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:ederal Reserve Bank
of St* Loui*
HAY 0 8 1 8




! Federal Reserve
Bank of Richmond



The Evolution of the Bank Regulatory
Structure: A Reappraisal




Summary of Operations


Comparative Financial Statements






ISSN 0164-0798


Additional copies of this Annual Report may be obtained without charge from the
Public Services Department, Federal Reserve Bank of Richmond,
P. O. Box 27622, Richmond, Virginia


April 12, 1984

To Our Member Banks:

W e are pleased to present the 1983 Annual Report of the Federal Reserve
Bank of Richmond.

The Report’s feature article outlines the main stages in the

evolution of the bank regulatory structure in the United States.

The Report also

includes highlights of the year; a summary of operations; comparative financial
statements; and current lists of directors and officers of our Baltimore, Charleston,
Charlotte, Columbia, Culpeper, and Richmond Offices.

On behalf of our directors and staff, we wish to thank you for the cooperation
and support you have extended to us throughout the past year.

Sincerely yours,

Chairman of the Board



The Evolution of the Bank Regulatory
Structure: A Reappraisal
F. Ward McCarthy Jr.

The banking industry is regulated by an elaborate
institutional structure that exercises extensive au­
thority over virtually every aspect of banking activity.
The sheer size and complexity of the system is over­
whelming and has been a source of confusion in the
administration of the supervision and regulation of
banks. For this very reason, the Task Group on
Regulation of Financial Services, chaired by Vice
President George Bush, has studied the federal regu­
latory structure in order to reorganize and improve it.
The agency reorganization proposed by the Task
Group, however, merely rearranges authority under
the existing agency structure and does not reduce the
number of bank regulators.
A first step toward resolution of the reorganization
dilemma is to gain a better understanding of the
origin and development of the institutions that com­
prise the current regulatory framework. Students of
bank regulation offer two familiar explanations for
government control of banking. Public regulation of
banking is typically rationalized on the idealistic
grounds that it enhances economic stability by foster­
ing honest and sound practices. An alternative view
disputes the existence of the correspondence between
regulation and the public interest and regards public
regulation as a means of protecting the banking in­
dustry from competition. While each of these per­
spectives contributes to our understanding of govern­
ment regulation of banking, neither provides an ade­
quate explanation of the genesis and development of
the institutional structure of the regulatory frame-

The views expressed in this article are those of the
author and do not necessarily reflect the opinions of the
Federal Reserve Bank of Richmond or the Board of
Governors of the Federal Reserve System.

work. In order to understand this evolution, it is
necessary to recognize that government regulation of
the banking industry has enhanced the revenue gen­
erating capabilities of government authorities. The
institutional structure of bank regulation has served
as an instrument of public finance.
This article traces the major developments in the
evolution of the bank regulatory structure in this
country in order to gain some insight into the process
that generated the current regulatory framework.
Two major themes are developed: (1 ) government
intervention in banking was motivated by considera­
tions of public finance and ( 2 ) there has been a pro­
nounced reluctance of government agents to divest
themselves of regulatory authority once they have
gained it.
The article begins with an examination of the
colonial period when government control of banking
was initiated and the principle of government inter­
vention was established. Section II explains the post­
colonial development of charter regulation under state
legislative control and notes the attempt to establish
federal regulatory authority through the central bank
functions of the First and Second Banks of the
United States. Section III discusses the erosion of
state legislative control of bank entry and the imple­
mentation of free banking over the second quarter of
the century. The reestablishment of dual federal and
state regulatory control under the National Bank Act,
and the extension of federal regulatory authority
through the creation of the Federal Reserve System
are examined in sections IV and V , respectively.
Section V I presents a brief review of the reform
measures of the 1930s that established the Federal
Deposit Insurance Corporation and extended the au­
thority of the Federal Reserve System. Concluding
remarks are offered in section V II.


The prevailing public policy regarding banking
during the colonial period1 was to substitute govern­
ment control for market competition. Colonial gov­
ernments promoted government financial interests
and obstructed the development of private banking
organizations. Due to this government intervention,
public enterprises dominated the colonial banking era
and private banks seldom survived.
The precedent for government control of banking
in the colonies was established in 1690 when the
Commonwealth of Massachusetts became the first
American government to circulate an inconvertible
paper currency. The notes were issued in anticipation
of taxes to replenish a treasury that had been depleted
by an unsuccessful military expedition. Over the
next several years the colony accommodated treasury
deficits by expanding note issues, delaying or extend­
ing redemption periods and replacing redeemed issues
with more tax anticipation notes. This inflationary
finance contributed to a general depreciation of paper
currencies, a disappearance of precious metals from
circulation, and a decreased public willingness to pay
taxes. Nonetheless, these first issues of paper cur­
rency established the pattern for early monetary and
banking developments. By 1712 six other colonies
had followed the example of Massachusetts and were
utilizing public banks as an expeditious method of
public finance.2
Colonial governments guarded the right to circu­
late paper currency as a privileged monopoly and, in
so doing, impeded private banking institutions.3 If

1 Banking and other financial functions were provided
on a limited basis in the American colonies. Barter and
book credit were used extensively and many mercantile
needs were met by British merchants. Commercial banks,
which played an important role in the economic develop­
ment of the United States, did not appear until after inde­
pendence. In their absence, private merchants and banks
of issue were the primary sources of domestic banking
Colonial banks were not at all commercial in character.
Several histories of colonial banking refer to them simply
as “batches of paper money.” See, for example: Davis R.
Dewey, Financial History of the United States [7], John
Jay Knox, A History of Banking in the United States
[23], Horace White, Money and Banking [55].
2 New Hampshire, Rhode Island, Connecticut, New York,
New Jersey, and South Carolina were all issuing paper
Pennsylvania, Maryland, Delaware, Virginia
and Georgia fell into line by 1760.
3 Prior to 1690, all banking projects appear to have been
private. The establishment of the public bank in Massa­
chusetts in 1690 coincided with a temporary end to
attempts to issue notes by private banks. Unfortunately,
there is very little documentation of this period in bank-


the purpose of this policy can be deduced from its
effects, then the motivation clearly was to enhance
the ability of colonial governments to raise revenue.
In the absence of market discipline, colonial govern­
ments were free to exploit their self-imposed monopoly power and to reap the financial benefits of
regulation by circulating a variety of currencies
through their banks.4
Even when regulatory action was rationalized as
being in the public interest, the government often
was a beneficiary of the intervention. For example,
in 1714 the Commonwealth of Massachusetts rejected
a private proposal for a land-collateralized private
note issue as contrary to the public interest.5 The
Massachusetts General Court’s objection to the pro­
posal centered on two issues: ( 1 ) the inadequacy of
real estate as security for note issue, and ( 2 ) the in­
equity of granting the privileges and profit oppor­
tunities of note issue to private individuals. The
colony promptly revealed its true intentions, however,
when it agreed to accommodate the private demands
for currency by issuing its own treasury bills backed
by real estate. Although this note issue was intended
to diminish support for the private bank, it actually
did the reverse. For this application of a double
standard “ increased the zeal and raised a strong re­
sentment” 6 in those who supported the development
of private banks.
ing history and it is impossible to reconstruct the policy
behavior of the government at that time. However, in
1711 the Commonwealth did preempt private interests by
issuing a loan to merchants in need of funds to finance
supplies for a private project. For details see Dewey [7]
and A. D. Eliason, The Rise of Commercial Banking
Institutions in the United States [9], pp. 10-13.
4 One banking historian provided the following unflatter­
ing description of public banks.
. . . they were monotonously alike in character, in
origin, and in results. Ingenuity in devising vari­
ations of the main principle appears to have been
exhausted. There were interest-bearing notes, some
of which -were legal tender, while others were not;
there were non-interest-bearing notes, some of which
were legal tender for future obligations but not for
past debts; some were legal tender for all purposes,
and others not legal tender between private persons,
but receivable for all public payments. In some in­
stances funds arising from certain sources of taxation
were pledged for the redemption of the notes, in
others not.
In some cases they were payable on
demand; in others, at some future time. Sometimes
they were issued by committees, and sometimes by a
specially designated official.
Dewey [7], p. 24.
5 The plan was entitled “A Projection for Erecting a
Bank of Credit in Boston, New England, Founded on
Land Security.” The preamble recited that the decline in
trade necessitated a greater circulation of a medium of
6 Hutchinson, History of Massachusetts from 1628 to
1774, as quoted in White [55], p. 390.

Eventually the conflict between private and public
bank interests was decided by crown authorities who
had ultimate jurisdiction over such matters because
the colonies were part of the realm of England and
subject to English law. British authorities were ini­
tially sympathetic to private banks and counter­
manded colonial government policies that conflicted
with English law. In 1735, the Lords of Trade7 in
London overruled Massachusetts legislation that ex­
plicitly prohibited the circulation of notes by a private
partnership. The Lords recognized that private
credit issues were permissible under common law as
long as the notes were not made legal tender. This
ruling effectively removed the major constraint on
private banking.
The view that the business of banking could be
conducted independently of government influence
prevailed, however, for only a short period. In 1741,
Parliament extended the principal provisions of the
so-called “ Bubble Act” of 1720 to the colonies.8 The
purpose of the original act was to strengthen the
British government’s control over unincorporated
joint-stock companies.
The occasion for the extension of this legislation to
the colonies was the establishment of a private land
bank in Massachusetts, a revival of the abortive 1714
proposal. Opposing the new land bank were those
who distrusted private ownership of the bank and
feared that it would lead to an increase in the volume
of bills of credit circulating in the colony.9 Chief
among the opponents was the governor of the colony
who published a proclamation warning that the land
bank notes were fraudulent and harmful to trade.
Since the governor and his supporters lacked the
legal authority to restrain the land bank, they peti­
tioned Parliament to do so. In passing the extension
to the Bubble Act, Parliament referred explicitly to
the land bank as one of the offenders which was to be
suppressed. In so doing, Parliament reversed the
earlier position taken by Whitehall in upholding the

7 In 1696, Parliament created the Board of the Lords of
Trade and Plantations to oversee the colonies, make them
more useful to England and suppress industries detri­
mental to England’s interests.
8 The act is entitled “For restraining and preventing
several unwarrantable schemes and undertakings in His
Majesty’s colonies and plantations in America.” The act
states that all clauses of the Bubble Act “did do and shall
extend to and are and shall be in force and carried into
execution” in America.
9 The colony of Massachusetts was an aggressive note
issuer and, with the exception of 1732 and 1739, issued
bills every year between 1702 and 1741 inclusive. There
was also a large inflow from Rhode Island, often referred
to as the most reprobate of the colonies for its lack of
monetary restraint.

legality of private banks and paper money issues in
the colonies, and firmly established the requirement
of government sanction as a major principle of bank
regulation in this country.


