy. Banking, like other business enter
prises, is entered into by stockholders for the purpose of realizing a return upon
their investment.
The same can be said of national banks. The control of national
banks is in the board of directors and aside from the supervision
allowed the Comptroller of the Currency, the National Government
can no more dictate the affairs of the national banks than they can
of State banks, corporations, or individual citizens.
Since the establishment of the Federal reserve system, the Federal
reserve banks are in fact the real fiscal agency of the Government.
The idea that the Government can not depend on the officers and
directors of State banks to respond to needs of their Government in
times of need is nt well founded, as was demonstrated during the late
war. State and national bankers, business corporations, and our
entire citizenship responded horoically to meet the needs and demands
of the Government. I think we will all agree to that. No power is
in the National Government to compel a contribution of service or
money of national banks or national bankers other than the power
which could be enforced against State banks and bankers, business
corporations, and provate individuals. I can see no reason for
BRANCH, CH AIN, AND GROUP BANKING
1571
changing our banking system on the theory that national banks are
instrumentalities of the National Government.
I feel sure some people feel that one system of banking, and that
the national system, would be preferable to the two systems which
we now have. Possibly some people may think our system of
government would be better if we had simply a National Government
and no independent State governments, but the great majority of
our people are in favor of two systems of banking. This is evidenced
by the great volume of business handled by the State institutions.
I have no prejudice against the national sj^stem and most of m3*
active banking experience has been as a national banker, and to my
mind, to say the least of it, the merits of the national system and its
advantages are equal to those of the various State systems. There
are advantages inherent to each system and these advantages can not
and should not be destroyed by law as they are for the best interests
and welfare of the banking public. The closer personal, sympathetic,
and more understanding supervision of the State banks is a very
decided advantage to both the bank and the customers of the bank.
On the other hand, the unity of the national system and the stability
and uniformity of the laws and the supervisory powers are inherent
advantages to the national system.
The two systems working side by side with healthy competition
have created a banking condition in this country which has con
tributed largely to the prosperity of this country and the development
of its virgin resources to the distinct advantage of the people of this
country and an unparalleled progress and rapid development of the
resources of our country has been the result. Banking policies and
practices which have emanated from the comptroller’s office, and
especially many rules and regulations of the Federal reserve banks
have done much to raise the standard of banking in this country.
The State banks have been benefited along with the national banks
as they have had to raise their standards and meet this healthy
competition. On the other hand, the fact that national banks have
had State banks as competitors has had the salutary effect of keeping
the banking business closer to the people and more responsive to
the people’s needs.
The two systems working side by side have demonstrated that
commercial transactions growing out of production, manufacturing,
and transportation of goods and commodities from one section of the
Nation to the other are not now hampered but can and are now being
handled satisfactorily by banks in each system.
The two systems of banking are in keeping with our form of govern
ment. One system is a check on the other, and having the State
banking system prevents the banking bysiness from becoming too
autocratic and the national system prevents the State banks from
becoming too loose and lax in their practices and have done much to
unify and standardize banking methods and policies in the several
States.
Our country has prospered well indeed under the two systems.
Certainly our national progress and national wealth compare favor
ably with other nations having but one system.
Branch banking, when permitted to extend beyond State lines,
will result in but one form of banking. We have but to look to
1572
BKANCH, CH AIN , AND GEOUP BANKING
Canada, England, and other countries to see that this will be the
result.
The second point urged against the present system of unit banking
system is that the unit banking system has broken down and is not
furnishing adequate banking facilities to smaller banking communities,
expecially in the agricultural sections. I do not subscribe to this
view of the situation. Our unit banking system has not failed and is
not breaking down but is making vast strides keeping pace with the
rapid development of the country in general and with other business
organizations. As proof of the failure of the unit system the Comp
troller has submitted figures showing 5,640 bank failures in the United
States since 1920, the deposits in these failed banks amounting to
$1,700,000,000 and the number of depositors suffering losses in these
institutions numbering 7,264,957. These are large and imposing
figures and are likely to create the impression that unit banking is
more hazardous than it really is. As a matter of fact the banking
business in this country is the safest business, for the safety of the
creditors, that we have, and as a matter of fact it should be the
safest business we have.
Mr. Pole further states that the recovery to depositors of failed
national banks equals 80 per cent; in other words, the loss was 20 per
cent.
One billion seven hundred million, the amount of all deposits in all
the banks that failed during the last nine years divided by 7,264,957,
the number of depositors, equals $234 as the average deposit of each
customer in all of these failed banks. Each depositor recovered 80
per cent of this $234, which is $187.20, which subtracted from $234
leaves a loss to each depositor of $46.80. Not a bad loss to the bank
ing public during the 9-vear period following the deflation beginning
in 1920.
Risk can not be eliminated from business, and banking is no ex
ception to that rule. Please do not misunderstand that I look lightly
upon bank failures and their results. I deplore them as much as any
member of this committee and as much as the comptroller himself,
but I do know the bad results have been greatly exaggerated and I do
know the people of this country lost many times as much money by
reason of investments in land and in stocks of various kinds, and while
I do not have the figures and do not know that they are available, I
am inclined to think that very comparable losses were occasioned by
investments in Liberty bonds, direct obligations of our great country,
by reason of having paid par for these bonds and having to sell them
as low as 82 and 83 cents on the dollar. The loss to many purchasers
of Liberty bonds amounted to $18 for each $100 invested and the de
positors in the failed banks of this country during the last nine years
have lost $20 for each $100 of deposits in those banks.
We must not lose sight of the fact that for several years prior to
1920 we were operating under an unusual and unprecedented period
of inflation. Beginning in 1920 and thereafter we wTere operating
during a period of unusual and unprecedented deflation and great
losses were inevitable in all lines of business. As stated above, we
know that many, many purchasers of Liberty bonds, the obligations
of this great Government of ours, lost a great deal of money, yet I
have heard no one suggest that we change our form of government to
correspond to that of Canada, England, France, or other countries.
BRANCH, CH AIN, AND GROUP BANKING
1573
Mr. B r a n d . I did not get that.
Mr. F e n n . Will you say that over again?
Mr. S h u l l . I had previously brought out the fact that the people
had lost money in the purchase of Liberty bonds, but that has not
been given as a reason why we should change our form of government.
The fact that seven and one-quarter millions of people, or 18 per
cent of our population— and I am just approximating those figures—
incurred a loss of $20 per head by reason of their deposits in failed
banks is not so alarming as we might think, and creates no banking
situation demanding a change. These losses were inevitable and
small indeed compared with the losses in other classes of investments.
The losses in land, in cattle, in wheat, in corn, in horses and mules,
in every conceivable form of investment in each community, even
losses in Liberty bonds, were reflected to a greater or less extent in
each bank serving each community.
I have heard much said depreciating the ability of the small-town
banker. This opinion of his ability or lack of ability has arisen
since 1920. Before that he was considered a respectable and fairly
average capable citizen and good banker, but his bank has failed and
they are still failing. I want to make this statement, that I am
fully convinced that better than 95 per cent of the bank failures since
1920 were caused, and are really traceable to the abnormal inflation
and abnormal deflation caused by our late war conditions.
In Oklahoma— and you will pardon me for referring to Oklahoma
for naturally my sources of information come mostly from that
State— only five State banks which were organized since January 1,
1920, have failed up to this time. All other State banks which have
failed in Oklahoma during this 9-year period were those chartered
prior to that date and of course those affected by the conditions exist
ing during the inflation and deflation period. One hundred and
seventy-four State banks failed during this period and only five failures
of banks chartered after that period of deflation began have failed,
showing 98 per cent of the failures were caused as a result of conditions
brought about by the war and 2 per cent which you could say were
not caused by this same reason.
Lately we had 12 banks to fail in one day, each one of these in better
shape the day they failed than they had been any time during the last
10 years, and each failure caused by the result of war conditions.
Lately a national bank failed in our State, the continued condition
of which during the last 10 years I happened to be acquainted with
and I am sure it was in better shape the day it failed than it had been
for 10 years, but it had lots of losses in its assets dating back to the
war period which simply could not be eliminated. War conditions
brought about losses, abnormal and unprecedented and inevitable
losses, and a great per cent of the bank failures are directly traceable
thereto.
Much has been said about the earning ability of small banks, es
pecially in agricultural sections. Of course, my source of information
comes solely from my knowledge of State banks in Oklahoma.
I have had prepared an analysis of the earnings of Oklahoma State
banks for the year 1929. We have 325 State banks in Oklahoma at
this time; 199 of these banks paid dividends during the year 1929;
126 did not. Sixty per cent of the banks did pay dividends. The
average net earnings of the State banks in Oklahoma on their capital
1574
BRANCH, CHAIST, AFD GROUP BANKING
stock for 1929 was 16.6 per cent. The net earnings figured against
the capital and surplus was 12.6 per cent. Dividends paid figured
against the entire capital stock of all the banks equaled 11.2 per cent.
Those percentages were figured counting all the capital stock of all
the banks in the State, whether they paid dividends or not, and the
average was 11.2 per cent.
Group 1. I have had analyzed the net earning capacity of banks
according to size of capital stock. Banks having a capital of less than
$25,000 earned 17.9 per cent on the capital stock and 14 per cent on
the capital and surplus. Dividends paid last year by these small
banks equaled 11 % per cent on the capital stock of all banks in this
group. Of this class of banks, 221 in number, 131 paid dividends;
90 did not; or 60 per cent paid dividends.
Group 2. Banks having capital of $25,000 up to and including
$50,000, number 89, 64 of which paid dividends; 25 did not, or 70
per cent of which paid dividends. Net earnings on the capital stock
of these banks equaled 17.7 per cent. Net earnings on the capital
and surplus equaled 13% per cent. Dividends paid last.year equaled
11% per cent on the capital stock of all banks in this class.
Group 3. Capital stock in excess of $50,000. Number, 15. Four
paid dividends, 11 did not, which equals 26.6 per cent paying divi
dends. Net earnings on capital stock 12.6 per cent. Net earnings
on capital and surplus 9% per cent. Dividends paid equal 10% per
cent on the capital stock of all banks in this class.
Remember, we have 325 State banks in Oklahoma; 199 paid divi
dends; 126 did not. Out of the 126 banks which did not pay dividents, only 8 were chartered since 1920 and 3 of these 8 were chartered
during 1929 and 1 during 1928, and these 4 banks would not be
expected to pay dividends so soon after their organization, thus
leaving only 4 State banks in Oklahoma organized since 1920 which
did not pay dividends. This all goes to show that the failures in
our State banking system in Oklahoma and the present dividendpaying ability or earning ability are directly chargeable to war con
ditions rather than to banking ability or local conditions.
You can not, in my opinion, get away from the fact that war
conditions are still causing the trouble we are having to-day in our
banking situation; not 100 per cent, but very nearly that per cent.
The failures we will have for the next few years or so will be traceable
to the same cause.
There is no need to change our system of banking. What we
should do is to improve the present system where possible, and in
my opinion the bankers of this country are doing that very thing
themselves. Our country bankers are able to meet the present day
local demands of banking. They are wide-awake business men and
have revised their business methods to meet the changes which have
occurred in economic conditions.
Our records show that out of 151 State banks organized in Okla
homa since January 1, 1920, 5 have failed during this 10-year period.
N ot perfect, but, to my mind, a very good record.
Branch banking will not stop the failures of banks which are yet
to come, because of war conditions. These large branch banks will
not acquire these particular banks on account of the condition of
their assets. In my opinion, it will cause the failure of some of these
BRANCH, CH AIN, AND GROUP BANKING
1575
banks still carrying on and still having losses in their assets charge
able to war conditions and which in many instances may be able to
pull through. M y reason for this is that if branch banking is per
mitted, there will be many instances where a branch office will be
opened in the community where these banks are now operating and
thus deduct from their volume and lessen their possibility of working
out of their trouble.
M y thought is this, that there will be a great many points where it
would not be possible to get another bank chartered there, but it
would be possible to get a branch; in other words, it might justify a
branch office of some large bank, but it would not justify two unit
banks there, and my thought is that this branch office will finally get
established in such points as that.
Canada has had some bank failures. I understand a bank there
having about 80 branches failed. I further understand there are
about 12 or 13 banks operating in Canada. This would show 1
bank out of every 13 failing. I further understand another large
branch bank with between 300 and 400 branches was on the point of
failing and the Canadian Government donated $15,000,000 to enable
another banking institution to take it over. I further understand
that three banks in Canada do a very large per cent of the banking
business of that country. Statistics will show the per cent.
I have seen the percentages, but they were not available to me at
the time I secured these figures.
In 1885 Canada had 41 banks. They now have 12 or 13, with 3
doing a very large per cent of the business.
England has, I understand, 20 banks, with 5 doing a very large per
cent of the banking business of that great nation.
How can we imagine that branch banking will decentralize banking
business in this country? Admit, for the sake of argument, that
branch banking is safer than unit banking. I am not admitting this
and would like to see a comparison of the failures in Canada on a
percentage basis, compared with the failures in this country. I would
like to have the committeemen get those figures; it is not possible for
me to get them.
But, admitting there is some greater degree of safety in branch
banking, there are other advantages to unit banking which offset the
additional risk, if any. There is no doubt that the unit bank is more
responsive to the needs of its customers in the smaller community,
both to the borrowers and the depositors. There is no question that
the people who live in the very communities which Comptroller Pole
states has need of branch banking facilities do not want branch
banks and are, in fact, opposed to them and are decidedly in lavor of
unit banking. These people realize that even if not as safe, the small
risk incurred in the unit bank is worth the money and that the extra
safety, if any, is offset by the local independence and self-development
which the unit bank encourages and makes possible. This idea is
deeply ingrained in the minds of the American people. These people
realize that they will not receive the banking accommodations to which
they are entitled and can obtain from the local banker who knows
them intimately, who knows their integrity and ability. I have
reference, especially, to the average citizen in the smaller com
munities. They know that the result will be that branch banking
will gladly take their deposits and in many, many instances will not
1576
BRANCH, CH AIN, AND GROUP BANKING
loan the small borrower the money to which he is entitled, especially
the small farmer and the small merchant.
We know, further, that the independence of hundreds of country
bankers will be lost under this system and I firmly believe that if
branch banking is once adopted on the plan outlined, that we have
committed ourselves and this Nation to a policy which will bring
about centralization of wealth in the hands of fewer people and will
be the greatest stride this Nation has ever taken toward the elimina
tion of the greatest asset to the middle class, the small and worthy
individual comprising the great and large per cent of the citizenship
of this country.
From the standpoint of safety alone, nation-wide branch banking
is preferable to trade area branch banking. More diversity in
investment would follow in nation-wide branch banking. I am
firmly convinced that if we had, during the war period, branch
banking in trade areas, and if these banks had served their com
munities with banking facilities as was necessary during the war
period, many of these banks would have failed also.
The greatest reason for greater safety to branch banking on a
nation-wide scale, is the fact that the few banks we would have
under this system would be so large that the results of their failure
would be so great and so nation-wide that the National Government
would have to step in and save them, as was done in Canada, and
I understand, in other countries. This, of course, is paternalism,
and around the corner is socialism.
Branch banking is all right for the people who are accustomed more
or less to a monarchial form of government, but the people of this
country are not ready for it and the business conditions of this country
do not demand it.
The Canadian Government guarantees bonds issued by some of the
railroad companies and some of the bonds issued by municipalities.
Great centralization of banking with branch banking fits into their
scheme of government, but not ours.
Group banking has been in vogue in this country for years and
many failures have occurred in operating groups and chains. The
recent enthusiasm for group banking has, in my opinion, been occa
sioned by the thought of the possibility of branch banking. Many
enterprising and ambitious people are entering the group banking
field, with a view to selling out to larger branch banking organizations
which will be in operation, if permitted.
In submitting figures showing the growth of branch banking in
this country, these figures are, to my mind, misleading. For instance,
since the passage of the McFadden act the large national banks in
New York and other cities have established branches in other points
in the city. The resources of this large bank have been transferred
from the unit-bankipg column to the branch-banking column. This
character of branch banking is not the kind of branch banking now
under consideration. These so-called branches in the same city as
the parent bank are no more than offices. The parent bank is no
more doing a branch banking business than it w^as before. It is still
serving the same community and the same customers that it was
serving before. That is not the kind of branch banking we are talking
about now.
BRANCH, CH AIN, AND GROUP BANKING
1577
Judging from the figures given for Oklahoma, chain and group
banking have not made the inroads into our banking that the figures
would indicate. We do have one group-banking organization, and
only one, and I think it has probably 20 banks, in quite a number of
which they are not owners of a majority of the stock; in other words,
the majority of the stock is not owned by the holding company, and
quite a few of these banks that are now in the group were in a chain
system before.
I notice listed 15 chain banks under the Thurman Bros, in Okla
homa. As a matter of fact, there are three or four of those brothers
that own a control of those banks, but those banks are operated
absolutely as unit banks. I would not class them as chain banks.
Technically they might be, but in operation they are not.
Mr. Douglas, of Shawnee, owns nine banks which can be classified
from every standpoint as chain banks, and R. A. Yose is interested
in three, but does not have a controlling interest in all of them, the
banks being absolutely operated as unit banks.
Gentlemen, this is about all that I am prepared to say on this
subject. I did not have as much time to devote to the preparation
of my remarks as I would have liked to have had, for I did not get
the notice to come until a short time ago, and meanwhile had other
duties to perform.
Mr. S t r o n g . I would like to ask you with respect to the amount
of money involved in State and national-bank failures prior to 1920.
We have had a good deal of testimony regarding bank failures from
1920 to date, but what do you say about the situation prior to that
time?
Mr. S h u l l . The only information I have on that h that I noticed
m Comptroller Pole’s figures that he furnished to the committee that
there had been a great many more State banks that failed than na
tional banks, and that is true. Somebody on the committee asked
him to furnish the amount involved in dollars and cents in the failures
of banks under these two systems, and if that information was ever
furnished, I was not able to find it in the proceedings that were fur
nished to me. I would really like to see that information furnished.
Mr. S t r o n g . Mr. Await, do you know whether that information
has been furnished or not?
Mr. A w a l t . The comptroller did not have the information from
State banks.
Mr. S t r o n g . And he can not get it?
Mr. A w a l t . A s far as I remember it, we did not have the figures
for State banks, nor did the Federal Reserve Board have them.
Mr. S t r o n g . Did not the comptroller furnish that from 1920 to
date?
Mr. A w a l t . The number of failures, but I do not think he furnished
the amounts.
Mr. W ingo . What I think Mr. Shull has in mind is this, that the
comptroller furnished the numbers and pointed out the fact that,
measured by numbers, there had been more failures in the State
banking system than the national, and Mr. Shull suggests that if we
will procure information showing the volume of banking assets, and
not simply the number of banks, there would be a different comparison.
I presume that the inference you want us to draw is that, measured
by assets, there was not a greater volume of banking assets involved
1578
BRANCH, CHAIN, AND GROUP BANKING
in the State bank failures during that period than in the national bank
failures, though the number of units was greater.
Mr. S h u l l . Yes. I would just like to know. I do not know.
Mr. W i n g o . That would be interesting.
Mr. C h a ir m a n . I am wondering if Mr. Await could not procure
from the State bank commissioners the figures on that, so as to make
that comparison.
Mr. S t r o n g . I hope that, if he can, Mr. Await will do that.
Mr. A w a l t . I understand that the Federal Reserve Board is in
the process of getting that now and it will be furnished to the com
mittee, but it will take some time.
Mr. W i n g o . I wish, if you would, that you would get for us that
information. However, I understand that the information that they
are preparing is for the Senate committee and that they do not in
tend to complete it before the expiration of this Congress. It ought
to be furnished at this Congress.
Mr. S t r o n g . It would not take very long to write to each one of
the banking commissioners of the States for that information.
Mr. W i n g o . My point is that they would include it with a whole
lot of other information that they expected to procure, but we ought
to have this information right away.
Mr. S t r o n g . Yes; we ought to see what the loss to the Nation was
in money, not in number of banks, by reason of failures.
Mr. W i n g o . I do not know what it would be worth, but we ought
to have that point of comparison.
Mr. A w a l t . We will try to get it.
Mr. S t r o n g . All right.
Mr. Shull, I would like to have you give us your comment on the
condition in which a community finds itself when a bank fails, whether
the failure of a bank robs the community of much of its assets, or
what the situation is, in your opinion, in a community when a unit
bank fails.
Mr. S h u l l . I see. Well, I should say this: Of course, we do not
like to figure on a system on the basis of taking care of failed banks
as much as we do in keeping them going, but I would like to say this,
that if you do have a failure of a big branch bank the damage to the
scattered communities would be worse than the failure of a unit bank
operating in a community, because of the fact that in a unit bank
operating in a community, naturally the larger percentages of the
loans are made to the citizens of that community and the money is
still there in that community somewhere. It may have changed
hands from one fellow to another, but still the money is in that
community, and my idea is that the individual community would be
hurt less by that.
Mr. S t r o n g . By the failure of a unit bank than by the failure of a
branch bank?
Mr. S h u l l . I think so.
Mr. S t r o n g . We have had a good deal of information here about
trade areas. Will you give us your idea upon that proposition?
Mr. S h u l l . Well, I think Comptroller Pole has probably given
about the best description of what a trade area is that you have had.
I think I made a note of it somewhere. He said that “ A trade area
is that geographical territory which embraces any city's flow of trade/'
BRANCH, CH AIN, AND GROUP BANKING
1579
I think that it has been demonstrated by the number of questions
asked on that point that it is pretty hard to tell what a trade area is,
and I think unquestionably that granting branch banking privileges
on that basis would cause a great deal of conflict of territory. It
seems to me that it would be very easy to point out that the entire
United States is in the trade area of New York City, because our
little merchants in the little country towns in Oklahoma and in that
western country come to New York regularly to do their trading.
Mr. S t r o n g . They come about once a year?
Mr. S h u l l . Once or twice a year.
Mr. S t r o n g . T o b u y their stocks?
Mr. S h u l l . Yes, sir.
Mr. S t r o n g . And they also go to Chicago.
Mr. S h u l l . Chicago and St. Louis.
Mr. S t r o n g . And in the meantime they go to Kansas City.
Mr. S h u l l . Yes; a few of them down there do.
Mr. S t r o n g . So that the proposition of trade area, followed to its
logical conclusion, would simply mean nation-wide branch banking?
Mr. S h u l l . I think so.
Mr. S t r o n g . In your opinion, will branch banking tend to decen
tralize, either nation-wide branch banking or trade-area branch
banking?
Mr. S h u l l . I certainly think it will not. We only have to look
to other countries which have branch banking privileges to see that
the number of banks operating is becoming smaller and smaller each
day and covering a wider territory.
As I said before, Canada has three banks doing a very large per
centage of the business. I wish I had the figures, but I am sure it was
better than 75 per cent of the business of the country, and five banks
in England are doing the same thing.
I think the Fedearl reserve system of this country has done much
toward decentralization.
I have noted with a good deal of interest the gain in total resources
of banks at different points as brought out in somebody’s testimony
here before the committee; I think Comptroller Pole’s— for instance,
Detroit had gained 46 per cent; Dallas, 437 per cent; Atlanta, 234
per cent; Cleveland, 225 per cent; Chicago, 210 per cent; and Min
neapolis, 284 per cent. It seems to me that our present Federal
reserve system has done much along that line.
Mr. S t r o n g . What do you think will become of the Federal-reserve
system if we have nation-wide branch banking?
Mr. S h u l l . Well, I do not know. M y personal opinion is that in
the course of years— I do not know how long, for we do things pretty
fast nowadays— we would have a few large banks in this country and
would not have the need for the Federal reserve system that we
have to-day.
Mr. S t r o n g . And they would rather dominate and overpower?
Mr. S h u l l . I understand that in Canada— and, of course, the
things I am giving I would like to have checked up, because my
information is not definite information, but I have read it from reliable
sources that they virtually have no supervision of the banking business
in Canada, that the Government does not. If I am not mistaken,
they just make a report about once a year, and they have virtually
no supervision as we understand it in this country.
1580
BRANCH, CH AIN, AND GROUP BANKING
Mr. G o l d s b o r o u g h . Mr. Chairman, I would like to ask one
question there.
Isn’t that because, instead of the Government being able^to control
the banks, the banks largely control the Government?
Mr. S h u l l . Yes; they are just in absolute partnership.
Mr. G o l d s b o r o u g h . Assuming that it is conceded that branch
banking is becoming more and more necessary, with which proposition
I do not agree, do you not believe it would be better for metropolitan
banks to be allowed to establish branches within their areas, and
then have the rural districts conduct their own branch systems, dis
connected from any metropolitan banks?
Mr. S h u l l . Well, I have thought about that a great deal. I think
that unquestionably there are some advantages to branch banking,
and I think branch banking in large cities is good, but I do not think
branch banking should ever be permitted to cross State lines. That
is my idea.
Mr. G o l d s b o r o u g h . But if you allow branch banking to be on a
state-wide basis, is there not bound to be some legislation which w^ill
allow it to cross the State lines?
Mr. S h u l l . It is pretty apt to come.
Mr. G o l d s b o r o u g h . N o w , with respect to the definition of the
term “ trade area” which you referred to a moment ago as involving
the city’s flow of trade, the necessary implication being that Mr.
Pole’s idea of a branch banking system is a system which has its incep
tion in the cities, do you think that is necessary at all? Do you not
think that sufficiently strong branch systems could be set up in the
rural districts without having a parent bank in a city?
Mr. S h u l l . Yes, sir; I d o .
Mr. S t r o n g . I want to ask you now about that supervision. You
have charge of the supervision of banks in your State. What is your
opinion as to the ability of a superintendent of banks to examine
large systems, when they have 1, 2, 3, or 100 banks?
Mr. S h u l l . Well, I attended the supervisors’ convention of all the
State bank commissioners of the United States held in San Francisco
this last summer, and while there I had occasion to talk with, I think,
the chief auditor of the State banking department of California, and
he told me that in the examination of chains in that country, of
branches, that they paid very little attention to the actual audit of
the bank. You understand that an examination of a bank by a
State department comes under two heads, one an audit and the other
more of an analysis of its solvency, and he said that it was absolutely
impossible for them to go very far into the auditing part of branch
banking, that they left that principally to the auditing department of
the parent institution.
Mr. S t r o n g . Of the branch bank itself?
Mr. S h u l l . Yes, sir.
I would like to state further along that line, since you brought it up,
that I noticed in Mr. Pole’s discussion of that that he admitted that
it would virtually be necessary for his office to be examining those
banks all the time, almost a continuous examination, which to my
mind suggests that you just have that department helping to operate
those banks, and you are getting the Government right in the bank
ing business.
Mr. S t r o n g . Have you any suggestion as to what policy might be
used to strengthen the banks of the country?
BRANCH, CH AIN, AND GROUP BANKING
1581
Mr. S h u l l . Well, I do not know whether I have anything that is
practicable or not. I have one pet theory that I have thought about.
Mr. S t r o n g . The committee would like to have it.
Mr. S h u l l . I have often wondered, in the organization of a bank,
if it would not be possible to provide that each stockholder, in addi
tion to paying in the capital and surplus required, should purchase
an equal amount of good bonds, of a class to be determined, of course,
to be deposited by a national bank with the Comptroller of the
Currency and by a State institution with the banking department
of that State, as a guarantee to taking up losses as they occurred.
Now, banks do not fail over night; it is a trend that a certain bank
gets into, usually, that causes failure. I am talking now about
normal banking conditions, and eliminating the war period. It is a
trend that a bank gets into, and many times in my department, and
I am sure in others, we realize that we should levy assessments before
we do, but for various reasons we do not do it; the banker thinks it
will ruin his business, break him, and we do not do it, and the trend
of his business, instead of getting better, gradually gets worse, and
the first thing that happens, we wTake up and his capital is lost.
Now, if these bonds were pledged with the banking department,
the loss in that bank could be taken care of gradually out of the sale
of those bonds, and then whenever those bonds got down to a point,
say, of 50 per cent of the amount originally deposited, you could
require them to replenish.
I do not know whether that is a practical idea or not. As I said
before, you can not eliminte risk from business altogether.
Mr. S t r o n g . It would tend to bring the stockholders to the im
portant realization of the fact that losses were occurring and cause
them to take more interest in the affairs of the bank, would it not?
Mr. S h u l l . Yes, and one of the biggest things about it that I did
not mention was the fact that it would assure you of a better class of
stockholders than you now have. There are a great many people that
in the organization of a bank have become interested in it through
stock ownership that have no interest in the banking business at all,
and this would tend to prevent that kind of a citizen from becoming
interested in the organization of a bank.
Mr. S t r o n g . We have had a good deal of controversy before this
committee regarding the taxation of banks. I would like to ask you
if you have any views in that regard.
Mr. S h u l l . I have been bank commissioner about two years and a
half, I think, in Oklahoma, and I have advocated how I think banks
should be taxed. I think it would be right and equitable for banks to
be taxed at about 60 cents on $100 of their capital stock; that is about
in line with other taxable property on an ad valorem basis. Then I
think that the surplus of a bank should be exempt from taxation, or
certainly only a very small amount of tax levied on it, perhaps as much
as is levied against money in the different States, which in our State
is two-fifths of 1 per cent, I think, provided the bank carries a certain
per cent of its earnings to the capital each year until it got equal to the
surplus.
In our State our court has just lately rendered a decision that is
favorable to the State banks, because we have a law to the effect
that you can not tax a State bank greater than a national bank; that
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1582
BRANCH, CH AIN , AND GROUP BANKING
you can only tax bank stock on a basis equal to money in banks,
deposits in banks, which is two-fifths of 1 per cent, which virtually
means we do not have any taxation against bank stock.
M r. S t r o n g . Y ou do not think that the capital of banks should
be put in a preferred class, do you? You think that it ought to pay
the same rate as other property?
Mr. S h u l l . I do; and I want to say this in fairness to the bankers,
and, as I said before, I am giving you more or less the localized view
point, because that is all I have, but the bankers of my State are very
much in favor of paying a just and equitable tax. They think they
have too much relief now. They felt until this court decision that
they had been taxed too much, and they know that we have gone
too much in the other direction now and they want to pay an equit
able tax, and I think the bankers in other States feel the same about it.
Mr. S t r o n g . What do you think of applying Gresham’s law to the
banking proposition?
Mr. S h u l l . Well, I noticed that something was said about Gres
ham’s law in these hearings. I believe the idea of Gresham’s law is
that the baser metal drives out the good, and I was rather surprised
to see it applied to banking. However, I think it was brought
out later in the controversy that it did not apply to business but
simply to metals, and certainly banking is not metals; its chief busi
ness is not to deal in metals but in credits. It is a business like any
other business, and I think it was brought out in the hearings here
that that theory worked adversely in business, and I think it would
have no application.
Mr. W i n g o . If I may say this, others referred to that, and I think
I referred to it in this connection, that a superior service and better
quality of goods had a tendency to drive out of existence the com
petitor who dealt in the inferior service and the inferior quality of
goods, and I think I incidentally remarked that was just the reverse
of Gresham’s law, that, in so far as metal and money are concerned,
the baser drives out the superior, whereas in business service and qual
ity of goods, the superior drives out the baser.
Mr. S h u l l . Yes, sir. I do not know who brought it out, but I
know some one did, but my point is that I do not think it has any refer
ence to the banking business. I may be mistaken, about that, but
that is my idea.
Mr. W i n g o . I still seem to be enable to make myself understood.
I did not say that.
Mr. S t r o n g . I know you did not.
Mr. W i n g o . The point I made was this, that it was just the op
posite applied to business, that in business the superior drove out the
inferior, whereas in currency the baser drove out the superior.
Mr. S h u l l . I agree with y o u o n that; y e s , sir.
Mr. W i n g o . It is just the reverse o f Gresham’s law.
Mr. S h u l l . Yes.
Mr. S t r o n g . What do you think the States will do if Congress acts
favorably on a law to permit nation-wide branch banking?
Mr. S h u l l . Well, I think unquestionably the States would follow
suit in allowing branch banking within their States, and possibly there
would be some attempts made to allow banks in different States to
reciprocate with each other across State lines.
BRANCH, CH AIN, AND GROUP BANKING
1583
Mr. S t r o n g . And it would eventually result in nation-wide branch
banking?
Mr. S h u l l . Yes; a bad condition, I think.
Mr. S t r o n g . Y o u have pointed out that in England they only
have five banks with 8,000 branches, and in Canada, only three large
banks with numerous branches, and that they exist in countries where
they have practically two classes of people; that the middle class in
these countries is largely eliminated. Do you think the establishment
of nation-wide branch banking in this country would tend to eliminate
the middle class here?
Mr. S h u l l . I think it would be the biggest step this country has
ever taken toward decentralization and toward making it impossible
to insure that the smaller business interests in this country would get
the line of credit that they are entitled to.
Mr. S t r o n g . The trend now is toward mergers and chain stores—
big organizations. Do you think that if we permitted a banking
system that would eventually result in a few banks having control of
all the money and credit that the outcome would eventually be that
the middle class of people in this country would be eliminated as they
are in other countries? Is that your idea?
Mr. S h u l l . I think it would be the biggest step we have ever
taken in that direction.
Mr. S t r o n g . Mr. Wingo wishes to question now.
Mr. W i n g o . I just desire to ask a few questions. Just take the
question you have just left, that of banks having branches established
beyond the State line; that is, by State charter: You said something
about reciprocity between the States. What did you mean by that?
Mr. S h u l l . I meant it would be possible— at least I think it would
be possible for the State of Arkansas, as I believe you are from
Arkansas, to allow a bank in Oklahoma City, we will say, to estab
lish branches in your State provided the State of Oklahoma would
allow a big bank in your State to do a branch banking business in
Oklahoma.
Mr. W i n g o . Y o u are not a lawyer, are you?
Mr. S h u l l . Well, I graduated from a law school and I practiced
some, but I do not claim to be much of a lawyer.
Mr. W i n g o . I was under the impression you were not a lawyer
and I was prepared to ask some questions that you would not appre
ciate if you were not a lawyer. If branch banking is a blessing and
a good thing, why confine it to geographical limitations?
Mr. S h u l l . I tried to bring that idea out in my talk at the start.
I think we might as well face the proposition and look at it as a nation
wide branch banking, because you will remember that Mr. Young’s
testimony virtually admitted it would come to that. He said that it
would take 50 years, but it is a matter of opinion whether it would
be 25 or 50 years.
Mr. W i n g o . Well, take as a practical proposition, two towns in
my district— two largest ones— Texarkana and Fort Smith: If branch
banking is a good thing, why say to the banks of the city of Fort
Smith that “ You can not cross the river to a town on the other side
of the river in Oklahoma and establish branches there?”
Mr. S h u l l . A s a matter of fact, they do own several banks in
Oklahoma.
1584
BRANCH, CH AIN, AND GROUP BANKING
Mr. W i n g o . Y o u mean gentlemen connected with them-----Mr. S h u l l . It is a chain proposition; I mean the head officers/
For instance, the First National Bank of Fort Smith owns the con
trolling stock in several banks of Oklahoma.
Mr. W i n g o . Y o u do not mean the bank itself owns that con
trolling stock?
Mr. S h u l l . N o------Mr. W i n g o . Y o u mean the dominant persons in those banks in
Fort Smith are also stockholders in smaller banks in your State?
Mr. S h u l l . Yes, sir.
Mr. W i n g o . Y o u say the First National. Mr. Nakdimen, o f
the City National also owns some, does he not?
Mr. S h u l l . Yes, sir.
M r. W i n g o . Y ou do not call them chain or group banks either?
Mr. S h u l l . I have not thought about what I call them.
Mr. W i n g o . What they set up is this, that they are separate
corporations, of course-----Mr. S h u l l . Yes, sir.
Mr. W i n g o . Some National and some State banks?
Mr. S h u l l . Yes, sir.
Mr. W i n g o . And the same man who is an officer or lage stock
holder in one of these Fort Smith banks is also an officer and, in
some instances, a director in these State banks and National banks
in your State?
Mr. S h u l l . Yes, sir.
Mr. W i n g o . But to get back to the proposition I started on, if it
is a good thing, and aside from that barrier, I have not found out
what is the argument in favor of confining the blessings of this system
of branch banking to any given geographical area. I can not catch
the point. Have you heard of any reason for it? You suggested
you thought it should be confined to State boundaries. I wondered
what reason you had in mind for that?
Mr. S h u l l . Well, there are communities, in my State, and I am
sure in other States, that have no banking connections or facilities.
Some have them, but they are, in reality not supported, and I wonder
some times if it would not be all right to permit a bank at a county seat
to establish offices out in other towns in the county, to say the least.
I do not know how much further it should go than that.
Mr. W i n g o . In other words I think the though that is back in
your mind is that you would maintain more of an intimate connection
and intimate knowledge of conditions to be met and the services to
be rendered, by confining it closer to the parent bank?
Mr. S h u l l . Yes, sir; a more localized community.
