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Calendar No. 604
72d C ongress
1st Session

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)

SENATE

( H b pt , 584
] P a rtll

OPERATION OF THE NATIONH7AND FEDERAL RESERVE
BANKING SYSTEMS

A pril

Mr.

29 (calendar day, A pril 30), 1932.— Ordered to be printed

N o r b e c k , from the Committee on Banking and Currency, su b ­

mitted the following

MINORITY VIEWS
[To accompany S. 4412]

The Senate Committee on Banking and Currency has had under
consideration the bill (S. 4412) to provide for the safer and more
effective use of the assets of Federal reserve banks and of national
banking associations, to regulate interbank control, to prevent the
undue diversion of funds into speculative operations, and for other
urposes, and reported favorably thereon on April 22,1932. (Kept,
lo. 584.)
On behalf of the minority of the members of the Senate Committee
on Banking and Currency, I am making this report in protest against
the proposed extension of branch banking, without taking issue with
the distinguished author of the bill, Senator Glass, on other matters
in the bill, in most of which I heartily concur, and some of which I
deem very important.
In speaking of our banking system, we must keep in mind that we
have:
(1) A system of national banks chartered and supervised by the
Federal Government.
(2) We have a competitive system, that of State banks, chartered
and supervised by the States.
There is difference of opinion among well-informed people as to their
comparative merits, and certainly there is a great desire* on the part
of certain people to wipe out the State banking system. What can
not be done directly by law may be done by giving the national
system such an advantage that the competitive State system can not
exist.
Aside from the two general classifications, we might make further
classifications, as follows: Unit bank, chain banks, group banks,
branch banks.

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

A unit bank may have a national or State charter. It is generally
defined as an institution which is owned, controlled, and operated by
residents where the bank is located, and has no affiliated institutions.
This is the typical American bank.
The term “ chain bank” is generally applied where two or more
banks are owned and controlled by one individual and partnership
(without a holding company or more centralized control).
Group bank is tne proper term for institutions that have been grow­
ing up in many sections of the country of late years. If not a viola­
tion of law, it is certainly an evasion of law. A holding company is
generally organized for the purpose of owniilg and controlling these
banks. As a rule, the holding company owns over 90 per cant of
such bank stock, but there remains a local organization and a local
board of directors, subject, however, to the control of the holding
company, which is located in some central place.
It is a well-known fact that shares in a bank carry a double liability
with them on the part of the stockholder. As a rule, the shares in a
holding company do not carry this extra liability, though there are a
few notable exceptions to this practice. I have in mind especially the
Detroit group, who appeared before this committee and explained
their system.
Branch banking is where a parent bank has one financial structure,
from which it operates the several branches or offices under set rules
and instructions issued by the head office. The officers of the several
branches have very limited powers of discretion.
FALLING PRICES

Since the war, there has been a continual shrinkage in values and
this has put a great strain upon our banking structure. Numerous
failures have been taking place, and those, who for different reasons
prefer the chain bank with the central control, are continually pointing
to the banking systems of other countries. But all things considered,
the American system has held up wonderfully well. Our Government
has not come to the direct aid of our banking structure, such as has
been the case in many European countries, where the governmental
form of banking exists, where the taxpayers took the losses.
We are often reminded of the losses suffered by depositors in this
country. That is true, and it is deplorable, but it is not fair to point to
other countries for comparison. The American dollar is still at par,
while the bank deposits m foreign lands have dwindled in proportion to
the shrinkage of their currency value; in Canada it is 20 per cent, and
in France it is 80 per cent. We have much over which to be happy,
and do not need to be hasty about importing a banking system from
foreign lands.
The so-called safety of the French, Canadian, or English system
is simply one of percentage, and we need not be ashamed of the com­
parison.
It is not believed that the remedy lies in more centralization.
When we take the history of the chain bank, group bank, and branch
bank, many States in the Union have had debacles, which are appall­
ing. The greatest bank failure in this whole depression was in the
case of a branch-bank system—a central bank with some 50 or 60
branches. On the other hand, while the losses of unit banks in the




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

3

United States, due to overbanking conditions and the present financial
situation, have been devastating, we have no assurance that such a
condition may not arise again under a different form of banking, as
each generation must learn its own lesson, and human nature, as a
rule, has never been able to capitalize 100 per cent from the mistakes
of the past.
BRANCH BANKS

Advocates of the branch-banking system ignore the fact that such
a system has never been tried in a country of 120,000,000 population,
3,000 miles across. They ignore the tendency in this country to
centralize control of everything, and especially of credit. I believe
the branch-banking system would put us at the mercy of the financial
centers.
THE CANADIAN SYSTEM