The experience of the colonial era influenced both
the post-colonial regulatory framework and the com­
mercial banking industry that developed within this
framework. To avoid repetition of the colonial ex­
perience with inflationary paper currency issues, the
Constitution prohibited the individual states from
issuing paper money. This restriction prevented the
reappearance of public banks and created the potential
for private enterprise banking.
This potential, however, was not realized because
the individual state governments had the incentive to
utilize banking as an instrument of public finance just
as the colonial governments had done. State govern­
ments were able to circumvent restrictions on direct
monetary authority by chartering banks as corpora­
tions with the power to issue debt obligations.10
Government control of banking was perpetuated be­
cause state-chartered banks could legally circulate the
paper currency that the states themselves could not.
As a result, commercial banking in America began
with incorporation and the specific governmental
sanction of charter regulation.
Under charter regulation, which characterized the
first fifty years of commercial banking, the establish­
ment of a new bank required a charter that was
granted only by a special legislative act.11 This en­
abled the legislatures to control the number of banks
in operation and set the range of the permissible and
obligatory activities for banking institutions. Charter

10 The constitutionality of state banks was upheld in
Briscoe v. Bank of Kentucky, 36 U.S.(11 Pet.) 257 (1837).
The Supreme Court ruled that state banks could issue
notes, even when stock in the state bank was held by the
11 With the two notable exceptions of the First and
Second Banks of the United States, each of which was
chartered by Congress, charter regulation was essentially
a system under the control of the individual states. How­
ever, Congress also sanctioned the Bank of Pennsylvania
in 1780 which was established to furnish supplies for the
Continental armies and ceased operations in 1784. In
1781, Congress approved a charter for the Bank of North
America although there was doubt concerning Congres­
sional legal authority to grant a corporate charter since
the power to incorporate was universally accepted as an
implied and exclusive right of the individual state legis­
latures. Consequently, the bank also obtained charters
from the states of Delaware, Massachusetts, New York
and Pennsylvania.


regulation, then, presented state governments with a
potential source of revenue because a charter con­
ferred a valuable corporate privilege on terms speci­
fied by the state. States were able to exact favorable
financial arrangements in the form of bonuses and
low-interest loans in exchange for granting banks the
opportunity to earn monopoly profits.
In order to enhance the stature of governmentsanctioned banks, charters were often couched in
language designed to encourage public acceptance of
chartered institutions. Of far greater significance to
the value of a charter, however, was the conviction
that a charter also conferred a monopoly privilege.
The earliest chartered banks were understood to be
monopolies even when monopoly power was not ex­
plicitly granted. Of course, this interpretation of
charter rights was encouraged by those possessing
charters, but also was reinforced by a commonly held
misconception regarding competition. New institu­
tions, chartered or unchartered, were thought to
represent an inherent threat to the stability of all
banking interests. In short, competition was viewed
as an evil. This misconception prevailed for several
years even after experience proved it to be inde­
For example, there were no provisions in the orig­
inal charter of the Bank of North America granting
exclusive rights to banking in Pennsylvania.12 None­
theless, the bank maintained its monopoly for ten
years after its establishment in 1781 because of fears
that banking could not survive under a competitive
framework. The fear of competition stemmed from
the erroneous assumption that the specie require­
ments of an additional bank would prevent the possi­
bility of profitable bank operations.
A new bank produces no new deposits of specie.
There is not a dollar more money added to the
circulation. A new bank divides the deposits of
specie and of course diminishes the advantages of
For it is manifest that two banks with
small capitals will do less than one bank with both
capitals. Besides the ordinary banking risks, each
institution is in danger from the others.13

Even after events demonstrated that bank entry
and competition did not have the feared effects, oppo­
sition to competitive banking remained among both
those who wished to maintain monopoly power and
those who wished to restrain it. Established banking

institutions continued to resist new entry in order to
maintain their monopoly privileges and profits. These
monopoly privileges, in turn, induced a popular re­
sentment of banks, the privileged status of which was
seen as smacking of aristocracy, as constituting a
threat to the existence of individual freedom, and as
being in need of restraint. In short, contemporary
popular opinion equated corporate power with mo­
nopoly power. For this reason, an increase in the
number of bank charters was interpreted as an “ex­
pansion of privilege rather than a division of it, ” 14
and a restriction on the number of corporations was
viewed as the effective method of limiting monopoly
power. Ironically, the opponents of banking formed a
coalition with established banking interests in pursuit
of the common goal of restricting bank entry.
Although the states succeeded in limiting the num­
ber of banks by controlling entry, charters were not
indispensable in the early years of charter regulation.
In fact, some banks operated for years without re­
ceiving legislative sanction. This practice, however,
was curtailed around 1800 with the appearance of
so-called “restraining acts.” These laws attempted
to restrict banking to chartered banks and made it
illegal for anyone unauthorized by law to become a
member or a proprietor of any banking institution.
As a consequence of the restraining laws, the common
law right to borrow was distinguished from the right
to borrow by issuing obligations intended to circulate
as money; the business of banking was legally re­
served to corporations chartered by the state.15 This
legal restraint on entry permitted the state legis­
latures to solidify their control of banking and pro­
tected the monopoly power of chartered institutions
from encroachment by private non-sanctioned in­
Once the restraints on unincorporated banking
were in effect, the competition for new bank charters
intensified. As the demand for banking services grew
with economic expansion, more entrepreneurs at­
tempted to enter the banking industry. State legis­
lators, who controlled the rights to a valuable fran­
chise, were solicited both by existing charter-holders
who lobbied to protect their privileges and by wouldbe bankers who lobbied for new charters.

Thus, in

14 Bray Hammond, Banks and Politics in America [19],
p. 67.
12 For an excellent discussion of this controversy see
Anna J. Schwartz, “The Beginning of Competitive Bank­
ing in Philadelphia, 1782-1809” [38], pp. 417-432.
13 From “On Banks” an article written anonymously in
the Gazette of the United States, March 10, 1792, as
quoted in Schwartz [38].


15 These restraining acts also gave birth to the unregu­
lated financial sector because they did not prohibit other
incorporated and unincorporated businesses outside the
field of banking, such as canal companies and water com­
panies, from going into debt by issuing notes. These
notes often were accepted as money.

the early part of the 19th century, banking was an
integral part of the political system.
Since they were bargaining from a position of
strength, state legislatures were able to insist on a
variety of favorable financial arrangements in ex­
change for the profit opportunities conferred by
charters. The allure of profits was also strong enough
to motivate aspiring charter holders to provide a
variety of pecuniary inducements to individual legis­
lators. Charges of corruption were widespread and
were proven in some cases.16 Although monopoly
banking privileges were diluted as state-chartered
banks grew more numerous, the benefits of any re­
sulting competition were severely limited. Indeed,
many chartered banks were handicapped from the
start because they were forced to fulfill unsound com­
mitments as the price of obtaining a charter.
The federal government did not have the constitu­
tional authority to regulate banks by statute, but
exerted a strong regulatory influence through the
First (1791-1811) and Second (1816-1836) Banks
of the United States which were chartered by Con­
gress.17 The First Bank of the United States was

16 One historian described the chartering process in New
The evidence . . . afforded a most disgusting
picture of the members of the legislature . . . and
indeed of the degradation of human nature itself.
The attempt to corrupt, and in fact, corruption itself,
was not confined to any one party. It extended to
individuals of all parties.
Jabez Hammond, History of Political Parties in New
York. Albany, 1843, I, p. 337 as quoted in Hammond,
“ Free Banks and Corporations: The New York Free
Banking Act of 1838” [18], p. 190.
17 There are no clauses in the Constitution pertaining to
banking, per se. The monetary clauses of the Constitu­
tion are:
Article 1, section 8 which gives Congress the power
“To regulate Commerce with foreign Nations, and
among the several States, and with the Indian
Tribes; To establish an uniform Rule of Naturaliza­
tion, and uniform Laws on the subject of Bankrupt­
cies throughout the United States; To coin Money,
regulate the Value thereof, and of foreign Coin, and
fix the Standard of Weights and Measures. . . .”
Article 1, section 10 which restrains state activities to
the extent that
“No State shall enter into any Treaty, Alliance, or
Confederation; grant Letters of Marque and Re­
prisal; coin Money; emit Bills of Credit; make any
Thing but gold and silver Coin a Tender in Payment
of Debts; pass any Bill of Attainder, ex post facto
Law, or Law impairing the Obligation of Contracts,
or grant any Title of Nobility.”
Article 1, section 8, clause 18 which concluded the
specific grants of power by granting Congress the
“To make all Loans which shall be necessary and
proper for carrying into Execution the foregoing
Process, and all other processes vested by this Con­
stitution in the Government of the United States or
any Department or Officer thereof.”

established to serve as a fiscal agent for the Treasury,
to furnish credit to the federal government, and to
issue a uniform national paper currency. Although it
was federally chartered, it was mostly privately
owned and was intended to compete with other pri­
vate commercial banks. The First Bank was not
established as a central bank. That is, it was not
intended to serve as a central depository, clearing­
house and lender of last resort for a banking system.
Indeed, there was no integrated banking system as
such. For when the First Bank was chartered in
1791, each of the four banks in existence comprised
an isolated banking system of its own and did not
need any of the functions provided by a central bank.
Furthermore, while Congress’s right to charter any
bank was hotly disputed, its right to charter a central
bank was not even considered a possibility under
contemporary interpretations of the Constitution. A
central bank was a genus that had not been clearly
differentiated from other banks by 1791.
Much to the chagrin of the state governments,
however, the First Bank emerged as a central bank
and the general regulator of money and state char­
tered banking institutions.18 Because of its size, fiscal
agency functions, large reserve holdings and inter­
state branches, the First Bank was able to constrain
the activities of the state banks by presenting the
notes of state banks for redemption in specie. In so
doing, the First Bank imposed restraints on the note
issues of state banks and, consequently, the public
finance potential of state chartering authority. This
role was later adopted and expanded by the Second
Bank of the United States which attempted to assert
itself in central bank activities.19 Even though central
bank authority was not prescribed by statute, the
bank “performed these functions deliberately and
avowedly— with a consciousness of quasigovernmental responsibility and of the need to subordinate profit
and private interest to that responsibility.” 20
18 Richard H. Timberlake, Jr. The Origins of Central
Banking in the United States [43], p. 10.
19 The Second Bank of the United States did not always
impose restraint on state bank note issues. Initially the
bank’s policy was expansive in order to appease state
banks and encourage them to redeem their notes in
specie. The Second Bank agreed to exchange its own
notes for a large sum of state bank notes, to hold these
state bank notes in its vault and to accommodate state
currency needs during financial crises. It was not until
the latter part of the decade that the Second Bank began
to redeem state bank notes on a large scale. See Murray
N. Rothbard, The Panic of 1819: Reactions and Policies
20 Hammond, Banks and Politics [17], p. 324. See also
Timberlake, The Origins of Central Banking [43], chaps.
3 and 4, for a discussion of the role of the Second Bank
of the United States.


Early attempts by the states to check the authority
of the Second Bank by taxation were curtailed by the
Supreme Court in the McCulloch v. Maryland case
of 1819. The Court was petitioned to rule in a suit
brought against the Second Bank by the state of
Maryland for failure to pay a tax that the state
imposed on all banks not chartered by the Maryland
legislature. Similar taxes had been imposed or were
being considered by a number of other states opposed
to the Second Bank. The case was of immediate
importance because the taxes weye a threat to the
existence of the Bank, but the more important issue
was the extent and strength of federal powers. In
upholding the Second Bank as a legitimate exercise
of the implied “necessary and proper” powers dele­
gated to the federal government by the Constitution,
the Court ruled the Maryland tax to be an unconsti­
tutional “power to destroy” federal government au­
thority :
I f the states may tax one instrument employed by
the [federal] government in the execution of its
powers, they may tax any and every other . . .
means employed by the [federal] government, to an
excess that would defeat all the ends of [federal]

This Supreme Court ruling helped to extend the
life of the Second Bank until its charter expired in
However, partly because it was generally
believed that the Bank had extended its powers with­
out license at the expense of state governments, bills
for renewal of the Bank’s charter were first vetoed by
President Jackson and then delayed indefinitely. This
effectively curtailed federal central banking activities
until the organization of the Federal Reserve System
in 1913, and returned the control of bank regulation
to the individual states.