Mr. W i n g o . What is there in the present decisions of the courts
that would prevent a bank in Oklahoma or in Delaware from estab
lishing branches in States whose corporate laws authorize the domestic
banks to establish branches?
Mr. S h u l l . I could not tell you.
Mr. W i n g o . It is all governed by the decisions of the courts in
reference to foreign corporations coming into the States and doing
business, is it not?
Mr. S h u l l . Yes, sir, but there is a special statute on banking, you
know. It does not come under the general corporation statute— the
banking privilege of our State.
BRANCH, CH AIN, AND GROUP BANKING
1585
Mr. W i n g o . Suppose they tie up, like the telephone and telegraph
companies did. Take the Western Union: The Western Union is
the one that tested what is known as the Wingo Corporation Act,
of which I was author, when I was State Senator, governing cor
porations coming into the State and doing business. Suppose some
Oklahoma banking corporation got control of some banks in my
district, in Arkansas, and subsequently they wanted to make them
branches and went into the court and showed they had established
their business there and made the same plea that the telephone com
panies did— set up that they are engaged in interstate business:
Have you any reason in your mind, as a lawyer, why the modern
trend of the Supreme Court would not hold that the State laws could
not discriminate against them by classification of business?
Mr. S h u l l . Well, of course, you have asked me quite a legal ques
tion and my thought is this, that the only right to establish banks in
the several States is purely a statutory right and there is a special
statute on banking in my State and in most of the States, I presume,
and that statute would govern the organization of a bank.
Mr. W i n g o . It is true we used to have the idea that a State could
determine whether or not a foreign corporation could come into the
State and do business, but we have had to modify that to some extent,
have we not?
Mr. S h u l l . I think so.
Mr. W i n g o . Well, take the trade area. You have read the defini
tion of the trade area that Mr. Pole gave. Under his definition and
the rule he lays down, Oklahoma would be included in the trade area
of Kansas City, would it not?
Mr. S h u l l . Oh, no; I would probably say more so in St. Louis.
St. Louis does a great deal of business in Dallas and a great deal of
business in Wichita, Kans.
Mr. W i n g o . Kansas City merchants-----Mr. S h u l l . The western parts of the State would deal with Kansas
City and the eastern parts of the State with St. Louis.
Mr. W i n g o . In the eastern part of the State, Kansas City mer
chants have a big business in Oklahoma and as far south as Grannis
on the Kansas City Southern— Grannis, in Arkansas, and as far down
as DeQueen. They call that their trade territory. Their business
is done there. I mention that to get your view on this, that if you
undertake to say the trade area shall be the rule, necessarily that
would be a fluctuatig rule, would it not; that the boundaries would
have to be changed to meet the fluctuating trend or course of trade
and commerce?
Mr. S h u l l . Yes, sir; and there would be a very great overlapping
of territory.
Mr. W i n g o . Could you conceive of a legislative rule to be laid down?
Would it not be necessary to leave that to a bureau to define, and,
in the last analysis, would it not practically mean nation-wide branch
banking?
Mr. S h u l l . Yes, sir; I think the only way you could define it would
be just an arbitrarily defined area.
Mr. W i n g o . I was interested in two of your suggestions, and I
want to see if I understood you correctly. One was that you had
studied your banks and that the failures that had been taking place
1586
BRANCH, CH AIN, AND GROUP BANKING
in recent years were not in the banks that had been recently organ
ized— that is, the abnormal percentage of bank failures— and that this
abnormal rate had been confined to those banks in existence prior
to 1920?
Mr. S h u l l . Yes, sir.
Mr. W i n g o . And that the failure of those banks that were organ
ized and in existence prior to 1920 was occasioned not by any new
business so much as it was by the continued hangover of paper and
credits that they had extended or acquired prior to 1920?
Mr. S h u l l . There is no doubt about that in my mind.
Mr. W i n g o . I had been told that it was true in my State and I was.
interested in your suggestion that, as a matter of fact, banks failing
in your State and in my district are not failing on account of any mis
management or misjudgment of extension of credit in recent years,
but because ever since 1920 they have been hoping against hope,
renewing paper and getting interest whenever they could in driblets
on the principal, but finally they had to face the fact that it was hope
less and that they could never, however long they might carry some
people, get cleaned out and they might as well clean house and
acknowledge they were broke?
Mr. S h u l l . I think you are right.
Mr. W i n g o . You contention is that, and you draw from that,
that the cause of the abnormal bank failures in the small country
banks throughout the agricultural sections of the country is not the
failure of your present banking system to meet changed economic
conditions, but that it was attributable mainly to the reasons you
give, namely, the hangover, first of the inflation and then the drastic
deflation?
Mr. S h u l l . Yes, sir.
Mr. W i n g o . I notice you grouped your banks into about three
different groups. I think I gathered from your analysis that instead
of the smaller banks being the less profitable, as we have been led to
believe, in your State they seem to be more profitable?
Mr. S h u l l . That is true; yes, sir; but I will find out for sure.
Mr. W i n g o . In other words, you undertook to show how many had
paid dividends. As I recall, there was a larger percentage of the
smaller banks paying dividends than there was of the larger banks.
Mr. S h u l l . The largest percentage of banks paying dividends was
Group No. 2— $25,000 to $50,000 capital.
Mr. W i n g o . In that group was there a smaller number than there
was in Group No. 1?
Mr. S h u l l . There is a slightly larger number paying dividends.
In other words, 70 per cent to 60 per cent of banks less than $25,000.
Mr. W i n g o . The point I was trying to get at is this: Measured by
total number of banks in groups, which was the greater, No. 1 or
No. 2?
Mr. S h u l l . N o. 1, but I would hate to put that into the record
without having the paper before me.
Mr. F e n n . I think the reporter has it.
Mr. W i n g o . The percentage you gave there was the percentage
of the dividends on the whole system; you did not give the percentage
measured by the capital of the banks that simply paid the dividends?
You just took all the banks, did you not?
BRANCH, CH AIN , AND GROUP BANKING
1587
Mr. S h u l l . I took all the banks, for instance, in Group 1, and
figured the earnings against the capital stock in all of the banks in
that group, and it averaged so much. If I figured just against the
capital of a few of them, of course the figure would be very much
different. The dividends were figured against the capital of all the
banks in the particular group.
Mr. W i n g o . Measured by the future stability of your banking
system in Oklahoma, this abnormal number of failures in the last
few years is attributable to the major causes which you described—
the hangover of bad paper in 1920— and the fact you have finally
cleaned house tends to give more stability in the future and promises
fewer bank failures in the future, does it not?
Mr. S h u l l . Yes, sir; but I will state this: We have not fully cleaned
house 100 per cent yet.
Mr. W i n g o . I realize that. You have still some that you think
will have to face the inevitable. I will not say a lot, but several, as
they have in all States, that are still trying to clean up. However,
you have one abnormal condition that some of the members of this
committee not acquainted with the conditions in our section, do not
realize, that in four years in Arkansas and Oklahoma, you have faced
a complete failure due to the failure of the cotton crop either quantity
or price, and to floods and the depressed price of the cotton crop, and
if you had had one good cotton crop in the last four years a large
number of the banks that are failing would have cleaned up and gotten
back on their feet?
Mr. S h u l l . I think so; yes, sir.
Mr. W i n g o . And the floods and the evil effect, first, of the inflation
and then of the deflation, are more responsible in your judgment for
the numerous failures in your State than any deterioration or failure
of the banking system to adjust itself to changed economic conditions?
Mr. S h u l l . Yes, sir.
Mr. W i n g o . Now, you suggested, or named some chain,banking
systems in your State and I was struck by your failure to list some
that I understood were chain banks and I will ask you to give your
definition of the distinction between a chain and group system of
banks. First, what do you call a chain bank? Let us get that first.
Mr. S h u l l . Well, a chain bank, as I understand it and think of
it, is a bank where one or probably several people own the control
or exercise the control over a number of unit banks.
Mr. W i n g o . Before you go to your definition of the group system
of banks, will you state whether that is on the increase or decrease
in Oklahoma?
Mr. S h u l l . Chain banking?
Mr. W i n g o . Yes.
Mr. S h u l l . I do not think there is as much chain banking as there
was 12 or 15 years ago in our State. I do not think there is.
Mr. W i n g o . What do you define as a group bank?
Mr. S h u l l . Well, a group bank is where a company owns stock
in a number of different unit banking organizations.
Mr. W i n g o . In other words, a holding company?
Mr. S h u l l . Yes, sir.
Mr. W i n g o . That has different unit corporations?
Mr. S h u l l . Yes, sir.
Mr. W i n g o . Is that on the increase or on the decrease in Oklahoma?
1588
BRANCH, CH AIN, AND GROUP BANKING
Mr. S h u l l . We have one company of that kind in Oklahoma that
has come into existence right lately. Probably 10 or 12 years ago
there were several groups of banks in our State, but during the last
four or five years, group banking has almost entirely disappeared in
the State up until the late group was organized.
Mr. W i n g o . Speaking about your tax proposition— and I will not
pursue the matter any further— I was interested in the decision of
your Supreme Court, under whidh your banks were relieved from
State taxation. That was a decision some time last fall, as I recall?
Mr. S h u l l . Yes, sir.
Mr. W i n g o . It was furnished me by a gentleman who was inter
ested in the exemption of national banks in my State from their new
tax bill that passed the State Legislature. The real test should be,
in your opinion, should it not, not so much the rate as the burden?
It is possible for a bank or any other taxpayer to have the same rate
applied to them yet, measured by the actual burden, the burden may
be greater or less, may it not?
Mr. S h u l l . I think the rate should be the same and the assessment
should be the same as against other property taxed on that basis.
That has been the trouble. Banks heretofore have been overassessed,
compared with other property.
Mr. W i n g o . To show you what I had in mind, I found, in exam
ining some tables the other day, that the general counsel for the
American Bankers’ Association furnished us that whereas the na
tional banks will not have to pay one species of taxation the State
banks will in Arkansas, yet, measured by their earnings and possibly
on one other basis, the percentage taken from their earnings by the
State of Arkansas in taxes was greater on the national banks than
on the State banks, whereas the popular impression is down there
that national banks, by reason of developments, are bearing a smaller
taxation than the State banks.
The point I have in my mind is that it is possible to have an
apparent equality of treatment measured by rates, but when you
come to measure the actual tax burden sometimes there w~ould be a
discrimination that w'ould not be apparent upon the face of it; and
in the last analysis, in Oklahoma and other States, is not this true,
that the insufficiency and discrimination that takes place in the assess
ment is frequently a thing more to be condemned than any lack of
uniformity or any discrimination that may exist in the law itself?
Mr. S h u l l . Well------Mr. W i n g o . Take the other circumstance you cited, that you have
been overassessing your banks measured by the way other properties
have been assessed.
Mr. S h u l l . Yes, sir; but all banks in both systems have been
assessed alike.
Mr. W i n g o . I am taking banking as a business and not distin
guishing between banks, either State or national, because in your
State you have a law that is different from the law in my State.
Whereas in your State the very moment the court decides that the
tax levied against a national bank can not exceed a certain amount—■
that is, a very small tax applicable to money and intangibles— under
your State, the moment the national banks defeat the collection of
that tax under another statute, the State banks get the benefit of
that; whereas in Arkansas when the new statute conflicts with sec
tion 5219, as far as national banks are concerned, the State banks
BRANCH, CH AIN , AND GROUP BANKING
1589
do not get the benefit, but the State banks have to bear the burden
and have to pay that tax. There is a discrimination and a distinction
in the two States?
Mr. S h u l l . Yes, sir.
Mr. L u c e . Bearing upon the situation of the depositors in these
matters, will you tell us what reason you find in your community for
the prevalence of a higher rate of interest at large than we have in
the east. We understand the prevailing rates for money in the
West and South are higher than in the East, and we were given to
understand that if we had the Federal reserve system it would tend
to equalize the rates of interest all over the country.
Mr. S h u l l . Yes, sir.
Mr. L u c e . Why has it not been done?
Mr. S h u l l . Simply for the reason that there is more money in the
East and more demand in the West in proportion to the amount of
money available than in the East.
Mr. L u c e . We were told when the Federal reserve system was
established, that it would facilitate the flow of money back and forth
over the country and that its transfer by telegraph and by the devices
the Federal reserve system has followed, would make it as easy to
borrow $10,000 in Oklahoma as it is in Buffalo.
Mr. S h u l l . I do not think you could expect the Federal reserve
system to bring about just that result. I think the Federal reserve
system has assisted in lowering the rates in the West and making the
money in the East more available in the West, but the actual money
owned in the West is less, in proportion to the demand than it is in
the East. Individuals loaning money individually can simply get
more for their money there, and it affects banking to some extent,
too.
Mr. L u c e . The next question is: Do you share the apprehension
that the creation of branch banking systems will result in bringing
still more money into the East away from the West and, if so, how
do you reconcile it with the higher earning power of money in the
West?
Mr. S h u l l . On account of the reason you have a greater risk there,
especially for an organization in the East lending that money in the
West. Unquestionably a local banker in a local community can lend
money and be satisfied with it and do it more safely, whereas, when
lending money away out of the territory, that can not be done. That
is one reason why the money.is cheaper in the East. The people have
the money and they would rather lend it in the East than in the West.
I think if you take it individully, you would rather do it. You would
take the loan closer at home to people you know personally and inti
mately rather than lend it in the West at even a greater rate of
interest.
Mr. L u c e . I find it hard to reconcile that with the recent era of
stock speculation. Great quantities of money were pulled out of the
West and out of the South into the New York market.
Mr. S h u l l . Of course that was not an average condition; it was
an abnormal condition.
Mr. L u c e . What opportunity does the man with a little money
in Oklahoma have to share in the larger profits that are made by banks
that charge higher rates of interest? To put it concretely, in my own
neighborhood, in Massachusetts, the depositors in savings accounts,
1590
BRANCH, CH AIN , AND GROUP BANKING
get now from 4 to 5 per cent income on their money. How do you
explain the fact we do not find that apparently in any of the smaller
communities of the West?
Mr. S h u l l . They do. That is the rate they get in our State— 4
per cent. Our law provides that the banking commissioner shall fix
the rate and that has been fixed at 4 per cent. The State bank is not
supposed to pay more than that. However, some of them do do it
where they have competition that makes them do it. But 4 per cent
is the general rate over the State.
M r. L u c e . T o depositors?
Mr. S h u l l . Yes, sir.
Mr. L u c e . Does your State give any particular protection to
savings or time deposits by requiring their segreagation?
M r. S h u l l . N o, sir; they do not.
Mr. L u c e . We have thought, in the East, that there was a par
ticularly sacred character, shall I say?— that is hardly the word—
but that it was more important to safeguard the savings of the people
than the money that is used for commercial purposes?
Mr. S h u l l . I think there is good room for thought along that line.
I think the losses to that class of depositors cause a great deal more
harm than the same losses in the commercial department.
M r. L u c e . D o you think that it would be probable or improbable
that the development of either branch or chain banking would in
crease the safety of such depositors?
Mr. S h u l l Well, as I brought out in my talk, I think this: I think
eventually the banking business of this country will be done by a very
few parent institutions and I think the size and the result of a failure
would be so big that probably the Government would step into the
picture and, on that theory, make it safer. It would be so big you
could not allow it to fail. I think that is the biggest element of safety
that there is in it.
Mr. L u c e . It has been brought to my attention, outside of these
hearings, that where branch banking is developing, there seems to be
a tendency to cut out the little fellow as much as possible— I mean the
small depositor. Do you think that is a probability, that when aggre
gations of banks become prevalent, they will make it harder for the
man with a little money to do business with them?
Mr. S h u l l . I think it will be a little more expensive for them to
do it. I think they will always take their money, but as the large
banks in the country are doing now, they will probably charge for
taking their money. I think that will be enlarged upon. I think the
greatest element involved is the borrower under our unit system, who
is entitled to make loans. I think that privilege, to make small loans,
will be taken from him.
Mr, L u c e . Your statement leads up to something that I wanted
to ask next. There is growing dissatisfaction with the tendency of
banks to slough off, so to speak, the small business; to refuse to carry
accounts having small balances, or to impose something in the nature
of a fee for the privilege of checking accounts for household purposes
and other similar purposes of daily life. Is that noticeable in Okla
homa?
M r. S h u l l . Y e s , sir.
Mr.
Mr.
L u c e . Y o u think itr is a good
S h u l l . Yes, sir; I think it is
policy on the part of the banks?
worth the money.
BRANCH, CH AIN, AND GROUP BANKING
1591
Mr. L u c e . In other lines of quasi-public utility—for example,
electric lighting, and the telephone as well as the purely public Postal
Service— it has come to be recognized that it is just, wise, and profitable
to maintain certain services at less than cost for the sake of the whole
structure. Might that not also apply in banking?
Mr. S h u l l . Well, I do not know. I do not think the condition of
affairs in our State justify it. Personally, I have been advocating the
putting on of a reasonable service charge, because the earning capacity
of banks in our State is not as large as I would like to see it.
Mr. L u c e . But the little fellow is the fellow that becomes a big
fellow in course of time.
Mr. S h u l l . I had a man who came into my office recently to or
ganize a bank and his thought was to run a bank without a service
charge and I asked him what he would do if he was a merchant—
would he sell his goods to a customer at a loss for a period of time on
the theory that, after a while, the customer would buy from him on a
profitable basis. I think that principle applies to banking. I think
they are entitled to a legitimate profit on the service they render.
Mr. L u c e . Are they not, in their nature, quasi public? The argu
ment has been advanced from time to time, that the public interest
is greatly concerned with the present tendencies in banking and that
they are not purely private institutions.
Mr. S h u l l . I have never been able to conceive how you could con
sider them anything else. They get their charters from the State, it
is true, but their busines is really private.
Mr. L u c e . But have you any official charged with the supervi
sion, for instance, of grocery stores?
Mr. S h u l l . N o , sir.
Mr. L u c e . Does not your very existence, as an official, show that
the State is taking the ground that banking is quasipublic in its
nature?
Mr. S h u l l . I did not mean to convey the idea that it was not
somewhat quasipublic in its nature. I did not mean to go that
strong, but I think it is really over-emphasized on the other side too
and that it is not as much so as some people think. I think banking
is entered into by stockholders rightfully from the standpoint of
legitimate profit. I think legitimate profits is one of the greatest
safeguards that a bank can have.
Mr. L u c e . Did I correctly gather from something you said, that
you are apprehensive that the development of branch and chain
banking might result in more difficulty in the matter of getting credit
by the small merchant or the rancher or farmer?
Mr. S h u l l . Yes, sir; I think it will.
Mr. L u c e . I do not quite follow your logic there. You have led
me to understand that the interest rate will be higher, or is naturally
higher in Oklahoma than it is, say, in Pennsylvania.
Mr. S h u l l . Yes, sir.
Mr. L u c e . Why would not a branch-banking system send its
money where it could get the most profit on it?
Mr. S h u l l . There is an element of risk and the knowledge of the
risk that they are assuming, that would enter into that. The loans
they would make in the territory, I am sure, would be made at as low
a rate of interest or probably lower, but there are a great many loans
1592
BRANCH, CH AIN, AND GROUP BANKING
in the territory that a unit bank can safely make and that a parent
or branch bank would not make.
Mr. L u c e . Gentlemen who have represented the present group
systems have insisted that they would be just as liberal and anxious
to do business in the small places as the unit banker has been.
Mr. S h u l l . Well, I am giving you my opinion and I have talked
to some bankers in California that verified my statement. A t least
that is their opinion about what is going on out there. I know from
the very nature of things that the small merchant or small farmer—
lots of farmers in our State want to borrow $100 or $200 or $300, and
in making that loan the question of interest is not, by any means,
the only charge that could be made against that loan. It takes a
great deal of time to wait on that customer. It is not a profitable
loan, even if the interest rate is large. If I was in a bank away off
somewhere I would not approve of such business because I do not
think I could do it safely. If I was in close touch with it and had
personal knowledge of that class of customer that I was doing business
with, it could be done safely.
Mr. L u c e . That is all.
Mr. F e n n . I have only one or two questions to ask. Under your
State law, there can be no branch banking— I mean branch banking
in Oklahoma?
Mr. S h u l l . No, sir.
Mr. F e n n . The State law forbids it?
Mr. S h u l l . The State lawT does not forbid it. It is silent on the
subject, but the attorney general of our State has ruled that it can
not be done.
Mr. F e n n . Group banking has started in your State?
Mr. S h u l l . Yes, sir; one group of banks.
Mr. F e n n . Of course, by group banking, you refer to several banks
held by a holding company?
Mr. S h u l l . Yes, sir.
Mr. F e n n . D o you think there should be a control of that holding
company by authority?
Mr. S h u l l . Yes, sir; I think so.
Mr. F e n n . I think the mention was made here either by Mr. Wingo
or by yourself, in regard to foreign corporations coming into a
State. Now, we will presume that your holding company for one of
your groups in Oklahoma, is chartered in Delaware or in Connecticut
or in some State that gives favorable charters for associations of that
character.
Mr. S h u l l . Yes, sir.
Mr. F e n n . H o w would your State be able to control that Delaware
corporation— to use that expression as an illustration— control the
operations of this out-of-your-State corporation, which controls,
to a large extent, the banking facilities in your State?
Mr. S h u l l . I could not answer that. I do not know how they
would do it. I said I thought they ought to have some control.
Mr. F e n n . If the branch banking association is made up entirely
of national banks, that control might be taken by the Government,
but it has occurred to me, under this system of group banking, the
holding of a chain of banks by an out-of-the-State, ultra-State cor
poration, the State was losing control of that unit, and that some
BRANCH, CH AIN, AND GROUP BANKING
1593
system should be devised by which control could be given over the
controlling corporation.
Mr. S h u l l . I think so, too.
Mr. F e n n . What do you think of that?
Mr. S h u l l . I think there should be.
Mr. F e n n . In regard to direct branch banking, you say— and we
have always known it— that interest rates are higher in States like
Oklahoma and in some other midwestern States and southwestern
States, than it is in other States. How is it in California where branch
banking has been developed to the highest degree— I mean the charges
to the borrower?
Mr. S h u l l . I do not know.
Mr. F e n n . I do not know whether Mr. Giannini brought that out
the other day or not.
Mr. S h u l l . Personally, I do not know.
Mr. F e n n . I am curious to know what the rates in California, just
west of you— and that is a remote State from the east, as remote as
anything can be in the United States to-day— are. I believe the
rates in California are not very much higher, if any, with branch
banking, than they are here.
Mr. S h u l l . I do not know.
Mr. F e n n . Do your people look with favor upon the proposition
of this group banking in Oklahoma, as far as you are able to ascertain?
Mr. S h u l l . They do not.
Mr. F e n n . They are fearful that the present banking system
would not be able to furnish as good facilities to your people under the
group system as under the existing system— is that the idea?
Mr. S h u l l . Yes, sir; you will find that the people— and I am not
referring to the bankers, but to the people themselves in these agri
cultural towns— are not in favor of branch banking.
Mr. F e n n . I just want to say, in passing, in regard to Mr. Luce’s
statement about charging for carrying small accounts, I know of a
bank— the fourth oldest bank in the United States— where, years ago,
the president of an insurance company gave up his presidency of that
company to organize a bank, w'hich is now a part of this big bank of
which I speak. Three or four banks were consolidated, and that
bank this man had organized is one of the units of that consolidated
bank. One day one of the tellers said, “ We ought to get rid of a lot
of these small accounts; some do not carry over $12,” and this very
successful insurance president said to his teller, “ D on’t you let one of
them go.” He said, “ Some day they may be the largest depositors
in this bank.” That happened; some of them turned out to be the
largest depositors in that bank.
Mrs. P r a t t . The first question I have is on a subject which was
very strongly brought out here both by the Comptroller and by the
Governor of the Federal Reserve Board, and that was that the purpose
of branch banking was the mobilization of credit in a great many
different centers, for the purpose of decentralizing it. Would you be
in sympathy with that purpose? Their idea was that that could be
done more easily through a branch-banking system.
Mr. S h u l l . M y idea is that it will not be done through the branch
banking system.
Mrs. P r a t t . But you think it would be a good thing to bring about?
Mr. S h u l l . Yes.
1594
BRANCH, CH AIN, AND GROUP BANKING
Mrs. P r a t t . H o w would you suggest it could be done without
branch banking?
Mr. S h u l l . I think it is done with the Federal reserve system,
as far as you can do it. I think any country, in the nature of things,
will have one financial capital, and I do not think you can eliminate
it. I do not know that it is necessary.
Mrs. P r a t t . You think the decentralization is done sufficiently
through the Federal reserve system as it now stands?
Mr. S h u l l . I do.
Mrs. P r a t t . Another point that has been brought out is the ad
vantage of the branch banking system as a diversifier of credits.
Would you think, in the situation about which you were talking with
Mr. Wingo, where the failures were due to loans on cotton crops, that
had your banks been members of a branch system they would have
had greater diversity of credits and they would not have depended
on loans on one type of security? Is it not a fact that if their loans
had been diversified, they might have been able to pull through, but,
having all of their loans in one type of security, when that was wiped
out they had nothing to fall back upon?
Mr. S h u l l . I think possibly there would be somewhat more diver
sification. However, if you will attend a bankers’ convention at any
point of the co u n try , you will find that diversification is the one thing
preached and practiced by the banks to-day.
Mrs. P r a t t . Y o u think the small unit bankers could do that?
Mr. S h u l l . Yes; they are doing that to-day— diversifying their
investments by purchasing bonds to an extent th.at was unheard of
10 years ago.
Mrs. P r a t t . That is a recent development?
Mr. S h u l l . Yes; for the country bankers. But you will hardly
find a country banker now who has not substantial holdings in
securities of various kinds.
Mrs. P r a t t . I think that is all.
Mr. S t r o n g . Without objection, we will take a recess until half
past 2.
(Whereupon, at 12.30 o ’clock p. m., a recess was taken until 2.30
o ’clock p. m.)
AFTER
R E C E SS
Upon the expiration of the recess, the hearing was resumed, Hon.
Robert Luce presiding.
Mr. L u c e . The committee will come to order.
Mr. Brand, I understand you want to ask some questions?
Mr. B r a n d . A few questions only.
How long have you been Banking Commissioner of the State of
Oklahoma?
Mr. S h u l l . About two and a half years; since October, 1927.
Mr. B r a n d . Were you connected with a bank at the time you
were appointed to that position?
Mr. S h u l l . N o, sir; not at that time.
Mr. B r a n d . I am interested in an independent unit bank, and
therefore I was very much interested in your statement and your
attitude toward the different systems of banking, branch, chain, and
group.
BRANCH, CH AIN , AND GROUP BANKING
1595
Did I understand you to say that, as an experienced banker, your
preferred the unit banking system either to chain banking or branch
banking?
Mr. S h u l l . Yes, sir, I do.
Mr. B r a n d . H o w much experience have you had tin the banking
business?
Mr. S h u l l . I was in the banking business for about 15 years.
Mr. B r a n d . A s an active banker?
Mr. S h u l l . Yes, sir.
Mr. B r a n d . What positions did you hold?
Mr. S h u l l . Cashier and president in one, and vice president in
another.
Mr. B r a n d . And you were actively engaged in banking during those
15 years in the State of Okalahoma?
Mr. S h u l l . Yes, sir.
Mr. B r a n d . President of one, you say, and vice president of another,
and then cashier?
Mr. S h u l l . Yes, sir.
Mr. B r a n d . During these years that you were engaged in the
banking business, were you connected with unit banks exclusively?
Mr. S h u l l . Yes, sir. At one time I did have some stock in other
banks at close-by points, but not a controlling interest.
Mr. B r a n d . What were the figures you gave us this morning, as
to the number of failures of banks in Oklahoma, from the beginning
of the deflation period in 1920 down to 1929?
Mr. S h u l l . There were 174 State banks that failed during that
time.
Air. D u n b a r . What time is that?
Mr. S h u l l . From 1920 to 1929.
Mr. B r a n d . What character of banks were they? Were they
State banks exclusively, or some national banks?
Mr. S h u l l . Well, those were the State banks that failed. I think
there were only about 53 national banks that failed during that time.
Mr. B r a n d . Do you recall how many banks you had in 1920?
Mr. S h u l l . Not for sure, but Oklahoma at that time had in the
neighborhood of 600 State banks.
Mr. B r a n d . Beside the national banks?
Mr. S h u l l . Yes, sir.
Mr. B r a n d . D o you recall about how many you have now?
Mr. S h u l l . They have about 325 State banks now.
Mr. B r a n d . And you had 600 State banks in 1920?
Mr. S h u l l . Yes.
Mr. B r a n d . D o you recall how many national banks you had in
1920?
Mr. S h u l l . N o , I do not know, but quite a number; more than
they have now.
Mr. B r a n d . The figures you gave were very significant to me, in
regard to the amount each depositor lost in these failed banks. I
felt that they had made a very good showing. What per cent was
it that you gave us?
Mr. S h u l l . There were 5,640 failures which occurred during the
9-year period, and the average deposits were $234. I am taking the
comptroller’s figures to arrive as to the number of depositors involved
in the failed banks.
1596
BRANCH, CH AIN, AND GROUP BANKING
Mr. B r a n d . What per cent d id you say that was?
Mr. S h u l l . The recovery in national banks w as 80 per cent, just
a fraction under that, and I am using that figure all the way through.
That made the net average loss $46.80.
Mr. B r a n d . The net loss?
Mr. S h u l l . Yes, sir.
M r. B r a n d . T o each depositor?
Mr. S h u l l . To each depositor— the average loss to each depositor,
you understand. Of course, some lost more and some less, but that
is the average loss.
Mr. B r a n d . You spoke once or twice about the deflation period.
I take it, then, that you recognize that the inflation period was
succeeded by a deflation period.
Mr. S h u l l . It certainly was.
Mr. B r a n d . H o w long did it last in your State?
Mr. S h u l l . The deflation period is still there, really. Land values
in our State have never anything like recovered to the normal values
before the war.
Mr. B r a n d . Y o u stated, as I recall, that these failures were largely
due to the war period and the deflation period.
Mr. S h u l l . Yes, sir.
Mr. B r a n d . Which one of these periods caused the greater number
of failures of banks?
Mr. S h u l l . Well, I would say that both periods were the cause of
it. During the period of inflation, the banks were doing business on
the basis of values at that time, and then, of course, the period of
deflation, which came about, as I remember it, about the middle of
1920, found us with values that were very materially decreased.
Mr. B r a n d . I asked that question because we had bank failures in
Georgia, but none failed during the inflation period.
Mr. S h u l l . They did not fail during the inflation period, but they
were laying the foundation for failure during that period.
Mr. B r a n d . They were becoming shaky during the period in
your State?
Mr. S h u l l . They were not exactly shaky during that period, but
the loans that they were making during that period were being made
on a basis that ultimately did result in the losses.
Mr. .B r a n d . All of our failures, as I said, occurred during what we
call the deflation period, after the war.
Mr. S h u l l . Ours did, too.
Mr. B r a n d . Did any of the banks with which you were connected
fail during that deflation period?
Mr. S h u l l . Yes, sir.
Mr. B r a n d . I believe you stated your connection was only with
State banks.
Mr. S h u l l . M y official c o n n e c tio n n o w ?
M r . B r a n d . N o ; b u t a t th a t ti m e ; d u r in g th e 15 y e a rs t h a t y o u
w ere c o n n e c te d w ith th e b a n k in g b u sin ess.
Mr. S h u l l . Only about a year was I with a State bank. I was
with a national bank at that time.
Mr. B r a n d . During that 15 years experience in the banking busi
ness, how many of those institutions that you were connected with,
if any, became insolvent?
BRANCH, CH AIN, AND GROUP BANKING
1597
Mr. S h t j l l . I think they have all since failed. Practically every
bank in our county failed, except one.
Mr. B r a n d . In the county in which you live, you mean?
Mr. S h u l l . Yes, sir.
Mr. B r a n d . D o you mean during that period, or since then?
M r. S h u l l . Since the deflation period; 1924, 1925, and 1926.
Mr. B r a n d . Including and since the deflation period?
Mr. S h u l l . Yes, sir.
M r. B
rand.
H
ow
m a n y b a n k s h a v e y o u in y o u r c o u n t y ?
Mr. S h u l l . We h a v e three.
Mr. B r a n d . We have a few counties in Georgia where all the
banks have failed and where they have no bank now. That is true,
I understand, in some sections of Alabama and in some sections of
South Carolina,
When a bank fails in your State, Mr. Shull, a State bank, for
instance, does the State superintendent of banking take charge of
the bank?
Mr. S h u l l . Yes, sir; the bank commissioner, under the statute, is
made the liquidating agent of the bank.
Mr. B r a n d . Just the same as a receiver for national banks?
Mr. S h u l l . Yes, sir. Then he appoints some man to act for him
in liquidating the bank. We call him a liquidating agent.
Mr. B r a n d . Who was the commissioner of banking at the time
of the failure of the banks in your county? Who was in office, then?
Mr. S h u l l . You understand, I was in the national banking busi
ness at that time, but I think a man by the name of Walcott was
State commissioner at that time.
Mr. B r a n d . Was he a banker?
Mr. S h u l l . I do n o t k n o w a n y th in g a b o u t h im . I d o n o t k n o w
en o u g h a b o u t h im th a t I w o u ld lik e to an sw er th a t.
Mr. B r a n d . Have you lived in that county all your life?
M r. S h u l l . Since 1902.
Mr. B r a n d . Where were you born?
Mr. S h u l l . In Missouri.
Mr. B r a n d . I thought you made a good showing this morning
in
regard to the small amount of losses sustained by the individual
depositors.
Mr. S h u l l . I ju s t to o k the figures th e m se lv e s an d a n a ly z e d th e m .
Mr. B r a n d . And I am not questioning them, but in our State the
losses were much heavier.
What do your agricultural people grow in your county?
Mr. S h u l l . Cotton is the principal commodity, and wheat. Part
of our State, in the northwestern and western sections, is quite a
wheat section.
Mr. B r a n d . Did you make loans to farmers on lands?
Mr. S h u l l . No. I w o u ld n o t s a y it w as n e v e r d o n e . It was d on e
in so m e in sta n c e s, b u t it w as n o t a p ra ctic e to do it .
Most o f the
la n d lo a n s y o u find in fa ile d b a n k s w ere n o t o r ig in a lly m a d e as su ch ,
b u t th e y w ere ta k e n as a d d itio n a l s e c u rity o n a line th a t h a d b e c o m e
e n la rg e d , y o u k n o w .
Mr. B r a n d . If you did not loan on land, then, you would not loan
to farmers on crop mortgages as the only security, would you?
100136— 30— VOL 2 P T 12--------3
1598
BRANCH, CHAIN, AND GROUP BANKING
Mr. S h u l l . We do not have as much share-cropping in our State
as they have in your State. We have more of tenant farming. We
do loan a good deal of money on tenant-farms and take mortgages on
the cattle, horses, or mules to secure the loan, but very seldom would
the loan itself be secured just by the crop.
Mr. B r a n d . A s I understood you to say this morning, the banks
that did fail usually were in a better condition at the time they failed
than they w^ere prior thereto?
Mr. S h u l l . That is right.
Mr. B r a n d . I do not exactly understand that.
Mr. S h u l l . They had generally improved; in other words, they
had been able to collect a lot of paper that looked a few years ago as
if it would be a loss, but by keeping the bank open they were able to
realize on a good deal of that paper.
Mr. B r a n d . Could you not get assistance that would help to put
them in a better condition?
Mr. S h u l l . They could be in a better condition and still be in a
bad condition as a matter of fact.
Mr. B r a n d . I will tell you why I asked that. We had in Athens,
Ga., my home town, a national bank called the Georgia National
Bank. I was a director in it, and we were in a better condition than
we had been at any time during the preceding five years, gradually
discharging the obligations of the bank to the satisfaction of the
Federal reserve bank, to whom we owed a good deal of money, with
collateral notes as security. Governor Wellborn, of the Atlanta
Federal Reserve Bank, wanted to afford us more assistance and let
the bank go on, but some member of the Federal Reserve Board here
in Washington would not let him do it— so it was reported to me; I
do not know whether that is true or not. But, in any event, the
Federal reserve bank refused to loan the Georgia National Bank any
more money, when the bank was compelled to close its doors, at
which time the bank was in better condition than it had been in
five, years.
I was wondering if the same situation existed with you at the time
your banks failed, and other banks in the same class as yours.
Mr. S h u l l . Well, as a matter of fact, the bank I was with failed
in 1925.
Mr. B r a n d . 1925?
Mr. S h u l l . 1925.
Mr. B r a n d . That is the same year ours failed.
Mr. S h u l l . In our particular bank, the directors just closed up, be
cause of a deal that had been made in taking over another institution.
Mr. B r a n d . Y o u were not refused help b y the Federal Reserve
Bank?
Mr. S h u l l . We were refused help, all right; but that was not the
only thing that did it.
Mr. B r a n d . I think the refusal of the Atlanta Federal Bank to
help our bank is the chief reason why the Georgia National failed.