We hear much about the Canadian systen, which is the outgrowth
of the British system, but we hear only the good side of it. However,
we occasionally run across something suspicious even in these presenta­
tions. We are told that Canada has only 11 banks, with an average
of about 400 branches, and that there have been no failures. Tms
statement is not in accordance with the record, for they have had
numerous failures.
An advocate of the Canadian system in a recent magazine article
said they had had only 16 failures in 62 years. The branches are not
counted when the failures occur, but let us take them at their own
statement. They have 11 banks and they have had 16 failures; that
is more than a hundred per cent.
We are told that these 11 Canadian bankers have during the last
few years had a smaller percentage of failures than the banks in this
country, and I think that is true. But we have a large number of
banks in this country that have had no failures, and certainly we
have one banking system here, not above referred to, that has gone
through entirely without losses, and it has done an enormous banking
business. The worst thing that can be said about it is that it has not
furnished accommodation to the communities where the deposits were
received. They have taken no risk. They have not been interested
in building up the communities. If we had only such a system, we
would make no progress in our development; we would slow down—
we would come to a standstill. The system is the nearest comparable
to the Canadian system. I have reference, of course, to the postal
savings bank that drains the community dry of its cash.
One of our distinguished Senators, who has spent a great deal of
time in Canada, told me privately he believed the natural resources of
Canada were equal to those of the United States. Their growth has
only been one-tenth the growth of the United States. I Delieve we
are much indebted to the unit banking system for this difference.
I feel that section 19 of the Glass bill should be eliminated in its
entirety. There is a movement on foot to control the banking indus­
try of the United States by centralization. This movement might be
termed not only national but international. Of late years this move­
ment has been becoming more evident. The only way it can be ac­
complished, apparently, is through nation-wide branch banking and
the complete elimination of the unit bank.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The unit banker has had a most prominent place in the development
of the United States. By reason of his individualistic characteristics
he has been able to mold himself to meet any possible situation. It
has been through his foresight, strength of character, and belief in
these great United States of ours that our country has become the
foremost in commerce and industry. His endeavors have been most
outstanding. The history of our country might have been different
if our banking system had been controlled from Washington or New
York.
Our dual system of banking has been one of the great motivating
factors in making the United States the outstanding country that it
is to-day. Our country is too large, too widely diversified, to expect
one banking system to be so versatile as to deal with so complex a
situation efficiently. The American people are individualistic and so
should be our banking structure. The unit bank has a most definite
position in our national welfare.

Two reasons have been advanced why we should have one system
of banking:
First. The commerce of the United States should be financed in an
orderly manner; must have a uniform system of banking under Fed­
eral supervision. Our past history does not prove the necessity of
the same.
Second. That the Federal Government can not rely upon the vol­
untary cooperation of State banks and trust companies for the execu­
tion of a national policy. The record is clear that there has never
been a time when the unit bank or the State chartered institutions
have not upheld the hands of our Government.

The placing of our banking structure with the now overburdened
bureaucracy in Washington is in direct violation of the principle of
State rights. So far no tangible evidence has been offered that the
passage of this section would be of value to the rank and file of our
citizenry or would meet and stabilize the present situation. We have
always the matter of politics, change of administration, Government
in business, which can not be overlooked. History repeats itself.
The past several yeaxs a large amount of propaganda has been fed
to the people endeavoring to educate them to national branch banking,
and while the resolutions of some of our financial organizations were
rapid in their opposition to branch banking, owing to steady pressure
from without and within, their position has been gradually changing.
This plan appears to be a part of the preconceived plan for the
elimination of the unit State bank and placing the control of our
banking structure in financial centers. Those interested in controlling
the banking structure of our country will find it far more easy to
handle Washington than some 19,000 different banking corporations
scattered throughout the United States. ^ When bankmg and credit
are centralized in a few hands, it is easier for the powerful to get
control of such corporations; in fact, Mr. Whitney, president of the
New York Stock Exchange, testified before the Banking Committee
that with good dollars; he could “ go out and buy every corporation
in the world,” and there seems to be no limit to the number of good
dollars they control. This is most true.