Public dissatisfaction with both the corruption and
instability of the banking system under charter regu­
lation led to the development of several experimental
regulatory systems.21 Two of the most important of
these systems were free banking and the safety fund
system, both of which apparently had their American
origin in New York state.
In 1825, a New York legislative committee report
recommended reform of the chartering system. The
21 Prohibition was not uncommon. Arkansas, California,
Iowa, Oregon and Texas all prohibited banking for vari­
ous periods.


reform was intended to eliminate the parceling of
monopoly banking privileges so that “whatever ad­
vantages are to be derived from banking operations
all citizens would be free to enjoy alike.”22 The
following year, a similar committee report decried
the charter system as “odious to the free spirit of our
civil institutions” and detrimental to sound banking
because the “ [confidence, induced by the supposed
sanctity of a charter, enables the unworthy and dis­
honest managers of [a bank’s] concerns to flood the
country with a circulation”23 that would not exist
otherwise. This committee recommended the removal
of legislative control of entry and an increase in
competition to improve public welfare and the per­
formance of the banking system. Within a year plans
for a banking system with easier entry and increased
competition were proposed. However, the state legis­
lature was able to resist, at least temporarily, the
political pressure to divest itself of its chartering au­
Instead, the state satiated public demands for re­
form when it enacted the Safety Fund Act which
introduced the idea of guaranteeing creditors against
loss due to bank failure. Under the safety fund
system, the state maintained its ability to utilize the
banking system as an instrument of public finance
because the legislature maintained control over the
issue and terms of bank charters. In addition, each
bank was required to contribute a portion of its
capital to a fund which was to be used to liquidate
the liabilities, capital stock excluded, of failed banks
participating in the system. The contributions to this
fund were controversial for two reasons. First,
bankers objected to being subjected to the additional
costs of safety fund membership because they already
contributed to the state legislature in return for the
grant of a charter. Second, critics of the system
noted that the flat rate contribution to the fund meant
that low risk banks subsidized bankers with high risk
preferences. The uniform contribution did not reflect
the relative riskiness of the individual contributors
as would a fee that varied directly with risk. In
addition, by eliminating the risk assumed by the
public, the uniform contribution also reduced public
incentive to monitor and discipline individual bank
behavior. This aspect of the plan was soundly criti­
cized by opponents who anticipated the recent prob­
22 New York State Senate Journal, 1825, as quoted in
Robert E Chadduck, The Safety Fund Banking System
in New York 1829-1866 [4], p. 371.
23 Report of the committee on banks and insurance com­
panies on petitions. Albany, 1826. As quoted in Chad­
duck [4], p. 372.

lems associated with the flat rate premium of FDIC
deposit insurance24 by some one hundred and fifty
The gravest objection to the system, is the cre­
ation of the Bank fund, by the half per cent annual
contribution of the banks. This is represented by
the “ Union Committee,” as being one of those
defects “ endangering the soundness of the curren­
cy,” and also “ unjust,” inasmuch as it renders
banks responsible for others, over which they have
no control; as offering a “ premium in favor of
misconduct, at the expense of those which are
wisely and cautiously managed; . . .” 25

In addition to introducing an insurance principle
to bank regulation, the Safety Fund Act did initiate
the transfer of the authority of direct state control of
banking from special legislative statute to delegated
authority. The law provided for three bank commis­
sioners. One was appointed by the state governor
and the other two were appointed by the banks. These
commissioners were empowered to examine the con­
dition of banks and apply for injunctions against
those which were judged to violate safety fund law
provisions. The supervisory powers furnished in this
legislation formed the basis of current bank super­
In 1838 New York removed the requirement of
specific legislative sanction for bank entry when it
passed free banking legislation.26 In permitting
banking to be open to an indefinite and unlimited
number of banks, this free banking act was both
revolutionary and controversial. It departed from the
legal convention of granting incorporation through
special enactment and delegated the powers to charter
an unlimited number of corporations to an admini­
strative authority.27 In the spirit of laissez faire, it
restored the common law right to engage in the busi­
ness of banking and disassociated banking from the
status of privileged monopoly that had characterized
banking from early colonial times.
Free banking, however, did not completely elimi­
nate either legal restrictions on entry or portfolio
24 For a discussion of the current controversy see Eu­
genie D. Short and Gerald P. O ’Driscoll, Jr., “Deregula­
tion and Deposit Insurance” [39], pp. 11-23.
25 An anonymous pamphleteer, as quoted in Fritz Redlich,
The Molding of American Banking, Men and Ideas [31],
vol. 1, p. 93.
26 Michigan passed the first free bank act in 1837.
27 As early as 1811 small manufacturing firms were per­
mitted to incorporate without special legislative sanction.
Toward the latter part of the period of charter regulation,
legislation was passed to charter a specified number of
banks, but there were no laws permitting general incor­
poration of banks until free banking.

restrictions designed to aid states in raising revenue.
Under free banking, prospective bankers were en­
titled to a charter only if they met minimum legal
capital requirements. Banks chartered under free
banking laws were entitled to issue their own notes
but were required to deposit designated state govern­
ment bonds as security for all notes issued. This
security requirement helped to supply, a market for
government bonds and compensated the states for
the loss of the financial assistance that was routinely
required from banks under state charter regulation.
In addition to these restrictions, free banks were re­
quired to redeem all circulating notes on demand in
specie, and were entitled to earn interest on the
securities as long as they remained solvent. If a free
bank failed to redeem its notes, the state closed the
bank and reimbursed the noteholders with the pro­
ceeds of a sale of the bank’s assets.
The success of free banking as a reform movement
is a point of considerable debate. The traditional
appraisal of free banking, which is used as support
for government regulation, is that it was dismal. The
system has been judged harshly because of its hetero­
geneous currency and because it witnessed many bank
failures, failures which caused note holders to suffer
losses which were substantial in some cases. To
critics of free banking, the period is characterized by
the behavior of the so-called wildcat banks which
gained infamy due to their purported success in ex­
ploiting the potential for fraud in the free banking
system. The Governor of Indiana expressed his con­
cern with wildcat banks in an 1853 address:
The speculator comes to Indianapolis with a
bundle of bank notes in one hand and the stock in
the other; in twenty-four hours he is on the way to
some distant point of the Union to circulate what
he denominates a legal currency authorized by the
Legislature of Indiana. He has nominally located
his bank in some remote part of the State, difficult
of access, where he knows no banking facilities are
required, and intends that his notes shall go into
the hands of persons who will have no means of
demanding their redemption.28

However, episodic evidence of the exploits of wild­
cat banks leaves a stronger impression of the diffi­
culties associated with free banking than a more
complete view of the experience would justify. Evi­
dence of satisfactory performance can be found in
the statements of contemporaries who were inti­
mately connected to the banking of the era. For
example, the state auditor of Indiana appraised the
results of free banking much more favorably than

28 As quoted in Knox [23], p. 318.


one might have expected in light of the governor’s
speech three years earlier.
The experiment of free banking in Indiana, disas­
trous as it has been in some particulars, has
demonstrated moat conclusively the safety and
wisdom of the system. The original bill was crude
and imperfect, admitting of such construction as
held out to irresponsible men inducement and
facilities for embarking largely in the business of
banking, without the ability to sustain themselves
in a period of revulsion. That revulsion came . . .
and yet the loss to which the bill-holder was neces­
sarily subjected, in many cases, did not exceed five
per cent, and in no case exceeded twenty per cent
of the amount in his hands.29

Recent study of the free banking era provides more
conclusive evidence that the experience under free
banking varied considerably and that the kind of mis­
conduct conventionally attributed to wildcat banking
was atypical.30 Many banks were profitable and, of
the banks that did fail, many redeemed their notes at
par. Many of the difficulties of the period occurred
in the first few years of free banking and seem to
have been associated with the organizational diffi­
culties of instituting the system. For example, the
free banking system in New York was a disaster ini­
tially, but after some of its defects were corrected it
became the model for other free banking states.
Moreover, the regulations imposed on free banks
may themselves have been a source of instability. For
example, the requirement that government bonds be
deposited as security for bank notes increased bank
exposure to term structure risk and forced the re­
tirement of bank notes as bond prices fell. Recent
evidence suggests that regulated free bank portfolios
were more important determinants of bank failure
than misconduct or mismanagement.
Despite its alleged failures, the free banking move­
ment gained widespread acceptance. By 1860, more
than half of the thirty-two states, including some of
the most populous, possessed some form of free bank­
ing. Moreover, in 1863, some of the features of free
banking were initiated on a national level with the
passage of the National Bank Act and the establish­
ment of the National Banking System.

29 As quoted in Hugh Rockoff, The Free Banking Era:
A Re-Examination [34], p. 22.
30 The remainder of this section is based on the follow­
ing: Rockoff [34]; Arthur J. Rolnick and Warren E.
Webber, “ New Evidence on the Free Banking Era [35],
and “The Causes of Free Bank Failures; A Detailed
Examination” [36].



The idea for a national system of banks evolved
over a long period of time. In the McCulloch v.
Maryland case of 1819, the Supreme Court estab­
lished the constitutional foundations of a national
banking system. A decentralized system was advo­
cated as early as 1834 by banking reformers who
were opposed to the financial power of a central bank
and favored “abolishing all monopoly, and for substi­
tuting in the place of a National Bank a National
System of Banking.”31 Long before the National
Bank Act, it was recognized that a system of national
banks could be organized to provide the national
currency desired by some bank reformers. Moreover,
it was also understood that the circulation of a na­
tional currency backed by federal government securi­
ties could help to create a market for government
bonds and satisfy the funding needs of the federal
government even in the absence of a central bank like
the Bank of the United States. For example, Millard
Fillmore, the Comptroller of the Currency in New
York, who advocated the extension of free banking
throughout the country, noted that should
Congress authorize such notes as were secured by
stocks of the United States, to be received for
public dues to the National treasury, this would
give such notes a universal credit, co-extensive
with the United States, and leave nothing further
to be desired in the shape of a national paper cur­
rency. This would avoid all objection to a national
bank, by obviating all necessity for one for the
purpose of furnishing a national currency. The
National Government might be made amply se­

However, neither a national currency nor a na­
tional banking system was feasible given the pre­
vailing political climate and the acceleration of the
free banking movement during the antebellum period.
It was only because the Civil War put great financial
pressure on the federal government to exploit the
revenue generating potential of a national currency
that a national banking system was established.
The first federally sponsored proposal for a system
of national banks appeared in the Annual Report of
the Secretary of the Treasury in 1861.
In this
Report, Secretary Chase outlined a plan for a national

31 “Essays on the Currency on Which is Proposed the
Enactment by Congress of a General Bank Law” Boston,
1834, quoted in Leonard C. Helderman, National and
State Banks [20].
32 Buffalo Historical Society Publications, X , pp. 282-283,
quoted in Helderman [20].

system based on the principles of New York’s free
banking law. He advocated a free banking frame­
work “because it has the advantage of recommenda­
tion from experience. It is not an untried theory. In
the State of New York and in . . . other States it has
been subjected . . . to the test of experiment, and has
been found practicable and useful.”33 Of course,
Chase’s plan differed from the New York plan or
any state free banking system because it substituted
federal control of a national currency backed by
United States securities for the heterogeneous bank­
note issues of the individual banks.

There was considerable opposition to a national
system. The first two attempts to enact legislation
authorizing a national currency and a national bank­
ing system were defeated in spite of recommendations
of the Secretary of the Treasury and the President.
In 1863, however, Congress established the National
Banking System by enacting the National Currency
Act, now known as the National Bank Act.37 The
original bill passed the Senate by only two votes and,
given the antifederal persuasion of the southern
states, the bill would not have been enacted had the
South been represented in Congress.

As was the case with previous instances of govern­
ment intervention, a national banking system was
rationalized as being in the public interest. For ex­
ample, Chase hailed the proposed national currency
as potentially “the safest currency which this country
has ever enjoyed.”34 As was the case with previous
instances of government intervention, however, the
government also was intended to be a beneficiary of
the control scheme. Chase argued that national banks
would provide the “further advantage of a large de­
mand for government securities . . . [and] increased
facilities for obtaining the loans required by the
war.”35 Indeed, Chase clearly viewed the banking
system as a potential source of financial assistance for
the beleaguered United States Treasury.
In the
absence of a central bank, a national currency backed
by federal government securities was the most con­
venient means of tapping this source:

The act marked the beginning of the dual banking
system, the division of regulatory authority between
state and federal governments. The law provided the
federal government with the authority to charter and
supervise national banks and to regulate the national
currency by establishing the Office of the Comp­
troller of the Currency within the Treasury Depart­
ment. Since the national banking system was modeled
after free banking, a group of five or more persons
was permitted to form a national bank by satisfying
the minimum statutory capital requirement and filing
articles of association with the Comptroller. Each
national bank also was required to deposit United
States bonds with the Comptroller and in exchange
received national bank notes equal to 90 percent
of the lesser of the par or market value of the de­
posited bonds. The act also imposed a number of
restrictions on bank activity that were rationalized
as enhancing bank soundness and financial stability
including: (1) a requirement to maintain reserves
against both deposit and note liabilities,38 (2) restric­
tions on the scope of operations primarily to accepting
deposits and making short-term, self-liquidating loans
to business,39 and (3) a requirement to provide peri­
odic reports of condition to the Comptroller.