Now, I want to ask you this question: As I understand it, you said
that if you established a branch bank in a given community or town
where an independent unit bank, was then located, one or the other
would have to fail, and it was your judgment, as I understood you to
say, that the unit bank would likely go under?
Mr. S h u l l . N o, you misunderstood me.
BRANCH, CH AIN, AND GROUP BANKING
1599
Mr. B r a n d . Then clarify that.
Mr. S h u l l . What I said was this, that we have banks which were
chartered, we will say, prior to 1920 which have many losses in them
and that are still operating and which, under favorable circumstances,
will pull through, but there is not room enough in the towns where
some of those banks are located for two unit banks, and I am very much
afraid that if we had branch banking there would be a possibility of
some larger institution— and you know there is no getting away from
the fact that larger institutions do have some power in the way of
getting done what they want to get done— putting a branch in that
particular town, which would make it a good deal harder for this unit
bank to work itself out of its present condition than it would be if it
did not have that competition.
Mr. B r a n d . And it would be the unit bank that would go down?
Mr. S h u l l . Yes, but I am assuming that it is a unit bank that is
now in first-class condition. We have some banks yet that are not
in 100 per cent perfect condition.
Mr. B r a n d . Y o u are opposed, as I understand your statement, to
the plan of branch banking as outlined by Mr. Pole, the Comptroller
of the Currency?
Mr. S h u l l . Yes, sir.
Mr. B r a n d . Do you mind briefly giving your reasons for this con
viction of yours? I not only want to know on account of being a
member of this committee, but I want to also know as a citizen in
terested in the banking situation in Georgia.
Mr. S h u l l . In the first place, I think it is rather unworkable to
define and determine what is a trade area. I think you will have to
fix the areas in a more or less arbitrary fashion, or do a great deal of
overlapping.
In the second place, I do not think there has been the demonstra
tion of any need for branch banking in this country. The unit banks
are handling the banking business of this country on a satisfactory
basis. We financed the Great War, and we are financing to a very
large degree the world itself to-day, and the unit banks are doing it,
and the failures which have occurred have been, in a very large per
centage, 95 per cent at least, caused by the deflation which followed
the war, and branch banking is not going to correct the failures that
come from that source.
Mr. B r a n d . Are you of the opinion that if these branch banking
systems continue to pursue their present policy, and the group bank
ing systems continue their present policy of taking over in one way or
another different banks into their respective systems, it will in the
end become nationwide and that it will create a monopoly of the
capital and credit?
Mr. S h u l l . I think it will very largely tend to monopoly. I do
not know that it will be an absolute monopoly of it, but it will
certainly be in fewer hands than it is to-day.
Mr. B r a n d . It will, in your opinion, either create to a certain
extent a monopoly of money and credit or tend to do so?
Mr. S h u l l . Yes, sir.
Mr. B r a n d . That is your firm judgment about it?
Mr. S h u l l . Yes, sir.
Mr. B r a n d . I believe you are the only witness that has been before
our committee who would admit unconditionally that that would be
the result; and that is the way I feel about it myself.
1600
BRANCH,
c h a in
,
and
group
b a n k in g
What is the average salary you paid for your clerical force in your
unit banks?
Mr. S h u l l . Y o u m e a n , a m o n g th e b a n k s th e m s e lv e s ?
Mr. B r a n d . Yes, sir; the clerical force in the country unit banks.
Mr. S h u l l . Well, of course, they vary in size, but I would say the
average salary for a cashier in a bank of $25,000 capital in our State
would be about $200 a month.
Mr. B r a n d . What would be the average salary of the bookkeepers,
stenographers, and so forth?
Mr. S h u l l . From $100 to $150.
Mr. B r a n d . Y o u are paying them pretty good salaries for $25,000
banks.
Mr. S h u l l . I do not think that is a very high salary for them.
Mr. B r a n d . Are the agricultural classes in your country now
prosperous?
Mr. S h u l l . N o; not very prosperous.
Mr. B r a n d . Are they in debt?
Mr. S h u l l . Yes, sir.
Mr. B r a n d . In what size town in your State, as a rule, is a bank
of not over $25,000 capital located?
Mr. S h u l l . The law provides that a town with 6,000 people shall
have a bank of $25,000 capital, as I remember it now.
Mr. B r a n d . What rate of interest do you charge your tenant
farmers, as you call them, where you lend money to them in order
to make crops?
Mr. S h u l l . Pretty universally 10 per cent.
Mr. B r a n d . What is the legal rate in your State?
Mr. S h u l l . Contract rate, 10 per cent. Legal rate, 6 per cent.
Mr. B r a n d . As I understand you, you prefer independent unit
banking to chain banking, branch banking, and group banking?
Mr. S h u l l . Yes, sir.
Mr. B r a n d . Mr. Chairman, I do not believe I care to ask any
more questions.
Mr. G o o d w i n (presiding). Mr. Dunbar is next.
Mr. D u n b a r . Mr Shull, you said, if I understood you correctly,
that if branch banking becomes nation-wide and they operate under
national charter, that in time three large banks will control all the
branch banks in the United States.
Mr. S h u l l . No; I did not make that statement.
Mr. D u n b a r . What statement did you make?
Mr. S h u l l . I made the statement that in Canada three large banks
control a very large percentage of the business there.
Mr. D u n b a r . Then I understood you to say, after you had made
that statement, that three large banks in the United States with many
branches would drive the Federal reserve system out of existence.
Mr. S h u l l . I did not make that statement exactly as you have it.
Mr. D u n b a r . Please state it as you said it.
Mr. S h u l l . I did state that in my opinion, in the course of years,
you would have only a few large banking concerns in the United
States. Just what number, of course, would be hard to guess, but
I say very few, comparatively, and that when you do have just those
few banking concerns I was very doubtful if this country would have a
Federal reserve system any more than England and Canada and other
countries have, which have reached that degree of concentration.
BRANCH, CH AIN, AND GROUP BANKING
1601
Mr. D u n b a r . That is what impressed me this morning, your
statement to that effect. Suppose that our Federal reserve system
were forced out of existence by a few large banking institutions that
controlled all of our national banks, how would we get our circulating
medium?
Mr. S h u l l . Well, of course, we had a circulating medium prior
to the inauguration of the Federal reserve system.
Mr. D u n b a r . That consisted of national bank and Federal notes
only to the extent of $500,000,000 in circulation, so that it would
make our circulating medium possibly only one-third of what it is
now.
Has it occurred to the gentlemen what would be the alternative if
such a thing occurred? I know that you are opposed to branch
banking, but is it one of the evils that you would predict would come
about as a result of a nationally authorized branch banking system?
Mr. S h u l l . Yes, sir.
Mr. D u n b a r . Have you any idea as to how the circulating medium
would then become restored to its necessary amount?
Mr. S h u l l . No; I do not feel competent to make suggestions along
that line.
Mr. D u n b a r . Yet you do realize it would be necessary to do
something?
Mr. S h u l l . Yes, sir.
Mr. D u n b a r . N o w , when Mr. Strong asked you what the effect
in a community was when a bank failed, your reply was that all of
the property, all of the money, remained there, and that the effect
from a money standpoint did not in any way add to the disaster
because of the failure.
Mr. S h u l l . No; I did not make it that strong.
Mr. D u n b a r . How strong did you make it?
Mr. S h u l l . I said that I did not think that failure would be as
disastrous to the community as if that community had a branch
bank there that failed.
Mr. D u n b a r . But it would be practically impossible for a branch
bank to fail, would it not? Is not that your idea?
Mr. S h u l l . N o ; that was not m y idea.
Mr. D u n b a r . What was your idea?
Mr. S h u l l . I tried to bring out this idea: We are going to suppose
that everyone of the banks there failed, whether unit or branch banks.
M y idea is that the community situated maybe 200 miles or 500 miles
from the parent organization will be hurt worse by the failure of a
bank operating under the branch banking system than it would be
with the unit bank, because with the unit bank a larger percentage of
its loans is loaned locally and that money would still be in the com
munity.
Mr. D u n b a r . I have been led to believe that it is almost impossible
for a branch bank to fail.
Mr. S h u l l . W e ll, I do not think that is true, because we had fail
ures in Canada.
Mr. D u n b a r . I mean in the United States.
Mr. S h u l l . I think upon investigation that you will probably find
that a branch bank failed in California. I would suggest that you
investigate that.
1602
BRANCH, CHAIN, AND GROUP BANKING
Mr. D u n b a r . Was that connected with a parent bank which itself
was solvent?
Mr. S h u l l . Well, that condition could not exist under branch
banking.
Mr. D u n b a r . What condition?
Mr. S h u l l . A parent bank would have to fail if any branch of it
failed.
Mr. D u n b a r . That is what I thought.
Mr. S h u l l . M y information is— and I am suggesting this for your
investigation, because I may be mistaken— that there was a bank in
California that was a branch bank that did fail. I would suggest
that you investigate that.
Mr. D u n b a r . I have no doubt that, with a small bank having a
small number of branches, such a thing would be possible, but their
safety, as I understand it, is based on the fact that they have such an
immense amount of capital and surplus that they are able to finance
any emergency arising in any of the branch banks under their juris
diction, and then this morning you added another reason why they
might be made secure, which was that when only a few branch banking
systems operated our banks in the United States, in event of their
failure our Government would have to come to their assistance in order
to save chaos.
Mr. S h u l l . I think that is the biggest element of safety in branch
banking.
Mr. D u n b a r . The prospective help of the Federal Government in
the event of a threatened failure?
Mr. S h u l l . Yes, sir; I think that is right.
Mr. D u n b a r . Now, a few questions along the line asked you by
Judge Brand and Mr. Wingo, respecting the number of failures of
banks since 1920. You stated, as I remember it, that of the banks
organized in Oklahoma since 1920, but eight of them failed?
Mr. S h u l l . I think that is right. It is either five or eight.
Mr. D u n b a r . That is near enough; whereas about 150 failed
altogether.
Mr. S h u l l . Yes, sir.
Mr. D u n b a r . And Mr. Wingo brought out the point that the fail
ure of these 150 banks was due to obligations that they had assumed
during the inflation period, and the deflation period caused them to
have to suspend payments.
Mr. S h u l l . Yes, sir.
Mr. D u n b a r . And that the banks which had been organized since
then had been organized under new fundamental conditions then
existing and that they had been able to go along and take care of
their customers and operate successfully.
Mr. S h u l l . Yes, sir; that is the history of our State.
Mr. D u n b a r . N o w , I remember, in corroboration of what Mr.
Wingo said this morning, that when I was on the Committee on
Banking and Currency some years ago, we had private, confidential
information that in one of our prosperous Western States— of coure, I
will not name it— if all the banks there had to liquidate in two years’
time, 95 per cent of them would not succeed in doing so.
That is in accord with your theory that the banks that have been
failing since have been among that 95 per cent and that it was the
BRANCH, CH AIN, AND GROUP BANKING
1603
actual result of the inflation before 1920, and that that could not be
used as an argument against the continuance of unit banking?
Mr. S h u l l . Yes, sir.
Mr. D u n b a r . So, your judgment is that if these unit banks were
going into business now and were not overburdened, as they would
not be, with past obligations, there is no reason why they should not
prosper and succeed—is that your idea?
Mr. S h u l l . Yes, sir.
Mr. D u n b a r . And that a unit bank would be better able to serve
the public than a branch bank?
Mr. S h u l l . Yes, sir.
I think one other point is worthy of consideration I understand
that in the State of Iowa which is probably the most typical agri
cultural State in the Union, more banks failed with a capital stock
of over $50,000 than under $50,000. In other words, more large banks
failed in that State than small banks.
Mr. D u n b a r . N o w , your contention is, as I understand it, that
branch banking will not stop the failures of smaller banks in these
various communities?
Mr. S h u l l . I think they certainly will not
Mr. D u n b a r . On the other hand, you think that branch banking
would have a tendency to hasten the failure of these small banks,
because of the competition?
Mr. S h u l l . Yes, sir.
Mr. D u n b a r . How much interest do you pay on deposits?
M r. S h u l l . Four per cent is the present rate.
Mr. D u n b a r . How much do you lend your money for?
Mr. S h u l l . It is from 6 to 10 per cent.
Mr. D u n b a r . The 10 per cent loans being the risky loans, if I
understood you correctly?
Mr. S h u l l . There is more risk involved in them.
Mr. D u n b a r . H o w do banks in some communities pay 4 per cent
interest on savings and lend that out at 6 per cent?
Mr. S h u l l . That occurs in the larger banking points. A small
bank with a small volume of business could not loan out money at 6
per cent and at the same time pay 4 per cent on deposits.
Mr. D u n b a r . You brought out this morning a thought on a
subject that I spoke to you previously about, and that is that if we
were to have Federally authorized branch banks, they would drive
out the Federal reserve system, and, if they drove out the Federal
reserve system, there would have to be some solution of the problem
arising in connection with our currency. You are firmly of the con
viction that unit banks organized now and properly managed can
be a success in the communities in which they exist, are you?
Mr. S h u l l . Yes, sir.
Mr. D u n b a r . What size community would you think would be the
smallest in which that situation could come about?
Mr. S h u l l . We have some banks that are as good banks as we have
in the State in very small communities, of 300 or 400 population,
and some of the safest banks and the best earning banks that we have
are in those small communities.
Mr. D u n b a r . And they draw their business for miles around?
Mr. S h u l l . Yes, sir.
Mr. D u n b a r . Have you much branch banking in Oklahoma?
1604
BRANCH, CH AIN , AND GROUP BANKING
Mr.
Mr.
Mr.
S h u l l . We have none.
D u n b a r . The law o f your State does not permit it?
S h u l l . N o ; th e a tto r n e y gen eral h a s ru le d t h a t i t d o e s n o t,
b u t th e s ta tu te is sile n t o n th a t q u e stio n .
Mr. D u n b a r . That is all.
Mr. G o o d w i n . If b ra n ch b a n k in g b e c o m e s le g a liz e d o n a n a tio n
w id e b a sis, or w ith in c ertain defin ed tra d e areas, w h a t e ffe c t w o u ld
th e b ra n c h b a n k s h a v e u p o n th e in d e p e n d e n t u n it b a n k s t h a t are n o w
e x istin g ?
In other words, do you believe that an independent bank and a
branch belonging to a large system can exist side by side, or must one
inevitably go under?
Mr. S h u l l . Well, I am looking up the histories of the countries
that have had branch banking for quite a while, and the result in
those countries is that there is just one system of banking now, branch
banking.
In California there are some good unit banks in operation to-day
that are competing successfully with branch banks.
Mr. G o o d w i n . But the branch banking system in California has
been of comparatively short duration?
Mr. S h u l l . Yes, sir.
Mr. G o o d w i n . This group has been increasing tremendously within
the last few years?
Mr. S h u l l . Yes, sir.
Mr. G o o d w i n . Well, I want to get your own opinion as to whether
an independent unit bank can exist for any length of time with the
increased competition that a branch bank would give to the unit
bank?
Mr. S h u l l . I did not catch the question.
Mr. G o o d w i n . What I am anxious to know is if, in your opinion,
an independent unit bank— even a strong one— can exist against the
competition of a strong branch bank with a vigorous management
and powerful influence that it carries with it?
Mr. S h u l l . Well, there m ig h t be exceptions in the cases where
they could, but I would say generally they could not.
Mr. G o o d w i n . We have been to ld in this committee repeatedly
that there is nothing quite so fluid as money; that wherever there is
a demand for money, money will be available. Do you have any
apprehension that if there is established legally a branch banking
system, nation-wide, or within a trade area, there will be any restric
tion of credit in different localities?
Mr. Shull. I think there will be. You will have to interpret what
that demand is. There would not be a restriction of credit even in
any section of the United States, to certain classes of enterprises, but
there would be to others. I think unquestionably these large banks
would not make loans to the small farmer and certain classes of
people— small merchants— because they would simply prefer a larger
line of business and a large line of business which they could take a
little more time and get more information about.
Mr. G o o d w i n . In other words, the little fellow who may want to
borrow a small amount for the development of his business would not
have the same opportunity to obtain credit from a large branch bank
ing system that he would from an independent unit bank where he
BRANCH, CH AIN, AND GROUP BANKING
1605
was known by the officers of the bank and trusted and relied upon
for his integrity?
Mr. S h u l l . I do not think so.
Mr. G o o d w i n . Have you given any thought to the taxation of
branches of a branch bank in the different communities where
branches would be located?
Mr. S h u l l . Well, I do not know whether there would be any way
to correct it or not. Under the present law of taxation all the taxes
would be paid where the charter was taken out by the parent bank.
There might be a way to get around that, but I do not know what it is.
That would have to be changed to provide to smaller communities
where the branches are the benefit of that taxation.
Mr. G o o d w i n . On the basis of money used by that particular
bank in the community?
Mr. S h u l l . Yes, sir.
Mr. G o o d w i n . In your State, Mr. Shull, where have the bank
failures been most pronounced— in the agricultural sections or
industrial sections or in the oil fields?
Mr. S h u l l . Of course, the entire State of Oklahoma is more or less
an agricultural State, even in the oil districts. The number of failures
in our States have been pretty well distributed. The southeastern
section of the State, which is strictly the cotton section, had their
failures first. The northeastern section, which is the oil section, is
getting their failures now. However, there was more financial
strength in that section and they have been able to carry on longer,
but in the last year and a half the most failures have been there.
Mr. G o o d w i n . As I understood you, you charged the deflation
that followed the war as being the cause of many of these failures?
Mr. S h u l l . Yes, sir.
Mr. G o o d w i n . D o you have in mind anything in reference to the
War Finance Corporation activities and the policy it pursued in
calling loans it had made to banks to carry agriculture?
Mr. S h u l l . Yes, sir.
Mr. G o o d w i n . What do you think of that policy they pursued a t
that time? Was it either necessary or justified?
Mr. S h u l l . I had wondered what the losses were to the Govern
ment under that policy. Of course I had no way of finding out.
Mr. G o o d w i n . I understand the Government lost nothing, but
had a substantial profit.
Mr. S h u l l . They may have; I do not know.
Mr. G o o d w i n . But losses were sustained b y agriculture, mostly,
I understand?
Mr. S h u l l . I know some good that was done by that system.
Mr. G o o d w i n . If that money had been made available continuing
for some length of time, so as to permit the farmers to recover entirely,
in your opinion, w^ould many of these bank failures have followed or
would many of them have been saved?
Mr. S h u l l . Those failures might have been lessened somewhat.
However, in speaking of bank failures, the men in a supervisory
capacity like to speak of frozen loans. As a matter of fact, most of
those loans were just losses. We just had losses that happened, and
the bank failure in a community itself is not the bad thing. These
losses that they had that caused that bank failure are the things that
hurt so much. It is the losses.
1606
BRANCH, CH AIN, AND GBOUP BANKING
Mr. G o o d w i n . Those are all the qusetions I have to ask. Is
there any other member of the committee who wishes to ask Mr.
Shull any further questions?
Mr. W i n g o . I think I will take the liberty of thanking Mr. Shull
on behalf of the committee for coming here. I understand, Mr. Shull
you are one of the outstanding banking commissioners in the country
and we appreciate very much your coming here and giving us your
views.
Mr. G o o d w i n . The committee thanks you very much.
(Whereupon, at 3.25 o ’clock, p. m., the committee adjourned to
meet at 10.30 o’clock, Wednesday, M ay 14, 1930.)
BRANCH, CHAIN, AND GROUP BANKING
W E D N E S D A Y , M A Y 14, 1 9 3 0
H
C
o use
o m m it t e e
on
of
B
R
e p r e s e n t a t iv e s ,
a n k in g
and
C
urrency,
Washington, D. C.
The committee met in the committee room, Capitol, at 10.45 o ’clock
a. m., Hon. Robert Luce presiding.
Mr. L u c e . The committee will come to order. Mr. Reichert, will
you please give your name, address, and official position to the
reporter.
STATEMENT OF RUDOLPH E. REICHERT, COMMISSIONER
BANKING, STATE OF MICHIGAN, LANSING, MICH.
OF
Mr. R e i c h e r t . M y name is R . E. Reichert, State banking com
missioner of Michigan, Lansing, Mich.
Mr. L u c e . Mr. Reichert, you understand we are here to learn what
we can about branch, chain, and group banking. We shall be glad
to have you tell us what you know about it and what you think
about it.
Mr. R e i c h e r t . Would you like to have me make a statement?
Mr. L u c e . If y o u w ill, p lease.
Mr. R e i c h e r t . Mr. Chairman and members of the Banking and
Currency Committee of the House of Representatives, I greatly
appreciate the courtesy of being invited to appear before your com
mittee and take part in this very interesting discussion, which is of
such vita] importance to the banking world. You are seeking a
solution of a very perplexing problem, and both the bankers and the
public should appreciate the time and labor that you are giving in
your efforts toward finding its solution. I shall be very happy if I
can assist you and possibly contribute something to your study of
this question as a result of my observations and experiences in con
nection with the duties as commissioner of banking for Michigan. I
must of necessity confine my statements principally to the operations
of banks in Michigan.
A report from the Comptroller of the Currency, advising your
committee that under the present State and national banking systems
there have been 5,641 bank suspensions in the last nine years should,
of course, call for an investigation and study of our present systems.
It should, however, be definitely kept in mind that the comptroller
referred to suspensions when giving these statistics and not failures.
I
have read all the testimony available to me, and with particular
interest that of the Comptroller of the Currency and the governor|of
the Federal Reserve Board. I shall endeavor to make my statement
1607
1608
BRANCH, CHAIN, AND GROUP BANKING
as brief as possible, and in it will attempt to anticipate as many of
the questions as I think you might ask, judging from your previous
hearings. I shall also refrain in the main from using statistics that
have already been furnished to you, except in so far as they pertain
to my own State.
Michigan has had three banking laws during its existence. In 1837
the first act was passed. The banks chartered under this act immedi
ately went into land speculations and the issuing of what was known
as wildcat currency. It was the dismal failure of these corporate
banks that brought about private banking, and with the exception
of those corporate banks which went into liquidation, they were
succeeded by private institutions. Private banks still exist in
Michigan.
In 1857 the second act was passed and was amended in 1871. This
did not prove successful and wildcat banking continued, and along
with it bank failures. This condition brought about a demand for a
complete revision of our banking laws, placing definite powers in the
commissioner of banking, including discretionary power for the grant
ing of charters. It is the latter provision, so wisely administered by
previous commissioners, that has contributed more to the success of
our banking system than any one other thing. In 1887 the present
act was passed, and in 1889 the department of banking was organized.
This act was recodified in 1929 by the department with the assistance
of a committee from the Michigan Bankers Association, and this act
was passed by the legislature in that year.
In our State at the present time there are 581 State banks, 8 indus
trial banks, 23 trust companies operating under State law. These
institutions have total deposits of $1,419,488,000. The number of
national banks operating in the State is 130, and their deposits are
$536,147,000. According to the latest statistics available to me, the
average ratio of banks to population in the United States is one bank
to every 4,554 people. Michigan has one bank to 5,371 of population.
In some States this runs as high as one bank to 1,150 of population.
The principal difficulties have arisen in States where the ratio of
banks to population is high.
As far as the operation of our banks under our act since 1889 is
concerned, we do not feel that we have had an unusual number of
bank failures. Since 1889 we have actually had 24 chartered State
bank failures. The amount of money involved in these receiverships
amounted to $13,141,355.24. The amount that has been paid to
creditors up to date is $5,110,505.81. We have at present four active
receiverships, the amount involved in these being $1,187,815.34. For
the last nine years, which is the time covered by the comptroller’s
report, we have had six chartered State bank failures. The amount
involved in these six banks is $2,964,702.45. Four of these are still
active receiverships. Up to date there has been returned to creditors
$703,853.53. This covers the period of the last nine years. Com
paring this amount with the total assets of our chartered State banks
and trust companies on March 27, 1930, which amounted to
$1,780,698,856.96, you will find that the losses to creditors approxi
mate $6,000,000 in these banks for a period of over 40 years, and
after the present receiverships are closed, a loss of approximately
BRANCH, CHAIN, AND GROUP BANKING
1609
$1,500,000 to $1,700,000 in the receiverships for the last nine years;
this in banks with assets aggregating $1,780,698,856.96. The per
centage of loss on this basis would be approximately one-tenth of
I per cent.
The question which naturally comes to your minds after comparing
this statement with that made by the comptroller, reporting 66 banks
suspensions in Michigan for the last nine years, is concerning the
nature of the other 60 suspensions. As previously stated, six banks
of the 66 were State banks that are now or have been in receivership.
One of these is listed twice in his report because it suspended business
in 1924, was reopened, and finally closed in 1925. Four were State
banks that were temporarily closed and reopened after regoranization
took place under a new management. Three were State banks that
were closed while sales were being effected with other institutions
so that in these instances the deposit liability was cared for. Two
were national banks, and the balance of 50 in number were private
banks which now must, under act 284, P. A. 1925, go into liquidation
or organize under the State or national banking law should the
individual or partners die. Under this act, private banks can no
longer be established, nor can the private banks in existence at the
present time be sold. In the last three years we have taken over
II private banks. During this period, 33 banks have given up their
charters by virtue of consolidations. In some instances these latter
banks did not have sufficient earning power.
The matter of earnings is one item in the reports which we watch
very closely. We consider earning power one of the most important
factors in a bank. In order to have earning power, the bank must
have a clientele and management. The best managed bank in the
world without customers can not be successful. In connection with
the subject of earnings, I might state that we have prepared with the
cooperation of the Federal Reserve Bank of Chicago, a chart showing
the distribution of gross earnings of Michigan banks according to their
relative sizes.
I have those charts with me and if you should like to see them,
I shall be glad to present them to you. They are charts that the
examiners use to fit the banks into the group to which they belong,
using these charts to acquaint the board of directors with the average
experience of institutions of like size.
Mr. H o o p e r . Did you intend to place one of them in the record?
Mr. R e i c h e r t . If you so desire; yes. I though possibly you might
have had those charts furnished you by the Federal reserve bank.
M r. H o o p e r . D o you not think it is proper to have those charts
inserted in the record at this place?
Mr. L u c e . Yes. It is not a diagram chart, is it?
Mr. H o o p e r . We might look at them first, before inserting them.
Mr. L u c e . I do not feel that I want to take the responsibility of
inserting this type of chart into the printed record.
Mr. H o o p e r . Perhaps it would be better for us to examine the
charts first.
Mr. L u c e . However, after consultation with the clerk, I find that
the chart can be inserted.
(The charts referred to are reproduced on following pages.)
1610
BRANCH, CH AIN, AND GROUP BANKING
BRANCH, CHAIN, AND GROUP BANKING
1611
«
io cc ^
P5 «d i-Jci 05 05 05 00 O O OS OS 00
77.85
HN«OOHWNOON>CCDCOO
39. 50
^
18.49
Per cent
7.59
9.53
9.91
11.59
10. 22
11.77
10. 79
11. 45
9. 39
9. 97
11.29
11. 29
10. 94
10.90
Per cent
10.00
13.98
17.83
15.82
16. 33
16.64
15.46
15.32
16.89
17.28
19.98
17. 77
17.97
I
2.40
oi
i
I
N 0 0 O c 0 C C 0 0 H 0 5 C 3 0 i 0 s O i0
8.62
Per cent
85.39
81.01
78.41
79.98
79.36
77.74
79.42
78.70
77.15
77.56
76.36
76.57
77.95
£ oi oi <m’ oi c4 <m’ oi c-i ei c4 <n
T o ta l. .................................................
779. 36
i
12.37
Per cent
54.14
58.24
63.82
65.84
69.11
66.90
65.09
60. 67
63. 22
62.76
63. 89
57.77
52.96
57.18
Per cent
22. 87
15. 98
11.28
11. 85
10. 88
11. 03
10.87
11. 34
10.70
10. 52
14. 40
12. 34
12.69
'°.-§ro r°.-s
£ ,
£
Per cent
Per cent
27. 43
428. 64
Under $150,000_____________
23.04
$150,000 to $250,000_________
602.90
21.14
$250,000 to $350,000.................
824. 65
20.41
$350,000 to $500,000..........................................
798. 34 ..........................
17.57
$500,000 to $750,000.. .............
870.97
861.74
18.67
$750,000 to $1,000,000..
$1,000,000 to $1,250,000_
882.79
18.67
18.92
$1,250,000 to $1,500,000___
1
838.41
18.22
$1,500,000 to $2,000,000......... !
894.33
$2,000,000 to $3,000,000_______ !
18.14
896.39
16.84
$3,000,000 to $5,000,000_________|
686.96
16.87
$5,000,000 to $15,000,000...................
1
795.75
18.88
Over $15,000,000___________________ 758. 90
t,
Invested
capital
divided by
gross de
posits
l l f l l
Per cent
31.01
38.27
40.05
42.06
44. 90
42.23
42.64
41. 62
41.33
40.79
39.43
40.44
37.97
Gross
Interest
Net addi
Net addi
Interest
Salaries
Total
loans and
on de
Net losses
tion to
tion to
on de
Dividends
and wages
expenses divided by
invest
divided by
posits
profits
posits
profits
divided
by
divided
by
ments
total gross divided by
divided by
total
gross
1
divided
by
divided by
gross total gross total gross
divided by
earnings
earnings
gross de
total gross
invested j total
earnings
earnings
invested
earnings
earnings
capital
posits
capital
10.87
Per cent
0.18
8.96
13.69
11.49
12.58
13.27
12. 46
11. 70
13. 89
13. 53
10. 78
12. 19
9.85
Net earn
ings di
vided by
invested
capital
1612
BRANCH, CH AIN , AND GROUP BANKING
£
O
IO
id *did id »dco*d
O
*0
£
BRANCH, CH AIN, AND GROUP BANKING
1613
Mr. R e i c h e r t . In this manner we felt that we could assist our
banks in determining whether or not they conformed with the
average in their group. There are many things which enhance or
impair earning power. The forcing of the discontinuation of exchange
charges by banks and the resultant free use of checks has contributed
quite largely to the expense of handling commercial business. Banks
are making analyses of costs covering these floats which are very
enlightening, and as a result are installing systems to take care of
these costs. These systems, however, are quite complicated and
would not only be costly but difficult to operate in country banks.
There is some argument for the old system of exchange charges and
passing it back to the customer. As I go on in my work, I find that
these old bankers have thought of a lot of things that we apparently
again have to learn from experience.
Whenever some one had authority to restrict the organization of
banks to cases of necessity and had the courage to carry it out, the
result has not been so unsatisfactory. There is, of course, one factor
of which we must not be unmindful, and that is that we have come
through an economic readjustment after the World War, which has,
of course, along with everything else, upset our financial system.
During the war we played an important part in world banking, and
we did become the principal producer of food. We virtually had
the whole world for our customer. Following the cessation of
hostilities, foreign countries again looked to their former sources of
supply, which, of course, greatly interfered with our production
program; and in view of this it is not at all surprising that we have
had some very definite disturbances in attempting to readjust our
selves to existing conditions.
On January 21, 1927, at the time of my appointment, there were
581 State banks. Eleven charters have been issued to acquire
private banks, and 30 consolidations have been effected. On March
27, 1930, w~e had 581 State banks, so it must be quite evident to you
that we have not been very liberal in the granting of charters. We
have insisted that no charter be granted in a community unless a
bank is absolutely necessary. I have thought that it was better to
err upon the side of conservatism, feeling that there would be less
harm in not having a bank in a certain community if it was not
apparent tht sufficient business was available to make it a success,
than in granting a charter.
Since January 21, 1927, a period of a little over three years, we have
had one State bank failure. The total amount involved in this bank
was $723,097.76. This failure occured in M a y , 1929. We have
already paid a dividend of $146,309.60, and permission has just been
granted to pay another dividend of 10 per cent. This failure was
caused by forgeries, both in notes and mortgages on the part of a
father and son who were president and cashier respectively.
The question naturally arises in your minds just where the private
bank suspensions which were included in the comptroller’s report
should be charged. Certainly they can not be included with char
tered state banks or national banks, and a claim made that because
of the failure of these private banks, these systems are inoperative.
As stated before, it was not until 1925 that the act prohibiting the
establishment of private banks was enacted in this State. Private
100136— 30— VOL 2 PT 12-
1614
BRANCH, CH AIN, AND GROUP BANKING
banks are neither under the supervision of the banking department
nor under any other department.
Our State allows branch banking in municipalities. This has
worked out very satisfactorily. The bank can absorb the expense of
the operation of these branches until they begin to pay. These
branches, as operated by our banks, are purely a convenience to their
customers. The bank is limited in the extension of branches to an
investment of 50 per cent of its capital and surplus in banking house.
In 1929, our act was amended to give banks the right to establish
industrial loan departments for the purpose of taking care of the
small borrower. Our law also provides for the segregation of savings
assets to cover savings deposits, and designates the class of securities
that these deposits must be invested in. Our statute also provides
for trust powers to be given banks when they have the combined
capital required for a trust company and a bank in a given locality.
Trust companies may also have banking powers under certain
circumstances.
During the past year, group banking came into prominence in this
State. Upon the affiliation of the first State bank with one of these
groups, an opinion from the attorney general was asked for. He was
asked to rule upon the following questions:
(1) Is there any difference between the purchase or ownership of
one share of stock and the purchase or ownership of two-thirds or all
o f the stock of a bank or trust company by a holding company?
(2) D o these holding companies, by the ownership of two-thirds or
all of the stock, by the absolute power vested under our statute to
such owner, constitute operation of such institution?
(3) Banks and trust companies receive their charters from the
State to have offices in a city or village for the purpose of doing a bank
ing or trust business. Such corporations can not be organized under
the general corporation statute. Does the organization of a holding
company, organized under the general corporation statute, owning
two-thirds or all of the stock of such corporation, do by indirection
that which can not be done under either statute?
There are other points at issue such as the voting of stock, the
stockholders' liability in each of the institutions so owned by the
holding company, directors7 qualifying shares, machinery to be set
up to collect assessments should one be necessary. In fact, the whole
question involved seems to be, Can all the statutory provisions per
taining to the organization and operation of banks and trust companies
as set forth by the legislature in these two statutes, be complied
with by this method of organizing holding companies to own and
control banks and trust companies?
To the above he replied that all the provisions of our statute could
be complied with by the organization of a corporation under one
statute and owning all the stock but directors’ qualifying shares of a
corporation organized under another statute, provided the holding
company did not attempt to operate under the statute governing
the corporation whose stock it holds. I can furnish you with a copy
of his opinion if you so desire.
Mr. S e i b e r l i n g . That is an opinion from your attorney general?
Mr. R e i c h e r t . Yes.
Mr. L u c e . I s it long?
Mr. R e i c h e r t . Seventeen typewritten pages.
BRANCH, CHAIN, AND GROUP BANKING
1615
M r. L u c e . D o you desire it put into the record?
Mr. S e i b e r l i n g . I do not know that I want it to go into the record,
but I should like to see it. Have you printed copies of the opinion?
Mr. R e i c h e r t . N o, sir; only the one copy.
Mr. L u c e . I think this had better be inserted in the record at this
point.
(The opinion of the attorney general is printed in full, as follows:)
O c t o b e r 9, 1929.
Hon. R . E. R e i c h e r t ,
State Commissioner of Banking, Lansing, Mich.
D e a r S i r : Y o u have asked the following questions with reference to the
purchase of stock in State banks;
“ (1) Is there any difference between the purchase or ownership of one share
of stock and the purchase or ownership of two-thirds or all of the stock of a bank
or trust company by a holding company?
“ (2) Do these holding companies, by the ownership of two-thirds or all of the
stock, by the absolute power vested under our statute to such owner, constitute
operation of such institution?
“ (3) Banks and trust companies receive their charters from the state to have
offices in a city or village for the purpose of doing a banking or trust business.
Such corporations can not be organized under the general corporation statute.
Does the organization of a holding company, organized under the general corpora
tion statute, owning two-thirds or all of the stock of such corporation, do by
indirection that which can not be done under either statute?
“ There are other points at issue such as the voting of stock, the stockholders’
liability in each of the institutions so owned by the holding company, directors'
qualifying shares, machinery to be set up to collect assessments should one be
necessary. In fact, the whole question involved seems to be, Can all the statutory
provisions pertaining to the organization and operation of banks and trust com
panies, as set forth by the legislature in these two statutes, be complied with by
this method of organizing holding companies to own and control banks and trust
companies?”
A discussion of the issues involved depends upon the structure as well as the
relation of the holding company and the individual banks. It must be remem
bered at the outset that State banks can be organized and chartered only under
the banking act of Michigan. The holding company has been organized under
the general corporation law of the State and is, of course, not chartered for bank
ing purposes. The plan, is, however, to exchange shares of bank stock for shares
of stock in the holding company so that the shareholders of holding company
stock may indulge in what is termed “ group banking.”