NATIONAL AND FEDERAL BESERVE BANKING SYSTEMS

5

DEMANDS FOR MORE POWER

Congress first allowed the national banks to have branches within
the city in which they were located. The next step was to allow
branches in metropolitan areas. Now the demand is made that we
have what will mean nation-wide branch banking in its entirety, and
plans have been offered which can be utilized in eliminating every
unit bank by direct congressional action.
It is in the interest o f the United States that a banking monopoly
should not be created. The theory of syphoning credits through a
branch banking system has been exploded. Theoretically, it func­
tions perfectly, until under pressure the pipe springs a leak. When
a unit bank closes, there is merely a pop; when a system of branch
banks closes, it is a detonation.
We only have to look back to the history of the endeavor to renew
the charter of the Bank of the United States with its branches in the
then leading cities, during the Presidency of Andrew Jackson, to
prove now, as then, that a banking monopoly headed at Washington
is not for the best interests of the citizens of the United States.
The placing of more power in the national banking system is dan­
gerous. Additional powers given this system would not redound to
its benefit, unless it is coupled with legislation that will cripple or
eradicate our present State-chartered institutions. This fear of cen­
tralization in the hands of a few is possibly one of the factors behind
the popularity of State-chartered institutions, and general satisfac­
tion of our dual system of banking.
The following figures speak for themselves: #
On December 31, 1931, there were in the United States 194 private
banks, 587 mutual savings banks, 546 stock savings banks, 1,245 loan
and trust companies, ana 11,240 State banks: total, 13,812.
The national system had 6,368 banks with capital from $10,000
up, of which less than 225 had a capital of $1,000,000 or over.
As of the same time, national banks bad on deposit $19,210,000,000,
which included $260,000,000 of funds of the United States. While
deposits of State-cnartered institutions were $30,486,000,000, a
difference of $11,175,000,000 in favor of State-chartered institutions.
Now as to capital structure: State-chartered institutions had
$175,000,000 more than national banks and a surplus of $1,700,000,000
in excess of those of national charter. In other words, State-cnartered
institutions had more millions of surplus above the amount of surplus
of national banks than the total aggregate of capital aqd national
banks.
Further, take the period from March 25, 1931, to December 30,
1931. We find that during the intervening period, the deposits in
national banks decreased $3,100,000,000, while deposits in Statechartered institutions decreased $3,700,000,000. The per cent of
decrease in each instance is, national banks, 13 per cent; State banks, 8
per cent.
Now, further, a comparison of national bank suspensions and State
bank suspensions:
In 1931, prior to the figures cited above, there were 409 bank suspen­
sions as against 161 for the year 1930, or an increase of 154 per cent.
While the State-chartered institutions had 1,809 suspensions in 1931,
as opposed to 1,128 in 1930, or an increase of 60 per cent, there were
20366 O— 58-------38




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

reopened in 1931, 25 national banka and 250 State-chartered institu­
tions, or 10 to 1. In 1930, there were reopened five national banks and
140 State-chartered institutions.
Now as to deposits: Time deposits in national banks, including
deposits of the Post Office Department in national banks on Decem­
ber 30, 1931, were $7,594,000,000, as opposed to time deposits in
State-chartered institutions of $18,430,000,000, or, roughly speaking,
two and a half to one in State-chartered institutions. In the Postal
Savings System, at the end of the last fiscal year, June 30,1931, there
was on deposit averaging $500 for each depositor, an aggregate of
$347,000,000, an increase of $172,000,000 for the Government’s fiscal
year. Eight hundred and ten million dollars of the deposit shrinkage
in State-chartered institutions were in savings accounts. The number
of savings depositors decreased by one and a half million. Now,
obviously, the million and one-half depositors who ceased having
savings accounts in State-chartered institutions did not rush to the
ost office, for the increase in the number of postal-savings depositors
uring the same period was 304,000, or less than one-fifth.

S

LIQUIDATING CORPORATION

It is hoped that a liquidating corporation will be the means of more
prompt payment to depositors of some substantial part of their equity
as soon as a bank is closed. It is not a guaranty of bank deposits,
though it may point in that direction and, therefore, be subject to
much criticism.
GUARANTEE OF DEPOSITS

The State banking system is threatened from another angle, and
that is the great demand now on the part of the national banks to
have guarantee of deposits. The request is based on the plea that
it will restore confidence, but I do not hesitate to say there are national
banks that would like to unload their losses on the Federal Treasury,
and among them are some large ones, and where the bank is a large
one the taxpayer would be assuming a big burden. One of the pur­
poses is to give the national bank a certain advantage over the State
bank and destroy our dual system of banking. It is an indirect and
an insidious way to do that which they dare not attempt to do directly.
The writer believes that guarantee of deposits may sometime
become a reality, but it is quite convincing from the experience of
many States that tried the bank guarantee law that a more careful
approach to the subject must be made, and certainly it must be con­
sidered a form of insurance; therefore the two fundamental principles
of insurance must be recognized :
(1) No loss must be underwritten which can not be paid.
(2) No risk should be assumed at 100 per cent value; 75 per cent
would be a safer figure.
The depositor who could get 75 per cent cash would be fortunate,
indeed, compared to some of those who wait many years on the slow
liquidation of a receiver.
There are members of this committee who favor guaranty of bank
deposits who would hesitate now to have the Government take over




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

7

bank losses and also to destroy the State banking system, for State
banks would not be included in the program for guaranty.
The depression, started in agricultural sections, brought down
thousands of banks. These people have taken their losses. They
protest against helping pay the losses that are now threatening other
sections.




P e t e r N o rbec k ,

O

For the Minority.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102