To enable the government to obtain the necessary
means for prosecuting the war to a successful issue,
without unnecessary cost, is a problem which must
engage the most careful attention of the legislature.
The Secretary has given to this problem the best
consideration in his power, and now begs leave to
submit to Congress the result of his reflections.
The circulation of the banks of the United States
constitutes a loan without interest from the people
to the banks, costing them nothing except the ex­
pense of issue and redemption and the interest on
the specie kept on hand for the latter purpose; and
it deserves consideration whether sound policy does
not require that the advantages of this loan be
transferred, in part at least, from the banks, repre­
senting only the interests of the stockholders, to
the government, representing the aggregate inter­
ests of the whole people.36

33 Report of the Secretary of the Treasury on the State of

the Finances for the Year Ending June 30, 1861 [32],
p. 19.
34 Ibid., p. 19.
35 Ibid.
36 Ibid., p. 17.

37 The original national banking law was approved on
February 25, 1863 and was entitled “An act to provide a
national currency, secured by a pledge of United States
stocks, and to provide for the circulation and redemption
thereof.” This law was repealed and a revised version
was enacted July 3, 1864. On June 10, 1874 Congress
declared that the act “shall hereafter be known as the
National Bank Act.”
38 For an excellent discussion of the rationales and func­
tions of reserve requirements, see Marvin Goodfriend and
Monica Hargraves, “A Historical Assessment of the
Rationales and Functions of Reserve Requirements” [16].
39 This concept of the proper functions of banking, wide­
spread in the 19th century, is frequently referred to as the
“banking principle” and was derived from the “real bills”
doctrine. The “banking principle” and other 19th century
banking theories are discussed in Loyd W . Mints, A
History of Banking Theory [25].


Two factors hindered the growth of the National
Banking System initially. First, most bankers pre­
ferred to continue to conduct business under state
charters which typically had fewer restrictions and
offered more attractive profit opportunities than na­
tional (barters. In addition, the Comptroller exer­
cised arbitrary discretion in granting charters, dis­
cretion that discouraged entry. In considering charter
applications the Comptroller made subjective apprais­
als both of the economic potential of the community
and the extent of potential competition and also re­
quired the endorsement of a prominent citizen or,
sometimes, even a member of Congress.40 This
policy was neither consistent with the Congressional
design for an expanding national banking system nor
was it specifically granted by an allegedly free-bank
Strong measures, however, were soon taken to
coerce greater participation in the national banking
system. In 1865 Congress imposed a ten percent tax
on any bank paying out state bank notes after July 1,
1866. In his speech proposing the bill41 on Febru­
ary 27, 1865, Senator John Sherman left no room for
doubt that the tax was intended to eliminate state
banking by prohibiting profitable issue of state bank

of the tax and disposed of any lingering notion of
states’ rights regarding currency issues. The reasons
for the decision, which virtually assured the expan­
sion of the national system first proposed by former
Secretary of the Treasury Chase, were summarized
in the statement of the by-then Chief Justice of the
Supreme Court Chase:

A still more important feature of this bill is the
section to compel the withdrawal of State bank
notes . . . national banks were intended to supersede
the State banks. Both cannot exist together . . . the
power of taxation cannot be more widely exercised

the tax was “an unprecedented amputation of state
authority.” 45

. .


Resistance to the national banking legislation re­
mained strong. A Maine bank challenged the tax
and the constitutionality was tested in the Veazie
Bank v. Fenno43 case which was considered by the
Supreme Court in 1869. The bank contended that
the tax was a direct tax that had not been apportioned
among the states as required by the Constitution.
Furthermore, it argued that the tax exceeded Con­
gressional authority because it impaired a franchise
granted by the state. The Court, however, absolved
Congress of any wrongdoing, confirmed the validity

40 Ross M. Robertson, The Comptroller and Bank Super­
vision [33], pp. 57-69.
41 An act to amend an act entitled “An act to provide
internal revenue to support the Government, to pay
interest on the public debt, and for other purposes,”
approved June 13, 1864.
42 As quoted in Walter Wyatt, “ Constitutionality of
Legislation Providing for a Unified Commercial Banking
System” [57], p. 244.
43 75 U .S.(8 W all) 533.


. . . the judicial cannot prescribe to the legislative
departments of the Government limitations upon
the exercise of its acknowledged powers.
power to tax may be exercised oppressively . . .
[and not] be pronounced contrary to the Constitu­
tion [by the Judiciary] . . . [Furthermore] [i]t
cannot be doubted that under the Constitution
[Congress is given] the power to provide a circula­
tion of coin . . . [and] bills of credit. . . . Having
thus, in the exercise of undisputed Constitutional
powers, undertaken to provide a currency for the
whole country, it cannot be questioned that Con­
gress may, constitutionally, secure the benefit of it
to the people by appropriate legislation.44

In rejecting the majority opinion, the dissenting
justices argued that the decision had no historical or
legal precedent.
State banking organizations had
been accepted members of the financial community
since the early years of the nation and their constitu­
tionality had been upheld by the Supreme Court
twenty-two years earlier in the Briscoe v. Bank of
Kentucky case. In the view of the dissenting justices,

Through its power to tax, Congress persuaded a
large number of state banks and new entrants to
apply for a national charter. Ambitions, however,
for a banking system comprised solely of nationally
chartered banks were never realized because the tax
on state bank notes did not effectively restrain state
banks. By the time the tax on state bank notes was
imposed, deposits were supplanting currency as the
primary medium of exchange, and commercial bank­
ing was emerging as a profitable deposit banking
business immune to the Congressional tax on state
bank notes. As the innovation of deposit banking
spread, state banking underwent a resurgence. The
less restrictive state charters again were potentially
more profitable than national charters, just as they
had been before the tax on state bank notes. With
much more limited corporate powers, national banks
were never able to attain the supremacy envisioned
by the creators of the National Bank Act.

44 Wyatt [57], pp. 245-246.
4® Gerald T. Dunne, Monetary Decisions of the Supreme
Court [8], p. 50.


The period between 1875 and 1913 was marked
by a series of attempts to remedy perceived inadequacies in the banking system. The retirement of
bond-backed national bank notes and greater utiliza­
tion of private clearinghouse arrangements were cen­
tral to the reform movement. Congress was slow to
respond to this reform agitation that endorsed a de­
crease in federal regulatory authority, but eventually
responded by enacting legislation roughly based on
clearinghouse principles. In so doing, however, Con­
gress expanded and solidified the federal govern­
ment’s control over the banking industry and en­
hanced the revenue-generating capabilities of the
federal regulatory framework with the formation of
the Federal Reserve System in 1913.
The primary motivation for reform was the vul­
nerability of the financial system to liquidity crises
and panics. Contemporary observers focused on two
essential causes of this instability: ( 1 ) the pyra­
miding of reserves and ( 2 ) the alleged inelasticity of
the money supply.46
Pyramiding occurred because banks operated on a
fractional reserve system that permitted them to hold
part of their required reserves as deposits with other
banks. So-called country banks maintained reserve
deposits at designated reserve city banks, and the
latter held deposits at central reserve city banks.
Reserve city and central reserve city banks held
only a fractional reserve against the reserve deposits
they held for other banks and thus were able to use
some of the reserve deposits of depositing banks to
meet their own required reserves. As a consequence,
the actual cash reserve was a smaller fraction of
aggregate deposits than the numerical reserve ratios
stipulated by statute for individual institutions. More­
over, reserves tended to be highly concentrated in the
large money center banks that had a significant cor­
respondent business. While a fractional reserve
banking system is vulnerable to bank runs in the
absence of a lender of last resort, this pyramiding of
reserves sometimes exacerbated the problem. Any
systematic drain on the reserves of a sizable group

46 Friedman and Schwartz note that this view of inelas­
ticity was due partly to a failure to recognize fully the
significance of deposits as money, and partly “ [to] a
particular manifestation of the ubiquitous ‘real bills’ doc­
trine.” Milton Friedman and Anna Jacobson Schwartz,
A Monetary History of the United States 1867-1960 [13],
p. 169.

of banks caused a liquidity problem for the large city
correspondents as the banks experiencing the drain
would have to draw down their reserve deposits at
the city banks. A sustained large drain could cause
problems of crisis proportions. This reserve system
bility and, consequently, the total amount of money
The alleged inelasticity of national bank notes was
viewed as a separate defect of the system. This was
so because the size of the note issue was determined
by the level of government debt and, therefore, was
fairly rigidly fixed within short periods of time.47
National bank notes did not satisfy the popular notion
of an elastic currency because they did not vary with
cyclical and seasonal fluctuations in business activity.
For this reason, reformers considered a currency
based on national bank notes to be a serious flaw in
the financial system.
In order to remedy these perceived defects, reform­
ers recommended both a move away from a bondsecured currency and the development of a market
mechanism to serve a lender of last resort function.
Two of the most important reform measures based
on these ideas were the “ Baltimore Plan” of the 1894
American Bankers Association convention and Theo­
dore Gilman’s “ Graded Banking System.” 48 The
Baltimore Plan focused on currency reform as the
remedy to financial instability and proposed revisions
of the National Bank Act including amendments
( 1 ) to repeal the requirement that federal govern­
ment bonds be deposited as security for bank notes,
( 2 ) to provide for a new national currency backed
by bank assets, and (3 ) to provide for the relief of
liquidity crises with the circulation of an emergency
currency issued under heavy taxation in order to
encourage retirement after the emergency.
Like the Baltimore Plan, the “ Graded Banking
System” stressed the ability of banks to generate
reserves to meet short-term increases in the demand
for currency as the key to the stability of the banking
system. This proposal called for the organization of
clearinghouse associations to perform the lender of
last resort function. Clearinghouses developed in
this country in order to facilitate interbank transac­
tions, and eventually operated in all of the reserve

47 In order to increase its note circulation, a national bank
required time to (1) purchase the government bonds that
serve as security, (2) transfer the bonds to the United
States Treasurer, (3) notify the Comptroller to forward
the notes and (4) transport the notes.
48 Theodore Gilman, A Graded Banking System £14].