The holding company’s chartered purpose is stated to be as follows:
“ To acquire, own, hold, dispose of and deal in stocks, bonds and other evi
dences of indebtedness and securities including those issued by any corporation,
domestic or foreign, and to possess and exercise in respect thereto all the rights,
powers, and privileges of individual owners thereof including the right to vote the
same and to execute proxies therefor.”
The first consideration therefore is whether the holding company may legally
carry out these purposes with reference particularly to the ownership of bank
stock in banks located in the several cities of the State.
Section 1, part 1, chapter 1 of Aqt 84 (Pub. acts of 1921), provides:
“ Any number of persons * * * may incorporate for the purpose of
carrying on any lawful business for pecuniary gain.”
The general corporation law of Michigan previous to the amendment of 1929
was in part as follows (sec. 8, pt. 1, ch. 3):
“ Subject to the limitations of the laws of this State and the United States
with respect to monopolies and illegal restraints of trade, any corporation or
ganized for pecuniary profit shall have power, in furtherance of the objects of
its existence, to purchase and hold shares of stock of other corporations organized
under the laws ot this or any other State for purposes similar to those of such
corporation.”
Under this previous act the purchase and holding of corporate shares by a
corporation was strictly limited to the purchase, etc., of those shares of another
corporation organized for similar purposes. (See opinions Attorney General
1616
BRANCH, CH AIN, AND GROUP BANKING
Kuhn, 1911, p. 332; Attornev General Fellows, 1916, p. 277; Attorney General
W iley, 1921-22, p. 239.)
However, the 1929 legislature, recognizing the trend of modern economic
change, has seen fit to change the corporation act in this respect (Act 267, Public
Acts 1929) by eliminating the limitation upon the right of a corporation to pur
chase the shares of other corporations, and to give unlimited authority to in
corporate for the purpose of purchasing and owning stock in other corporations..
Section 8, pt. 1, ch. 3, Act 84 (Public Acts 1921), as amended by Act 267
(Public Acts 1929), reads as follows:
“ Subject to the limitations of the laws of this State and of the United States
with respect to monopolies and illegal restraints of trade, any corporation or
ganized for pecuniary profit, or organized on a stock share of nonstock basis not
for pecuniary profit, shall have power in furtherance of the objects of its exist
ence, to purchase and hold shares of stock or memberships of its own or other
corporations organized under the laws of this or any other State (jurisdiction
or sovereignty).”
Since the legislature has seen fit to give this broad power, the following lan
guage is significant:
“ A corporation therefore may take and own stock in another corporation
whenever it is expressly authorized to do so.”
(2 Fletcher on Corporations, 2075.)
I am therefore of the opinion that a corporation, organized under the general
corporation laws of the State, may legally buy and own shares of stock in State
banks if the scope of its charter is broad enough to' include these purposes.
Granting then the right to purchase and own stock in banks by a holding
'company, the second consideration is whether this power conflicts with thebanking law by permitting a corporation organized under the general corporation
laws of the State, and not under the banking laws, to do a banking business.
The banking laws (Act 66, Public Acts of 1929) clearly contemplate the local
izing of the business of banking in Michigan by the conducting of such business
within the city or village where such bank is located, thus negativing branch
banking outside the municipality of a chartered situs.
(See secs-. 1 and 70, Actr
66, Public Acts 1929, Op. A tty. Gen. Dougherty, 1925-26, p. 90.)
But, is the owning, holding, and voting of stock by a holding company the con
ducting of a banking business in law? I think not. There is a distinct legal
difference in the corporate entities of the bank and the holding company. There
is also a legal difference between the ownership of the shares of a bank and themanagement of the bank itself. The shares of stock do not legally constitute
the bank itself, nor the conducting of the business of the bank while the corporate
entity is maintained. The chartered powers of the holding company are limited!
solely to the ownership of shares and the privileges incident thereto. This is theentire scope of the holding company’s business under its charter.. If it transcendsthis power, it acts ultra vires, and if it remains within this power and the bank’ s;
corporate entity is maintained, there can be no legal objection.
This question has been foreclosed it seems to me, by decisions of our courts that
the ownership of stock in a holding company with its attendant incidents, does not
in and of itself imply that the holding company is carrying on the business of thecompany whose stock it may own. In the case of Peterson v. Chicago, Rock
Island & Pacific R y.(205 U. S. 364) at page 391, Mr. Justice D ay said:
“ It is true that the Pacific Co. practically owns the controlling stock in theGulf Co., and that both companies constitute elements of the Rock Island system.
But the holding of the majority interest in the stock does not mean the control
of the active officers and agents of the local company doing business in Texas.
That fact gave the Pacific Co. the power to control the road by the election of the*
directors of the Gulf Co., who could in turn elect officers or remove them from the
places already held; but this power does not make it the company transacting the
local business.
“ This record discloses that the officers and agents of the Gulf Co. control its
management. The fact that the Pacific Co. owns the controlling amounts of the
stock of the Gulf Co. and has thus the power to change the management does not
give it present control of the corporate property and business. Pullman PalaceCar Co. v. Missouri Pacific Co. (115 U. S. 587, 5 97).”
In Cannon Manufacturing Co. v. Cudahy Packing Co. (267 U . S. 333; 69 Law
Ed. 634), M r. Justice Brandeis said:
“ The main question for decision is whether, at the time of the service of process?.
defendant was doing business within the State in such a manner and to such an
extent as to warrant the inference that it was present here. * * *
“ Through ownership of the entire capital stock and otherwise, the defendant
dominates the Alabama corporation, immediately and completely; and exerts
BRANCH, CH AIN , AND GROUP BANKING
1617
its control both commercially and financially in substantially the same way,
and mainly through the same individuals, as it does over those selling branches or
departments of its business not separately incorporated which are established to
market the Cudahy products in other States. The existence of the Alabama
company as a distinct corporate entity is, however, in all respects, observed. Its
books are kept separate. All transactions between the two corporations are
represented by appropriate entries in their respective books in the same w~ay as if
the two were wholly indepdenent corporations. This corporate separation from
the general Cudahy business was doubtless adopted solely to secure to the de
fendant some advantage under the local laws.”
The court then held that the holding company was not in anywise transact
ing the business of the subsidiary in the State of Alabama.
In Monongahela Co. v. Pittsburgh & Birmingham Traction Co. (196 Pa. St.
25), the court said:
“ It does not follow, however, that the city is the owner of the property of the com
pany because it purchased its stock. W e have been referred to no authority, and
we know of none, that asserts the doctrine that the purchaser of all the shares of the
capital stock of a corporation thereby becomes the owner of its property. On the
contrary, the principle is well established that the shares of the capital stock of a
corporation are essentially distinct and different from the corporate property, and
that the owner of all the stock of a corporation does not own the corporate prop
erty or become entitled to manage or control it.”
As long as each company maintains its full, separate corporate identity, and
the individual bank is managed and operated in fact by its own respective
officers and board of directors, and the conducting of the business of such bank
is real and not a sham, then, in my opinion, the holding company would not,
although owning all except the qualifying shares, be conducting a banking business
in a legal sense. It is only when the practices or activities becomes such that
the local banking power, control, and management are usurped by the holding
company, and abdicated by the local bank that the holding company may be
said to be conducting a banking business under the guise of operating as a holding
company. It is only in such a case that the State would be justified in exercising
its right to file an action in quo warranto against either the bank, the holding
company, or both. The mere domination of the bank by the holding company
having a controlling interest in its stock is not a wrong, nor does it affect the
legal existence of the bank, nor the relationship of these two companies. But
what the company and the bank do might affect this relationship. It is the
practice or activity that governs. In short, it is only when a holding company,
organized under the general corporation laws, attempts to do by indirection the
business of banking, which it can not do by direction, that the practice might be
said to become unlawful and subject to restraint.
“ Where a corporation is so organized and controlled and its affairs so conducted
as to make it a mere instrumentality or agent or adjunct of another corporation,
its separate existence as a distinct corporate entity will be ignored and the two
corporations will be regarded in legal contemplation as one unit. In re Muncie
Pulp Co. (139 Fed. 546); Interstate Telegraph Co. v. B. & O. Telegraph Co. (51
Fed. 49); Wormser on Disregard of the Corporation Fiction, 54. When a corpo:ration exists as a device to evade legal obligations, the courts, without regard to
.actual fraud, will disregard the entity theory. Higgins v. Cal. (Pet. & Asp. Co.,
147 Cal. 363; 81 Pac. 1070); Brundred v. Rice (49 Ohio St. 640; 32 N. E. 169, 34
Am . St. Rep. 589); Donovan v. Purtell (216 111. 629; 75 N. E. 334; 1 L. R. A.
(N . S.) 176).” (Peoples v. Mich. Bell Tel. Co., 246 Mich. 198, at p. 204.)
As banking commissioner, it would be your duty to continue to deal directly
with the individual banks, to conduct examinations and exact compliance just
as though no change had occurred in the ownership of the shares of stock in any
bank, but it would also be your duty to scrutinize the practices of each local
bank concerned from time to time, to determine whether in fact its business con
tinues to be done by such bank as a local unit just as the law contemplates.
The next consideration w^ould perhaps be the matter of stockholders’ liability.
Assuming that the holding company owns all of the stock of the bank, the ques
tion then arises, how can the statutory liability be enforced? This liability is
found in section 48, Act 66, Public Acts 1929, as follows:
“ The stockholders of every bank shall be individually liable, equally and rata
bly, and not one for another, to satisfy the obligation of said bank to the amount
o f their stock at the par value thereof, in addition to the said stock; * * *
•Such liability may be enforced in a suit at law or in equity by any such bank in
1618
BEANCH, CH AIN , AND GROUP BANKING
process of liquidation, or by any receiver, or other officer succeeding to the legal
rights of said bank.”
In addition to this section 44, act 66, Public Acts of 1929, provides for the
making of an assessment upon shares of stock to repair deficiencies and other
remedies against the stock.
The charter of the holding company, I am informed, contains the following
clause in this regard:
“ The holders of the stock of this corporation shall be individually and severally
liable (in proportion to the number of shares of its stock held by them respec
tively) for any statutory liability imposed upon this corporation by reason of it&
ownership of shares of the capital stock of any bank or trust company.”
W ith this express provision in the charter, the question narrows itself to whether
the stockholders liability, if expressed in the charter (which is declaratory of the
statute) can be enforced against the stockholders of the holding company.
Fletcher on Corporations (vol. 1, p. 1077), after discussing the effect of such a
provision in by-laws, says:
“ Thus, in the absence of a charter or valid statutory provision therefor or an
express agreement, a by-law can not render a dissenting member or stock
holder liable to assessment by the corporation beyond the amount which he is
required to pay by his contract of membership.”
This would, therefore, imply that if the provision was found in the charter,,
the same would be enforceable.
Fletcher on Corporations (vol. 6, p. 7148), says:
“ It is not within the power of a corporation, unless it is authorized by the
charter or by some other statute, to bind the stockholders to personal liability
for its debts, without their consent, by agreement with its creditors, by resolu
tion or otherwise. A bank, for example, can not make its stockholders liable on
its notes or bills by printing thereon a notice that they are so liable; and, in the
absence of charter or statutory authority therefor, a corporation can not make
a valid by-law imposing upon stockholders personal liability for its debts, unless
they consent. ”
At page 7149 it is said:
“ Stockholders, of course, may render themselves personally liable for debts
of the corporation by express agreement or consent, provided their promise has
a consideration to support it, and is in writing, when this is necessary under the
statute of frauds, but their liability in such case is not as stockholders, but as
individuals.”
The general rule will be found in 3 R. C. L., page 410, where it is said:
“ Though the liability is imposed by statute it is regarded as contractual in
its nature, rather than penal. The undertaking is as if one subscribing for stock
expressly agreed to take and hold it under a previously prepared contract in
writing that all who should become holders of the stock should pay the amount
of their subscriptions to the corporation when needed, and should pay the addi
tional sum to create a fund for creditors if the corporation should become in
solvent,
* * *.”
In Duncan v. Freeman (110 S. E. (Ga.) p. 5), the court says:
“ The liability of the stockholder of a national bank, though statutory, rests;
at last on the stockholder’s subscription or on his receipt and acceptance of his.
stock.”
A general discussion of the question will be found in Western National Bank
v. Lawrence (117 Mich. 669), wherein the bank brought an action in assumpsit
against defendant Lawrence to enforce his individual liability as a stockholder
in a Kansas corporation. The court, at page 672, said:
“ While the liability is statutory, it is one which arises on the contract of
subscription to the capital stock,
* * *.
“ If the company’s charter provides that the shareholders shall be subject to
a special individual liability to creditors, persons becoming shareholders agree to
become liable, both in a corporate capacity and individually, to all persons who
shall give credit to the corporation.”
In this case, the defendant was a stockholder in an ordinary corporation, not a
banking corporation, and while such liability was sanctioned by the constitution
of Kansas, the domicil of the corporation, the court held that the liability is one
of contract.
It is, therefore, my opinion that shareholders may be bound to an added liability
when the same is properly expressed in the charter of the company, and this
liability may be enforced as provided by law.
branch
,
c h a in
,
and
group
b a n k in g
1619
Under section 44, the sale of stock provides a definite means of collection if the
stock has any value, but in case of insolvency such remedy is inadequate, because
the stock is without value.
The question arises as to how this liability can be enforced when the stock is
owned by a holding company. If the stock has sufficient value so that its sale
will produce enough to satisfy the assessment, it makes no difference whether the
stock is owned by an individual or a holding company. If the stock has no value
(as in the case of insolvency) recourse must be had to the personal assets of the
individual, or in case of holding company ownership, to the assets of that com
pany.
If the company is uncollectible, the court would probably look through the
company to its stockholders and enforce the liability against them. Particularly
would this be true where the stockholders assumed liability as here expressed in
the charters of the holding company.
In 3 R. C. L., 400, it is said:
“ In some instances the courts have gone beyond the registered stockholders.
This is upon the principle that the parties who by reason of being the actual
owners of the stock are entitled to the profits and benefits of the business carried
on by the bank, must respond to the burdens and debts up to the statutory limit.
In the enforcement of this liability against stockholders it is well established that
the actual owners of the stock can not shield themselves against such liability
by putting the title of the stock in the name of some irresponsible third party.
Creditors have the right to call upon the actual stockholders for contribu
tion; and this right can not be defeated by a merely colorable transfer of the
legal title to some third party, who in fact holds the same for the benefit of
the real owner of the stock. * * * The object of the statute is not to be
defeated by the mere forms of transactions between shareholders and their
creditors. * *
In Chicago, Milwaukee & St. Paul Railway Co. v. Minneapolis Association
(247 U. S. 490), the court said:
“ In such a case the courts will not permit themselves to be blinded or deceived
by mere forms of law, but regardless of fictions, will deal with the substance of
the transaction involved as if the corporate agency did not exist and as the
justice of the case may require.”
I therefore answer your first three questions in the negative and your last
question in the afiirmative and reach the following conclusions:
First. A holding company may organize under the general corporation laws
of Michigan and may, if its charter is broad enough, purchase, own, and hold
shares of stock in State banks.
Second. The ownership and exercise of incidents of ownership of stock in a
holding company owning all but qualifying shares in several banks is not legally
doing a banking business in the State, in violation of law.
Third. It is only when the practices of a holding company become such as to
usurp the functions of the bank in fact and in reality, so that a banking business
is being done by the holding company, that intervention can be sustained.
Fourth. A holding company can, by expression in its charter, meet the double
indemnity of statutory liability under the banking act.
Fifth. It is the banking department’ s duty to continue to treat individual
banks concerned in stock purchased by a holding company in all respects as
individual units for examination and all other purposes; and also to scrutinize
the operation of such banks in their factual relationship with the holding
company.
Very respectfully yours,
W i l b e r M . B r u c k e r , Attorney General.
Mr. R e i c h e r t . The proposition which we felt confronted us from
a supervisory standpoint was that we could see in this program the
combination of investment companies, trust companies, joint-stock
land banks, national banks, and State banks all under one head and
virtually the same directorate, but under different supervisory author
ities. In other words we felt that by the organization of these
groups under present law, it would be possible to defeat the principal
restrictive provisions in banking and trust laws, both National and
State, should these holding companies be organized by individuals
who were not sufficiently conservative. In Michigan we have been.
1620
BRANCH, CHAIN, AND GROUP BANKING
Tery fortunate that the two groups which have organized holding com
panies have voluntarify thrown around their organizations, through
their by-laws and articles of association, all possible protective pro
visions that have been suggested by the comptoller’s office or our
office, and have provided further that these provisions are subject to
change only with the consent of the supervising authorities. They
have also made available to our examiners the records of all of their
affiliated corporations. If group banking could be confined to groups
such as these, no anxiety should be felt either by the public or the
supervising authorities.
One of these groups has confined itself in its ownership of bank
stock to banks in the metropolitan area where its main office is located.
The’other, in addition to that, has gone out into the industrial centers
of the State. From the standpoint of our securities commission, we
have now made a ruling that no more stock of holding companies will
be approved for sale in Michigan, or for exchange for Michigan bank
or trust company stocks, unless it has similar provisions as are incor
porated in the articles of association and by-laws of these corporations.
Whatever argument may be advanced against our unit banking
system, one thing must be admitted— that it has developed our
progressive United States. Through it, initiative has been permitted
to develop local communities in which the banker and other individuals
had a community interest. I doubt whether this could have been
accomplished under any other system. Whether we now have
arrived at a time when this sytem should be abandoned due to bank
failures in certain sections, and some other system adopted— be it
group or branch banking— is a question for careful consideration.
There is also some force to the argument that banking units must be
established to be able to take care of credit requirements of large
business units.
Difficulties will be experienced in enacting laws to provide for
protective and restrictive provisions governing groups, the units of
which are operated under National and State laws with different
supervisory authorities. This difficulty would not arise in a branch
banking system.
When considering the high mortality of banks which has principally
occurred in territories where the issuing of charters was very freely
done, you should not lose sight of the fact that there is some argument
for the soundness and serviceability of a system that has had but one
bank failure during the last 3 years and six during the last 15
years, which is the record of our State for' State-chartered banks.
The record for national-chartered banks in this State is equally
satisfactory. If, however, it is determined to establish a branch
banking system, due consideration should be given to the unit banks
already in existence in the establishment of branches. Any changes
should have as their prime consideration the safety of the depositor.
Provision must be made to avoid ruinous competition with existing
unit banks,as such a procedure tends to impair the position of the
depositor.
If State lines are disregarded as suggested in the comptroller’s
plan of establishing branch banking for trade areas, I would feel that
the matter of taxation as it pertains to the States would be quite a
problem. If branch banking is to be extended, limited to States, or
established trade areas, the question of capital structure should have
BRANCH, CH AIN, AND GROUP BANKING
1621
your consideration. As branches are extended, capital should be
increased, otherwise you would be liable to approach mutual bank
ing rather than banking supported by stock capitalization. I am
sure that these matters have all had your consider atiom
The Federal reserve system should also be given consideration be
cause I feel that the enactment of that law was the greatest piece
of progressive financial legislation that Congress has ever passed.
In this connection I would, however, like to make one observation,
and that is that with changes that have taken place in financing,
less and less paper becomes eligible for borrowing and rediscount,
and in order this system to be of real service to banks, changes should
be made looking toward the liberalization of loaning restrictions.
Especially is this true as it pertains to State member banks.
Governor Young, in his testimony, referred to the earnings of the
Federal reserve banks. In this testimony he pointed out that
$147,109,573 had been paid over to the Government in franchise
taxes by these institutions, and $276,934,000 had been added to
surplus, and that their capital at the present time is $170,975,500.
These earnings have accrued largely as a result of the free balances
of the member banks, and I am entirely in accord with his plan for
the distribution of a portion of these earnings based upon deposits,
but there should be no definite rate set up in the form of interest on
deposits. In other words, I think there should be a distribution of
earnings at the end of the period to member banks either on capital
or deposits, but preferably on deposits, in lieu of interest.
There are other phases of this subject that I feel have been ade
quately covered by previous testimony, and in order to save time, I
will refrain from making any further statements other than to say
that we in our State are watching with interest the developments in
this exhaustive study that your committee is making of this subject.
Your recommendations to Congress will be given consideration by
every legislature which will convene next year, because your recom
mendations will be based upon a more thorough study than andividual
States could make and upon information which would not be avail
able to them except through your committee. On this information
and your recommendations the various supervising authorities will
largely base their recommendations to the legislative bodies in their
States. I want to assure you of our interest in the work that your
committee is doing and offer you the facilities of our office, if we can
be of service to you.
Mr. L u c e . Mr. Reichert, in giving the number of your State
banks and the number of national banks, you do not go to the point of
telling us what the tendency is in this particular. It would appear
that your national-bank deposits are a little more than one-third of
those companies operating under your State law. Is the tendency,
in your State, for capital to turn to the State form of organization
rather than the national form?
Mr. R e i c h e r t . I do n o t think that is the case to an unusual
degree. In Detroit we have had some consolidations where State
banks have been taken over by national banks and then again some
national banks which have been taken over by State banks, and that
is true throughout the State. I would not say that the increase in
assets in the two systems have been showing any tendency particu
larly one way or the other. I should say that the ratio of assets in
the two systems have been going along as they have been for some time.
1622
BRANCH, CH AIN, AND GROUP BANKING
Mr. H o o p e r . It seems that the locality governs considerably;
for instance, in the locality in which I live, there were 3 national
banks and 1 State bank and they have become 3 national banks.
On the other hand, in other communities, the tendency seems to
be the other way, so it about strikes a balance.
Mr. R e i c h e r t . Yes, sir; there are some cities where there are only
State banks and others where there are only national banks repre
sented.
Mr. L u c e . We are watching these two systems competing with
each other and interested in knowing which system is forging ahead
and which is dropping behind, if that thing is happening.
Mr. R e i c h e r t . A s far as our State is concerned there has been no
competition with the comptroller’s office in the granting of charters.
Wherever a group in a city has applied for a State charter, we have
only granted it where the situation seemed to warrant it, and in case
of national charters, the comptroller’s office seems to have recipro
cated in that respect very well.
Mr. L u c e . H o w many national banks are there in Detroit?
Mr. R e i c h e r t . T w o n a tio n a l b a n k s.
Mr. L u c e . T w o national banks in Detroit out o f how many banks?
Mr. R e i c h e r t . There are eight State banks and two national
banks in Detroit. I should like to check that figure a little later, but
I am sure that is correct.
Mr. L u c e . Y o u p o in te d o u t t h a t th e c o m p tro lle r, in h is figu res,
h a d referred to su sp e n sio n s an d n o t failu re s.
I h ave n o t cau gh t th a t
d istin c tio n an d h a v e b e e n a c c u sto m e d to sp e a k o f th e se to ta ls as fa il
u re s.
Y o u referred , la te r o n , to su sp e n sion s b u t d id n o t b rin g o u t,
w ith d efin ite n e ss, w h a t y o u h a d in m in d in d ra w in g th e lin e b e tw e e n
su sp e n sio n s an d failu res.
Mr. R e i c h e r t . In his statement he refers to suspensions and that
includes banks that were temporarily closed and then reopened and
also banks sold to other institutions and their deposit liabilities cared
for, and one bank is in his figures twice. What actually happened,
as far as State banks’ charters are concerned, we have had six failures
and there are 50 private banks that have either gone into voluntary
liquidation or are actually in receivership for the 9-year period.
Mr. L u c e . Have you any idea that should modify his statement as
to the 5,641 bank suspensions in the last nine years in the country;
would the point that you bring out make any serious difference in
the alarming feature of the situation?
Mr. R e i c h e r t . I think it possibly would, because I presume that
the experience in other States has been similar to ours; that is, in
many cases, banks have suspended and they have reopened either
by sale to other institutions or have opened up under new manage
ment. I do not know how far-reaching it would be, but I know it
makes a very definite difference so far as Michigan is concerned.
Mr. L u c e . In these cases that you referred to, of reorganization,
and so forth, has there been material loss, nevertheless, to depositors?
Mr. R e i c h e r t . Not to depositors, in any instance. There was no
loss to depositors in those reorganizations or where they were taken
over by another bank.
Mr. L u c e . Y o u referred to your act of 1925, preventing the organiz
ation of further private banks. Does that extend to prohibiting indi
viduals from engaging in the banking business?
BRANCH, CH AIN, AND GROUP BANKING
Mr.
yes.
R e ic h e r t.
1623
Unless they have a State or national charter:
M r. L u c e . D o you know of other States that have adopted that
type of law?
Mr. R e i c h e r t . I do not. The act was passed to prevent the
continuation of private banking and also to provide for orderly
liquidation. We have a number of private banks, however, that still
exist in the State.
Mr. L u c e . The matter has become of considerable interest to
the committee in its efforts to straighten out the tangle of taxation
produced by private and other banks and incorporated banks. Is
it your judgment that that law has been a useful one?
Mr. R e i c h e r t . Yes; I think it has been. It has prevented anyone
else going into the private banking business and has had a tendency
toward the elimination of private banks.
Mr. L u c e . Does it go to the extent of preventing the individual
from loaning money while engaged in business as a broker?
Mr. R e i c h e r t . Oh, no; not as a broker. Would you like to have
me read the act? It is very short.
Mr. L u c e . I think it is well worth while to have it in the record.
Mr. R e i c h e r t (reading):
The people of Michigan enact:
S e c t i o n 1. Private banks— when unlawful to organize.— On and after the
effective date of this act, it shall be unlawful for any individual, person, or
unincorporated association of individual persons, to engage in the business of
banking as defined in Act No. 205 of the Public Acts of 1887 as amended and other
laws of this State relating to banks and banking: Provided, That this act shall
not apply to any individual person or unincorporated association of individual
persons engaged in the business of banking at the time of the passage of this
act.
Then there is the penalty for the violation.
Mr. L u c e . Would that prevent partnerships similar to Morgan
& Co., Kuhn, Loeb & Co., and other big banking houses of New
Y ork City from engaging in business in your State?
Mr. R e i c h e r t . I should think so, if they took deposits or engaged
in the banking business such as is provided under the general banking
law of the State of Michigan. They can only engage in the banking
business under that law or the national act in the State at the present
time.
Mr. L u c e . Y o u have told us of provisions for the segregation of
savings assets to cover savings deposits. That is, of course, not the
case with national banks?
M r. R e i c h e r t . N o .
Mr. L u c e . Does any uneasiness result from the fact that your
State banks are compelled to give protection to savings deposits while
the national banks are not?
Mr. R e i c h e r t . That would be rather difficult for me to answer. I
have never heard the subject brought up, however.
May I go back to your former question in reference to Kuhn,
Loeb & Co. and Morgan & Co.?
Mr. L u c e . Yes.
Mr. R e i c h e r t . If they took deposits, I think it would prevent
them from doing business in Michigan. It would not prevent their
engaging in the sale of securities. Was that the point you wanted to
bring out?
1624
BRANCH, CH AIN , AND GROUP BANKING
^ Mr. L u c e . Yes. This matter of savings deposits interests me par
ticularly, because in my own State of Massachusetts, we have the
same requirements in the matter of trust companies and we find our
national banks, within a few rods of a trust company, enabled to
mix all their money at the close of the day, without any particular
protection to the savings deposits.
In your national bank failures in Michigan, have depositors suffered
notably by the failure of segregation?
Mr. R e i c h e r t . I would not be qualified to answer that because I
do not know what the outcome of national bank failures has been.
There have been two over the period of nine years, that the comp
troller speaks of. I think that probably one reason that State banks
have had large deposits, especially savings deposits, than national
banks is because they have had branches in the municipalities and
the national banks did not have them. Consequently, State bankshave more savings deposits in proportion to national banks.
M r. L u ce . W hat is the customary rate of interest now being paid
on savings deposits by your State banks?
Mr. R e i c h e r t . Three and 4 per cent— 3 in the larger centers, and
in some sections they are paying 4 per cent.
Mr. H o o p e r . In my neighborhood they pay 4 per cent— largely in
the south central portion.
Mr. L u c e . Y o u tell us there are two groups that have organized
holding companies in your State?
Mr. R e i c h e r t . Yes, sir.
Mr. L u c e . Has that b e e n d on e recently?
Mr. R e i c h e r t . I would say that has been done within the last ten*
months.
Mr. L u c e . Are they apparently at work to add to their g r o u p s ?
Mr. R e i c h e r t . No; I do not think so. I think they have purchased
all the banks that they desired and I do not know of their engaging
or negotiating for any banks at the present time.
Mr. L u c e . D o you know of any other movement on foot to create
other groups?
Mr. R e i c h e r t . Not at the present time.
Mr. L u c e . Y o u have told us of a ruling that you will approve n o
more stock issued by holding companies for exchange of Michigan
bank or trust company stocks, unless there are provisions incorporated
in the articles of incorporation or the by-laws of these associations
similar to those you apply to your State banks. It is not clear to me
whether that results in what I might call a quadruple liability. Tell
us about that.
Mr. R e i c h e r t . In the organization of these holding companies,
after the Attorney General’s ruling, the holding companies agreed—
they possibly agreed to this prior to the ruling— agreed to incorporate
the provisions that were in the banking law, and carry that on the
certificate of stock in the holding company, which carried the liability
through to the holder of a certificate. They also provided for various
other requirements that are in the statute. Those were Michigan
corporations. When foreign corporations came in to ask for their
stock to be approved, as holding companies, we felt that it would be
unfair to hold our Michigan corporations to certain regulations and
conditions, and approve the stock of a foreign corporation without
the same provisions, so that after this opinion of the Attorney General,,
BRANCH, CH AIN , AND GROUP BANKING
1625
we passed a ruling of the securities commission that we would not
approve any more stock of foreign holding companies unless they had
similar provisions as the holding companies organized in Michigan.
Mr. L u c e . What I am driving at is to find whether the mathe
matical result is that in the case of, say, the Farmers Trust Co., the
stockholders of the Farmers Trust Co., have, in addition to the double
liabilitj^, further accompanied by a double liability on the part of the
stockholders in the holding company, making twice the score— the
mathematics of it are all I am after.
Mr. R e i c h e r t . The holding company owns the stock of the bank—
all except the qualifying shares.
Mr. L u c e . Yes.
Mr. R e i c h e r t . The individual owns the stock of the holding com
pany and, in accepting that certificate of the holding company, he
assumes the stock liability that the holding company has in these
respective banks— his proportionate share of the stock liability.
That is according to the certificate.
Mr. L u c e . And there is no increase in his security?
Mr. R e i c h e r t . N o.
Mr. L u c e . Y o u referred to the matter of taxation as perhaps
presenting difficulties. Would there be any difference in that matter
from the situation brought about by foreign corporations doing busi
ness in your State, as well as in other States, where the taxation is
measured by the amount of capital employed in the State?
Mr. R e i c h e r t . Well, you have got to consider the deposit liability
and its ratio to capital. It could possibly be worked out, but I think
there would be more of a difficulty in working it out as a banking
matter than it would be in other corporations.
Mr. L u c e . It is only the taxation feature as to which I inquire.
Mr. R e i c h e r t . Yes. The question of taxation of bank stocks is
up before the special committee of our State at the present time— the
special committee on all taxation.
Mr. L u c e . Y o u point out the fact that less and less paper is becom
ing eligible for borrowing and rediscounting and think that changes
should be made looking toward the liberalization of the loaning restric
tions. Will you specify just what you have in mind in that regard?
Mr. R e i c h e r t . The changes in refinancing of corporations which
are going into financing themselves through stock issues. There is
less and less paper now coming into the banks from that source, but
banks -have a large number of municipal bonds. Not having this
rediscountable paper, they might have several million dollars of
municipals and, being a member of the Federal Reserve System, they
could not go to the Federal Reserve and borrow on that, but would
have to go to their other correspondents for that service, in case of
definite withdrawals.
Mr. S e i b e r l i n g . Y o u think that the law should be amended so as
to permit them to borrow on municipal bonds?
Mr. R e i c h e r t . Municipal bonds of a certain type, based on popula
tion of communities and ratio of indebtedness to assessment.
Mr. S e i b e r l i n g . And the total value of the tax duplicate?
Mr. R e i c h e r t . I do not know what you mean.
Mr. S e i b e r l i n g . The total value of the taxable property in the
district?
1626
BRANCH, CH AIN, AND GROUP BANKING
Mr. R e i c h e r t . Yes, sir. I would not want to advocate that all
municipal bonds should become eligible as collateral.
Mr. H o o p e r . I should like to ask one or two questions of Mr.
Reichert. In Michigan, Mr. Reichert, the limit of branch banking
to State banks is the boundary of the municipality, is it not?
Mr. R e i c h e r t . Yes.
Mr. H o o p e r . And how is that working out around through the
State outside of the large cities? Is branch banking being used in
the small towns and cities, say, of 25,000 to 100,000, considerably?
Mr. R e i c h e r t . Possibly these tables [exhibiting] will give you the
best idea.
Mr. S e i b e r l i n g . Have you placed the totals in the record?
Mr. R e i c h e r t . N o ; I did not know whether you would call for
them. There are 52 State banks having a total of 354 branch banks.
Eight banks in Detroit have 259 of these branches. Two banks in
Grand Rapids have 27 of these branches, and that leaves a total of
68 branches for the balance of the State.
Mr. H o o p e r . Has there been any consideration given in Michigan
to the extension of branch banking beyond the limits of the munici
pality at all?
M r. R e i c h e r t . N o .
Mr. H o o p e r . Then branch banking, as it exists in our State, corre
sponds, in a general way, with national branch banking as defined
by the McFadden bill?
Mr. R e i c h e r t . Yes, sir.
Mr. H o o p e r . N o w , Mr. Reichert, we have been hearing here some
men from all over the United States on this question, including the
Comptroller of the Currency and some very distinguished men.
Many of them at least attributed the decline of the banking business
in small towns throughout the country, for instance, to the lack o f
diversification of business in the small country towns. What has
been your observation about that in Michigan among the small banks?
Has that played much part in the banking business there? Has it
tended to injure the banking business of the small towns?
Mr. R e i c h e r t . The banks in the small towns are not increasing
their deposits. I think that is generally conceded, that the automo
bile, of course, has made some difference in regard to where a man can
do his banking conveniently.
We still have a great many banks in small towns that are being
operated at a profit and are soundly operated. The difficulty, o f
course, in operating a bank in a small town is to secure management
at the price that you can afford to pay.
Mr. H o o p e r . And then retain them after you secure them?
Mr. R e i c h e r t . Yes; retain them after you secure them.
Mr. H o o p e r . I suppose the same situation prevails in Michigan as
in other States— that there is a lure from the big city banks for the
small bank man?
Mr. R e i c h e r t . Yes, sir.
Mr. H o o p e r . Generally the small bank in Michigan, in the small
villages throughout the State, has the same sort of competition as it
would have in Georgia or Iowa or other states?
Mr. R e i c h e r t . I would say so.
Mr. H o o p e r . But you have shown us to-day that the small bank
in Michigan has been a fairly successful bank and there have been
BRANCH, CH AIN, AND GROUP BANKING
1627
very few failures; that while similar conditions have prevailed there,
it has not militated against the small bank in Michigan. That is
what you have been showing?
Mr. R e i c h e r t . Yes, sir. This chart [exhibiting] will answer your
question as quickly as anything. It will show the net profits in banks
under $150,000 or from $150,000 to $250,000.
Mr. H o o p e r . I think that is all.
Mr. S e i b e r l i n g . Y o u referred, awhile ago, to the Comptroller of
the Currency confusing the terms “ failures” and “ suspensions.”
I notice on page 12 of volume 1, part 1 of the hearings, the comp
troller states he is using the term “ failure” as synonymous with the
term “ suspension,” although these two terms are not always so used.
He further states, “ The statistics of the Federal Reserve Board for
bank failures are based upon suspensions,” but that the comptroller
has not counted such a bank as a failure that suspends and reopens
and continues to do business. I wanted to clear that up.
Mr. R e i c h e r t . Yes, sir. The reason I mentioned this is also to
clear it up because I found in later testimony that you were referring
to that being the number of bank failures in Michigan, especially in
the testimony that Mr. Lord gave here.
Mr. S e i b e r l i n g . When you incorporate or permit a chain banking
company, incorporated in another State, to do business in your State,
how does it qualify?
Mr. R e i c h e r t . It has to qualify before the securities commission
which only pertains to the sale of stock.
Mr. S e i b e r l i n g . What does it state its business is when it qualifies?
Mr. R e i c h e r t . I would think that would probably depend upon
the individual application. I have no recollection of any specific
application, but I would think that their application would be a
request to sell stock in Michigan, collaterally supported by bank
stocks as assets in our State or other States.
Mr. S e i b e r l i n g . Y o u do compel these chain companies to qualify
in order to do business?
Mr. R e i c h e r t . All stock in Michigan must be qualified before the
securities commission, with the exception of bank stock chartered
under Michigan law or the national bank act.
Mr. S e i b e r l i n g . The company has to qualify too?
Mr. R e i c h e r t . Yes, sir.
Mr. S e i b e r l i n g . When one of these foreign companies qualifies
to do business, they must state that they are going to acquire bank
stocks; they can not state they are going into the banking business?