cities of the national bank system and in other finan­
cial centers. Clearinghouses, though privately owned
by the member banks they served, nevertheless func­
tioned like a central bank in at least two ways: first,
by requiring member banks to hold a cash reserve
against deposit liabilities, and second, by creating new
reserves for member institutions in emergencies.
Also, the clearinghouses innovated new arrangements
to help their members cope with panics. For example,
clearinghouses attempted to alleviate the problem of
reserve drain, without the costly procedure of main­
taining 1 0 0 percent reserves, by utilizing emergency
currencies to stretch the reserve base of member
banks in order to relieve liquidity crises.49 These
clearinghouse innovations have been recognized as
the market’s response to the need for central bank
functions and “the specifically American solution to a
problem with which central banks in other great
commercial nations were faced.” 60
The principles embodied in clearinghouse arrange­
ments and currency reform represented a potentially
effective means of rectifying the unstable character­
istics of the banking system and, for this reason, were
central to a number of reform proposals considered
by Congress. Such proposals, however, were opposed
in some quarters because they diluted the federal
government’s control over the banking system, threat­
ened the financial power that the bond-backed cur­
rency provided to the federal government, and sanc­
tioned private competition in the issue of currency.51
Congress was reluctant to adopt any reform that
diluted federal regulatory authority.
In fact, no substantial reform legislation emerged
from Congress for several years. After the financial
panic of 1907, a panic marked by a widespread run
on banks and an inability of those institutions to
convert deposits into cash upon demand, the AldrichVreeland Act was enacted in an attempt to establish a
mechanism to relieve liquidity crises and to prevent
bank failures in a way similar to that practiced by
clearinghouses. The Aldrich-Vreeland Act was the
first legislation to provide for a currency backed by
short-term assets and “also marked the first tendency

for legislation to [encourage] . . . centralization and
cooperation among banks.” 52 The act, however, did
not bring about any major reduction in federal con­
trol of banking. First, it was only a temporary mea­
Second, it established the Secretary of the
Treasury as the regulator of the emergency currency
of the National Currency Associations. More signifi­
cantly for basic reform, however, it did establish the
National Monetary Commission to study the currency
and banking situation and report its findings to Con­
After the National Monetary Commission com­
pleted its deliberations on domestic and foreign bank­
ing practices, it submitted a summary of the perceived
defects of the banking system and remedies for these
defects. The Commission’s reform proposal, known
as the Aldrich Plan, called for the establishment of a
National Reserve Association to be comprised of a
central executive office and fifteen branches, each of
which was to be divided into local associations. The
organizational structure of the National Reserve A s­
sociation was modeled after the clearinghouse system
and it was intended to function as a clearinghouse.
Senator Aldrich was quite explicit on this matter:
The organization proposed is not a bank, but a
cooperative union of all the banks of the country
for definite purposes and with very limited and
clearly defined functions. It is, in effect, an exten­
sion, an evolution of the clearing-house plan modi­
fied to meet the needs and requirements of an
entire people.53

Membership in the National Reserve Association
was to be voluntary and the entire paid-in capital
stock was to be owned by the members.


banks were to be able to join without any qualifica­
tions, while state banks and trust companies needed
only to conform to specified reserve and capital re­
quirements to become members. Under the Aldrich
Plan, the government had little control over banking
because the Commission adhered to the principle that
practitioners were the best qualified to manage clear­
inghouse operations.

The Commission also sought

to remove the incentive for members to manipulate
the organization for profit by placing a ceiling on the

49 R. H. Timberlake, Jr., “The Central Banking Role of
Clearing-House Associations” [42], p. 4.
50Redlich [31], part II, p. 158.
51 The utility of clearinghouse issues was recognized by
many of its harshest critics.
The major criticism of
clearinghouse operations is that they were illegal because
the federal government exercised an exclusive authority
to issue money. For a discussion of this point, see Tim­
berlake, “The Central Banking Role of Clearing-House
Associations” [42], pp. 14-24.


dividends that the stockholders could receive.


National Reserve Association was intended to be
responsive to the public interest and insulated from
conflict of interest.
52 Robert Craig West, Banking Reform and the Federal
Reserve 1863-1923 [52], p. 51.
33 As quoted in W est, Banking Reform [52], p. 73.

The great central banking potential that clearing­
house operations offered was never realized because
federal authorities would not relinquish regulatory
authority. The control of the National Reserve
Association became the focal point of the contempo­
rary dialogue on reform. The Aldrich proposal was
criticized for promoting monopolistic tendencies be­
cause the procedure for selecting directors gave
greater influence to banks with a larger number of
shares in the National Reserve Association. Critics
also noted the virtual absence of government control
over the Reserve Associations. The sharpest critics
dismissed the National Reserve Association as a
poorly disguised scheme for a central bank.54
Congress, however, was not content to remedy
these perceived defects. It was simply opposed to the
privately controlled structure of the National Reserve
Association and determined to replace it with a
government-controlled institution, although there was
disagreement concerning the degree of centralization
of that authority. Ultimately, Congress established
the Federal Reserve System. That System was in­
tended to serve the same clearinghouse functions as
the National Reserve Association and consequently,
had an organization that was quite similar to that of
the National Reserve Association except, of course,
that the Federal Reserve was under closer control of
the federal government.55 The capstone of the sys­
tem, the Federal Reserve Board, was located in
Washington and, with the exception of its ex officio
members (the Secretary of the Treasury and the
Comptroller), all of its members were Presidential

While proponents of the Federal Reserve Act
criticized the Aldrich Plan for proposing a central
bank, they declined to recognize the central bank
features of the Federal Reserve System.67 The cen­
tral authority was depicted as a benign coordinating
agency that would function as a public utility or
perhaps even a “supreme court of American finance.”
The assumption underlying this view obviously was
diametrically opposed to the laissez faire principle
that the National Monetary Commission adopted
when it recommended the Aldrich Plan.

The pro­

ponents of the Federal Reserve Act also declined to
recognize the potential for political conflict embodied
in the central organization and occasionally invoked a
“people-control-it-through-the-government” 58
trine to dismiss this notion.


Federal government

control of the Federal Reserve was considered to be a
strong feature because it placed “great power in the
hands of the people.” 59 Carter Glass was one of the
more eloquent adherents to this principle.
No financial interest can prevent or control [the
Board]. It is an altruistic institution, a part of the
Government itself, representing the American
people, with powers such as no man would dare
misuse . . . strictly a board of control . . . doing
justice to the banks, but fairly and courageously
representing the interests of the people . . . the
task of political control [of the Board] is the ex­
pression of a groundless conjecture.60
The major point of departure for adversaries of the
proposed Federal Reserve System was the central
organization which made the system a central bank.
The “public control doctrine” simply was not accept­

54 See Timberlake, Origins of Central Banking [43], p.
192. It was very important that any reform measure
avoid the appearances of a central bank. A central bank
was offensive to both those who feared large bank domi­
nation of the financial system and those who feared
political control. In the words of a contemporary:
No, there is no way possible to keep a central bank
free from W all St., without [it,] it couldn’t be a suc­
cess, again you can’t keep it out of the hands of
Monopolists and politics, . . .
M. Lauretson, president of the First State Bank of Tyler,
Minnesota as quoted in Eugene N. White, The Regula­
tion and Reform of the American Banking System, 19001929 [54], p. 93.
55 The striking similarity between the Aldrich Plan and
the Federal Reserve Act is documented in Paul M.
Warburg, The Federal Reserve System, Its Origins and
Growth [48], pp. 178-406.
56 The idea of the Board has been attributed to political
expediency. (For details, see W est [52], chaps. 5 and 6.)
President Wilson is often credited with this suggestion.
However, the idea probably originated with Professor J.
Laurence Laughlin who recommended a central board in
his reform proposal called “Plan D .” See J. Laurence
Laughlin, The Federal Reserve Act: Its Origins and
Problems [24].

able to those who embraced the practical view that
“control through a Government bureau, by political
appointees, is not synonymous with control by the

57 Carter Glass denied that the Fed was a central bank
after it had been in operation for almost a decade.
“What are these regional banks?
There is no mystery about them . . . they are banks
of banks. They do not loan, can not loan, a dollar
to any individual in the United States . . . but only
to stockholding banks . . .
At the head of these 12 regional banks we put a
supervisory board. It is not a central bank.”
Carter Glass. “Truth About the Federal Reserve Sys­
tem.” Speech in the Senate of the United States, Janu­
ary 16-17, 1922 [15], p. 8.
58 Timberlake, Origins of Central Banking [43], p. 194.
59 H. H. Seldomridge, 60th Congress, 1st session, as
quoted in Timberlake, Origins of Central Banking [43],
p. 194.
60 Carter Glass, as quoted in Timberlake, Origins of
Central Banking [43], pp. 193-194.


people and for the people.” 61 This view also had its
spokesman in Congress.
This bill creates a “ central bank.” This plan is
much more centralized, autocratic, and tyrannical
than the Aldrich plan. It is true that we are to
have 12 regional banks; but these are but the
agents of the grand central board, which absolutely
controls them. The power is not with them; they
are not in any material matter given the right of
independent action; they must obey orders from
Washington .62

The Federal Reserve Act did not repeal the Na­
tional Bank Act or abolish the Office of the Comp­
troller of the Currency, but rather superimposed a
second regulatory system on the existing National
Banking System and created a second regulatory
agency. In so doing, federal authorities strengthened
their control over national banks by requiring the
latter to become members in the Federal Reserve
System, even though bankers had little representa­
tion in the System’s central decision-making process.
Also, by vesting new regulatory authority in this
second regulatory agency, Congress created a new
avenue to bring state-chartered banks under the
scope of federal control, preempted profitable oper­
ations of private clearinghouses and permitted the
federal government to maintain exclusive control
over the issue of paper currency.
In enacting the Federal Reserve Act, Congress
diluted the authority of the Comptroller and camou­
flaged the link between the Treasury and bank regu­
lation. There was a conscious decision not to sever
this link completely, however. Indeed Congress de­
clined to abolish the Office of the Comptroller of the
Currency or to put it under the control of the Federal
Reserve System despite sentiment to extinguish
“ remnants of an undemocratic, antiquated and dan­
gerous” 63 system.
In addition, Congress established the Federal Re­
serve to function as an instrument of public finance.
Because the Fed was granted the authority to
purchase and rediscount assets in exchange for its
own non-interest-bearing liabilities, Fed operations
were potentially quite profitable. Section 7 of the
Federal Reserve Act required that “all net earnings
[of the Federal Reserve Banks] shall be paid to
the United States as a franchise tax.” While the

61 Frank Mondell, 60th Congress, 1st session, as quoted in
Timberlake, Origins of Central Banking [43], p. 195.
62 Horace M. Towner, 63rd Congress, 2nd session, as
quoted in West, Banking Reform [52], p. 119.
63 Paul M. Warburg, “ Political Pressure and the Future
of the Federal Reserve System” [49], p. 72.


Act provided for the retirement of national bank
notes, it attempted to ensure the continuation of a
strong market for government bonds by authorizing
every Federal Reserve bank to “buy . . . bonds and
notes of the United States . . . with a maturity
. . . not exceeding six months, issued in anticipation
of the collection of taxes.” Section 4 also authorized
the issue of Federal Reserve bank notes “under the
same conditions and provisions of law as relate to
the issue of circulating notes of national banks
secured by bonds of the United States bearing the
circulating privilege, except that the issue of such
notes shall not be limited to the capital stock” of each
Federal Reserve Bank. Finally, Congress spelled out
the relationship of the new Federal Reserve System
to the U. S. Treasury Department as follows:
Nothing in this Act contained shall be construed as
taking away any powers heretofore vested by law
in the Secretary of the Treasury which relate to the
supervision, management, and control of the Trea­
sury Department and bureaus under such depart­
ment, and wherever any power vested by this Act
in the Federal Reserve Board or the Federal Re­
serve Agent appears to conflict with the powers of
the Secretary of the Treasury, such powers shall
be exercised subject to the supervision and control
of the Secretary of the Treasury .64

Almost from the start, the Comptroller of the Cur­
rency and the Fed were in conflict. The controversy
revolved around bank supervisory and examination
functions and the authority of the Fed to have access
to the information gathered by the Comptroller in
examination reports.65 The Fed believed that access
to information on bank financial conditions was neces­
sary to the proper discharge of its responsibilities.
The Comptroller, however, was reluctant to share
confidential information with the Fed, and for a
period of time only sent abstracts of examination
reports to the Fed. The Comptroller’s position
seemed to be based on the notion that access to
confidential financial information on the banking
system was not vital to the successful operation of
the new central bank. This attitude was reflected in a

64 Federal Reserve Act, section 10. The legislative his­
tory of this passage gives little insight into its intent
because it was not debated in Congress. The provision
appeared during the Senate discussion of the bill on one
of the several new prints of the bill intended to incor­
porate minor changes. No one directly claimed author­
ship, although the Senate Committee chairman implied
that it was suggested by the Treasury. Regardless of its
intent, it contributed to the jurisdictional friction between
the two federal agencies. For a discussion of this passage
in the law, see A. D. Welton, “The Reserve Act in Its
Implicit Meaning” [51], p. 57.
65 Robertson [33], p. 107.