M r. R e i c h e r t . N o , sir.
M r. S e i b e r l i n g . D o you think there is any difference between a
chain company owning the capital stock of a great many banks and
managing them and a company doing a banking business?
Mr. R e i c h e r t . That was the purpose of my inquiry of the Attorney
General and he said under our law it was possible for them to own as
long as they did not operate.
Mr. S e i b e r l i n g . I am asking you what you think about it.
Mr. R e i c h e r t . Of course I concur with our Attorney General.
Mr. S e i b e r l i n g . As a matter of law that might be true under your
statutes, but do you not think-----Mr. R e i c h e r t . I think, as an economic matter-----Mr. S e i b e r l i n g . They are in the banking business, are they not?
1628
BRANCH, CHAIN, AND GROUP BANKING
Mr. R e i c h e r t . I would not want to accuse them of it, but-----Mr. S e i b e r l i n g . N o w , you have six State banks, I believe, in
Detroit and two national banks.
Mr. R e i c h e r t . No; we have eight State banks.
Mr. S e i b e r l i n g . And two national banks?
Mr. R e i c h e r t . Yes, sir.
Mr. S e i b e r l i n g . Y o u have other large banks in Michigan— Flint,
Grand Rapids, and I guess over where you live, possibly. If we had
a law permitting branch banking in trade areas and these banks found
it convenient to take advantage of the law, you can not see any
reason why your entire State should not be furnished with banking
facilities and why it would not be of great assistance to your cities to
have a concentration of credit and capital in your large cities, instead
of having that concentration going somewhere else through chain or
group banks?
M r. R e i c h e r t . D o you refer now to the benefit to the small com
munity?
Mr. S e i b e r l i n g . To your whole trade area, the small and large
community as well?
Mr. R e i c h e r t . I would think there would be a tendency, of course,
under a branch banking system, to concentrate capital in the locality
where the main office is located. That w~ould be quite natural.
Mr. S e i b e r l i n g . That would be in Grand Rapids or Flint or
Detroit and you would still have plenty of competition and if your
industries wanted to finance temselves they could be financed in the
State of Michigan, could they not?
Mr. R e i c h e r t . Yes, sir.
M r. S e i b e r l i n g . D o you not think it would be a great advantage
to the country to have trade areas of that kind where people could
finance close at home where they knew the people and there was a
personal interest in the community rather than go to the large
metropolitan center far away?
Mr. R e i c h e r t . I think that would be preferable, and I think if
you are going to establish branch banking, it would be preferable to
establish it on State lines.
Mr. S e i b e r l i n g . Branch banking would be more economical?
Mr. R e i c h e r t . I will grant you that.
Mr. S e i b e r l i n g . And even under your group system, you would
have to have some plan of branch banking because, as a number of
bankers have stated here, group or chain banking can not take care
of these small centers that need banking facilities.
Mr. R e i c h e r t . I do not think that groups would be interested in
the small centers.
Mr. S e i b e r l i n g . Or chain banks either?
Mr. R e i c h e r t . N o, sir.
Mr. S e i b e r l i n g . Under those two systems, you do not take care
of the small communities with those facilities, do you?
M r. R e i c h e r t . N o .
Mr. S e i b e r l i n g . Of course these eight State banks that you have
in Detroit have branches all over the city of Detroit?
Mr. R e i c h e r t . Yes, sir; all over the city of Detroit.
Mr. S e i b e r l i n g . But they do not extend outside of the county?
Mr. R e i c h e r t . Not outside of the city— outside of the municipality.
BRANCH, CH AIN, AND GROUP BANKING
1629
Mr. S e i b e r l i n g . D o you not think it would be of great advantage
if a general banking law could be passed by Congress which would
permit more banks to come into the national banking system under
the branch-bank plan?
Mr. R e i c h e r t . A s I read the law, there is very little difference
between our State law and your national law at the present time,
and to take care of most communities I think, as the law is now,
you can do it as well under one system as under the other. Of
course, if you are going to disregard State lines in the matter of branch
banking then it would necessarily have to come through a national
banking system.
Mr. S e i b e r l i n g . D o you not feel it is unfortunate to have a
Government such as ours lose its national banks and get entirely
out of contact with the banking business of the country?
Mr. R e i c h e r t . Yes; that would be true. I do not feel that that
is happening in our State, however.
Mr. S e i b e r l i n g . Y o u have only two national banks in Detroit.
Mr. R e i c h e r t . Well, of course, one of those came out of a con
solidation of two national banks.
Mr. S e i b e r l i n g . Y o u have large cities in Michigan where you have
no national banks, have you not?
Mr. R e i c h e r t . Large cities?
Mr. S e i b e r l i n g . Yes.
Mr. R e i c h e r t . N o ; I do not think we would class those as large
cities that have no national banks. I would think that the largest
city that I recall now that has no national bank is Owosso.
Mr. H o o p e r . That has no more than 20,000 population.
M r. R e i c h e r t . Probably not more than ten or twelve thousand.
Air. H o o p e r . Twelve thousand, perhaps?
Mr. R e i c h e r t . Yes, sir.
Mr. S e i b e r l i n g . What percentage of your failures has been due to
mismanagement? Have you any idea?
Mr. R e i c h e r t . The only receivership that we have had that has
been due to mismanagement has been due to forgery.
Mr. S e i b e r l i n g . And you have had no difficulties in Michigan in
the depreciation of lands which were security for loans with failures
following, due to that?
Mr. R e i c h e r t . We have had some depreciation, but not failures.
We have had depreciation of the lands, but not failures of banks.
Mr. S e i b e r l i n g . The depreciation has not been so rapid the banks
could not protect themselves?
M r. R e i c h e r t . N o , sir.
Mr. S e i b e r l i n g . That has not been true in the agricultural
districts of the Middle West and Northwest?
Mr. R e i c h e r t . I could not say as to that, but I understand that
your testimony here bears that out.
Mr. W i n g o . Mr. Reichert you come to us with the reputation of
being one of the most capable State bank commissioners we have.
For that reason you were selected as one of three to come down here.
I should like to get your judgment on some things. You say you
favor branch banking?
Mr. R e i c h e r t . I should like to keep an open mind on that until
you have concluded your study, because I know I will be called upon
100136— 30— v o l 2
pt
12--------5
1630
BRANCH, C H AIN , AND GROUP BANKING
to make recommendations to the State legislature, no doubt, and
should I change my mind between now and then, due to your investi
gation, Iwould not like to be definitely committed to one program or
the other. I think there is some argument for and against branch
banking. So far as our State is concerned, the same necessity at
present does not exist as in some other States you refer to.
Our unit banking system has served our communities well. It
has been free from failures; that is, I am speaking of the corporate
banks, both national and State, and with few exceptions, the banks
have had an earning power sufficient to take care of losses and
wherever they have had them we have advocated consolidations or
reorganizations, and we do not feel that banking institutions in
Michigan have any unusual problem at this time.
Mr. W i n g o . Y o u feel, then, that your present unit banking
system has proved successful, but naturally you are open to such
convictions as may come to you from the further study that you
think the present investigations will afford?
Mr. R e i c h e r t . Correct.
Mr. W i n g o . I suspect that you are not alone in the view that you
are willing to consider whatever may develop in the way of changed
conditions, and you naturally do not want, as a public official, to be
embarrassed by some statement that may be predicated upon your
past conclusions. In other words, after taking into consideration
some changes that might be brought to your attention, you might
feel that you wanted to reform your judgment?
Mr. R e i c h e r t . That is correct.
Mr. W i n g o . I have no desire to embarrass you. I appreciate that
that is a very proper position for a public official who is to be called
on for recommendations to take.
Suppose that it should be decided to amend the national bank act
so as to permit a greater extension of branch banking privileges for
national banks. Based on your experience and on your observation,
would you advise that that extension be limited either to State lines
or to trade areas, or nation-wide? What is your judgment on that
or have you matured your judgment?
Mr. R e i c h e r t . I have not matured my judgment on that. I
would, however, feel that to confine it to State lines would be much
eas er to operate from a legislative standpoint when you come in
competition with the State banks. Of course I appreciate that
business does not recognize State lines.
Mr. W i n g o . Of course, if you are thinking about it from the
standpoint of your State banks, it would be easier, possibly, from a
regulatory standpoint to confine the branches of a State bank to
your State lines, but possibly you have overlooked the fact that you
could still thoroughly inspect any branch bank that your State bank
might establish, say in one of your adjoining States or anywhere
else; }^ou could still have supervisory control over the parent corpora
tion, could you not?
Mr. R e i c h e r t . Over th e parent corporation?
Mr. W i n g o . Yes.
Mr. R e i c h e r t . I would not be qualified to pass upon the point
whether we could go into another State and examine a branch there.
Mr. W i n g o . Y o u are not a lawyer?
Mr. R e i c h e r t . N o , I a m n o t.
BRANCH, CHAIN, AND GROUP BANKING
1631
Mr. W i n g o . Then I will avoid some of those questions that might
be purely legal.
But we will take the trade and economic situation. There are
other illustrations that can be used, but I will use one that is in my
district. Texarkana, Ark., is in my district. Texarkana, Tex., and
Texarkana, Ark., are in reality but one city, the dividing line being
nothing but an imaginary line between the two States running down
the center of one street. Banks on both sides of the line have busi
ness connections. For illustration, some gentlemen may live on
the Texas side, may be officers in a Texas bank, and yet have business
on the Arkansas side, or just the opposite. So that in a case of that
kind there would be a practical necessity, assuming now that branch
banking is right and that it is wise and good for the public, that
would somewhat handicap providing for any geographical limitation
or branches, would there not?
Do you see what I have in mind?
Mr. R e i c h e r t . I see w h a t y o u h a v e in m in d .
Mr. W i n g o . But that is a matter, I presume, that you think you
had better leave to the lawyers when they come to figuring on the
legal requirements and the legal right of a State bank commissioner
to go outside of his jurisdiction?
Mr. R e i c h e r t . I th in k so.
Mr. W i n g o . I will suggest that you had better go into that study,
and I suspect you will find that, as a matter of fact, there would be no
legal difficulties in having branches beyond State boundaries. The
question of permission of foreign corporations to do business in
Michigan is one that your law would control, but the real law is a
line of decisions that the Federal courts have built up passing upon
the State laws that undertake to restrict and govern that.
I was interested in one suggestion that you made— and I believe it
was an answer to a question by Mr. Seiberling— that you did not
think that a group or chain bank would be interested in banks in
small centers. I believe you used the term “ small centers,” and you
said that they would not be interested in them.
Will you explain to the committee what you mean by that— why
you think they would not be interested?
Mr. R e i c h e r t . Did I answer that they would not be? Possibly,
I might qualify that in our State they do not seem interested, and I
would question whether they would be interested in small centers.
Mr. W i n g o . That is your experience in Michigan, is it? That is
the reason I was interested. I happen to know that there are groups
or chains that are made up entirely of banks in small towns. Those
are chain banks, and, I believe, group banks.
Mr. R e i c h e r t . What I tried to convey to you is that this ac
tivity in our State has been confined to large institutions in industrial
centers.
Mr. W i n g o . Your State has reached that point where I suspect
it classes itself and is as a matter of fact an industrial State?
Mr. R e i c h e r t . Yes.
Mr. W i n g o . That is its major business?
Mr. R e i c h e r t . That is its major bu sin ess.
Mr. W i n g o . And the major bulk of your capital is invested in
industrial enterprises?
Mr. R e i c h e r t . I would say so.
1632
BRANCH, CHAIN, AND GROUP BANKING
Mr. W i n g o . Your State has been fortunate in its business activi
ties in the last 10 years, and you have not been troubled so much
with bank difficulties, have you?
Mr. R e i c h e r t . N o .
Mr. W i n g o . I believe you said that you have only had one receiver
ship of a State bank, and that that was caused by forgeries and mis
conduct, and not by an^ economic condition or any bad judgment
in making loans and things of that kind, but purely misconduct
upon the part of the managing officers?
Mr. R e i c h e r t . Yes. That is over a period of three years.
Mr. W i n g o . H o w many State banks did you say you have in the
State, approximately?
Mr. R e i c h e r t . Five hundred and eighty-one.
Mr. W i n g o . H o w many of those are in your larger cities? If you
do not have it definitely, just approximate it. What proportion of
them is in the larger cities? You have 8 or 10 cities there that might
be called industrial cities, have you not?
Mr. R e i c h e r t . Yes; there would be a small proportion in num
ber, but a large proportion in assets.
Mr. W i n g o . The great bulk of your banking capital— and I am
talking now about capital invested in State banks in the State of
Michigan— is in the cities of your State, is it?
Mr. R e i c h e r t . Y e s .
Mr. W i n g o . The bulk of it would be limited, I suspect, to possibly
five cities?
Mr. R e i c h e r t . There would be Detroit, Saginaw, Kalamazoo,
Battle Creek, Jackson-----Mr. H o o p e r . And Lansing.
Mr. R e i c h e r t . I would say about 8 or 10 cities.
Mr. W i n g o . Y o u have several cities or industrial centers w^ith
over 100,000 population, have you not?
Mr. R e i c j h e r t . Yes.
Mr. W i n g o . What is the population of the largest city?
Mr. R e i c h e r t . That would be Detroit— 1,600,000.
Mr. W i n g o . And you have another city there that has over a
million in population, or near it, have you not?
Mr. H o o p e r . Grand Rapids has 250,000, perhaps.
Mr. W i n g o . N o w , how many banks did you say that you have in
the city of Detroit?
Mr. R e i c h e r t . Ten.
Mr. W i n g o . H o w many o f them are State banks?
Mr. R e i c h e r t . Eight.
Mr. W i n g o . D o you recall offhand the percentage of the banking
capital of the State banks that is in the city of Detroit?
Mr. R e i c h e r t . I have not any figures on the national banks.
Mr. W i n g o . I am talking about State banks, Mr. Reichert.
Unless I specifically say so in any question, I am limiting the question
to the banks under your jurisdiction.
D o you have that information at hand?
Mr. R e i c h e r t . Could I send that on to you?
Mr. W i n g o . N o ; we will just abandon it now for the present.
Suppose that you do this: It might be worth while if you will give
us the total banking capital in your State in State banks.
BRANCH, CHAIN, AND GROUP BANKING
1633
Mr. R e i c h e r t . I can give you that. The total capital is $78,960,924; surplus, $72,145,598.25; and undivided profits, $19,961,786.
Mr. W i n g o . N o w , if you will give us a statement when you get
back and send it to us, or possibly you can make it before you leave
here, showing the total banking capital in your State, State banking
capital, then the total banking capital in the city of Detroit, and
then the total banking capital in cities of your State over 100,000
population, we will appreciate it.
Do you recall whether or not you have very many State banks in
towns under, say, 2,500 population?
Mr. R e i c h e r t . Yes, we have quite a few.
Mr. W i n g o . M ost of the banks in towns having less than 2,500
population in the State of Michigan are State banks, are they not?
Mr. R e i c h e r t . Yes.
Mr. W i n g o . Very few small national banks?
Mr. R e i c h e r t . Yes.
Mr. W i n g o . Y o u have no tabulation there available showing the
number of your banks that have a capital stock of less than $100,000,
have you?
Mr. R e i c h e r t . No, I have not. I have on the basis of assets, but
not on the basis of capital stock.
Mr. W i n g o . And, of course, you have not the same information or
the number of banks that you have with less than $50,000 capital,
have you?
Mr. R e i c h e r t . N o, I have not.
Mr. W i n g o . And the assets of those banks?
Mr. R e i c h e r t . I will be very pleased to get that for you.
Mr. W i n g o . It will not be necessary. We can get that in another
tabulation that will be condensed. Just let that go.
Here is one statement that I read in your prepared statement:
The bank is limited in the extension of branches to an investment of 50 per cent
of its capital and surplus in banking house.
Now, that, of course, is clear to you, but it is not to me, and I do
not mean that as a criticism. But that does not mean anything to
me. Just what do you mean by that?
Mr. R e i c h e r t . We have a State law that prohibits a bank from
investing more than 50 per cent of its capital and surplus in a bank
ing house; consequently the extension of branches, which would
also be its banking houses, must be limited to that investment,
unless they should lease the property, then, of course, they would
not have any of their capital funds invested in the branch site.
Mr. W i n g o . In other words, you say one of the limitations on
branch banking in your State is that restriction on the banks as to
the amount of their capital that may be invested in banking houses?
Mr. R e i c h e r t . That is right.
Mr. W i n g o . That does not include furniture and fixtures, does it?
Mr. R e i c h e r t . N o .
Mr. W i n g o . D o you authorize branches beyond the city limits in
your State?
Mr. R e i c h e r t . N o ; we do not.
Mr. W i n g o . It is confined to the city?
Mr. R e i c h e r t . Yes.
Mr. W i n g o . The great number of the branches that there are in
the State are in the city of Detroit, are they not?
1634
BRANCH, CH AIN, AND GROUP BANKING
Mr. R e i c h e r t . Yes.
Mr. W i n g o . And most of them are branches of State banks, are
they not?
Mr. R e i c h e r t . Yes.
Mr. W i n g o . The national banks only having about 8 or 10
branches?
Mr. R e i c h e r t . No, they have more than that.
Mr. W i n g o . I mean in the city of Detroit.
Mr. R e i c h e r t . Yes. This is purely an approximation, but I
would say that the two national banks had about 50 branches in the
city of Detroit.
Mr. W i n g o . Will you do this? Will you prepare for the record a
statement limited to the city of Detroit and confining it to those
banks that have intracity branches, and give the number of the State
banks that have branches and the number of branches of each?
Mr. R e i c h e r t . Of each bank?
Mr. W i n g o . And the resources of each of these banks. In other
wcrds, separate it both by national and State, giving the number and
giving the resources of each one of these banks that have branches.
Mr. R e i c h e r t . Yes, I will be gland to do that.
In previously giving you the number of banks in Detroit I did not
take into consideration the banks located in territories recently
annexed to Detroit. There are 12 State banks in Detroit as follows:
Name of bank
Name of bank
N umber
of
branches
Resources
Bank of Detroit____ ______
Michigan State Bank_____
Northwestern State_______
Bedford State Savings____
Peoples State Bedford____
United Savings.....................
Union Savings................... .
20
5
2
None.
None.
None.
None.
50, 760, 690.20
3,254, 500.10
2,257, 820.62
2,326, 531.98
3, 253, 799.12
19, 467, 965.90
537,833.05
Number
of
Resources
branches
Detroit Savings Bank.........
Peoples Wayne County
Bank...... ............ ................
American State Bank.........
Guardian Detroit B a n k ...
Comm onwealth-Commer
cial Bank..........................
26 $50,651, 619.96
152 449. 564, 027.07
27 52,928,115.49
None. 63,433,944.06
22
23,125,047.88
12
Total number of banks____
Total number of branches..
Total resources.......................
! $721,561,895.43
There are two national banks in Detroit as follows:
Name of bank
First National Bank...........................................................................................................
National Bank of Commerce__________ ______ ________________________________
Total number of branches..
Total resources.......................
Number
of
branches
34
20
Resources
$173,817,387.95
108,704,024.95
52, 521,412. 9
Mr. W i n g o . Have you any restriction in your law comparable to
that in the State of California with reference to the amount of capital
stock as to branches? For illustration, if you wish to establish a
branch in the State of California, as I recall, the minimum additional
capital required is $25,000. Have you any such provision in the
statutes of Michigan?
BRANCH, CHAIN, AND GROUP BANKING
1635
Mr. R e i c h e r t . N o ; the only provision as to capital is the pro
vision that carries the capital up to $400,000, based upon $5,000,000
of deposits. From there on there is no provision as to deposits, but
the capital is also based upon population. For instance, in the city
of Detroit the capital is $500,000.
Mr. W i n g o . In other words, that is the minimum capital for a
bank?
Mr. R e i c h e r t . Yes.
Mr. W i n g o . Let me take an illustration. Suppose that you have
a State bank now that has a minimum capital of $500,000, and it
has no branches. It applies to you for permission to establish 10
intracity branches in the city of Detroit, and you find that those
branches should be established. Is there any requirement that you
contemplate with reference to an increase of capital by reason of the
establishment of these branches?
Mr. R e i c h e r t . N o. The only restriction there would be would
be one that was previously given, and that is that their investment
could not exceed 50 per cent of their capital and surplus.
Mr. W i n g o . I am not talking about what your law is; I am talking
about your judgment, for which I have a great deal of respect. Would
you not think it would be wise, if you do not have it in the law, to
have some provision that would require an increase of capital when
ever you established a branch?
Mr. R e i c h e r t . Yes; I absolutely agree with you.
Mr. W i n g o . Am I in error when I assume that that is one question
upon which all bankers agree, and that is that the capital base must
bear a proper proportion or a proper relation in size to deposits, loans,
and discounts?
Mr. R e i c h e r t . Yes.
Mr. W i n g o . In other words, the volume of business that a bank is
transacting must have a sufficiently large capital base, measured by
the experience of bankers, to support that structure that is resting on
that capital base?
Mr. R e i c h e r t . Correct.
Mr. W i n g o . The bankers agree that that is a practical necessity?
Mr. R e i c h e r t . Yes, sir.
Mr. W i n g o . S o , if we should authorize or if we should not authorize
further extension, in your judgment would it be wise for us to make
some requirement with reference to the establishment of branches by
national banks that would insure the necessary increase in the capital
base? That requirement ought to take into consideration the fact
that it might be that the bank at the time already has a sufficient
capital base to support a given number of branches, but there should
be some standard there like there is a standard of population, because
we have found by experience, although there are some exceptions,
that there is a direct relation between the volume of banking business
in a community and its population.
Mr. R e i c h e r t . Undoubtedly.
Mr. W i n g o . Of course, there are some exceptions. Now, there
should be the same assumption that there is some relation between
capital requirements and the number of branches that the parent
institution has, should there not, and do you think that that would
be wise to have appear in the statutes?
1636
BRANCH, CH AIN, AND GROUP BANKING
Mr. R e i c h e r t . Yes, I think that could be done in two ways,
either based upon branches or based upon the ratio of deposits to
capital.
Mr. W i n g o . In other words, this thought has come to me, and I
wanted to get your judgment, with the thought not of laying down
so much an iron-clad rule such as, for example, that so much popula
tion shall have so much minimum capital, but the point is this, that
if we use any fixed standard at all, it should be the volume of business,
and that the Comptroller of the Currency should take that into con
sideration and that in enlarging a business by having additional
branches, while there might be a nominal requirement for additional
branches, yet the major requirement and the determining factor
should be the volume of business which those branches and the
parent bank is engaged in, and require the capital base to be suffi
ciently large to safely support that volume of business.
Mr. R e i c h e r t . Yes, I quite agree with you.
Mr. W i n g o . I understand from the Deputy Comptroller, who is
present, that while there is no requirement in the National Bank act
now, the Comptroller’s office does take into consideration the capital
base and will refuse to grant the establishment of a branch if the
capital base is not sufficient to justify the enlargement of the business
that is supposed to flow from the establishment of the additional
branch.
There would be nothing whatever wrong in confirming that judg
ment by proper limitations and definitions in the statute itself, would
there be, in your judgment?
Mr. R e i c h e r t . I think that is a proper way to arrive at it, because
if you are having branch banks outside of municipalities, you must of
necessity get away from population as your basis and go to the ratio
of deposits to capital base.
Mr. W i n g o . There is another statement in your prepared statement
that I have marked, that I do not exactly understand. I will read it.
Difficulties will be experienced in enacting laws to provide for protective and
restrictive provisions governing groups, the units of which are operated under
national and State laws with different supervisory authorities. This difficulty
would not arise in a branch banking system.
What do you mean by that?
Mr. R e i c h e r t . I mean by that-----Mr. W i n g o . I am not asking that in an argumentative sense.
I have respect for your judgment, and I want to see if there is some
thing there that I have not thought about before.
Just what do you mean by that statement?
Mr. R e i c h e r t . With branch banking it would either have to be a
national bank or a State bank; there would be no two supervising
authorities, while in group banking you might have a State bank or
several State banks, you might have several national banks, you
might have an investment company organized under the general
incorporation law or under our finance act, which is under the super
vision of the State Treasurer, and you might have joint stock Jand
banks, all under different supervisory authorities, and if those insti
tutions were operated by people that were not as conservative as
they might be, they could transfer assets, and it would be difficult,
unless you arranged to have all of these agencies go in there and make
their examinations simultaneously------
BRANCH, CHAIN, AND GROUP BANKING
1637
Mr. W i n g o . I see what you are driving at. Your point is that with
a double character in a group, both State and National, there would
occur a confusion of regulation and examination.
Mr. R e i c h e r t . Yes.
Mr. W i n g o . N o w , if we undertake to meet the formation of groups
and chains by such regulatory measures as will guard against abuses
such as the one you mentioned and some others, do you think, then,
that it would be proper to have some requirement that would make
the different units that have a State charter submit to the regulation
or investigation or examination of the comptroller’s office?
Mr. R e i c h e r t . I th in k so.
Mr. W i n g o . In other words, the banking business breaks over
State lines?
Mr. R e i c h e r t . Yes.
Mr. W i n g o . A great many of our banks now are just as much
engaged in interstate commerce as the Steel Trust or General Motors?
Mr. R e i c h e r t . Without question.
Mr. W i n g o . So that if any banking operation is being carried on
by a corporation, whether it be a national bank or whether it be a
holding company organized in Delaware or Michigan, you feel that
lodged in the Comptroller’s office there should be proper authority
which would enable the Comptroller to protect the public along the
same lines that the Comptroller protects the public and the depositors
and the stockholders in national banks now? In other words, so that
he can have a proper investigation and examination of this tie-up
that is multiple in its character, that would be proper?
Mr. R e i c h e r t . I would think that the records of these corpora
tions that are a part of the holding company should be open to the
different supervising authorities, in order to make a thorough investi
gation of their affairs. I think that that would almost have to follow
in both directions, whether they were institutions of a State or
National character.
Mr. W i n g o . Can you conceive of any other way that we can pro
tect the public interest and at the same time protect legitimate
banking activities? It is just as necessary to protect men engaged in
legitimate banking and doing it through group formation, because
some very capable and able men, just as sincere as you and I, believe
that group banking is ideal-----Mr. R e i c h e r t . Yes, I understand that.
Mr. W i n g o . And that under present conditions it is an admirable
way to meet certain conditions, and you feel that those who are
engaged legitimately, honestly, and fairly in trying to conduct
legitimate banking business through the group system should, as well
as the public, be protected along the line you suggest, by having the
records open to the supervising authorities so that they can detect
either mismanagement or maladministration?
Mr. R e i c h e r t . Yes.
Mr. W i n g o . There is another phase of that subject that you
touched on here in your statement. You said:
From the standpoint of our securities commission, we have now made a ruling
that no more stock of holding companies will be approved for sale in Michigan,
or for exchange for Michigan bank or trust company stocks, unless it has similar
provisions as are incorporated in the articles of association and by-laws of these
corporations.
1638
BRANCH, CH AIN, AND GROUP BANKING
Of course, your blue sky law and your securities commission can,
under a State statute, control the question of sales even of these
holding companies organized under the laws of Delaware, but suppose
that a citizen of Delaware sought to sell his stock in a Michigan
bank to a holding corporation that is incorporated in Delaware; you
might have some difficulty.
Mr. R e i c h e r t . Oh, y e s .
Mr. W i n g o . S o that is one of the reasons why I see no escape
from not only the right but the duty of Congress to supplement what
you are trying to do in Michigan, and very properly, not only in
connection with the question of sale of securities but in connection
with the general tie-up and control of the banking business, by the
Federal Government having restrictions and regulations with reference
to these purchases and transfers. I do not mean by that to either
approve or disapprove the suggestion of the chairman of this com
mittee in his famous 10 per cent bill that he has introduced; I am not
committing myself to that until I know more about it.
I believe that is all.
Mr. L u c e . Judge Brand is next.
Mr. B r a n d . A s I understand ^our testimony, you have no state
wide branch banking law in Michigan?
Mr. R e i c h e r t . We have n o t.
Mr. B r a n d . And I also take it that you have no law authorizing
chain banking systems?
M r. R e i c h e r t . N o ; we have not.
Mr. B r a n d . Y o u have a law, however, that allows branches to be
established in municipalities, as I understand your statement.
Mr. R e i c h e r t . There is no specific mention in our statute of it,
but branches have been established in municipalities for a good many
years. The law is silent on the matter of branches.
Mr. B r a n d . But you said that your State allows branch banking in
municipalities.
Mr. R e i c h e r t . Yes. There is no mention of it in the statute, but
for 40 years, by consent, branch banking has been permitted in
municipalities.
Mr. B r a n d . Does that custom limit the capitalization to any
particular population?
Mr. R e i c h e r t . The bank capital is based upon population in the
rest instance, and then the capital must grow with the increase in
deposits up to $400,000 of capital, and from there on there is no
provision for increase.
Mr. B r a n d . I confess that I do not understand the following part
of your statement, taken in connection with your evidence:
Under this act—
Referring to the act of 1925—
private banks can no longer be established, nor can the private banks in existence
at the present time be sold.
I understand that that is the kind of banks that you now have
in Michigan, private banks.
Mr. R e i c h e r t . I b e g your pardon?
Mr. B r a n d . A s I understand your testimony, that is practically
the only kind of banks that you have in your State, private banks.
Mr. R e i c h e r t . N o ; we have very few private banks.
BRANCH, CHAIN, AND GROUP BANKING
1639
Mr. B r a n d . D o you draw a distinction between a unit bank and
a private bank?
Mr. R e i c h e r t . Yes. Unit banks are corporate banks organized
under the statute, while private banks-----Mr. B r a n d . Practically all of your banks are the independent
unit banks, are they?
Mr. R e i c h e r t . Yes.
Mr. B r a n d . Then you said:
It was not until 1925 that the act prohibiting the establishment of private
banks was enacted in this State. Private banks are neither under the super
vision of the banking department no under any other department.
Do you mean by that to say that there are now private banks in
your State that have no supervisory regulation?
Mr. R e i c h e r t . That is correct. There always have been, but
they are getting smaller in number, and they are mostly banks in
very small communities.
Mr. B r a n d . Are they supplying the needs and the demands of th e
communities, as a rule?
Mr. R e i c h e r t . It would be rather difficult for me to say, because
I am not very familiar with their operations.
Mr. B r a n d . Are you in accord with or opposed to Mr. Pole's
proposition as to authorizing branch banking, as outlined by him in
his statement?
Mr. R e i c h e r t . As previously stated, I would like to keep an open
mind on the question of branch banking until the conclusion of your
committee is reached, because I might possibly be placed in the posi
tion of being asked to make recommendations, which might not be
in accord with the way I feel now.
Mr. B r a n d . I did not catch that part of your testimony before.
Then you made a statement that is very significant and interesting
to me, which reads:
If, however, it is determined to establish a branch banking system, due con
sideration should be given to the unit banks already in existence in the establish
ment of branches. * * * Provision must be made to avoid ruinous competi
tion with existing unit banks, as such a procedure tends to impair the position
of the depositor.
I am in full accord with that proposition. Now, my question is,
if we authorize branch banking as recommended by the Comptroller
of the Currency, what suggestion have you to make in order to protect
these unit, independent banks?
Mr. R e i c h e r t . It would almost have to be cooperative, I would
think, between the State department and the Federal department,
because they certainly ought to recognize a State bank in a commu
nity that is going along and is prosperous, and not without some con
sideration put a branch bank in there.
Mr. B r a n d . I do not think they should, either, and I feel very
strongly about that. The State of Georgia at present has no branch
banking law, and if this branch banking system should be authorized
as outlined by the Comptroller of the Currency, how could the State
have anything to do with it? In other words, if we should pass a
branch banking law in the United States, this Federal law would
become operative and effective in a State like Georgia.
Mr. R e i c h e r t . No question about it.
1640
BRANCH, CHAIN, AND GROUP BANKING
Mr. B r a n d . And the suggestion that I want from you, and I think
it would be valuable, is, what manner of legislation or what sugges
tion can you make which would protect the unit bank against a
branch bank establishing itself there?
Mr. R e i c h e r t . It would necessarily, I think, have to be put in your
Federal legislation, to recognize-----Mr. B r a n d . I realize that it should be put there, but what would
you suggest that we put there?
Mr. R e i c h e r t . I would like to have a little further thought on that
matter. M y thought now would be that it would almost have to be
cooperative with State departments— I would not say it would be
necessary to get their approval, but there would certainly have to be
cooperation there.
Mr. B r a n d . I know, but there could not be any cooperation in the
case of a State where they have no branch banking law.
Mr. R e i c h e r t . D on’t you think the State would pass a law to meet
that contingency?
Mr. B r a n d . They might do so, but suppose that they did not?
If you are not ready to give a matured opinion on that, as one of
the members of this committee I would like to have you think over
my question and, when you are ready to submit your recommenda
tion or opinion, let us have it.
Mr. R e i c h e r t . I will be very glad to do that.
Mr. B r a n d . Y o u are w illin g to do that, are you?
Mr. R e i c h e r t . Yes, sir.
Mr. B r a n d . I think that is a very important matter, Mr. Reichert,
in States where they have no branch banking law, to see that, if we
establish a nation-wide branch banking law, the present existing unit
banks which are prosperous and making money and serving the people
are not destroyed or their capital structure not impaired.
Mr. R e i c h e r t . I agree with you absolutely.
Mr. B r a n d . I a m m u c h o b lig e d .
That is all, Mr. Chairman.
Mr. L u c e . Mrs. Pratt, have you any questions?
Mrs. P r a t t . I am sorry I was not here to hear his statement. I
presume that many of the questions have been covered.
Mr. S e i b e r l i n g . I would like to ask him a few questions.
How do the earnings of your Michigan banks in 1929 compare with
other years?
Mr. R e i c h e r t . Without looking it up, I would say the earnings are
probably at a greater per cent than they were the previous years.
Mr. S e i b e r l i n g . H o w do you account for that?
Mr. R e i c h e r t . The call loan rate, for one thing.
Mr. S e i b e r l i n g . D o you mean the call money rate in New York?
Mr. R e i c h e r t . Yes, on the short-time investments.
Mr. S e i b e r l i n g . Have you any estimate as to how much Michigan
money was sent to New York, or Chicago, or Philadelphia, on account
of the high c all-money rate?
Mr. R e i c h e r t . From b a n k s?
Mr. S e i b e r l i n g . Banks and individuals; taken out of banks, of
course, by individuals, and sent down there.
Mr. R e i c h e r t . No; I would not want to attempt to estimate it.
Mr. S e i b e r l i n g . Was it a large amount?
BRANCH, CH AIN, AND GROUP BANKING
1641
Mr. R e i c h e r t . Yes; a fair sized amount. Some large corpora
tions and also many individuals sent money to these centers for
investment in call loans.
Mr. S e i b e r l i n g . D o you think it would amount to a good many
millions of dollars?
Mr. R e i c h e r t . Yes, sir.
Mr. S e i b e r l i n g . D o you think that the withdrawal of this money
from the banks there and sending it to the stock exchange had any
effect upon your commercial and industrial business, or your agricul
tural business?
Mr. R e i c h e r t . Well, that would be rather difficult to say. I
would not think so.
Mr. S e i b e r l i n g . Do you think that there was just as much money
available as was needed?
Mr. R e i c h e r t . I think there was plenty of money available.
Mr. S e i b e r l i n g . Did not some banks send their money on call to
New York?
Mr. R e i c h e r t . Some. Not many, however.
Mr. S e i b e r l i n g . In the cases where these individuals withdrew
their money and sent it to New York, or these corporations, did the
banks have to go to the Federal reserve banks to borrow?
Mr. R e i c h e r t . Not to an unusual extent; no. I think our
borrowings were not exceptionally high until the close of the year.
They were rather high then.
Mr. S e i b e r l i n g . That was what month? Have you the figures
there?
Mr. R e i c h e r t . Yes; I have the figures.
Bills payable on December 31, 1929, $45,487,000; rediscounts,
$10,503,000.
That is for all the banks in the State.
Mr. S e i b e r l i n g . Can you give the total amount borrowed from
the Federal reserve?
Mr. R e i c h e r t . No, I could not do that. I haven’t it segregated.
Mr. S e i b e r l i n g . How did those figures you gave compare with
July 1, 1929?
Mr. R e i c h e r t . On July 1, the total notes and bills rediscounted
amounted to $3,723,000; bills payable, $34,233,000.
Mr. S e i b e r l i n g . What is the difference between those two
totals?
Mr. R e i c h e r t . About $17,000,000.
Mr. S e i b e r l i n g . Did the rates of interest to borrowers in Michi
gan go up during the high c all-money rate?
Mr. R e i c h e r t . 'Possibly in the large centers. Our rates in banks
are quite stationary, especially in the smaller banks.
Mr. S e i b e r l i n g . You do not think that the small banks said to
their borrowers that they would have to charge them 1 per cent more
on account of the high call-money rate?
Mr. R e i c h e r t . I do not think so; no.
Mr. S e i b e r l i n g . But you do think that that was done in the cities?
Mr. R e i c h e r t . I think their rates went up; yes.
Mr. S e i b e r l i n g . What are the rates under your usury law in
Michigan?
1642
BRANCH, CH AIN, AND GROUP BANKING
Mr. R e i c h e r t . The legal rate is 5 per cent; the amount you can
charge is 7 per cent. The limit is 7 per cent.
Mr. S e i b e r l i n g . That has been very satisfactory; has it?
Mr. R e i c h e r t . Yes.
Mr. S e i b e r l i n g . That is all.
Mr. L u c e . Unless there are other questions, the committee will
thank Mr. Reichert for coming before it, and adjourn until to-morrow
morning.
(Thereupon, at 12.30 o ’clock p. m., an adjournment was taken until
Thursday morning, M ay 15, 1930, at 10.30 o ’clock.)
BBANCH, CHAIN, AND GBOUP BANKING
T H U R S D A Y , M A Y 15, 1 9 3 0
H o u s e o f 'R e p r e s e n t a t i v e s ,
C o m m it t e e o n B a n k in g a n d C u r r e n c y ,
Washington, D. C,
The committee met in the committee room, Capitol, at 10.45
o’clock a. m., Hon. Robert Luce presiding.
Mr. L u c e . In view of the memorial exercises to-day at 12 o’clock,
if the committee should be in session at a quarter of 12 , and I am in
the chair, I will declare a recesss in case we have not finished with
the witness, and then we will resume this afternoon. It is possible,
however, that we may finish with the questioning by a quarter of 1 2 ,
and that will give us an hour.
Mr. Hovey, the bank commissioner of Massachusetts, is here
to-day. Mr Hovey, we shall be glad to be informed by you of your
views on branch, chain, and group banking, and on any other features
of the banking situation that you care to discuss.
STATEMENT
OF ROY A. HOVEY, COMMISSIONER
STATE OF MASSACHUSETTS
OF BANKS,
Mr. H o v e y . Mr. Chairman and gentlemen of the committee,
perhaps I can best approach my views on branch, chain, and group
banking by a resume of the history of such forms of banking in
Massachusetts.
Branch banking made its first appearance in Massachusetts in
1902, when the legislature by a general law authorized trust companies,
our only State chartered commercial banks, to establish branch offices
subject to the approval of the supervising board. That act limited
to one the number of branches that a trust company might have and
confined its location to the same town or city in which the main
office was located and with the restrictions that it be operated solely
for the purpose of receiving deposits, cashing checks, and maintaining
a safe-deposit business. At that time there were 37 trust companies
having total assets of $164,000,000. To-day there are 101, with
assets of $777,000,000. Their distribution in cities and towns classi
fied as to population is indicated by a table which I am submitting.
The figures are as of March 27, 1930.
1043
1644
BRANCH, CH AIN, AND GROUP BANKING
(The table referred to is as follows:)
Number
Population
Cities
(1)
(2)
(3)
(4)
(5)
Per cent
Trust
of banks
com
Branches
panies 1
Assets
Per cent
of assets
100,000 or more....................................
50,000 to 100,000....................................
25,000 or 50,000............................ .........
10,000 to 25,000.............................. .
Less than 10,000..................................
8
7
13
42
285
37
13
12
20
19
25
14
7
9
5
36.64
12.87
11.88
19.80
18.81
$477, 580,801
110, 591,459
76,702,271
69,605,957
42,777,964
61.44
14.23
9.87
8.96
5.50
Total..................................................
355
101
60
100.00
777,258,452
100.00
i Members of the Federal reserve system: (1), 14; (2), 4; (3), 2; (4), 5; (5), none; total, 25.
Mr. H o v e y . Only four of our 101 trust companies have a capital o f
less than $100,000, the minimum statutory requirement being $50,000,
and then only in towns of less than 10,000 inhabitants. The smallest
town in which a trust company is located has a population of approxi
mately 1,800.
In spite of the fact that there are many towns within which there are
no banking facilities, there is no town in all the State which is not
within approximately 15 miles of the main office of a trust company or
national bank.
Under our statutes the authority for the establishment of branch
offices of a trust company is granted by the board of bank incorpora
tion, which consists of the commissioner of banks, commissioner of
corporations and taxation, and the treasurer and receiver general^
and only after a public hearing has been held and it has been shown
that the public convenience will be served by the establishment of the
branch. In 1914 the policy was also adopted through legislation to*
allow consolidating banks to maintain the offices of the consolidating
bank as branches provided both banks were located in the same city or
towTn and that the commissioner of banks was satisfied that the public
convenience would be served thereby. In 1920 we had our first
instance of a branch being established outside of the town in
which the main office is located. This was accomplished by a special
act of the legislature. Similar privileges have been similarly granted
four times since then, but only for the purpose of establishing a branch
where no other bank existed. Three of these branches are located in
communities which adjoin the town in which the main office is located,,
the others being in towns within 12 miles of the main office.
In view of the number of special bills which were being introduced
in the legislature seeking branch privileges for trust companies not
authorized under the general laws and which appeared reasonable and
desirable for the extension of banking facilities to our citizens, the
banking department was convinced that general legislation should
be passed and in 1926 made such a recommendation. This sought
to remove the restriction on the number of branches in the town in
which the main office was located and also sought to allow the estab
lishment of a branch office in an adjoining city or town provided no
other trust company was located therein. The recommendation,
which was intended mainly to extend banking facilities to communi
ties where such facilities were lacking, also carried provisions which
BRANCH, CHAIN, AND GROUP BANKING
1645
would prevent the consolidation of trust companies which were not
located in the same town or city. At that time we were opposed to
a policy of state-wide branch banking and the most that the bill would
have accomplished would have been to provide additional banking
facilities within the same or adjoining towns in which the main office
of the trust company was located. While the operation of such a law
would not have permitted any of the trust companies located in
Boston to establish branches in neighboring cities and towns it would
have been of advantage to some of the smaller communities in other
parts of the State which are unable to support a bank of their own.
However, attempts to obtain such a change in 1926 and in 1927 were
unsuccessful. Misunderstandings and the opposition of the national
banks undoubtedly prevented the adoption of such a measure.
In 1928 an amendment was passed which removed entirely the
numerical restriction of branches in cities of more than 100,000
population, and restricted to two the number permitted in cities of
50,000 to 100,000, and to not more than one in cities and towns under
50,000; thus bringing our law more in line with the McFadden Act
of February, 1927. These are the restrictions which are in force
to-day.
The total number of trust companies having branches is 42. Thirty
have one branch, 8 have two, 3 have three, and one has 5; 60 in all.
In 1908 the legislature granted a similar privilege to our mutual
savings banks but the conditions under which they were allowed to
establish branches varied from those of trust companies at that time
in that they might establish one or more branches in the same town
where the banking house was located or in towms not more than 15
miles distant, where no savings bank existed at the time. The
branches of savings banks were not established for competitive pur
poses but for the encouragement of thrift and to furnish facilities
for savings in communities not sufficiently large to support or main
tain a bank of their own.
Among the 196 mutual savings banks only 30 have branches;
22 have 1, six have 2, and two have 3; forty in all. Ten of these
banks have branches outside of the town in which the main office
is located.
We have never been in sympathy with a state-wide branch policy
for Massachusetts, but recognize, however, that conditions in other
sections of the country might warrant its adoption.
Concerning chain banking, our experience has been limited to two
or three cases several years ago in which one or two persons were
the dominating influence. These were made up of trust companies
and banks located in Boston and suburbs. These chains were, how
ever, eventually terminated, local interests taking over the control
and management in each instance. One resulted in the suspension
of the parent bank which caused losses to stockholders and directors
to an amount exceeding $4,100,000. Failures among our banks are,
it should be noted, few and except for the situation in 1920 and 1921
the record of Massachusetts among its trust companies is exception
ally clear, there being to date but 11 failures since trust companies
were first organized in 1869. Among the national banks in Massa
chusetts there have been but 15 failures.
100136—30—vol 2 pt 12----- 6
1646
BRANCH, CH AIN, AND GKOUP BANKING
Group banking in Massachusetts has developed within the last two
years, although not as widespread as in other sections of the country.
At the present time there are six groups, all but one of which include
both national banks and trust companies. The schedule which I will
submit exhibits these groups as constituted at the present time,
their assets comprising 45.5 per cent of the aggregate assets of national
banks and trust companies in Massachusetts. The trust companies
involved aggregate 14.4 per cent of the banking assets of all trust
companies, while the national banks represent 59.1 per cent of the
assets of all national banks in Massachusetts. At the present time
all of these groups are controlled by national-bank interests and include
the largest of our national banks.
The success of chain or group banking of course depends upon the
character of management the same as in individual banks. Group
banking may have its advantages and benefits and much can be
offered in its favor as your committee knows. I have no quarrel
with the system in theory and would not object to it if proper opera
tion could be guaranteed, but, granting that there are advantages, in
actual practice it can too easily be subjected to improper use and
when composed of banks operated under more than one code of laws
and more than one supervising authority the opportunity for misuse
is enlarged. For this reason and from the standpoint of a supervisor,
I am forced to look with disfavor on such a system. I much prefer
to see local management of a unit bank if the locality can furnish
proper support, and believe a community is better served thereby
than by the branch of a distant bank. If, however, I were to choose
between group and branch banking, I should prefer to see the branch
system, with all the difficulties it carries in examining, but I question
whether permitting the establishment of branches will of itself stop
or even check the growth of the group method. It is realized that
regulations governing national banks must necessarily be national in
scope but it must also be recognized that conditions differ widely in
various parts of the country and policies and methods which may be
beneficial in one section may be detrimental in another. Each State
should know its own needs best and for this reason it appears to me
that if a change is made in national bank branch regulations, the
privileges granted thereby should not exceed those granted to statecharactered institutions. This would, of course, necessarily limit
branch banking in its widest latitude to the State in which the bank
is located.
In Massachusetts more than one-half of the banking assets are
made up of savings or time deposits. In the smaller or suburban
centers the ratio of savings is greater than in the large cities. Outside
of the larger cities banking resolves itself more or less into an invest
ment service. This raises the question of whether the centering of
control and management of a group of banks of this type may not
open a way for unwise or unscrupulous investment of savings deposits,
which deposits we in New England for more than a century have given
the greatest possible protection. In so far as Massachusetts State
chartered banks are concerned, I feel that they are well protected by
the statutory requirement that such savings be segregated from com
mercial deposits and invested only as savings bank funds may be
invested, savings depositors being protected by an elaborate statutory
BRANCH, CH AIN, AND GROUP BANKING
1647
system regulating the investment and management of their funds.
Our experience has demonstrated that such segregation and invest
ment is of great advantage to the savings depositor, who has always
been given the utmost protection. Therefore, in considering this
subject, it would seem to me that some form of segregation and regula
tion of assets representing savings deposits should also have attention,
if it is within the scope of this investigation.
When a large proportion of the deposits consist of time or savings
accounts I do not see how any better service can be rendered by
banks in a group than could be worked out by a unit bank under an
arrangement with a larger city bank as correspondent or investment
counsel.
In view of the limited experience of Massachusetts in these different
forms of banking it is difficult at this time to arrive at a definite
conclusion. I appreciate that my views have offered no solution of
the problem confronting you, but only reflect my opinion as a super
visor and that of may others in my State, namely, that there appears
to be no real or immediate necessity for group banking nor wide
extension of branch banking privileges in Massachusetts.
I shall be glad to have you call upon me if I can be of any further
assistance.
I am submitting herewith the table I previously referred to, showing
the group banks in Massachusetts.
(The table referred to is as follows:)
Group banks in Massachusetts
1648
BRANCH, CH AIN , AND GROUP BANKING
BRANCH, CHAIN, AND GROUP BANKING
1649
Mr. L u c e . Mr. Hovey, am I right in my understanding that what
we in Massachusetts call trust companies are in all practical aspects
the same as State banks in other parts of the country?
| Mr. H o v e y . That is right. They are our only State chartered
commercial banks.
Mr. L u c e . We in Massachusetts seem to have a monopoly of the
use of that term for State banks, and I thought the record would
better show that.
Mr. H o v e y . We have no State banks; none as such.
Mr. L u c e . About 20 years ago there was a tendency in Boston
toward the amalgamation of banks, and, as I recall it, after 5 or-10
years of experience therewith, there came a revival of demand for
charters for smaller banks, the allegation being made that the big
hanks did not give that personal service and attention which a small
hank would.
Am I right in that?
Mr. H o v e y . I th in k y o u a r e ; y e s .
Mr. L u c e . N o w there seems to be a return to the idea of amalga
mation. What do you think the tendency is going to be in Massa
chusetts in the immediate future— toward more amalgamation?
Mr. H o v e y . I think the record shows that in the last few years
there has been a lessening tendency in that direction. In 1922 and
1923 we had quite a little activity among the banks toward consolida
tions, but since that time it has been falling off.
Mr. L u c e . I s one warranted in the inference that if these con
solidations fail to give as much service as might be desired, the result
will be competition from new, independent units?
Mr. H o v e y . I th in k th a t w o u ld fo llo w .
Mr. L u c e . That has a rather important bearing upon what we are
considering, because of the apprehension in many quarters that
consolidation means monopoly and a prevention of the benefits of
competition.
In the matter of these consolidations of trust companies, will you
set forth, for illustration, the story of the Newton Trust Co.? Tell
us what happened to the Newton Trust Co.
Mr. H o v e y . The Newton Trust Co. consolidated with the Newtonville Trust Co. located in the same city. Then there was a new trust
company formed under the name of the City Trust Co., which had a
branch, and then consolidated with the Newton Trust Co. The New
ton Trust Co. had a branch de novo authorized by the Board of
Banking Incorporation. So that, after the consolidation it had
practically, I should say, five or six offices in Newton. Then there
was a trust company organized in Needham, an adjoining town, and
I think the directors of the Newton Trust Co. owned the controlling
interest. Then, the Newton Trust Co. itself owned the control of
the Dedham National Bank, which was located in an adjoining town,
and also a national bank located in Westwood, so that they had
several offices right in Newton and the adjoining towns, all practi
cally under the same control and management. Then, when the Old
Colony Associates began forming their group, the Newton Trust Co.
was one of the banks taken, the control of which was taken over by
the Old Colony Associates.
Mr. L u c e . This has a bearing, of course, upon one of the more
serious problems before the committee at the present time. Evi
1650
BRANCH, CH AIN, AND GROUP BANKING
dently this amalgamation has taken place because theOpersons con
cerned thought it more profitable. We, of course, are here to guard
the welfare of the public, the depositors and borrowers as well as that
of the owners of the banks.
Do you hear any criticism of this series of transactions in their
bearing on the convenience and business prosperity of the commu
nities affected?
Mr. H o v e y . Not as much at the present time as when the idea
first took shape.
Mr. L u c e . T h e critic ism th e n w as on e of e x p e c ta tio n ?
Mr. H o v e y . Yes.
Mr. L u c e . In actual results, does anything indicate to you that
this has worked any injury to the public?
Mr. H o v e y . Not in this instance; not in the instance you speak of.
Mr. L u c e . You expressed, however, some apprehension that the
system, generally applied, might have unfortunate results.
Mr. H o v e y . It all depends upon the character of the group, that
is, of those managing the affairs of the group.
Mr. L u c e . It is easy to understand how the disposition of fund&
might be fortunate or unfortunate, according to the temper of the
management, but it is not so easy to understand, assuming honest
management, how an injury will result to the depositors and borrowers,
and if there be such injury, it is important that we should know it.
For example, we are told by some witnesses that consolidations o f
this sort injure the borrower because of less generous treatment than
would be received from the management of an individual unit, and
injures the depositor because of giving him less interest and also
exposing him to the new practice of restricting deposits to the larger
accounts.
What have you to say on that?
Mr. H o v e y . I have not seen any evidence of that occurring, of
having a tendency to act to the disadvantage of the depositor or the
borrower, so far as our experience in Massachusetts has gone.
Mr. L u c e . Then, .assuming honest management, what is the basis
for your own disposition to object to branch banking?
Mr. H o v e y . From the use that may be made of it, where a group
contains banks having both Federal and State supervision, from the
standpoint of the supervising examiner.
Mr. L u c e . The mechanical phase of it?
Mr. H o v e y . Yes.
Mr. L u c e . Am I right, then, in thinking that in principle you see
no objection to branch banking?
Mr. H o v e y . Y o u are sp e a k in g o f b ra n ch b a n k in g ?
Mr. L u c e . Yes, branch, or any other form of consolidation— in
principle.
Mr. H o v e y . N o ; I can not see any disadvantage to the group
system, if that is what you are speaking about just now.
Mr. L u c e . I am speaking of the broader question of the consolida
tion of banking capital in one form or another.
Mr. H o v e y . I imagine that it could be carried to excess, but so far
as our experience has gone I have not seen anything that would lead
me to believe that it has worked an injustice yet to the depositorpor
borrower.
BRANCH, CHAIN, AND GROUP BANKING
1651
Mr. L u c e . Turning to another aspect of the general subject, of
course you and I are familiar with the mutual savings banks and
their growth and value, but many of the members of Congress are not
so familiar with them, coming as they do from States where mutual
savings banks are few or there are none at all, and I think it would
be serviceable if between us we brought into there cord something
more about the mutual savings bank system.
How many States now enjoy the blessings of that system?
Mr. H o v e y . I think there are 17 States in which there are mutual
savings banks. The majority of them are located in New England
and New York.
Mr. L u c e . What is the prevailing rate of interest being paid now
by the Massachusetts savings banks on deposits?
Mr. H o v e y . Practically one-half of our banks are paying 5 per
cent per annum on savings deposits, and the rest of them are paying
between 4% and 5 per cent.
Mr. L u c e . I have inquired of various witnesses in the course of
these hearings, and have yet learned of no State where the mutual
savings banks do not exist where depositors of savings are getting
more than 4 per cent, and they are running from that down to 3
per cent.
Does your general knowledge of the situation lead you to think
that this difference is due to the fact that where the mutual savings
bank is found, it profits by the unpaid or the little paid services of
men who are engaged in it partly through philanthropic motives, or
is it due to the fact that where there are no mutual savings banks
the banks are not paying as much on their savings deposits as they
could pay?
Mr. H o v e y . N o . I think it is because the expense of operation of
a savings bank is very small compared with that it costs to operate a
commercial bank, and in a savings bank after the statutory amounts
which are required to be set aside for surplus and all expenses are
taken into consideration, the remaining earnings belong to the
depositors, and I think that has a great effect on the increased dividend
Then, again, the investments of savings banks are so regulated that
they are not subject to the same risks and hazards as are the invest
ments of the assets of commercial banks, so that the losses in savings
banks are very small.
Mr. L u c e . Let me inquire further about the matter of comparative
expense. M y observation would not lead me to think that the
employees of savings banks are paid on a greatly different scale from
those of national banks.
Mr. H o v e y . N o ; I think they compare about the same.
Mr. L u c e . And the rent, apparently, is not essentially different.
As you and I know, there are several savings banks in Boston that
occupy some of the most costly real estate in the city.
Mr. H o v e y . That is right.
Mr. L u c e . Then just what is the item of greater expense in the
savings department of a national or State bank?
Mr. H o v e y . Well, the namber of employees in a commercial bank
is much greater.
Mr. L u c e . It is greater, of course, because of the diversified
business, but I mean just confining ourselves to the comparative cost
of running a savings bank and the savings department in a national
1652
branch
,
c h a in
,
and
group
b a n k in g
bank, exclusive of the other national bank business. You will see
that I am trying to find out, if I can, any excuse for the payment in a
place like the District of Columbia, for example, of only 3 per cent or
3K per cent on deposits of poor people, when in Massachusetts they
can get 4){ per cent to 5 per cent. Nobody has ever given me an
adequate explanation, and I wanted to know if there is a reason for it.
Mr. H o v e y . Our savings banks’ assets are made up more than
50 per cent of real estate loans, on which the uniform rate practically
is 6 per cent, and that forms the bulk of the investment, and the
rest is in bonds which are legal for investment and which may not
return more than between four and a half and five per cent, but the
expense of management is so small that the surplus funds which
have been accumulating over a period of years produce an income
which carries the overhead, so that it allows the investment of income
realized from the investment of deposits to be paid in dividends.
Mr. S e i b e r l i n g . Will you have him put into the record what
commissions or other charges are paid in connection with real-estate
loans outside of the 6 per cent interest, if any?
Mr. L u c e . Yes. Will you answer Mr. Seiberling’s question on
that?
Mr. H o v e y . The borrower, you mean?
Mr. S e i b e r l i n g . What the borrower has to pay in addition to
6 per cent when he gets the loan.
Mr. H o v e y . There is nothing paid to the bank outside of the
interest.
Mr. S e i b e r l i n g . What does he have to pay?
Mr. H o v e y . He does not have to pay anything unless he goes to
a broker to get a loan for him.
Mr. F e n n . The borrower can go directly to the bank.
Mr. H o v e y . The borrower can go directly to the bank and make
an application for a mortgage loan, and there is no expense entailed
in connection with that.
Mr. F e n n . There may be a slight expense for examination of
title.
Mr. H o v e y . Of course, the borrower pays the title expense.
Mr. S e i b e r l i n g . That is very unusual.
Mr. F e n n . Not in New England, even with an insurance company
or a bank.
Mr. L u c e . If we should put into the banking law requirements for
segregation and stipulations about investments corresponding to
those in Massachusetts and of the other mutual savings bank States
would it be reasonable to expect or would there be ground for hope
that throughout the rest of the country the savings of the poor might
be safeguarded and that those savings might bring a rate of return
comparable to what they bring in the mutual savings banks States?
Mr. H o v e y . I would think that would depend upon whether con
ditions would be comparable to those in our States.
Mr. L u c e . What particular conditions?
Mr. H o v e y . In regard to real estate. Practically all of our realestate loans are on improved property, what we call improved
property. Now, that might not be possible for banks in other sec
tions of the country to loan such a proportion of their assets in that
manner and thus bring them the income that we get for the same
amount of security.
BRANCH, CHAIN, AND GROUP BANKING
1653
Mr. L u c e . When we passed the McFadden Act, you may remember
that we increased the amount that national banks might lend on real
estate. This was done in response to the averments from various
parts of the country that if the banks were given this privilege they
could easily find the mortgages; that they wanted the power to take
advantage of the opportunities which they said existed. So I should
doubt if the consideration you suggest would greatly affect the situa
tion.
I am asking these questions because I am so anxious to acquaint
the rest of the country, as far as I can, with the blessings of our mutual
savings bank system.
Now, in the matter of the segregation of deposits, would there be
anything unfair, anything in the nature of hardship, if we should make
it a part of the national banking act that savings deposits everywhere
shall be segregated?
Mr. H o v e y . I should think not.
Mr. L u c e . Turning to another aspect of the savings bank question,
it has been brought to my notice recently that persons interested in the
present movement toward bank consolidation are seeking to get con
trol of certain Massachusetts mutual savings banks; is that correct?
Mr. H o v e y . There have been attempts made to do that very
thing.
Mr. L u c e . I do not understand how it can be done under our laws.
Mr. H o v e y . Only under the guise, you might say, of liquidation of
the savings banks, but that is only possible with the approval of the
banking department or the commissioner, and I have withheld any
such approval.
Mr. L u c e . What advantage would the trustees of a savings bank
get out of liquidating? Is this thing done by offering some money
gain to them if they will liquidate?
Mr. H o v e y . Well, I do not know just what the consideration has
been, but a great many of the savings banks have on their boards men
connected with either trust companies or national banks, and it can
be readily seen, where only a two-thirds vote of the board of trustees is
required to liquidate a savings bank, that it would be easy to have that
proportion predominate to the interest of a commercial bank.
Mr. L u c e . I would like to put it on the record, sir, that for one I
strongly approve your course. I think it would be a calamity if
commercial interests were allowed to invade the mutual savings bank
field in that way.
Mr. H o v e y . There is a bill pending in the legislature— I think it is
probably in its final stages of passage— that will make it much more
difficult for the savings banks to liquidate, and before they can
liquidate they will have to try to make arrangements with a neighbor
ing mutual savings bank for consolidation.
Mr. L u c e . I am glad to hear that, and I hope the bill may become
law.
Mr. Hovey, to myself at least it seems that in the study we are
making here we are confronted by a condition rather than by a
theory. We see in every direction a tendency of consolidation
making headway in the banking field. Some of the committee are
reluctant to approve or support that tendency, but how are we going
to stop it? Assuming that it would be desirable to protect and
preserve the unit bank, what can we do about it? There are very few,
1654
BRANCH, CH AIN, AND GROUP BANKING
if any, witnesses who have told us how to stop it if we wTant to do
it. Have you any idea on that?
Mr. H o v e y . I have not any solution of that question.
Mr. L u c e . We seem to be in the dark as to what can be done
about it.
M r. H o v e y . I may add that the only statutory regulation we
have in Massachusetts is that two trust companies can not consoli
date without the approval of the commissioner, and I know of one
instance where such consolidation was contemplated and the approval
was denied.
Mr. L u c e . We have nothing to prevent John Jones from owning
the majority control of the stock in twTo trust companies?
Mr. H o v e y . N o.
Mr. L u c e . Has there been any suggestion in Massachusetts that
it ought to be prevented?
Mr. H o v e y . The only regulation regarding stock ownership is that
a trust company may not own more than 10 per cent of the stock of
another trust company. Of course, that does not prevent individuals
from holding the stock of another trust company for the benefit of
another bank.
Mr. L u c e . Is there any marked tendency in our State or in New
England, so far as you know, for national banks to turn to the State
banking system?
Mr. H o v e y . N o. There has been no indication of that, lately at
least. I think in the past 10 years there were three trust companies that
converted into national banks at the time of consolidation, and three
that converted from national banks to trust companies, so that it has
been even as far as that is concerned. There were several that con
verted into national banks for the purpose of consolidation, however,
within the last five or six years.
Mr. L u c e . Mr. Fenn, do you desire to ask any questions?
Mr. F e n n . I just wanted to ask a few questions, sir. I am very
much interested in what you have said about the savings banks, for
that same system prevails in my State, Connecticut, as in Massachu
setts.
Have you found that this privilege, if I may term it such, granted to
your State banks or your trust companies to carry on savings depart
ments, has diminished the interest in mutual savings banks? In
other words, has it reduced the number of depositors in mutual
savings banks? Has there been competition between the savings
departments of your trust companies and the purely mutual savings
banks?
Mr. H o v e y . All the competition that there has been has been bene
ficial, I should say.
Mr. F e n n . Been beneficial to the mutual savings banks?
Mr. H o v e y . It helped the mutual savings banks as well as the trust
companies.
Mr. F e n n . In relation to these dividends or this interest money
which is paid to depositors in savings banks— and in Connecticut
the same rate is paid, practically, as in Massachusetts, 4% or 5 per
cent— it occurs to me that this difference in interest rates between
that paid in Massachusetts and Connecticut and in other parts of
the country is due in a measure to the long existence of those banks
and to the fact that during that time they have accumulated a surplus,
BRANCH, CHAIN, AND GROUP BANKING
1655
and I do not know at the present time whether or no the investments
prescribed for savings banks and trust funds are the same in Massa
chusetts as they are in Connecticut. I take it they are very much the
same, but in Connecticut the savings banks are allowed to purchase
stocks in national banks, and investments have been made by mutual
savings banks in Connecticut for a long term of years in those bank
stocks, some in New York and some in Massachusetts, as well as some
in Connecticut, and by reason of the increased value of those bank
stocks which has come about because of the prosperity of the country,
the banks have built up a considerable surplus in addition to the
surplus by actual accretion in the purely mutual sayings banks, and
I want to ask you if that has not had a great deal to do, or considerable
to do, with this high rate of interest paid to our depositors, and I
use the term “ high rate of interest” in comparison with the interest
paid in other sections of the country.
Mr. H o v e y . I agree that it has helped to build up a surplus.
Mr. F e n n . And that surplus has had its effect in the amount dis
tributed to the depositors?
Mr. H o v e y . Yes.
Mr. F e n n . In regard to the question raised by Mr. Luce of the differ
ence in expense between a savings bank and a commercial bank, in
an ordinary commercial bank in a large city, that has a large capital,
surplus and undivided profits as well as a large amount of money,
there are several more executive officers, are there not, than in a savings
bank?
Mr. H o v e y . Yes.
Mr. F e n n . Does not that add largely to the salary expense, if I
may term it such of the commercial bank?
Mr. H o v e y . I think there is no question about it.
Mr. F e n n . I have in mind one of the largest savings banks in New
England where the affairs of that bank are administered practically
by the treasurer, one executive officer, and while they have a large
number of employees, necessarily so in a bank of that size, with six or
seven millions of deposits, on the other hand a commercial bank with,
we will say, $20,000,000 in deposits, which would be a good sized
commercial bank anywhere outside of these great aggregations of
capital in New York City, would reqire several more executive officers
— for instance, there is the chairman of the board of directors, there
is the president of the bank, and there are several vice presidents,
men who on account of their knowledge of banking draw considera
ble salaries in comparison with the salaries received by one or two
men in a savings bank of the kind I am referring to.
Has that not been your experience, Mr. Luce?
Mr. L u c e . Yes. Mr. Fenn, I w as trying to bring out, if I could, the
fact that the expense of handling the savings department of a national
bank ought to be no larger than the expense of handling the same
amount of money in a savings bank.
Mr. F e n n . I see. Of course, we are very much interested in his
savings matter, and our mutual savings banks in New England are a
matter of pride with us.
I inferred from what you said here that attempts had been made
by some commercial banks to take over mutual savings banks and
make them a part of their banks?
Mr. H o v e y . That is right.
1656
BRANCH, CH AIN, AND GROUP BANKING
Mr. F e n n . Under the Massachusetts law, that would entail a
supervision of the savings department, to see that the savings depart
ment complied with the law in regard to investments?
Mr. H o v e y . In a trust company?
Mr. F e n n . Yes. I am speaking purely of a trust company.
Mr. H o v e y . Yes.
Mr. F e n n . D o you think it would be wise to allow the combina
tion of the commercial department and the savings department under
the same roof and practically under the same management?
Mr. H o v e y . Y o u m e a n , th e in v e s tm e n ts m in g le d ?
Mr. F e n n . N o ; I do not mean mingled; I mean the carrying on
of the business. In other words, would a man who is thoroughly
versed in commercial banking be as competent to manage a savings
department as a man thoroughly versed in mutual savings banking?
Mr. H o v e y . Possibly I can illustrate that by our experience with
trust companies that we closed in 1920 and. 1921. They all had quite
sizable savings departments. In liquidating those 4 trust com
panies, 3 of them paid 100 per cent to their savings depositors
and 1 paid 92.04 per cent. In the commercial department, the
most that was paid was 66 per cent, and one paid only 38.07 per cent.
Mr. F e n n . In other words, the savings department was the most
profitable; that is, dollar for dollar?
Mr. H o v e y . T o the depositor, yes.
Mr. F e n n . Well, the bank must have had it or it could not have
given it to the depositors.
Mr. L u c e . I think it was due to the segregation of deposits in the
trust companies, to the fact that the savings deposits were invested
in accordance with the laws covering savings funds. They were
more safely invested. Am I right on that?
Mr. H o v e y . That is right, and the capital stock liability first goes
to help to make up any deficiency in the savings department.
Mr. F e n n . Of course, those were well-managed banks?
Mr. H o v e y . N o , they were not.
Mr. F e n n . Why did they liquidate?
Mr. H o v e y . Because of their poor management and bad condition.
Mr. F e n n . Despite that poor management, it did not particularly
affect the savings department? In other words, that savings depart
ment was controlled absolutely by the law of Massachusetts?
Mr. H o v e y . The same law that controls our mutual savings banks.
Mr. F e n n . As I asked before, have you found any ill effects from
this competition of the savings departments of the commercial banks
with the mutual savings banks? In other words, has it been detri
mental at all to the mutual savings banks?
Mr. H o v e y . That would be hard to prove.
Mr. F e n n . D o not the people of Massachusetts turn to the old
mutual savings banks for the safeguarding of their sayings?
Mr. H o v e y . I th in k th e y d o .
Mr. F e n n . It is more or less traditional and historic with them?
Mr. H o v e y ". Yes.
Mr. F e n n . And it is the same with us in Connecticut.
As Mr. Luce said, we scarcely know what to do in regard to this
question of branch, group, and chain banking; it is a very troublesome
problem. Has chain banking prevailed to any great extent in Mas
sachusetts?
BRANCH, CHAIN, AND GROUP BANKING
1657
M r. H o v e y . N o .
Mr. F e n n . I s there not a large bank in Boston that has a group of
banks?
Mr. H o v e y . Y o u are speaking of chain banking and group banking
as being the same?
Mr. F e n n . I speak of them as practically the same. Branch
banking we would consider different.
Mr. H o v e y . We have one large group— probably not large com
pared with some others, but I submitted a table which shows 21
banks in that group.
Mr. F e n n . Are those banks trust companies or national banks?
Mr. H o v e y . Both.
Mr. F e n n . I was very much interested in what you said in regard
to the supervision of an organization of that character, that the State
examiner could not supervise the national banks, and, contra, the
national bank examiner would have nothing to do with the State
banks. What solution could you give to rectify or cure that defect?
How can we get a national act that will provide for the supervision of
both classes of banks, when they are combined in a group?
Mr. H o v e y . I do not know that legislation would be necessary.
Full cooperation between the Comptroller’s department and the
State banking departments would accomplish it.
Mr. F e n n . Of course, the only thing I can see that could be done—
and I do not advocate it, because I have not studied it enough—
would be for the Government to say that in an organization of that
kind State and national banks should not be mixed. We certainly
could pass an act of some sort to prevent consolidations of State banks
with national banks, or their control by holding companies. We
have already given that some thought, and will continue to do so.
Mr. H o v e y . That would be the only way.
Mr. F e n n . I do not know that that should be done. While it may
be practicable, I doubt if it can be done, because, as you suggested,
of the two classes of supervision, of the State banks in a group by the
State examining authority and of the national banks in that same
group by the national authorities, and it would be rather difficult to
determine the exact condition of that group. Of course, if they were
all national banks in the group, or all State banks, it would not be so
difficult.
I think that is all.
Mr. L u c e . Mr. Seiberling, have you any questions?
Mr. S e i b e r l i n g . Outside of real estate loans, what other securities
are your mutual savings banks investing money in?
Mr. H o v e y . Government and municipal bonds, certain bonds of
gas and electric companies that meet the statutory requirements, and
railroad bonds.
Mr. S e i b e r l i n g . Bank stocks?
Mr. H o v e y . Yes, bank stocks of national banks in N*ew England,
or trust companies in Massachusetts.
Mr. S e i b e r l i n g . But not outside?
Mr. H o v e y . N o ; and then there are certain classes of personal loans
that they are allowed to make.
Mr. S e i b e r l i n g . Have your mutual savings banks made a good
deal of money out of investments in bank stocks?
1658
BRANCH, CH AIN, AND GROUP BANKING
Mr. H o v e y . I should say yes.
Mr. S e i b e r l i n g . And those stocks generally carry a double
liability?
Mr. H o v e y . Yes.
Mr. S e i b e r l i n g . Then their profits may have come from other
sources beside that 1 per cent differential between the interest paid on
deposits and the interest received on real estate loans— is that true?
Mr. H o v e y . Some of that surplus is made up of profits made in the
sale of securities.
Mr. S e i b e r l i n g . They are allowed to speculate to a certain de
gree?
Mr. H o v e y . If you want to term it that. It is the purchase of
bonds.
Mr. S e i b e r l i n g . This segregation of deposits has worked a hard
ship on the commercial depositor, has it not?
Mr. H o v e y . I do not know what you have in mind.
Mr. S i e b e r l i n g . In your trust companies and State banks, where
you segregate the savings deposits and commercial deposits, it has
worked a hardship on your commercial deposits, has it not?
Mr. H o v e y . No; I would not say it has worked a hardship on them.
Mr. S e i b e r l i n g . They did not get so much on their deposits as
the other people got.
Mr. H o v e y . That was because of the difference in the nature o f
the assets of the savings department and the commercial department.
Mr. S e i b e r l i n g . If they had all been together and the money
had all been mingled, and the loans and securities combined, they
would all have received the same percentage.
Mr. H o v e y . It would have worked a hardship against the savings
depositor.
Mr. S e i b e r l i n g . But they got their money in full.
Mr. H o v e y . Yes; because the investment of their deposits is
regulated by law.
Mr. S e i b e r l i n g . I understand, but I say that it has worked a
hardship on your commercial depositors, who did not get 100 cents
on the dollar.
Mr. H o v e y . That is right.
Mr. S e i b e r l i n g . They had the security of double liability, too.
Mr. H o v e y . The capital stock liability first went to take care of the
savings depositor, who received the greatest piotection.