report written by a committee that was commissioned
by the Comptroller to study the jurisdictional issue:
In requesting access to the complete reports of
extended by them is an extra hazardous risk and
of an abnormal character justifying them in de­
manding information not exacted by other banking
institutions and in no way relating to the solvency
of the bank. This point of view is not warranted
by past banking experience and if the extending of
accommodations is to be restrictive and surrounded
with burdensome exactions, the success of the sys­
tem is in jeopardy.66

In any event, the Comptroller declined to cooperate
with the Fed or explain what purpose this confi­
dential information served to the Treasury Depart­
The friction between the two federal agencies
eventually put the Comptroller’s office in jeopardy.
By 1921, Congress had introduced a number of bills
to abolish the Comptroller’s Office and resolutions to
investigate the agency’s behavior. Opponents of the
Comptroller argued that it would be more democratic
if the autocratic powers exercised by the Comptroller
were vested in a board.67 It was argued that the
Federal Reserve Act had made the Comptroller re­
dundant and that its continued existence would
constitute an unnecessary source of “costly delays,
duplication of work, inefficiency and unbearable irri­
tation.”6 These accusations, predictably, were denied
by the Comptroller. Nothing of significance came of
any of these bills or resolutions, in part because the
relations between the two agencies did improve after
1923. Without the embarrassment of open hostilities
between the two federal agencies, Congressional in­
centive to rectify the overlapping authority disap­

The advent of the reformed and dually executed
federal regulatory framework coincided with funda­
mental changes in the financial environment in the
United States. The outbreak of European hostilities
in 1914 presented unusual demands for funds and
stimulated activity in the financial services industries.
After the United States entered the war, the inte­

66 Quoted in Robertson [33], p. 108.
67 Congressional Record, 65 Congress, 3rd session, 1919.
68 Warburg, “Political Pressure” [49], p. 72.

gration of commercial and investment banking activi­
ties was encouraged by the federal government which
enlisted broad commercial bank support in under­
writing and distributing Liberty Bonds to help fi­
nance the government’s enormous demand for funds.
Participation in this distribution provided many com­
mercial banks with the expertise necessary for ex­
panded securities operations and helped to educate a
general public that became more willing to invest
funds in the capital markets during the ensuing era
of prosperity.
Consequently, even after the war, commercial bank
involvement in all aspects of the securities markets
continued to increase. The general prosperity en­
abled many nonfinancial corporations to reduce in­
debtedness to banks or to utilize the accommodative
securities markets as a substitute for bank loans to
finance business.69 Commercial borrowing at banks
declined, threatening the profitability of traditional
loan activities and leaving the banking industry with
surplus funds. Many banks relied on the longer term
capital markets to offset the reduction in loan reve­
nue. Since state banks were not constrained by
federal regulations, they directly accelerated their
activity in the investment banking business; national
banks were forced to rely more on trust company or
securities affiliates. By the mid 1920s, investment
banking and security services had become so popular
with the public that many banks found it necessary
to provide investment services in order to remain
Both branch banking and securities activities of
national banks were the focus of reform proposals
prior to the depression. While the national banking
system was growing relative to state-chartered bank­
ing in terms of numbers,70 the proportion of total
deposits attributable to national banks was declining
due to the attrition of many of the larger national
banks. These defections reflected an effort to gain
access to the most favorable regulatory framework.
For example, many national banks were able to in­
crease their branching capabilities71 by converting to
state charters or merging with a state bank and
retaining state-charter status. National banks seek6®Lauchlin B. Currie, “The Decline of the Commercial
Loan” [5], and William N. Peach, The Security Affiliates
of National Banks [27], chaps. 2 and 4.
70 Raymond P. Kent, “Dual Banking Between the Two
World W ars” in Banking and Monetary Studies [22],
p. 45.
71 The National Bank Act did not forbid branching by
national banks. However, the Comptroller interpreted
the law to preclude branching. See Robertson [33], pp.


ing more direct participation in the securities business
had the same incentives to operate under state regu­
lation. As a consequence, the Comptroller was espe­
cially concerned that national bank powers be broad­
ened in order to curtail national bank defections.72
The so-called McFadden Act, which was passed in
1927, included provisions intended to equalize com­
petition between national and state banks. The law
reduced inequities in branching regulations and
granted explicit authority to national banks to buy
and sell marketable securities.
Shortly thereafter, commercial bank involvement in
securities activities accelerated as commercial banks
became aggressive innovators in the investment bank­
ing industry. By the end of the 1920s, “commercial
banks and their security affiliates occupied a position
in the field of long-term financing equal to that of
private investment bankers, both from the standpoint
of investment banking machinery and from the stand­
point of the volume of securities underwritten and
distributed by the two groups of institutions.” 73
Following the stock market crash of 1929 and the
subsequent collapse of the banking system, however,
concern for more rigid control over banking activities,
especially investment practices, resurfaced. In 1930,
Congressional committees studied the causes of the
1929 collapse, which many believed to be the root
cause of the economic and financial distress. Bank
investment practices, especially the extent to which
bank credit had been funneled into the stock market,
became the focus of investigation and criticism. In­
deed, to many who witnessed the developments of the
late 1920s, the sequence of events seemed to provide
formidable evidence of commercial bank culpability:
No sooner had the McFadden Act taken effect,
then the great bull market had gotten underway!
During the period from 1928 through 1930, com­
mercial banks had substantially increased their
share of the new bond issues and had begun to
make inroads in the equities market.74

In addition, the Congressional investigations ex­
posed instances of conflict of interest, speculative
abuse and personal enrichment by officials at some
of the larger commercial banks. These revelations
helped to reinforce a general impression of bank
culpability and put the banking community on the
defensive. Although the scope and pervasiveness of

these abuses are still subject to debate, the dramatic
nature of the Congressional hearings had a strong
influence on public sentiment, and thereby contrib­
uted to both the lack of public confidence in the
banking system and to the popular belief that stronger
bank regulation was necessary.
Dispassionate study, however, suggests that the
banking system was as much a victim as a cause of
the financial instability because the central bank that
was intended to serve the lender of last resort func­
tion failed to serve this purpose.75 In the absence of
an organized private lender of last resort mechanism,
previously provided by private clearinghouses, the
banking system had no means of self-correcting its
reserve deficiencies and stemming a financial crisis.
As a consequence, conditions in the banking system
deteriorated until the “bank holidays” broke the mo­
mentum of the panic.
The severity of the banking emergency led to the
adoption of several reforms intended to prevent the
recurrence of events that were perceived to have con­
tributed to the collapse of the banking system. The
reforms, however, reflected quite different attitudes
regarding the deficiencies of the private and public
sectors. Because the banking community bore the
greatest share of the blame for the financial crisis,
many of the legislated reforms restricted the scope
of bank activities. On the other hand, the failure of
the federal regulatory structure either to prevent or
to alleviate the financial crisis brought an entirely
different legislative response. Congressional reform
expanded and strengthened the federal regulatory
system. Rather than enhance the banking system’s
ability to deal with financial crises independently,
Congress increased federal regulatory control over
banking. The two most important reforms introduced
deposit insurance on a national level and altered the
organization and power of the Federal Reserve
Deposit insurance, however, was a very contro­
versial reform measure. Since the New York Safety
Fund System had been established both to satisfy the
public demand for reform and to permit the New
York legislature to maintain its chartering authority,
there had been several experiments with deposit guar­
antees. All had failed during times of crisis. The
unpopularity of deposit insurance with bankers had
been responsible for many conversions from state to

72 See for example the Annual Report, Comptroller of the
Currency, 1924.
78 Peach [27], p. 20.
74 Edwin J. Perkins, “The Divorcement of Commercial
and Investment Banking: A History” [29], p. 500.


75 See, for example: Friedman and Schwartz [13], chaps.
7 and 8 and Clark Warburton, Depression, Inflation and
Monetary Policy: Selected Papers, 1945-1953 [50], chaps.
14 and 15.

national charters in states with deposit guarantee
systems.76 Bankers objected to deposit insurance
on a number of grounds, but the strongest objection
was that it subsidized risky management by “imsound institution for the benefit of the weaker insti­
tution.” 77 As had been the case one hundred years
earlier in New York state, deposit insurance repre­
sented a means of restoring public confidence in both
the banking system and the regulatory framework
without sacrificing any regulatory authority. Conse­
quently, Congress established deposit insurance under
the administration of the Federal Deposit Insurance
Corporation (F D IC ).
In some respects, the establishment of the FDIC
was analogous to the creation of the Federal Reserve
System. First, there was no clear separation between
the Treasury and the FDIC. The Comptroller was
appointed as one of the three members of the board
of directors of the FDIC that elects the FDIC chair­
Second, the creation of the FDIC did not
significantly alter or reduce the power of the Comp­
troller or the Federal Reserve. The FDIC simply
was superimposed on the existing framework. Third,
the FDIC inherited the existing federal regulatory
jurisdiction because all banks under federal regula­
tion— national banks and state-chartered members of
the Federal Reserve— were required to have their
deposits insured by the FDIC. Moreover, the FDIC
paved the way for the extension of federal regulatory
authority by permitting state-chartered banks to be
admitted to insurance coverage subject to FDIC
supervision. The FDIC succeeded in extending
federal regulatory control over state-chartered banks
to a much greater extent than either the National
Banking System or the Federal Reserve System be­
cause of the importance of deposit insurance to public
In addition to establishing the FDIC, the reform
legislation of the 1930s altered the organization and
operations of the Federal Reserve System.
Federal Reserve Board— renamed the Board of Gov­
ernors of the Federal Reserve System— and the Open
Market Committee were reconstituted to reduce the
influence of the individual Federal Reserve banks and
increase the centralization of control of the system.
While both the Secretary of the Treasury and the

76 After the panic of 1907, Kansas, Mississippi, Nebraska,
North and South Dakota, Oklahoma, Texas and W ash­
ington passed laws establishing bank deposit guarantee
77 Susan Estabrook Kennedy, The Banking Crises of 1933
[21], p . 216.

Comptroller were removed as ex officio members of
the Board and the franchise tax on the Federal Re­
serve earnings was abolished, the reform did not
eliminate the importance of the Federal Reserve Sys­
tem to the Treasury financing program. To the
contrary, this reform legislation broadened the au­
thority of the Federal Reserve to purchase federal
government securities as a fundamental tool of Fed­
eral Reserve operations. This broadened authority
has helped to maintain the market for government
debt that the federal government first attempted to
ensure when it passed the National Bank Act. In
addition, a variety of Fed-Treasury pecuniary trans­
fers have continued since the banking legislation of
the 1930s and have increased dramatically in recent




Statutory changes in the federal regulatory frame­
work since 1935 have been basically of a technical
nature, although there has been some strengthening
and extension of the authority of the federal regula­
tory agencies. In addition, there have been several
proposals for reorganizing and simplifying the regu­
latory structure. These efforts, however, have not
resulted in substantial reorganization but rather have
led to attempts to increase inter-agency coordination
by establishing committees composed of members of
the various agencies. For example, the Federal Fi­
nancial Institutions Examination Council (F F IE C ),
which is comprised of the heads of the FDIC, Federal
Reserve and the Comptroller as well as other federal
regulators, was formed in order to reduce the ineffi­
ciencies and redundancies of the system and improve
cooperation. It is possible, however, that the FFIEC
may itself become an independent agency.

Public regulation of banking was established during
the colonial period to enable colonial governments to
finance public expenditures. The institutional struc­
ture of regulation that has evolved since that time
also has served as an instrument of public finance.
Charter regulation permitted state governments to
circumvent Constitutional restrictions on state mone­
tary authority. State legislatures were able to exact
favorable financial arrangements in exchange for the
charter privilege of issuing currency. However, the
elimination of direct state legislative control of entry
78 See Goodfriend and Hargraves [16] on this point,
especially pp. 13-16.


under free banking did not eliminate the public fi­
nance function of government regulation. Free bank­
ing strengthened the market for state government
debt by requiring bank notes to be secured with
government bonds. This framework was eventually
established on the federal level with the enactment of
the National Bank Act which provided for a national
currency collateralized by federal government bonds.
The establishment of the Federal Reserve System
and the Federal Deposit Insurance Corporation en­
abled the federal government to satisfy public demand
for banking reform and maintain the public finance
function of federal regulation.