Mr. S e i b e r l i n g . Irrespective of what your law may be up there,
do you think that one depositor in a bank is entitled to any more
security than any other depositor?
Mr. H o v e y . We treat the savings depositor the same as a bene
ficiary under a trust. Those are trust funds.
Mr. S e i b e r l i n g . But I am asking you for your opinion about
that. Do you think that one depositor is entitled to more security
than any otfier depositor in a bank?
Mr. H o v e y . I th in k so, y e s.
Mr. S e i b e r l i n g . And your reason for that, I suppose, is because
he can not draw it out right away— is that the reason?
Mr. H o v e y . Not necessarily. The deposit is made under different
conditions. The savings deposit is something that may be a person’s
entire investment; it often is the entire investment of a small wage
BRANCH, CHAIN, AND GROUP BANKING
1659
earner or a man of small means, whereas in the commercial depart
ment-----Mr. S e i b e r l i n g . Y o u put it entirely on a philanthropic basis?
Mr. H o v e y . T w o different bases altogether.
Mr. S e i b e r l i n g . That is all.
Mr. L u c e . It is a quarter of 12, and I presume that members of
the committee will want to be on the floor of the House. So we will
adjourn to 2.30 o ’clock.
(Thereupon, at 11.45 o ’clock a. m., a recess w~as taken until 2.30
o ’clock p. m.)
AFTER RECESS
The hearing was resumed at 2.30 p. m., at the conclusion of the
recess.
Mr. L u c e . The committee will come to order.
STATEMENT OF ROY A. HOVEY— Resumed
Mr. L u c e . Mr. Wingo, do you desire to address some questions to
Mr. Hovey?
Mr. W i n g o . Unfortunately I had to be at another meeting this
morning and I did not hear his original statement; so I am hardly in
a position to question him.
Mr. L u c e . Judge Brand.
Mr. B r a n d . In answer to one of Mr. Luce’s questions, and in dis
cussing group bank systems, you stated that you had not seen any
deleterious effect and had not had discord or any trouble up to date
due to existing group banking system, but it did afford means to
affect the standing of depositors and borrowers in the banks; that it
might become injurious to depositors and borrowers in one of your
savings banks, referring to State banks.
Now, did you mean to exclude stockholders or was your failure to
do so due to inadvertence. As I understood your statement, it is your
opinion that this group banking system might arrive at a point
where it would interfere with the banking system of Massachusetts—
might injure depositors and borrowers, but you did not include
stockholders.
Mr. H o v e y . Well, if it was the result of poor management which
resulted in loss, of course it would affect the stockholders. It might
become necessary to levy an assessment to make good any losses that
might be incurred.
Mr. B r a n d . The stockholders would be affected first, it would seem
to me. What is the liabilit}- in the banks in your State?
Mr. H o v e y . One hundred per ce n t.
Mr. B r a n d . N o w , in another part of that statement, Mr. Witness,
you stated that the time might come when the group system would
have a bad effect on banks generally up there. That is the part that
I had marked in your statement and which I wanted to read to you.
You used the word “ trouble” or it would be productive of trouble to
the other banks now doing business successfully in your State. Do you
recall that part of your statement?
Mr. H o v e y . I do n o t recall just w h a t y o u h a v e reference to.
1660
BRANCH, CHAIN, AND GROUP BANKING
Mr. B r a n d . I refer to page 7 of your statement and this portion
thereof:
I have no quarrel with the system in theory and wTould not object to it if proper
operation could be guaranteed, but, granting that there are advantages in actual
practice it can too easily be subjected to improper use and when a company of
banks operated under more than one code of laws and more than one superseding
authority the opportunity for misuse is enlarged.
Mr. H o v e y . It might bring trouble.
Mr. B r a n d . Well, now, amplify that statement. In what way
would it bring trouble to the other banks? You have in mind what I
am trying to call your attention to?
Mr. H o v e y . Well, I do not know as I could answer that in just
the way you are looking for. Other than that portion of my State
quoted by you.
Mr. B r a n d . Will the time ever arrive if this group system of bank
ing gets a foothold in your State and continues to take over banks
and go into other States where other unit banks are established,
would it be injurious to the banks now in existence?
Mr. H o v e y . That would reflect back on the character of the man
agement of the group. Some groups might be managed very ably
which would be beneficial for the smaller bank and also the reverse
might be true if the character of the management was not looking
toward the proper conduct of its various group members, but rather
to its own profits.
Mr. B r a n d . If it is bad management on the part of the group
bank, how would the other banks be hurt?
Mr. H o v e y . The management of the individual bank as well as
of the parent bank------ ■
Mr. L u c e . I think the judge has in mind not the bank in the group
but an independent unit bank in the same community.
Mr. H o v e y . Y o u mean a competitor?
Mr. B r a n d . Yes. It is not material to my inquiry whether group
banks are successfully managed or not. I am more interested at
the present in the competitors of the group systems, the independent
unit banks. The chairman has the right idea about it. What
effect would bad or good management or group banking have on
competitors?
Mr. H o v e y . A group bank, in a large group of banks, might
furnish more facilities than a smaller bank could alone which might
draw business away from the other banks.
Mr. B r a n d . Would it not have that effect?
Mr. H o v e y . It is quite apt to— that is, a properly managed group
bank would.
Mr. B r a n d . Ultimately, is it not possible that it could drive out a
competitor?
Mr. H o v e y . I have in mind also another effect. A group bank
might offer a higher rate of interest than it could afford to pay to
get business from the other banks and thus jeopard its own depositors.
Mr. B r a n d . And would it not also hurt the competitors?
Mr. H o v e y . It would hurt both.
Mr. B r a n d . I am not now interested in the group bank. I am
making my inquiry relative to the independent unit bank.
Mr. H o v e y . Undoubtedly it would feel the effect.
BRANCH, CHAIN, AND GROUP BANKING
1661
Mr. B r a n d . Would it not have the effect of taking depositors away
from the competing bank?
Mr. H o v e y . I think so.
Mr. B r a n d . Suppose, for instance, this branch of a group sj^stem
offers to pay 5% per cent to savings depositors, the other banks not
paying over 4 per cent: Would not that hurt?
Mr. H o v e y . Y e s .
Mr. B r a n d . Suppose the old independent unit bank is lending
money at 8 per cent, and the branch of a group bank comes in and
says, “ We will lend money at 6 per cent:” Will not that hurt them?
Mr. H o v e y . Yes, sir.
Mr. B r a n d . I s not there a possibility of a number of group banks
or of branch banks setting up this institution in a county where
now only unit banks exist of breaking down the unit and independent
banks.
Mr. H o v e y . Quite possible.
Mr. B r a n d . WTould you say that there would be a probability that
such would be the effect?
Mr. H o v e y . I do not know that I would want to go as strong as
that. The chances are it would.
Mr. B r a n d . These group banks would not hesitate to do that if
they wanted to?
Mr. H o v e y . They might go to any length to get business.
Mr. L u c e . Is that all?
Mrs. P r a t t . I have looked through your statement very briefly
but I judge it is largely based upon condition in Massachusetts.
I think you stated that almost any village of any size is within 15
miles of a bank?
Mr. H o v e y , Almost any; yes.
Mrs. P r a t t . I know Massachusetts very well. That means there
is not a rural, or very little rural, community in Massachusetts.
Almost all of those little towns flow one into the other. Of course the
problem before us is not applicable to an old grown-up State like
Massachusetts where I judge you are opposed to anything but the
unit bank; that is, you feel that the unit bank-----Mr. H o v e y . It is favored in our State.
Mrs. P r a t t . It is favored in your State?
Mr. H o v e y . Yes.
Mrs. P r a t t . H o w would you meet the situation where you have
great expanses of country and very scattered communities at long
distances from central banks? You could not have, perhaps, a
unit bank; it could not exist, and yet those people are entitled to
banking facilities and that is the situation I think we will have to meet.
I assume from your statement that possibly it will have to be done
by each State.
Mr. H o v e y . That is what I mean when I said while we are opposed
to a State-wide policy, we realized conditions in other states might
warrant its adoption.
Mrs. P r a t t . Y o u think it should be confined to state branch
banking and not national branch banking?
Mr. H o v e y . That is the way I feel.
Mrs. P r a t t . Y o u would b e opposed to the suggestion brought
100136— 3 0 — v o l 2 p t 12--------7
1662
BRANCH, CH AIN , AND GROUP BANKING
forward here of trade areas or areas coterminous with Federal reserve
districts? You think that is too wide?
Mr. H o v e y . I think for the present such changes as come should
come gradually. That may eventually be a desirable plan, but I do
not think any wide extension should be granted all at once.
Mrs. P r a t t . Along the line that Judge Brand has been speaking,
about the possibility of a branch bank or a bank belonging to a group
coming into a locality where there was a unit bank: After all, the
banking business is not altruistic any more than any other business.
D o not banks have to meet competition as much as any business?
Have you not a perfect right to go in and establish-----Mr. H o v e y . Yes, to some extent, but in Massachusetts we w^ould
not approve the establishment of a branch in a community that was
already served, unless we thought there was a field there for another
successful bank.
Mrs. P r a t t . Even though it offered the possibility of giving the
people better service and higher rates of interest?
Mr. H o v e y . We would not allow the establishment of a bank
just for competitive purposes.
Mrs. P r a i t . D o you believe that is perfectly fair to a community?
Mr. H o v e y . If they are receiving ample facilities already, yes;
because if you overbank a community you will probably have weak
banks instead of strong banks. The trouble is, in many places, there
are too many banks.
Mrs. P r a t t . I think it has been brought out in the hearings, especi
ally in the Western States, that the various agencies set up during the
war, together with the banks already in existence, provided too many
banking facilities. You would not be in sympathy a,t all with the idea
of branch banking?
Mr. H o v e y . In my statement I said I would favor branch banking
over group banking, but I was not ready to see it become too wide
spread— that is, the privilege become too liberal.
Mrs. P r a t t . Y o u are opposed to such mergers as have taken place
in New York? You call those mergers group banking, such as the
Bank of Manhattan and the Chase National? That is what you call
group banking, is it not?
Mr. H o v e y . When I had reference to group banks, I had reference to
a number of banks under the same control; not where they have been
consolidated into one bank.
Mrs. P r a t t . Y o u are not opposed to these consolidations or mergers
but only to group banks or branch banks?
Mr. H o v e y . I h a v e n o t ta k e n a n y definite sta n d .
Mrs. P r a t t . Y o u do n o t wish to ?
Mr. H o v e y . N o .
Mr. L u c e . Mr. Wingo, has anything else occurred to you?
Mr. W i n g o . Nothing else, thank you.
Mr. L u c e . There is one other matter I should like to inquire about
for the purposes of the record, and that is in the matter of trust com
panies that failed, of which you spoke this morning. Am I correct in
my impression that the underlying cause for these failures was the
advancing of money for promoting?
Mr. H o v e y . I do not know just which ones you refer to.
Mr. L u c e . The Tremont and others?
BRANCH, CH AIN , AND GROUP BANKING
1663
Mr. H o v e y . There was quite a little evidence of that, but I think
the real cause was poor management and poor judgment in making
their loans.
Mr. L u c e . Was it in any considerable measure due to making loans
on real estate?
Mr. H o v e y . No; I do not think it could be laid to that. Possibly
the report of the commissioner in 1922 will give the reason a little
clearer. I quote from that report:
A small group of Boston trust companies, controlled by men who lacked the
ability, the training, and, in some cases, the moral character requisite to the
proper administration of a bank, were so glaringly mismanaged and in such an
unsound condition that the most drastic of actions became necessary in order to
quickly avert a situation which was inviting a financial crisis in the city of Boston.
Mr. L u c e . We have had some reference in the hearings to what
seems a change in the character of banking which has marked the last
10 or 20 years— the lessening of discount of commercial paper and
the increase in the investment in securities and the financing of
corporate enterprises. Another phase of this question arose when
the McFadden bill was under consideration, the testimony at that time
showing a marked desire, on the part particularly of the western banks,
to have larger opportunities to place their funds upon mortgages.
Do you look without any apprehension on the increasing part that
the banks are playing in the matter of securities?
Mr. H o v e y . I do not know as I have given any particular attention
to that phase of it. Some of our trust companies have organized
corporations for that purpose which have been controlled by banks.
The prime purpose was for the purpose of buying and selling of
securities, which previously had been carried on by the banks them
selves; that is, they separated the two businesses.
Mr. L u c e . The allegation is made that this development of which
you are speaking, has tempted some financial institutions to unload on
trust funds the less safe securities which the bank may undertake to
handle in an allotment for placing securities throughout the country,
and that affiliated investing institution finds it almost impossible
to exercise independent judgment as to the value of the security when
the possibility of a profit on the part of the bank is a factor in the
situation. Have we been troubled with that in Massachusetts?
Mr. H o v e y . No. I think I can say quite definitely that the trust
companies have been very careful in the investment of trust funds in
their keeping and they have not taken advantage of any issues in
which they may have been interested in selling. Some of them have
even gone so far in their trust department as not to purchase any
securities from their investment corporation.
Mr. L u c e . Would it be desirable to enforce that rightesous prin
ciple by law or can it be safely left to the consciences of the banks of
the country?
Mr. H o v e y . Speaking for Massachusetts only, from our experience
I think it can be left to our own banks. As you know, we have no
statutes that regulate the investment of trust funds. I think the
record has been exceptionally clear in that matter and the losses have
been very rare.
Mr. L u c e . I think, sir, that concludes our inquiry unless you think
of something else you would like to volunteer.
1664
BRANCH, CH AIN , AND GROUP BANKING
Mr. H o v e y . I do n o t th in k o f a n y th in g ju s t n o w , b u t I s h a ll b e
g la d --------Mr. L u c e . If any further suggestions occur to you or anything
you wish to cover, I am sure that Chairman McFadden will be very
glad to insert them following your statement in the record, for all the
information and advice you can give will be very much desired.
Mr. B r a n d . I have one more question I would like to ask.
Mr. L u c e . Very well.
Mr. B r a n d . D o your banks belong to the Federal reserve system?
Mr. H o v e y . Twenty-five out of one hundred and one trust com
panies are members of the Federal reserve system.
Mr. B r a n d . Of the regular commercial banks?
Mr. H o v e y . Yes, sir; but none of the mutual savings banks are
members. Twenty-five of the trust companies are members.
Mr. B r a n d . What percentage of all banks in the State belong to
the Federal reserve system— approximately?
Mr. H o v e y . When you say “ all of the banks,” do you want to
include the savings banks or trust companies?
Mr. B r a n d . N o , just the commercial banks, including, if the words
include trust companies, in your State. What percentage?
Mr. H o v e y . Twenty-five per cent, approximately.
Mr. B r a n d . I am very much obliged to you, Mr. Witness.
Mr. L u c e . The committee will stand adjourned until to-morrow
morning at 10.30.
(Whereupon, at 3 o’clock p. m., the committee adjourned to meet
at 10.30 o’clock a. m., Friday, May 16, 1930.)
BRANCH, CHAIN, AND GROUP BANKING
W E D N E S D A Y , M A Y 2 1 , 1 9 30
H
C
ouse
o m m it t e e e
on
of
B
R
e p r e s e n t a t iv e s ,
a n k in g
and
C
urrency,
Washington, D. C.
The committee met in the committee room, Capitol, at 11 o’clock
a . m., Hon. Robert Luce presiding.
Mr. L u c e . The committee will come to order.
Mr. Nahm, we are sitting for the purpose of getting such informa
tion and judgment as we can in the matter of branch, chain, and
group banking, and we shall be grateful to hear your views in the
matter.
STATEMENT OF MAX B. NAHM, VICE PRESIDENT, CITIZENS
NATIONAL BANK AND BOWLING GREEN TRUST CO., BOWLING
GREEN, KY.
Mr. N a h m . Banking is a business, the people’s business. It has
common law rights. It deals in credits which grow out of commerce
and agriculture, in the production and exchange of the needs of
human life.
In a nation where over 90 per cent of the business transactions are
settled by check, where the humblest worker carries a bank account,
where the bank and its facilities are indispensable instruments to sus
tain modern life and enterprise, any profound structural change
should arrest attention and invite study.
The individual in the banking business is the genius of the Ameri
can people in financial action. The history and development of the
individual began only with our Declaration of Independence, that all
men are born free and equal. All history before that time was the
story of the overlord.
Right into the beginning of banking went the evolution of the
individual, the unit banker. His history has run parallel with our
changing fortunes. Under his financial administrations this country
has grown great and rich.
In the last decade business in general has tended toward larger
operating units with huge capital funds, more efficient and trained
management, grinding out mass production. Banking is following
at the heels of this movement.
The depositing public must be protected but there should be no
experimenting about it. Theories should be well considered, but
only slowly adopted. Changes are needed to adjust the banking
business to new conditions but only such changes as will accomplish
that, and no more.
It is too early to arrive at definite conclusions or to make positive
determination upon the various systems of banking that are now
1665
1666
BRANCH, CH AIN, AND GROUP BANKING
being put into operation. However, there seems to be a feeling in
some minds that the unit system has broken down. To this I desire
to address myself.
The total number of all banks in the United States at the end of
1929 was 24,645 head offices; adding branches numbering 3,547
gives a complete total of 28,192.
Of these, 21,839 were unit banks; that is, banks having no
branches and belonging to no group or chain, or about 70 per cent
of all.
The loans and investments of all banks were $58,461,000,000; of
unit banks $28,445,000,000, about 48 per cent.
This large proportion of banks with a business so great is too vast
to rest under the imputation of failure. Is it not incumbent upon
us, while we are studying branch, chain, and group banking, to analyze
all statistics concerning unit banks and attempt to arrive at definite
means to protect them by laws and by well thought-out conclu
sions? If the unit banks need adjustment to the changing conditions
of to-day, and no doubt they do, is not this our first duty before we
convert ourselves to some new theory of banking, perhaps not germane
to our theory of life?
Fortunately, the recent hearings before the House Committee on
Banking and Currency furnish us with ample statistics for complete
analysis as to bank failures.
Let us separate banks according to capital into three groups, banks
of $1,000,000 and over, banks of $100,000 and over, and banks of
less than $100,000.
In the last 10 years, no banks with $2,000,000 capital and over
failed, and only four banks, one national and three State, failed with
capital of $1,000,000 and over. So this first class is practically
eliminated.
In the 8-year period ending in 1927, out of a total of 4,513 bank
failures, only 12 per cent had a capital of $100,000 and over.
Eighty-eight per cent of failed banks fell in the third group, under
$100,000 capital.
Now in the 9-year period, 1921-1929, 4,985 banks failed, 91.6 per
cent in towns of 10,000 inhabitants or less.
Therefore, the great middle class of banks, the typical American
unit banks, in towns of over 10,000 inhabitants, were responsible for
only 8.4 per cent of the failures, and the banks of $100,000 capital
and over up to $1,000,000 capital were responsible for only 12 per
cent of the failures. ' These banks which we may class closely together
have a fair record, and may well demand study with a view to the
protection of the law and betterment of their fairly good condition
They are not great sinners in the failed class, and need only to be
adjusted to the changing conditions of our generation. They are
surprisingly clear of trouble.
Then let us consider the third class of banks where really all the
trouble lies. The banks in towns of less than 10,000 inhabitants are
responsible for 91.6 per cent of bank failures, and the banks of less
than $100,000 capital for 88 per cent of the failures.
The last decade that we have selected for study has been subjected
to the severest of all tests, inflation and deflation following a great war.
The agricultural States have borne the brunt of this. We find— and
I got this from Mr. Busby— that four agricultural States on the
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1667
Atlantic coast, North and South Carolina, Georgia, and Florida,
with a population in 1920 of 7% per cent of the population of the
United States, had 729 or 15K per cent of the bank failures. In the
Northwest, nine agricultural States, Minnesota, Iowa, Missouri,
Oklahoma, North and South Dakota, Nebraska, Kansas, and M on
tana, with 14K per cent of the population, had 2,768 or 56% per cent
of the bank failures.
So these 13 States with 22 per cent of the population had 71.6 per
cent of the bank failures, while the remaining 35 States with 78 per
cent of the population had only 28.4 per cent of the bank failures.
This outline does not complete the picture. Not all of these banks
failed. The communities failed. There was a pioneer need for
banks at crossroads and in villages. Many were speculations started
to sell safes, fixtures and jobs. Their service and clientele passed on
to the larger cities when hard sense operating on hard roads with
cheap automobiles and trucks came. With these disappearing banks
went the country store, the country doctor, the preacher, and the
inhabitants. They ail went together. These banks would have
closed their doors, had they been branch, chain or group. This is an
economic, not an eleemosynary development, and do not imagine
that remote city branches would remain open under such pressure.
This is a fundamental change. To stay on the map a town must
locate factories or colleges, or become a center of a network of roads
and draw from other towns. Sixty per cent of failures were in towns
of 1,000 or less; 63 per cent had $25,000 capital or less.
This analysis reveals the strength and also the weakness of unit
banks. This weakness in some small banks in some small towns can
not be entirely eradicated. It does not require branch banking to
eliminate this trouble, for it is self eliminating by the eventual dis
appearance of these banks. Were they branches, or groups, or chains,
they would disappear in the long run for the business on which they
should subsist is passing away. Parent banks might be able to stand
the loss, but in the long run common sense would close such branches.
It can not be the purpose of government to create size to satisfy the
ambitions of bankers, but to protect the depositing public. Even the
frozen real estate loans that have closed many small banks are not
indicate of small bank frozen brains, for the large institutions, the
Federal farm loan banks and the great insurance companies have
suffered severely from the same cause, and some joint stock farm loan
banks have fallen into receivership from the same cause. This is a
matter of judgment, not size. This landslide to bigness, mass pro
duction, creation of enormous units, and ambition for great profits
is a natural development, but it does not reach our problem.
Our free and independent unit banks standing on their own founda
tions have the resources within themselves to meet these emergencies.
A small unit bank in a growing community can be properly conducted,
and can make good loans intelligently. Local credit can thrive best
in a unit bank, and local capital there has its widest scope and
opportunity. The president and board of directors are residents and
prominent in all local affairs. Its business is germane to that com
munity alone.
To have our problem well before us we must recognize the fact that
within the last 20 years small banks have experienced losses of sources
of profit peculiar to themselves. Wisely or unwisely, they lost their
1668
BEAN"CH? CH AIN, AND GEOUP BANKING
exchange on checks, charges on growing float, loans to and deposits of
small merchants driven out by chain stores, and these chain stores
seldom carry worth-while deposits and never borrow from small
banks. Taxes, insurance, rents, salaries, and incidental charges have
grown out of proportion to increased business.
What are the remedies?
Broadly, better banking, where there is a filed for a bank to thrive
in, and there must be a scientific revision of banking laws and banking
practices in unit banks.
The generic difficulty with small banks is that they have no proper
diversification of business or assets. The trust business is more perm
anent than the banking business, and in the long run more profitable.
The investment business is growing and calls for a securities depart
ment. To include these departments means consolidations and
mergers of banks of which there are far too many, 20,000 in towns
of 10,000 inhabitants or less. This is only possible in fair-sized
communities.
Diversified assets mean a proper secondary reserve and balanced
investments that all banks should have to render them immune
from crop failures or neighborhood collapses. Such a reserve consists
of good bonds and marketable commercial paper.
Branches and groups do shift funds to locations where they are
needed, but so does membership in the Federal reserve system.
The small unit bank in any community can maintain its independence
in competition with any multiple system of banking by becoming a
member of this system. It can hold its traditional relation with its
city correspondent and besides secure a guaranty against tight con
ditions by the protection which the Federal reserve system has
afforded for 16 years. With this anchor to windward, it can serve
its patrons in comfort under any conditions that may arise in good
banking. It is the one guarantee that the unit bank can continue
to exist.
M ay we suggest a few preventive laws to afford protection to
depositors?
No new bank should be chartered with less than $50,000 capital.
Seventy-one per cent of all such banks have failed in the last 10 years.
Mr. D u n b a r . Seventy-one per cent of all banks with less than
$50,000 capital have failed in the last 10 years?
Mr. N a h m . Yes; 71 per cent of all banks chartered with less than
$50,000 capital have failed in the last 10 years.
Now, continuing:
No bank should be chartered where the banking needs are supplied
and the field is properly served.
No bank should be chartered unless its personnel includes men
trained in banking.
No fees collected from banks by States should be used for any
other purpose than to secure highly trained examiners.
Then banks should charge for unprofitable services and recoup their
lost profits by proper service charges on unprofitable accounts, charges
upon float that is paid by them, charges for expense incurred by issue
of bad checks. This requires some backbone in a country banker,
but no other business man suffers so greatly for unpaid services.
The human element enters largely into our problems. The psy
chology of the human being must be considered.
branch
,
c h a in
,
and
group
b a n k in g
1669
It takes time to train men to operate the huge aggregations of
capital now gathering into the banking business. It requires health,
brains, and experience. Many men in these great financial mills are
breaking under the strain. They frankly declare that they can not
see through it all, that it is too big.
Most country banks are 1-man banks, men who, from a banking
standpoint, though perhaps not in organizing ability, are abler men
than the men developing the multiple metropolitan banks.
Reduce this man to a managing clerk, take away from him his full
authority and autonomy, give him his daily instructions and a com
plex set of rules to abide by and you will in time make of him a mere
cog in a great machine, instead of an individualistic, resourceful
American.
It is a melancholy experience to be thrown with men whose orig
inality and initiative have been crushed out of them by the weight
of authority. That is paternalism in its deadliest form.
The young man will not seek the branch-banking business, nor
will those who are employed be tempted to remain memorizing a set
of rules, with little opportunity to develop initiative, with no ambi
tion left to become the president of a bank, but only a manager at
a smaller salary. The honor and the stability of the job is gone, and
local understudies will not be found.
Multiple banks naturally seek the best banks in the towns, and
buy and control them. If they retrograde, the one man gone, and
fail to pay, as many will, the bank will be closed. What then is
left? Those banks not so good are left, and the result may be, if
not disastrous, worse than it was before.
The country banker knows men and localities. The manager knows
rules and collaterals. Within his special sphere of activity, the coun
try man is just as keen as his city brother.
At best, the local manager can be only advisory and must refer
back to the head office all great problems. Men of high type will
leave this nature of employment and the substitute may be a robot,
bound by rigid instruction, enforced in a mechanical way.
The enterprises of a town will interest a unit banker, and not appeal
to a branch of a distant city. The one man has knowledge of the
individuals, their character and ambitions, and sympathizes with their
ideas of developing the city.
The other, being under foreign sway, can not enter into that inti
mate relatino and would refuse such loans. It takes a high order of
talent to estimate and make such a loan correctly, but on such decisions
the growth of the country commercially has largely been predicated.
Destroy the power and disposition to foster this growth and you have
broken the main-spring of American resource. The history of many
of our greatest enterprises began in such loans.
So, if we find that the unit system of banking has not broken down
as a whole, but only in part, and only in definite sections, in only some
small banks, in some small towns, is it not then worth while to protect,
develop and foster the remaining unit banks?
Let us realize that unit banking is a profession, and that multiple
banking is a large-sized business.
Let us adhere to unit banking and depart from it only so far as
developments make it necessary to do so. Let us abandon it only
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BRANCH, CH AIN, AND GEOTJP BANKING
to the extent that we must to eliminate its defects, and restore it
to its former efficiency.
Mr. L u c e . Mr. Nahm, you have just suggested some laws that
would afford protection to depositors. Is it not a fact that a con
siderable number of these banks that have failed were chartered by
the States?
Mr. N a h m . Yes, sir; more of them, sir, than national banks.
Mr. L u c e . Then your remedy would not be sufficient unless the
States cooperated?
Mr. N a h m . N o , sir; these would mainly be in the States.
Mr. L u c e . Would you think it advisable to try to find any way in
which we could coerce the States or control the States in that regard?
I might say that for a long time I have been of the opinion that one of
the fundamental factors in this situation is the maintenance in this
country of two different systems of banks, one national and the other
State, and I have feared that sometime it would lead to much more
important trouble than now exists. Your suggestion here, however,
brings it right to the surface. How can we do anything in the direc
tion of controlling or coercing States in this regard?
Mr. N a h m . Well, sir, in the first place, with reference to these
suggestions I think the national bank law allows banks of $25,000 in
small towns, of 3,000, I think, or less. I would suggest, if I may, that
that should be increased at least to $50,000, if not to $100,000,
provided that the States themselves would also go to $50,000 or
$100,000. Even if the States did not, I might suggest that it should
go at least to $50,000.
Mr. S e i b e r l i n g . M ay I interrupt for just a minute?
Mr. L u c e . Yes.
Mr. S e i b e r l i n g . In connection with that 71 per cent of failures,
did you give us the percentage of national bank failures and State
bank failures? You did not give us that, did you?
Mr. N a h m . N o , sir, I did not, but I think I have it here.
Mr. S e i b e r l i n g . It would be interesting to know that.
Mr. N a h m . In nine years, the failures of national banks numbered
763; of State banks, 4877.
Mr. S e i b e r l i n g . What would that percentage be?,
Mr. N a h m . If you want the failures in small towns, I think that I
have that also.
Mr. S e i b e r l i n g . Can you give us those percentages with respect
to the banks having less than $50,000 capital?
Mr. N a h m . As to those that failed and that had less than $50,000
capital?
Mr. S e i b e r l i n g . Yes.
Mr. N a h m . Those that have failed with a capital of below $25,000
are 63 per cent.
Mr. S e i b e r l i n g . What perentage of those were national banks and
what percentage State banks?
Mr. N a h m . I can not tell you that, but I will go into that in an
other way in a minute.
Those that have failed with a capital below $50,000 constitute 71
per cent, and that comes from Mr. Pole’s testimony, in book 1, page 11.
M r . S e i b e r l i n g . What I am after is what percentage of those
constituted national banks and what percentage State banks?
BRANCH, CHAIN, AND GROUP BANKING
1671
Mr. N a h m . Well, the failures have been for the most part in the
relation of 6 or 7 State banks to one national bank.
Mr. S e i b e r l i n g . H o w is that?
Mr. N a h m . The percentage of banks that have failed has been in
the relation, acutal numerical relation, of 6 or 7 State banks to one
national bank; but, counting the number of State and national banks,
the relation has been about 3 to 1.
Mr. S e i b e r l i n g . That is all.
Mr. L u c e . If it should prove impracticable to coerce these States
into adopting a wiser banking system, would we not then be justified
in attempting to meet the situation in the way Mr. Pole suggests?
Mr. N a h m . Yes, sir.
Mr. L u c e . What is your judgment of Mr. Pole’s attitude in this
matter?
Mr. N a h m . I would be in favor of Mr. Pole’s proposition of having
branches in limited trade areas under the following restructions:
First, that these branches be extended only to cities of 10,000 or less
inhabitants, because that is where, as I attempted to show, the trouble
lies;
Second, that banks acquiring such branches must be of a high type,
well officered and well conducted, with a successful business of its
own, and to be under the control of the Comptroller of the Currency;
Third, that the territory invaded be one not already completely
served by existing banks, this to be left to the judgment of the Comp
troller of the Currency;
Fourth, that no branch be placed in a territory where there is no
need for a bank, and where the population and business have passed
to a larger city, such matters to be determined by the Comptroller of
the Currency.
With restrictions of this nature, Mr. Pole’s proposition would
probably be one of the solutions of the banking troubles of small towns
and small banks.
Mr. L u c e . We observe that wherever there is an attempt, either
National or State, to interfere with the tendency toward consolida
tions, apparently we simply drive the men who see profit in consolida
tion to other recourse. For example, within the last two or three
days the newspapers have carried the announcement that 50 banks in
Pennsylvania are in process of being amalgamated in a group system.
So it would seem that if there is to be Federal legislation, we shall
have to anticipate, if we can, the effect of restrictions that do not go
any further than what you suggest.
What are we going to do about a situation like that in Pennsylvania,
or should we do anything?
Mr. N a h m . Mr. Luce, I would say that any system of banking
with an ideal set-up of capital and surplus and secondary reserve,
with diversified investments in a territory where such a group can
profitably operate, is all right ; but the trouble will come, if it comes,
when the men and the conditions are not so ideal.
Now, what I fear and what I tried to bring out in my statement is
a condition when it arises of having set-ups and men to run them not
so ideal.
Now, as to what to do, as far as I have been able to observe from
reading all the testimony and thinking over the matter, Mr. Pole’s
1672
BRANCH, CH AIN, AND GROUP BANKING
proposition, with the restrictions that I have tried to bring out,
would be, I believe, a very valuable set-up.
Mr. L u c e . Mr. Hooper, have you any questions?
Mr. H o o p e r . I came in after Mr. Nahm had started his state
ment, and so I have not any questions to ask, but I do want to say
that from what I have heard of his statement I think it is one of the
most valuable and most instructive that we have had in this series of
hearings.
Mr. B r a n d . Mr. Witness, I did not get your last answer to the
chairman’s question. What was it you said about Mr. Pole’s proposi
tion?
Mr. N a h m . I believe that, with the restrictions that I have stated—
did you hear those restrictions?
Mr. B r a n d . Yes.
Mr. N a h m . I think it would be as valuable a mean£ of reaching the
proposition as any I know of.
Mr. B r a n d . I am much obliged. I did not hear your answer.
Mr. L u c e . Mr. Seiberling, y o u are next.
Mr. S e i b e r l i n g . I take it from hearing your statement that you
think the unit banker would be more interested in a new enterprise
in a small city than the branch manager,
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . And the small enterprises grow into large enter
prises in a community?
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . And the banker not only has to loan this small
enterprise money and nurse it along, but he has to give a lot of his
personal time and attention to it?
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . He has to do that for nothing, does he not?
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . And it is that personal interest and business
judgment that the unit banker gives to the small enterprise that you
think would be lost in branch banking?
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . Y o u say you do not believe that a bank should
do anything that is not profitable?
Mr. N a h m . Yes, sir; that is what I said.
Mr. S e i b e r l i n g . But you do think that it is justified in giving its
time and loaning its money, and maybe permitting over drafts at
times to a new industry, to help build it up?
Mr. N a h m . What I tried to bring out——
Mr. S e i b e r l i n g . I know, but if you will just get that question,
I think you can answer it.
Mr. N a h m . What was the question?
(Question repeated by the reporter as above recorded.)
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . N o w , you are familiar, I suppose, with the custom
of charging $1 a month to individuals where they do not have a
balance of so much in their accounts?
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . D o you do that in your bank?
Mr. N a h m . N o , sir. We are just beginning now to put in the
service charge of 50 cents a month, where an account does not average
as much as $50 during the month.
BRANCH, CH AIN, AND GROUP BANKING
1673
Mr. S e i b e r l i n g . Y o u do that on the theory that you should not
carry on account at a loss?
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . Y o u do not think the principle that applies to a
small industry in your town should apply to the individual, then?
M r. N a h m . I can not say that I do.
Mr. S e i b e r l i n g . I s not the individual likely to become a big
depositor also?
Mr. N a h m . Yes, sir. The purpose of the service charge is not to
collect, but to bring the individual to have a worth-while bank
account, for his own good as well as for the good of the bank.
Mr. S e i b e r l i n g . By the way, who invented the idea of making
this charge? It is rather a new thing, just a few years old.
Mr. N a h m . I do not know, sir.
Mr. S e i b e r l i n g . Who is putting it in your bank?
Mr. N a h m . We are, ourselves.
Mr. S e i b e r l i n g . Who is furnishing the scheme, and what are 37ou
paying for it?
M r. N a h m . Nothing.
Mr. S e i b e r l i n g . There is some institution in this country that has
been doing that and charging the banks for it.
Mr. N a h m . I think so, but the American Bankers Association will
furnish all the information you want without charge.
Mr. S e i b e r l i n g . But, in the beginning, it was simply some
body’s scheme to make money for himself, to get the banks to put this
in operation.
Mr. N a h m . I do not know, sir.
Mr. S e i b e r l i n g . H o w do you think a young married man feels
when he is telling his wife that he has been unable to carry a balance
in the bank of $100 and the bank has closed his account, and he can
not any longer write checks on the bank, but they must carry their
money around in their stockings and pay their bills in cash?
Mr. N a h m . Well, sir, I do not think the banks close his account.
If he does not carry $100 in the bank, they charge him 50 cents in oar
neighborhood.
Mr. S e i b e r l i n g . They charge him a dollar in many banks, do they
not?
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . Are you going to pay any interest to your depos
itor who carries more than a balance of $100?
M r. N a h m . N o, sir.
Mr. S e i b e r l i n g . What kind of a proposition is it that only works
one way? Do you not think that when an account becomes profitable,
you should then pay some interest on that account?
M r. N ah m . N o , sir.
Mr. S e i b e r l i n g . Why not?
Mr. N a h m . For the reason that banking includes many more things
than merely carrying their accounts. It includes taking care of a
man’s money so that when he calls for it, it will be there for him,
which he can not do for himself. It includes paying his check, no
matter where he goes in the United States or Canada, or, sometimes,
Europe.