The structure of bank regulation in the United
States has evolved over the better part of three cen­
turies. Since a primary motive for regulation has
been an expansion of the financial power of various
government authorities, the structure of regulation
has been designed to serve this purpose. In addition,
the structure of bank regulation has become more
complex at each stage of its evolution because of the
reluctance of government agents to divest themselves
of regulatory authority. Any consolidation of the
federal regulatory structure would represent a signifi­
cant reversal in a secular trend that has continued
since the colonial period.

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Earnings and Capital Accounts
Net earnings before payments to the United States
Treasury declined in 1983 by $53,618,126.65 to
$1,204,649,502.68. Six percent statutory dividends
totaling $4,336,297.02 were paid to Fifth District
member banks, and the sum of $1,197,695,755.66 was
turned over to the United States Treasury.
Capital stock increased by $2,617,450 to $74,164,050
as member banks increased their shareholdings in
this Bank, as required by law, to reflect the rise in
their own capital and surplus accounts. The Bank’s
surplus account increased $2,617,450 to $74,164,050.

Electronic Payments Product Management
In August 1983, the Conference of First Vice
Presidents of the Federal Reserve System created
new positions of Product Director and Product Man­
ager to manage each major financial service line.
First Vice President Jimmie R. Monhollon was ap­
pointed Electronic Payments Product Director, and
Vice President Bruce J. Summers was appointed
Product Manager.
As Product Director, Mr. Monhollon has respon­
sibility for the Systemwide management of electronic
payments services in addition to his duties as the
Bank’s First Vice President. The Electronics Pay­
ments Product Manager position is full time and
reports through the Product Director to the Confer­
ence of First Vice Presidents, so Mr. Summers has
relinquished his previous responsibilities at the Rich­
mond Bank and now works for all twelve of the
Reserve Banks.
Messrs. Monhollon and Summer’s responsibilities
in the new electronic payments product management
function will include ( 1 ) developing business plans,
(2) monitoring financial plans, (3) pricing and
product development, and (4) industry liaison for
the Federal Reserve’s three electronic payments

Discount Rate
The discount rate, which was lowered to 8^4 per­
cent in late 1982, remained unchanged during 1983.

Computer Operations
Implementation of the Federal Reserve Long
Range Automation Program, which involves stan­
dardization of applications software throughout the


Federal Reserve System, continued during 1983. In
October the new Administrative Messages Applica­
tion became operational Systemwide. The Depart­
ment of the Treasury and the Department of
Agriculture now have access to the Federal Reserve
Communications System as Fifth District users.
Substantial support was provided for the develop­
ment and acceptance testing of the General Ledger
and Contemporaneous Required Reserves modules of
the Integrated Accounting System. A reconfigura­
tion of the intradistrict network and terminal equip­
ment used by financial institutions has been completed
in preparation for the new standard Funds Transfer
and Securities applications.
Twenty-one institutions came on line to the Fifth
District Communications System for wire transfer of
funds in 1983. Seven on-line institutions merged
with other on-line institutions during the year, bring­
ing the net total to 109. Of the 109 institutions, 44
are also handling securities transfers (CPD ’s).

Two additional high-speed currency processing
machines were installed in Baltimore and one in
Richmond during 1983 bringing the total of such
machines in each of these offices to six. There are
four high-speed currency processing machines at the
Charlotte Office.

Community A ffairs and
Economic Information
In mid-October the Research Department was re­
organized to further emphasize the functions of the
Community Affairs Officer (C A O ) and the collec­
tion and dissemination of economic information. A
new section was established to perform these func­
tions and to conduct regional studies. James F.
Tucker, Vice President in the Research Department
and the Bank’s Community Affairs Officer, was ap­
pointed to head this new section.
Prompting this reorganization was the need to
provide resources adequate to the responsibilities of
the Bank’s Community Affairs Officer. This position
was mandated by the Board of Governors in Febru­
ary 1981 to “provide information to the public and to
state member banks about successful programs for
community investment, reinvestment, small business
lending, and economic development” and “ to serve
as a resource to other departments of the Reserve
Bank in areas involving the C A O ’s expertise, particu­
larly when a protest under the Community Reinvest­
ment Act is filed.”

In addition to staffing the CAO function, objectives
of the new section include developing a publications
program directed at the business, consumer, and
educational segments of the Bank’s constituency, and
conducting special studies of regional industries, such
as coal, seafood, textiles, shipbuilding, and the federal
Appointed CAO coordinators at the Baltimore and
Charlotte Offices were William E. Pascoe III, Vice
President at the former, and Robert F. Stratton,
Assistant Vice President at the latter.
Culpeper Office
In October, the computer operations section of the
communications division at the Culpeper Facility
ceased operation when the management control func­
tion was transferred to the Federal Reserve Bank of
Federal Reserve Membership
The following newly chartered institutions in the
Fifth District opened for business during 1983 as
members of the Federal Reserve System:
National Banks
The Palmer National Bank
Washington, D. C.

June 1

National Enterprise Bank
Washington, D. C.

August 23

State Banks
First Commonwealth Bank
Wise, Virginia •

September IS

Community Bank & Trust Company
of Virginia
Sterling, Virginia
First Virginia Bank-Commonwealth
Grafton, Virginia

October 15

December 31

Nondepository Trust Company
Dominion Trust Company
Roanoke, Virginia

September 15

The following State-chartered banks converted to
membership in the Federal Reserve System during
Massanutten Bank and Trust,
National Association
Harrisonburg, Virginia
Central Carolina Bank and Trust Company,
National Association
Durham, North Carolina

March 31

July 1

Changes in Directors
In September the Board of Directors of the Federal
Reserve Bank of Richmond appointed J. Donald
Collier, President and Chief Executive Officer, First
National Bank in Orangeburg, Orangeburg, South
Carolina, to fill the vacancy created on the Charlotte
Board by the resignation of Marvin D. Trapp, Presi­
dent and Chief Executive Officer, The National-Bank
of South Carolina, Sumter, South Carolina.
James A. Chapman, Jr., Chairman of the Board
and Chief Executive Officer, Inman Mills, Inman,
South Carolina, died in November. Banks in Group
3 elected George Dean Johnson, Jr., a partner in the
law firm of Johnson, Smith, Hibbard, Cleveland,
Wildman and Dennis in Spartanburg, South Caro­
lina, to serve for the remainder of Mr. Chapman’s
three-year term expiring December 31, 1985.
The election, by Fifth District member banks, of
one Class A and one Class B director to three-year
terms on the Richmond Board of Directors was held in
the fall. Robert S. Chiles, Sr., President/Chief Execu­
tive Officer, Greensboro National Bank, Greensboro,
North Carolina, was elected a Class A director by
banks in Group 3 to succeed J. Banks Scarborough,
Chairman and President, Pee Dee State Bank, Timmonsville, South Carolina, whose term expired at
the end of 1983. Thomas B. Cookerly, President,
Broadcast Division, Allbritton Communications,
Washington, D. C., was elected by banks in Group 2
as a Class B director to succeed Leon A. Dunn, Jr.,
Chairman, President, and Chief Executive Officer,
Guardian Corporation and Sudsidiaries, Rocky
Mount, North Carolina, whose term expired Decem­
ber 31, 1983.
The Richmond Board of Directors appointed
Charles W . Hoff III, President and Chief Executive
Officer, Farmers and Mechanics National Bank,
Frederick, Maryland, to a three-year term on the
Baltimore Board. He succeeded Joseph M. Gough,
Jr., President, The First National Bank of St.
Mary’s, Leonardtown, Maryland, whose term ex­
pired December 31, 1983. John A. Hardin, Chair­
man of the Board and President, First Federal
Savings and Loan Association, Rock Hill, South
Carolina, was appointed by the Richmond Board to a
three-year term on the Charlotte Board to succeed
Nicholas W . Mitchell, Chairman of the Board, Pied­
mont Federal Savings & Loan Association, WinstonSalem, North Carolina, whose term expired at the
end of 1983.


at the Communications and Records Center in Cul­
peper, resigned on March 11.

The Board of Governors designated William S.
Lee, Chairman of the Board and Chief Executive
Officer, Duke Power Company, Charlotte, North
Carolina, as Chairman of the Richmond Board of
Directors for 1984. Leroy T. Canoles, Jr., President,
Kaufman & Canoles, Norfolk, Virginia, was ap­
pointed a Class C director for a three-year term be­
ginning January 1, 1984, and designated Deputy
Chairman for 1984.
He replaced Steven Muller,
President, The Johns Hopkins University, Baltimore,
Maryland, whose term expired December 31, 1983.

Stuart P. Fishburne, Senior Vice President in
charge of the Charlotte Office since 1974, died
suddenly on May 15. Albert D. Tinkelenberg, Senior
Vice President in charge of the Communications and
Records Center in Culpeper, was transferred to the
Charlotte Office as the senior officer effective
June 16. At the same time John G. Stoides was
promoted to Senior Vice President in charge of the
Communications and Records Center in Culpeper.

Robert L. Tate, Chairman, Tate Industries, Balti­
more, Maryland, was reappointed by the Board of
Governors for a three-year term on the Baltimore
Board. The Board of Governors also reappointed
Wallace J. Jorgenson, President, Jefferson-Pilot
Broadcasting Company, Charlotte, North Carolina,
to a three-year term on the Charlotte Board.
Mr. Tate was elected Chairman of the Baltimore
Board for 1984; similarly, Henry Ponder, President,
Benedict College, Columbia, South Carolina, was
reelected Chairman of the Charlotte Board.

Yash P. Mehra joined the staff as a Research
Officer effective June 13.
Three changes in the
official staff took place July 1. In the Richmond
Office, Joseph F. Morrissette was promoted to
Public Services Officer, and Frank D. Stinnett, Jr.,
Assistant Vice President, retired after 37 years of
service; in the Communications and Records Center
in Culpeper, James J. Florin III, was promoted to
Special Projects Officer. Bobby D. Wynn, Technical
Support Officer, was transferred on this date from
the Culpeper Facility to the Richmond Office.

Federal Advisory Council
The Richmond Board of Directors reappointed
Vincent C. Burke, Jr., Counsel, Steptoe & Johnson,
Washington, D. C., to a one-year term, beginning
January 1, 1984, as the Fifth Federal Reserve Dis­
trict representative to the Federal Advisory Council.
The Council, composed of a representative from each
of the 12 Federal Reserve Districts, meets in Wash­
ington at least four times a year with the Board of
Governors of the Federal Reserve System to discuss
business conditions and other topics of current inter­
est to the System.

Changes in Official Staff
Barthonhue W . Reese, Assistant Vice President,
and John C. Horigan, Assistant Vice President, at
the Richmond Office, elected to take early retirement.
Mr. Reese’s retirement was effective February 1 after
23 years of service and Mr. Horigan’s was effective
April 1 after 39 years of service. John M. Denkler
joined the official staff as Advisor effective Febru­
ary 6 . Frances R. Hurdle was promoted to Loan
Officer in the Discount and Credit Department on
April 1. Thomas C. Judd, Assistant Vice President


Aubrey N. Snellings, Vice President at the Rich­
mond Office, retired August 1 after 21 years of
Chester D. Porter, Jr., Vice President in the
Examining Department, died suddenly on Septem­
ber 22.
On November 16 four promotions were
announced in the Examining Department: Fred L.
Bagwell to Vice President, Wyatt F. Davis to Vice
President, Lawrence P. Nuckols to Examining Offi­
cer, and William F. White to Examining Officer.
Jackson L. Baker, Communications Operations
Officer at the Culpeper Facility, transferred to the
Board of Governors effective December 30.
In December the following promotions were an­
nounced to be effective January 1, 1984: In the
Richmond Office, William C. Fitzgerald to Associate
General Counsel, Marvin S. Goodfriend to Vice
President, John W . Scott to Vice President, William
A . Bridenstine, Jr., to Assistant General Counsel,
Roy H. Webb to Research Officer, Betty M. Fahed
to Statistical Officer, and Michael W . Newton to
Budget and Control Officer; in the Baltimore Office,
Victor Turyn to Vice President; and in the Charlotte
Office, Jefferson A . Walker to Vice President,
Marsha H. Malarz to Assistant Vice President, and
Francis L. Richbourg to Assistant Vice President.