Mr. S e i b e r l i n g . Let us put it another way. You think, then,
that a bank should be paid for any service that it renders at a loss?
1674
BEANCH, CH AIN, AND GEOUP BANKING
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . But it is under no obligation to pay for a service
it renders at a profit?
Mr. N a h m . It does pay for a service that it renders at a profit,
Mr. Seiberling, in the service itself. In other words, if there were
no bank in the community, and some communities have none, one
would have to carry his money in his pocket or in some secret place
at home and probably have it stolen, putting a premium upon a
robber coming in and maybe killing him or his family. A bank
renders a service when it carries money for a man and is ready to pay
it at any and all times when the check is presented.
Mr. S e i b e r l i n g . There are many banks that put on campaigns
to get accounts. You have heard of that, have you not?
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . They spend two or three weeks putting on their
campaigns, and they go around to back doors and get servant girls and
chauffeurs and everybody else to open accounts with them, and then
a year or two later they come around, after these people have opened
these accounts, and after proclaiming how many new accounts they
have got, and then they say to these people, “ Now, you are not carry
ing enough balance here, and you have to close your account and
get out of the bank.
What do you think of that?
Mr. N a h n . That they have to close their accounts and get out
of the bank?
Mr. S e i b e r l i n g . Or pay $1 a month.
Mr. N a h m . Of the banks with a capital below $50,000, 71 per cent,
as I stated, have failed. Now, the reason that those banks have
failed is because a bank does more for nothing than any other char
acter of business.
Mr. S e i b e r l i n g . But you are not answering my question.
Mr. N a h m . I am going to answer it,
Mr. S e i b e r l i n g . I asked you whether you thought it was right.
Mr. N a h m . Yes, sir; I do think it is right.
Mr. S e i b e r l i n g . T o solicit an account and at the time impose no
condition upon it, and then come around later and tell them that
they have to carry a certain balance or pay $1 a month or get out
do you think that is all right?
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . Y o u do not think that the lawyer, for instance,
does a lot of work for nothing, do you?
Mr. N a h m . Of course he does, but not as much as the banks.
Mr. S e i b e r l i n g . Y o u do not think the doctor does, do you?
Mr. N a h m . Yes, sir; but not as much as the banks.
Mr. S e i b e r l i n g . What makes you think that a bank is a charit
able institution?
Mr. N a h m . A man steps into a bank, say in Baltimore, with a
check on one of the banks in Washington, and they give him the
money, and it is three or four days before they get that money back.
That is a service for nothing.
Mr. S e i b e r l i n g . They do not do that for a man who has not good
credit at the bank. They will cash his check for him if he has good
credit, but he must furnish a good indorser for the bank.
BRANCH, CH AIN, AND GEOTJP BANKING
1675
Mr. N a h m . Our bank would do it for you, sir, although we do not
know you, provided that you satisfied us as to who you were.
Mr. S e i b e r l i n g . With a good indorser in your town.
Mr. N a h m . N o , sir; you would not need any indorser in that town.
Mr. S e i b e r l i n g . Where is the place where your bank is?
Mr. N a h m . Bowling Green, Ky. Our banks do that, Mr Seiberling.
Mr. S e i b e r l i n g . I have pursued that subject far enough, and I
will ask you another question. You are the head of a national bank?
Mr. N a h m . I am vice president of a national bank and also of a
State bank.
Mr. S e i b e r l i n g . What real service do you get out of the Federal
reserve system?
Mr. N a h m . In order that you may know, I am a Federal reserve
director at St. Louis.
Mr. S e i b e r l i n g . That is all right, but what real service do you
Set?
Mr. N a h m . I think the greatest service that any bank can possibly
have-----Mr. S e i b e r l i n g . M y question is, what does your bank get out of
the Federal reserve system?
Mr. N a h m . In the first place, we have gotton out of the service an
elastic currency; we have gotten an absence of panics-----Mr. S e i b e r l i n g . Yes; I understand that, but, confining your
self-----Mr. N a h m . We do not have money panics.
Mr. S e i b e r l i n g . But what I am aiming at is this, the rediscount
ing of paper, and so forth.
Mr. N a h m . We get the rediscounting of paper when we need it.
Mr. S e i b e r l i n g . D o you think that the law should be liberalized
somewhat in that respect so that member banks can rediscount some
forms of paper that they can not discount now— for instance, that
paper secured by approved municipal bonds, or something of that
kind?
Mr. N a h m . Well, they can rediscount municipal warrants, with
short maturities.
Mr. S e i b e r l i n g . I am talking about municipal bonds, good
municipal bonds.
Mr. N a h m . At the present time there is in eligible paper about
$7,600,000,000.
Mr. S e i b e r l i n g . But that has been reduced. The corporations
do not have these acceptances to the extent that they used to have
them.
Mr. N a h m . Commercial paper is coming back slowly. I dare say
that within a year or two the amount of commercial paper will be
very nearly as big as it used to be, and as this financing that the cor
porations have done becomes absorbed into their plants they then go
back to the banks.
Mr. S e i b e r l i n g . Y o u see no reason why paper secured by good
municipal bonds, or paper secured by good commercial bonds, should
be subject to rediscount in the Federal reserve, do you?
Mr. N a h m . Well, provided they are exceedingly good municipal
bonds.
1676
BRANCH, CH AIN, AND GROUP BANKING
Mr. S e i b e r l i n g . If the law provided certain limitations, where the
tax duplicate was so and so and the limit of indebtedness was such?
They would have to put in a limitation in the law in order that they
might be good.
^Mr. N a h m . If they are absolutely high-class municipal bonds; yes,
sir.
Mr. S e i b e r l i n g . It would help, in a stringent money market, to
have municipal bonds eligible?
Mr. N a h m . Yes, sir; but with restrictions on the type of municipal
bonds.
Mr. S e i b e r l i n g . That is all.
Mr. L u c e . Mr. Dunbar, do you desire to question the witness now?
Mr. D u n b a r . Mr. Busby is so many times left out because he is
the last on the list, I should like to yield to him now and give him a
chance, and take up my questions after a while.
Mr. B u s b y . I am not particular at all about proceeding at this time.
Mr. B r a n d . M ay I ask one question?
Mr. S e i b e r l i n g . As far as I am concerned.
Mr. B r a n d . I do not think you answered Mr. Seiberling’s question
in regard to the benefit a Federal reserve bank is to an individual
bank that has no occasion to borrow money from the banks or dis
count any eligible paper.
Mr. N a h m . The absence of money panics, the insurance against
what we had in 1873 and in 1907-----Mr. B r a n d . We did not have the Federal reserve system in those
days.
Mr. N a h m . N o , sir.
Mr. B r a n d . What benefit does a member bank which has no
occasion to discount eligible paper with a Federal reserve bank recieve by reason of it being a member of the system?
Mr. N a h m . The only loss that a unit bank sustains in joining the
Federal reserve is the interest on its 7 per cent reserve— on the deposit
that it must place with the Federal reserve bank.
Mr. B r a n d . And may I interrupt you?
Mr. N a h m . Yes.
Mr. B r a n d . Another character of loss is the charges on checks.
It loses that, does it not?
Mr. N a h m . Yes, sir; it also has that loss.
Mr. B r a n d . N o w , considering those losses, when the bank has no
occasion to discount paper with the bank, what benefit is this system
to that class of banks?
Mr. N a h m . Well, sooner or later such bank most likely have to
rediscount somewhere. It can usually, if not all the time, rediscount
with the Federal reserve a little cheaper than it can with its corre
spondents.
Mr. B r a n d . Well, suppose it has no money to borrow from its
correspondent or from the Federal reserve bank either. What benefit
does it get out of its being a member of the system? That was part
of the question Mr. Seiberling asked.
Mr. N a h m . I would say two; first, insurance against panics; and
second, a reservoir to draw from would be there if it needed it, and
those are two great propositions to a man running a bank.
Mr. B r a n d . That is your answer to the question?
Mr. N a h m . Yes, sir.
BRANCH, CH AIN, AND GROUP BANKING
1677
Mr. B r a n d . D on’t you think that the Federal reserve system ought
to do something more than is now being done for the member banks?
Mr. N a h m . Yes, sir; I do.
Mr. B r a n d . I am glad to hear you say that. D on’t you think, to
put it in another form, there ought to be some benefit in a monetary
way to the banks, more than they have now?
Mr. N a h m . Yes, sir.
Mr. B r a n d . What way would you suggest that be done?
Mr. N a h m . I would suggest that the net earnings should be redis
tributed so as to give a member bank from 8 to 10 per cent instead of
6 per cent on his stock.
Mr. B r a n d . On his p a id c a p ita l sto c k ?
Mr. N a h m . Yes, sir.
Mr. B r a n d . From 8 to 10 per cent?
Mr. N a h m . Yes, sir.
Mr. B r a n d . You are the first witness who has appeared before us
up to date that I have heard of, outside of Mr. Ottley, of Atlanta, who
has made that concrete admission. And you are a member of the
Federal reserve or on the directorate of the Federal reserve bank?
Mr. N a h m . Yes, sir; at St. Louis.
Mr. B r a n d . Do you know whether or not they contemplate or are
considering doing anything like that?
Mr. N a h m . N o , sir; I h a v e no k n o w le d g e o f th a t.
Mr. L u c e . Mr. Busby, do you care to question the witness now?
Mr. B u s b y . Following up the thought that Mr. Brand was trying
to make clear, a bank that is eligible for membership in the Federal
reserve system receives an indirect benefit, whether it is a member or
not a member of the Federal reserve system, because of the existence
of the Federal reserve system, does it not?
Mr. N a h m . Yes, sir.
Mr. B u s b y . I have observed that in the agricultural field of opera
tions the cooperative agricultural organizations benefited greatly the
farmers who were not in those cooperative organizations, by reason
of the fact they took off the market, in a sense, or controlled in a way,
the price of those commodities through the larger method of con
suming or handling element that came in contact with the different
commodities; so, in the banking field, the bank that is eligible for
membership in the Federal reserve system or even if it is not eligible
for membership, has the same type of assurance back of its operation,
that this source of relief is in existence and can be called upon by its
correspondents, if not by it?
Mr. N a h m . Yes, sir.
Mr. B u s b y . And in that way it is a bulwark to the small bank as
well as the State banks that are members and the national banks that
are required to be members?
Mr. N a h m . Yes, sir.
Mr. B u s b y . And that is your idea of the benefits to be received by
the banking fraternity, if you term it that, even though they are not
members of the system?
Mr. N a h m . Yes, sir; absolutely.
Mr. B u s b y . Some one has suggested, in regard to the great number
of bank failures duirng the last nine years, that many of those banks
were organized prior to 1920 and were loaded up with types of loans
100136— BO— VOL 2 PT 12--------8
1678
BRANCH, CH AIN, AND GROUP BANKING
about 1920 and prior to that time, which loans they were never able
to realize on or, in other words, these loans have remained in a frozen
state and ultimately the banks had to go out of business when they
could not realize on the old loans. What is your idea in regard to that
thought?
Mr. N a h m . That is quite true, sir.
Mr. B u s b y . The suggestion has been made that few of the bank
failures have come to banks organized since the deflation period was
over in 1921; that the bank failures are not among recently organized
banks. Have you given any thought to that question?
Mr. N a h m . I would say that that is not entirely true. I think,
in the first place, there are too many banks in small places. In the
second place, there are a great many small places that are shown,
even by our census that is going on, where reports have been given
out, to be getting smaller.
Mr. B u s b y . Yes.
Mr. N a h m . And the business is simply going away a,nd is not there
and the banks located in such territory must, necessarily, eventually
close if that condition continues. Therefore, it makes no difference,
Mr. Busby, whether such banks were organized before 1920 or since;
it is a question of the territory being a profitable territory to operate
in.
Mr. B u s b y . With automobiles and transportation facilities that
bring business in contact with remote places, do you think that a
branch-banking system would maintain the old status of things much
better than a unit-bank system would maintain it?
Mr. N a h m . With the restrictions that I pointed out— did you hear
them?
Mr. B u s b y . Yes.
Mr. N a h m . With the restrictions I pointed out, I think it would.
Mr. B u s b y . Following out the last thought on the subject, it
would not be feasible for an independent bank or branch bank to
try to remain in a territory that did not need either one of them,
from a business standpoint?
Mr. N a h m . Absolutely.
Mr. B u s b y . And where formerly need was felt for banking activi
ties in a community, that need has passed away, largely?
Mr. N a h m . Yes, sir.
Mr. B u s b y . In many communities?
Mr. N a h m . Yes, sir.
Mr. B u s b y . We are becoming more concentered in our commercial
and industrial and banking activities as well— much more so than we
were a few years ago?
Mr. N a h m . Yes, sir.
Mr. B u s b y . Because of transportation, largely?
Mr. N a h m . Yes, sir.
Mr. B r a n d . D o you have overdrafts in your bank?
Mr. N a h m . N o , sir.
Mr. B r a n d . None?
Mr. N a h m . Not in the city of Bowling Green, Ky. Please let me
qualify that. We do not allow overdrafts, but in case a very good
patron should accidentally, or without knowledge of his own, over
draw his account slightly, we have two ways of paying that; first,
there is a small fund set aside of perhaps $4,000, out of which, when
BEANCH, CH AIN, AND GROUP BANKING
1679
the cashier or president thinks it advisable, they will pay that man’s
check to keep him from getting into trouble and having his check
protested, and immediately notify him and he comes right over and
settles that. I myself have given the cashier a written instrument
authorizing him to sign my note for an overdraft, if I should make
one while I am away from home, so as to prevent that. With those
two exceptions, we have no overdrafts.
Mr. B r a n d . Do you charge any interest on overdrafts of that
character?
Mr. N a h m . N o , sir.
Mr. B r a n d . D o you know of any banks that take care of these
overdrafts, that have a policy of rule to charge interest on the over
draft during the period of the overdraft?
Mr. N a h m . I think in England that is the rule. I think they do
business on an arranged overdraft basis and charge interest on
them.
Mr. B r a n d . Suppose I sent a check to the bank and have over
drawn $500, and it is 10 days before I get the money to the bank
to take care of it; should I not pay a reasonable rate of interest
on that overdraft for that time?
Mr. N a h m . Certainly.
Mr. B r a n d . Is such a charge as that made by any banks in the
United States?
Mr. N a h m . Yes, sir.
Mr. B r a n d . It is a proper charge, is it not?
Mr. N a h m . I th in k so.
Mr. B u s b y . Y o u spoke of the idea of Mr. Pole establishing branches
in certain restricted trade areas. Have you a definite notion as to a
proper trade area in which those branches ought to be established?
Mr. N a h m . N o sir; I have not.
Mr. B u s b y . D o you form a correct or accurate conception of
what Mr. Pole means by trade areas?
Mr. N a h m . I think so. I think his idea is that such trade areas—
it is a very indefinite proposition— that such trade areas are not to
go beyond Federal reserve districts and to be in such territory as
the ebb and flow of business of a given city exists in— ebb and flow
of trade, I should say.
Mr. B u s b y . What is your conception of the effect of holding
companies owning and controlling stocks in State banks, national
banks, investment companies and all types of business activities,
under the management of the holding company, with regard to its
effect on the unit bank and on business generally; in other words,
I am asking about a holding company of a very extensive nature?
Mr. N a h m . Well, I think the danger lies in their getting so big
and so multiform that the average man at the head of it will not
be able to see through it all and run it. As long as you have these
ideal men* who now seem to be organizing those companies, such as
Mr. Giannini, Mr. Decker, and Mr. Wakefield, I do not feel any
apprehension, but men die and their successors might not be able
to see through it.
Mr. B u s b y . Taking into consideration the unit bank and type of
credit extension that has developed our country to its present state
of development, does it not seem to you that this holding company
1680
BRANCH, CH AIN, AND GROUP BANKING
orgy we are entering into is a little beside the spirit of the business
of this Nation?
Mr. N a h m . Yes, sir.
Mr. B u s b y . D o you not think our problem is more in determining
what to do regarding the holding company than it is what to do
with the individual or unit bank? There are two or three angles to
be considered, are there not, just now?
Mr. N a h m . I would not say that it is more, for I think that the
unit bank— the small unit bank in a small town— has been your
greatest sufferer and they need attention. But both are problems
to be considered.
Mr. B u s b y . At the present time, does it not seem to you that
legislation in regard to controlling, defining or dealing with holding
companies would be just as much in order as legislation to deal with
branch and chain banking? The holding companies are over the
branch and chain banking in most instances?
Mr. N a h m . Yes, sir.
Mr. B u s b y . And we could not deal with branch and chain banking
unless we dealt with its creator, the holding company?
Mr. N a h m . Yes, sir.
Mr. B u s b y . Now, in the great number of failures in very small
communities, of many very small banks, the idea of the survival
of the fittest will largely control that situation and put the men
who ought not to have established banks into other lines of business,
largely?
Mr. N a h m . Yes sir; but that is hard medicine.
Mr. B u s b y . I k n o w it is.
Mr. N a h m . It should be corrected by not adding to the dif
ficulty with too small banks with too small capital in too small
territories.
Mr. B u s b y . The most effective antidote would be to require an
adequate capitalization before a charter was given to them to open a
bank. Would not that be the better way?
Mr. N a h m . Were you in when I read these points?
Mr. B u s b y . Yes; I heard your statement, but coming to the
remedy, does it not seem that that would be the most adequate
remedy and the simplest to apply?
Mr. N a h m . That is one of the remedies.
Mr. B u s b y . If all State and national banks had a requirement of
$50,000 capitalization before a charter to do business was given them,
that would correct most of the evils we have from small bank failures,
would it not?
Mr. N a h m . It would help, but there are other conditions just as
important.
Mr. B u s b y . It would insure two things— first, more capital to
protect the depositing public and it would insure a better type of
management, because it would enable them to bid for better qualified
men to operate the institution?
Mr. N a h m . In that sense; yes sir.
Mr. B u s b y . I will not take any more time.
Mr. L u c e . Mrs. Pratt?
Mrs. P r a t t . Mr. Chairman, I regret that I was detained in a
hearing before the Rules Committee and I was not here to hear Mr.
branch
,
c h a in
,
and
group
b a n k in g
1681
Nahm’s statement, but I assume, Mr. Nahm, you are a proponent
of the unit banking system?
Mr. N a h m . Yes.
Mrs. P r a t t . In line with the statement you made a few minutes
ago, that men die, we are dealing with theories as well as practice
here?
Mr. N a h m . Yes.
Mrs. P r a t t . And that would apply to the head of the unit bank as
well as the head of a chain system or branch system. Would you, in
theory, feel that a branch system was the only way to take care of the
banking question in very small communities? Mr. Busby brought
out the point just now that perhaps one remedy was the requirement of
larger capital and surplus before a bank should be allowed to have a
charter. Would not that cut out from the very small communities the
possibility of even a small unit bank, and would not that community
have to be taken care of in another way? I am talking about the
small rural community that has been very much discussed here and
where many bank failures have occurred?
Mr. N a h m . I th in k t h a t w o u ld ; y e s .
- Mrs. P r a t t . Y o u feel, in that case, a branch system would be the
necessary system?
Mr. N a h m . May I answer that in my own way, Mrs. Pratt?
Mrs. P r a t t . Yes. Perhaps the question was not well put.
Mr. N a h m . It was splendidly put. With the good roads that are
being built everywhere and the opportunity of reaching, in a very
short time, a center of population large enough to sustain a bank, I
do not think it would be any great hardship on very small communi
ties, if they did not have a small bank for the reason that the statistics
show that such a large percentage of those banks eventually fail,
carrying with them a great loss to that community, that it would be
better if such communities were taken care of in their largest near-by
center and therefore I, for one, would be in favor of no new banks being
chartered with less capital than would make a bank that is able to go
though trouble.
Mrs. P r a t t . When Mr. Decker and Mr. Wakefield were here
before this committee, I think I am right in stating that their purpose
was to stimulate the local communities. They rather encouraged a
local board and local officers, but with a possibility of their getting
help from the large parent bank in the central city. Am I right in
that statement?
Mr. L u c e . I so understood it.
Mrs. P r a t t . Would you feel that that w'as a better plan, possibly,
than where the parent bank would have immediate control over these
smaller banks?
Mr. N a h m . Group banking is only two years old— less than that.
It is rather early to answer that question. I happen to be a member of
the economic policy commission of the American Bankers Association
and I have been studying that and our opinion is that so far, we are
not prepared to express a definite opinion on that subject; we would
rather see it wwk out awhile.
Mrs. P r a t t . I think that is all, Mr. Chairman.
Mr. L u c e . T o make it clear that we understand just what your
proposal is, in regard to a limit, am I correct in taking it that your
proposal is that branches might well be established in places of less
1682
BRANCH, CH AIN , AND GROUP BANKING
than 10,000 inhabitants by parent banks in places of more than 10,000
inhabitants and that you are not prepared to approve branches of
banks in places of more than 10,000 inhabitants?
Mr. N a h m . Yes, sir.
Mr. L u c e . Branches of parent banks in other larger places in that
same area?
Mr. N a h m . Yes, sir:
Mr. L u c e . Mr. Dunbar, have any questions occurred to you since
you yielded to Mr. Busby?
Mr. D u n b a r . Y o u stated the Federal reserve system, in your
opinion should pay member banks from 8 to 10 per cent on their stock?
Mr. N a h m . Yes, sir.
Mr. D u n b a r . Governor Young was here and also Mr. Pole, to
give expression to thought along that line. Would it not be better
to maintain the 6 per cent interest on the stock and give the member
banks interest on their daily deposits?
Mr. N a h m . The earnings of the Federal reserve are not such as to
make that possible.
Mr. D u n b a r . Judge Brand, in his speech the other day showed you
diverted a great deal of your earnings to the purpose of buying
increased stock in the Federal reserve system. If that is so, why could
not that be used? Why should they be doing that?
Mr. N a h m . I do not understand that question.
Mr. D u n b a r . Sir?
Mr. N a h m . I do not understand that question.
Mr. D u n b a r . A branch member of the Federal reserve bank wishes
to purchase more stock in the Federal reserve system and they do it
and use their earnings to pay for the stock.
Mr. N a h m . A branch Federal reserve bank?
Mr. D u n b a r . Yes. You are a member of the St. Louis Branch?
Mr. N a h m . Yes, sir.
Mr. D u n b a r . Have you any stock in the Federal reserve system?
Mr. N a h m . An individual can not own stock.
Mr. D u n b a r . I mean your bank?
Mr. N a h m . Yes, sir.
Mr. D u n b a r . Suppose you wanted to increase the amount of that
stock?
Mr. N a h m . Yes, sir.
Mr. D u n b a r . Could you not do that?
Mr. N a h m . Yes, sir, by having more capital or more surplus.
Mr. D u n b a r . And then you use your money from your earnings to
buy that additional stock— is that no correct?
Mr. N a h m . Yes, sir.
Mr. D u n b a r . Why can not that money be used to pay interest on
daily deposits?
Mr. N a h m . There is not enough of it.
Mr. D u n b a r . H o w much money has been diverted each 37-ear on
an average for the last five years, by the various banks in America?
Mr. N a h m . I do not know.
Mr. D u n b a r . H o w much are your deposits in the Federal reserve
system?
Mr. N a h m . The reserve is $2,300,000,000.
Mr. D u n b a r . That represents 7 per cent on one kind of deposits
and 3 per cent on another, does it not?
BRANCH, CH AIN, AND GROUP BANKING
1683
Mr. N a h m . Yes,sir; but that i; an accumulation since the organiza
tion of the Federal reserve, since 1914.
Mr. D u n b a r . Then you say it would not be possible to pay 6 per
cent?
Mr. N a h m . I think your testimony here, given either by Mr. Pole
or by Governor Young, shows that there is about 1% per cent on
deposit earned.
Mr. D u n b a r . Yes.
Mr. N a h m . That would be immaterial to the small bank.
Mr. D u n b a r . I do not think it would be immaterial because of the
complaints I have heard about it.
Mr. N a h m . I k n o w th a t.
Mr. D u n b a r . Why would it not be a good thing to pay 1 per cent
on deposits?
Mr. N a h m . May I answer that in my own way?
Mr. D u n b a r . Of course.
Mr. N a h m . Last year, in the Federal reserve bank in St. Louis,
which has a paid in capital of $5,000,000 and a surplus of $10,000,000,
making $15,000,000 in all, the city of Louisville, alone, owed the
Federal reserve at one time $29,000,000. Now, what, in my opinion
the Federal reserve banks need, since, for the future they must bank
for America and, almost, I might say, for the world, is a larger sur
plus, so that they can accommodate the various cities in the United
States in times of stress.
Mr. D u n b a r . Of course I am in favor of the Federal reserve sys
tem, but what I am interested in is trying to make the Federal reserve
system more popular, so that we may have in it a greater number of
banks who own stocks. Now, I think that if you can pay 1 per cent
interest on the daily balances— and you thought that was nothing—
I believe if you would pay 1 per cent interest, they would feel like they
were getting something.
Mr. N a h m . I did not hear that last.
Mr. D u n b a r . If you could pay 1 per cent interest, they would feel
that they were getting something and it would appease them to a
large extent. Everywhere you go in the country they have an objec
tion to the Federal reserve system because they do not get interest on
daily deposits. I believe it would be better to give them 2 per cent
on daily deposits than give them 5 per cent on their stock. That is
just an opinion. You do not think so?
Mr. N a h m . N o , sir.
Mr. D u n b a r . I just want to tell you one thing: The banks all over
my section of the country are cursing the Federal reserve system
because they do not get interest on daily deposits. I think we should
work out a plan of that kind rather than increase dividends and pay
them 8 or 10 per cent on their stock.
Another thing: I am favorable to the unit banking system and I
deplore the obstacles which present themselves to it. How is the
Federal Government going to regulate that, when the State govern
ments have a right to grant branch banking?
Mr. N a h m . It is very difficult for the Federal Government to
reach that proposition.
Mr. D u n b a r . It is almost impossible to reach it?
Mr. N a h m . The American Bankers Association have brought
about some uniform legislation throughout the 48 States and would
1684
BRANCH, CH AIN , AND GROUP BANKING
be of great assistance to that, but a large part of the trouble is in the
States.
Mr. D u n b a r . D o you not think there is so much trouble in the
States, it looks like we will not be able to do very much in controlling
the banking situation except so far as we have an influence through
the Federal reserve system?
Mr. N a h m . I would not say that.
Mr. D u n b a r . Well, what is your opinion?
Mr. N a h m . I would say, under the restrictions I have named, Mr.
Pole’s proposition would be of help.
Mr. D u n b a r . What was his proposition that does not interfere
with the States?
Mr. N a h m . To allow branches in trade areas.
Mr. D u n b a r . I know, but that would interfere with the States.
Mr. N a h m . Yes; it would. That is true, Mr. Dunbar. I first
wrote, among the restrictions that I put here, that there should be no
branches in the 22 States that themselves forbid branches.
Mr. B u s b y . Twenty-eight, is it not?
Mr. N a h m . N o , sir, 2 2 . There are 7 that have no legislation;
22 prohibit it. But I scratched that out, under this idea. The States
can meet that, if they choose, by passing laws, allowing branches.
Secondly, all of those 22 States have branches or chains or groups now
except 6, in the way of holding companies which defeat their laws.
Mr. D u n b a r . That is what I have observed, and I think the prac
tice is going to grow.
Mr. N a h m . It is growing.
Mr. D u n b a r . It may be impossible to work out a plan and possibly
it would be unwise to do it, but I think you can get at the problem by
paying interest on daily deposits that would help the Federal reserve
system more than anything I know of.
Mr. L u c e . Mr. Seiberling, have you any further questions?
Mr. S e i b e r l i n g . I have just a few more questions. Our whole
purpose should be to arrange a system, I take it, to furnish banking
facilities, as far as possible, to remote parts of the country— to
agriculture and to everybody that has occasion to use banking facil
ities. Do you agree with that— as far as possible, I say?
M r. N
ahm
. A
s
far as p o ssib le ; y e s sir.
Mr. S e i b e r l i n g . I take it that you have a very profitable banking
institution wTith which you are connected?
Mr. N a h m . Fairly s o .
Mr. S e i b e r l i n g . H o w long have you been organized?
Mr. N a h m . Since 1901.
Mr. S e i b e r l i n g . I take it you have increased your surplus and
undivided profirs each year?
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . And you paid substantial dividends on your
stock?
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . And your stock has a good market price?
Mr. N a h m . Yes, sir.
Mr. S e i b e r l i n g . N o w , in the face of all that— and the reason I
am asking this question again is because you start your statement by
saying “ Banking is a business, the people’s business” -----Mr. N a h m . Yes, sir.
BRANCH, CH AIN, AND GROUP BANKING
Mr.
say:
S e ib e r l in g .
1685
And on page 4, at the bottom of the page, you
Then banks should charge for unprofitable services and recoup their lost
profits by proper service charges on unprofitable accounts.
In view of what you said about increasing your surplus and paying
good dividends and further, that banking facilities should be furnished
to remote parts of the country, as far as possible, so that everybody
could enjoy banking facilities, you still think that a service charge
is proper where that service charge automatically, of necessity, de
prives some people in your community of banking facilities?
Mr. N a h m . M ay I answer that in my own way?
Mr. S e i b e r l i n g . Certainly.
Mr. N a h m . Yes sir; I do. With a large number of small banks,
it is a fight for existence.
Mr. S e i b e r l i n g . Yes; but you are making a lot of money and your
bank is prosperous.
Mr. N a h m . That particular bank is prosperous.
Mr. S e i b e r l i n g . Why should you do it?
Mr. N a h m . But 71 per cent of the banks with capital of less than
$50,000 are broke. Now, they have got to get back somehow or other,
in a legitimate way, what they have lost.
Mr. S e i b e r l i n g . But if this is the people’s business, then why
should you adopt a policy which deprives a lot of people of the facilities
of banking?
Mr. N a h m . Because the greatest blow to the people’s business is a
broke in a community and that is the thing you want to avoid and you
can only avoid it by allowing banks to charge for unprofitable business,
just as a department store charges for everything they sell except the
wrapping paper and twine.
Mr. S e i b e r l i n g . The gas company that furnishes gas to the people
in a community has a great number of accounts they do not make
any money on, have they not— small accounts where they only get-----Mr. N a h m . Yes, sir and they put on a service charge.
Mr. S e i b e r l i n g . Well, a street railroad company carries some
people for a short haul and makes money on them and carries other
people for a long haul and does not make any money on them. Is not
that correct?
Mr. N a h m . Yes sir, but a great many street railroads in the United
States are broke.
Mr. S e i b e r l i n g . Well, do power companies make a charge where
the monthly fee is below a certain amount?
Mr. N a h m . Yes, sir; a service charge.
Mr. S e i b e r l i n g . Everywhere in the country?
Mr. N a h m . Those that I know of do. We are granting a franchise
right now in our city which embraces a service charge.
Mr. S e i b e r l i n g . Y ou still think that a prosperous bank that is
increasing its surplus and paying good substantial dividends to its
stockholders and its stock is selling at a good high price, that has made
money for 10 years, should take action which they know will, of neces
sity, deprive some people of the privilege of banking facilities in its
bank?
Mr. N a h m . The general rules apply to banks not so prosperous who
are fighting for existence.
1686
BRANCH, CH AIN, AND GROUP BANKING
M r. S e i b e r l i n g . Y ou are doing this to protect the other banks in
your community?
Mr. N a h m . Doing it because, in the first place, people do not value
service they get for nothing. They only realize the value of it when
they pay for it and that very service charge may mean the absolute
existence of some of the banks.
Mr. S e i b e r l i n g . Is it not worth something to a bank to train
people in the community to methods of doing banking business and
get them accustomed to coming to the bank?
Mr. N a h m . That is the purpose of the service charge.
Mr. S e i b e r l i n g . Is not that worth something to the bank?
Mr. N a h m . Naturally.
M r. S e i b e r l i n g . D o not the small depositors become large deposi
to r s after awhile?
Mr. N a h m . Yes, sir; and you can help them with the service
charge.
Mr. S e i b e r l i n g . Y o u th in k so ?
Mr. N a h m . Yes, sir; absolutely.
Mr. B u s b y . In my district we have no town of 5,000 people. It
embraces more than 5,200 square miles. What would you say in
regard to our securing banking facilities under your idea of a parent
bank in a town of 10,000 people or more with branches in smaller
places?
Mr. N a h m . M ay I ask a question?
Mr. B u s b y . Yes.
Mr. N a h m . Have you any successful bankers in that district?
Mr. B u s b y . We have only had 34 bank failures in the entire State
in the last 10 years. We declare as much as 33 per cent dividends in
towns of 1,500 inhabitants.
Mr. N a h m . Those people are very high-class bankers, and I should
hope that nothing would occur to discontinue that service to your
community.
Mr. B u s b y . But that seems to run so counter to the theories of you
larger bankers, that I am getting uneasy about the folks down home
and I want to break the sad news to them.
Mr. N a h m . M y fear has been in regard to new banks and I think
no new banks should be chartered, but it is not ex post facto and
would not affect the people you are talking about.
M r. B u s b y . D o you not think your theories and the theories of
these other extensive banking institutions would apply more to a
section where you had very large cities, where you had suburbs of
four, five, six, seven, or eight thousand people, rather than a section
like mine, where the larg^' towns are not more than four or five
thousand inhabitants?
Mr. N a h m . I would think that even in your towns that banks that
are now being run profitably with a smaller capital, would better
protect your people if they had $50,000 capital. It might mean
some consolidations and mergers, but I believe, in the end, it would
protect your people better.
Mr. B u s b y . You might be right in some respects. What is true
of banks, however, as I see it, is true of merchants, that the little
fellows are not so well prepared to compete, in a business way, with
the big institutions.
Mr. N a h m . That is true.
BRANCH, CHAIN, AND GROUP BANKL ln
lb87
Mr. B u s b y . And they ought to go out of business if your theory
is correct, in order to bring about a more efficient unit management
of that type of business?
Mr. N a h m . W e ll -----Mr. B u s b y . But following all of that, I am wondering what is
going to become of the small merchants and bankers and small
operators in every way— what they are going to do.
Mr. N a h m . For a liv in g ?
Mr. B u s b y . Yes; and I think it is beginning to bother them, too.
Mr. N a h m . That is one of the emergencies of life. We wondered
what would become of the saloon keeper when the eighteenth amend
ment was passed.
Mr. B u s b y . I never did bother about him. I knew he would be
better off when he got in some productive business.
Mr. N a h m . Well, the same thing occurred when the women bobbed
their hair and stopped using hair nets.
Mr. B u s b y . I think perhaps we are getting away from the subject.
Mr. N a h m . Nothing I have said goes to put your successful banker
out of business, no matter how small his capital. I am only looking
towards the future in saying that new banks should not be chartered
with a less capital than-----M r. B u sb y . But when I listen to all these statements, I look back
to my district and I see not a single town or city in it large enough to
have a bank and I seriously question the theories expounded by
you experts.
Mr. N a h m . Y o u have a bank in most places?
Mr. B u s b y . Yes.
Mr. N a h m . If it is successful, I hope that nothing I have said would
put it out of business.
Mr. B u s b y . Really, I do not think it will, but it condemns the
theory so strongly that I can not be impressed much with the idea
you gentlemen present here, which is gathered solely from the larger
center viewpoint.
Mr. N a h m . N o , sir; I know of a bank with $15,000 capital and
150,000 surplus that has over a million depositors.
Mr. B u s b y . Yes.
Mr. N a h m . What security have those depositors in the way of
capital and surplus to protect them in case of trouble?
Mr. B u s b y . Well, of course, I do not know the surrounding facts
and can not answer.
Mr. N a h m . There are a great many just such cases. The proper
relation, it is said, is 10 to 1, but I am simply talking about the
future and not the past.
Mr. B u s b y . Different types of territory demand different types of
banking.
Mr. N a h m . That is quite true.
Mr. B u s b y . Still our bankers in Mississippi, in the smaller towns,
know their business and know their field for business and know their
methods of operating and can operate successfully and pay overhead
and salaries and from 10 to 30 per cent dividends, yet they might not
be able to do the same thing in New York or in another territory.
Mr. N a h m . I would not put them out of business at all with even
the plan I have suggested here.
k ^
..*ANOH, CHAIN, AND GROUP BANKING
Mr. B u s b y . So, when it comes to expounding a banking theory,
you have to know what sort of field you have to expound it in, in
order to have it stand up in all lines.
Mr. N a h m . Yes, sir.
Mr. L u c e . I will adjourn the meeting with the statement that the
witness invited to appear before the committee to-morrow, has asked
to be excused and there will be no meeting to-morrow.
Mr. E. B. Green has been asked to appear before the commits
Tuesday morning, at 10.30, and Mr. Robert Fleming, president of the
Riggs National Bank, will be before the committee next Tuesday at
2.30 o’clock.
(Whereupon, at 12.35 o ’clock p. m., the committee adjourned to
meet at 10.30 o’clock a. m., Tuesday, May 27, 1930.)
@FedFRASER