Summary of Operations
Currency Received and Verified
Dollar amount































1,140 ,003,000

Currency Verified and Destroyed
Number of pieces___________________
Dollar amount ______________________

Coin Received and Verified
Number of coin _____________
Dollar amount _______________

Checks Handled
U. S. Government checks
Number _______________
Dollar amount
Postal money orders
Number ___ _______
Dollar amount
Commercial checks - processed*
Number ______________________
Dollar amount
Commercial checks - packaged items
Number ___________________________
Dollar amount

Collections Items Handled
U. S. Government coupons paid
Number ______________________
Dollar amount
Noncash items
Number ______
Dollar amount

Fiscal Agency Activities
Issues, Redettiptions, and Exchanges of U. S. Securities:
Definitive securities
Number _______________________________________________
Dollar amount
Number ______
Dollar amount

Transfer of Funds
Number of transfers sent and received
Dollar amount __________________________

Food Stamps Redeemed
Number _________________
Dollar amount _

Number ________
Dollar amount ...


* Excluding checks on this Bank.


Comparative Financial Statements
December 31, 1983

Gold certificate account

December 31,1982





Special Drawing Rights certificate account



Coin _________________________________________




Loans to depository institutions



Federal agency obligations ____



Bills _______________________



Notes _____________________



Bonds _____________________









Cash items in process of collection



Bank premises ____________________



Furniture and equipment, n e t ____



U. S. Government securities:

Other assets ______________________



Interdistrict settlement account__









Accrued service income___________

Federal Reserve notes __________
d e p o s it s :

Depository institutions_______



Foreign _______________________



Other __________________________



TOTAL DEPOSITS _____________



Deferred availability cash items



Other liabilities _________________






Capital paid i n ___






Capital Accounts:




Earnings and Expenses


Interest on U. S. Government securities________________________________


Foreign currencies _______________________________________________________



Income from services_____________________________________________________



Other earnings____________________________________________________________

_______ 502,295.75

t o t a l CURRENT E A R N IN G S ____________________________________________



Loans to depository institutions__________________________________________



_______ 624,750.95



Operating expenses (including depreciation on bank premises) after
deducting reimbursements received for certain Fiscal Agency and
other expenses __________________________________________________________



Cost of earnings credits_________________________________________________



NET EXPENSES ____________________________ ___________________________



CU R R E N T N E T E A R N IN G S _____________________________________




Profit on sales of U. S. Government securities (net) ___________ .____


All o th e r ________________________________________________________________

________ 16,030.10

TOTAL ADDITIONS _____________________________________________________





Losses on Foreign Exchange transactions____________________________


A ll other ______________________________________________________________

________ 61,784.77

________ 60,625.01

t o t a l DEDUCTIONS ___________________________________________________



N E T A D D IT IO N S OR D E D U C T IO N S ____________________________



Assessment for expenses of Board of Governors________________________



Federal Reserve currency c o sts__________________________________________






Dividends paid ------------------------------------------------------------------------------------------



Payments to U . S. Treasury (interest on Federal Reserve notes) -------


Transferred to surplus __________________________________________________


T O T A L ________________________________________________________ ______







Su rplus A cc o u n t
Balance at close of previous y e a r __________________-_____________________
Addition of profits for y e a r _____________________________________________
B A L A N C E A T CLOSE OF CURRENT Y E A R ___________________









Capital S tock A ccou n t
(Representing amount paid in, which is 50% of amount subscribed)
Balance at close of previous y e a r _______________________________________


Issued during the year __________________________________________________



Cancelled during the y e a r ________________________________________________

BALANCE AT CLOSE OF CURRENT Y E A R __________________




_____________ 962,550.00





(December 31,1983)

Steven M u lle r ___________________ Chairman of the Board
William S. Lee __________________Deputy Chairman of the Board

Class A
Willard H. Derrick _____________President and Chief Executive Officer
Sandy Spring National Bank and Savings Institution
Sandy Spring, Maryland
(Term expires December SI, 1985)
Joseph A . Jennings _____________Chairman and Chief Executive Officer
United Virginia Bankshares, Inc. and United Virginia Bank
Richmond, Virginia
(Term expires December SI, 1984)
J. Banks Scarborough----------------Chairman and President, Pee Dee State Bank
TimmonsvUle, South Carolina
(Term expired December SI, 198S)
Succeeded b y :

Robert S. Chiles, Sr.
President/Chief Executive Officer
Greensboro National Bank
Greensboro, North Carolina
(Term, expires December SI, 1986)

Class B
Leon A . Dunn, Jr. ----------------------Chairman, President, and Chief Executive Officer
Guardian Corporation and Subsidiaries
Rocky Mount, North Carolina
(Term expired December SI, 198S)
Succeeded b y:

Thomas B. Cookerly
Broadcast Division
Allbritton Communications
Washington, D. C.
(Term expires December SI, 1986)

Paul G. Miller _________________ Director, Commercial Credit Company
Baltimore, Maryland
(Term expires December SI, 1984)

Class C
Robert A . Georgine _____________President
Building & Construction Trades Department, A F L-C IO
Washington, D. C.
(Term expires December SI, 1985)
William S. Lee __________________Chairman of the Board and Chief Executive Officer, Duke Power Company
Charlotte, North Carolina
(Term expires December 31, 1984)
Steven Muller ___________________ President, The Johns Hopkins University
Baltimore, Maryland
(Term expired December 31, 198S)
Succeeded b y :

Leroy T. Canoles, Jr.
Kaufman & Canoles
Norfolk, Virginia
(Term expires December SI, 1986)

Member of Federal Advisory Council
Vincent C. Burke, Jr. __________ Counsel, Steptoe & Johnson
Washington, D. C.
Director, The Riggs National Bank of Washington, D. C.
and Riggs National Corporation
Washington, D. C.
(Term expires December SI, 1984)


Pearl C. B rackett_______________ Deputy Manager (Retired)
Baltimore Regional Chapter of the American National Red Cross
Baltimore, Maryland
(Term expires December SI,198U)
*Edward H. Covell_______________ President, The Covell Company
Easton, Maryland
(Term expires December SI, 1985)
Joseph M. Gough, J r .___________ President, The First National Bank of St. M ary's at Leonardtown
Leonardtown, Maryland
(Term expired December SI, 198S)
Succeeded b y :

Charles W . H off III
President and Chief Executive Officer
Farmers and Mechanics National Bank
Frederick, Maryland
(Term expires December SI, 1986)

Thomas H. Maddux ____________Executive Vice President and Chief Operating Officer, Easco Corporation
Baltimore, Maryland
(Term expires December SI, 198U)
Howard I. Scaggs ______________ Chairman of the Board, American National Building and Loan Association
Baltimore, Maryland
(Term expires December SI, 1985)
Hugh D. Shires ________________ Senior Vice President (Retired), The First National Bank of Maryland
Cumberland, Maryland
(Term expires December SI, 1985)
Robert L. Tate __________________Chairman, Tate Industries
Baltimore, Maryland
(Term expires December SI, 1986)

G. Alex Bernhardt______________ President, Bernhardt Industries, Inc.
Lenoir, North Carolina
(Term expires December SI, 1985)
Hugh M. Chapman _____________ Chairman of the Board and Chief Executive Officer
The Citizens and Southern National Bank of South Carolina
Columbia, South Carolina
(Term expires December SI, 198U)
J. Donald Collier _______________ President and Chief Executive Officer, First National Bank in Orangeburg
Orangeburg, South Carolina
(Term expires December SI, 1985)
Wallace J. Jorgenson __________ President, Jefferson-Pilot Broadcasting Company
Charlotte, North Carolina
(Term expires December 31, 1986)
John G. Medlin, Jr. _____________President, Wachovia Bank and Trust Company, N .A .
Winston-Salem, North Carolina
(Term expires December SI, 1985)
Nicholas W . M itchell____________Chairman of the Board, Piedmont Federal Savings & Loan Association
Winston-Salem, North Carolina
(Term expired December SI, 198S)
Succeeded b y :

John A . Hardin
Chairman of the Board and President
First Federal Savings and Loan Association
Rock Hill, South Carolina
(Term expires December SI, 1986)

♦Henry P on der___________________ President, Benedict College
Columbia, South Carolina
(Term expires December SI, 198U)
♦Branch Board Chairman.



(January 1, 1984)

Robert P. Black, President

J. Lander Alim, Jr., Assistant Vice President

Jimmie R. Monhollon, First Vice President

Jackson L. Blanton, Assistant Vice President

Welford S. Farmer, Senior Vice President

William A . Bridenstine, Jr., Assistant General Counsel
William E . Cullison, Research Officer

Roy L. Fauber, Senior Vice President
James Parthemos, Senior Vice President and
Director of Research

Donna G. Dancy, Assistant Vice President

John F. Rand, Senior Vice President

Thomas M. Humphrey, Research Officer

Robert L. Hetzel, Research Officer

Joseph F. Viverette, Senior Vice President

Alice H. Lingerfelt, Assistant Vice President

Fred L. Bagwell, Vice President

Harold T. Lipscomb, Assistant Vice President

Lloyd W . Bostian, Jr., Vice President

Yash P. Mehra, Research Officer

J. Alfred Broaddus, Jr., Vice President

G. Ronald Scharr, Assistant Vice President

Timothy Q. Cook, Vice President

James R. Slate, Assistant Counsel

W yatt F. Davis, Vice President

R. Wayne Stancil, Assistant Vice President

John M. Denkler, Advisor

Walter A . Varvel, Assistant Vice President

George B. Evans, Vice President
William C. Fitzgerald, Associate General Counsel

Roy H. Webb, Research Officer
Jack H. Wyatt, Assistant Vice President

William C. Glover, Vice President
Marvin S. Goodfriend, Vice President

Bradford N. Carden, Assistant Cashier

Robert B. Hollinger, Jr., Vice President

Betty M. Fahed, Statistical Officer

William D. Martin III, Vice President arid
General Counsel

Sharon M. Haley, Corporate Secretary

Arthur V . Myers, Jr., Vice President

Frances R. Hurdle, Loan Officer

Joseph C. Ramage, Vice President

Joseph F. Morrissette, Public Services Officer

James D. Reese, Vice President

Michael W . Newton, Budget and Control Officer

John W . Scott, Vice President

Lawrence P. Nuckols, Examining Officer

Bruce J. Summers, Vice President

Jesse W . Seamster, Building Officer

Andrew L. Tilton, Vice President

William F. White, Examining Officer

James F. Tucker, Vice President

Bobby D. Wynn, Electronic Payments Officer

David B. Ayres, Jr., General Auditor
H. Lewis Garrett, Assistant General Auditor
Thomas P. Kellam, Audit Officer



Robert D. McTeer, Jr., Senior Vice President

Albert D. Tinkelenberg, Senior Vice President

William E . Pascoe III, Vice President

Jefferson A . Walker, Vice President

Victor Turyn, Vice President

Woody Y . Cain, Assistant Vice President

Gerald L. Wilson, Vice President

Marsha H. Malarz, Assistant Vice President

Ronald B. Duncan, Assistant Vice President

Francis L. Richbourg, Assistant Vice President

Ronald E . Gould, Assistant Vice President

Harry B. Smith, Assistant Vice President

Robert A . Perry, Assistant Vice President

Robert F. Stratton, Assistant Vice President

Samuel W . Powell, Jr., Assistant Vice President


John G. Stoides, Senior Vice President

Richard L. Hopkins, Vice President

James G. Dennis, Assistant Vice President

Boyd Z. Eubanks, Vice President


James J. Florin III, Special Projects Officer