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Branch, Chain, and Group Banking
HEARINGS
BEFORE
THE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
S E V E N T Y -F IR S T CONGRESS
SECOND
S E S S IO N
UNDER
H. Res. 141
A U T H O R IZ IN G
TO
T H E B A N K IN G
STUD Y AND
AND
AND
CURRENCY
IN V E S T IG A T E
BRANCH
FEBRUARY
B A N K IN G
25, 26, A N D
27, 1930
VOLUME 1
Part 1
U N IT E D
GOVERNM ENT
100106
STATES
P R IN T IN G
W A S H IN G T O N : 1930
C O M M IT T E E
G R O U P, C H A IN
O F F IC E
COMMITTEE ON BANKING AND CURRENCY
L O U I S T . M c F A D D E N , Pennsylvania, Chairm an
J A M E S G . S T R O N G , Kansas.
O T IS W I N G O , Arkansas.
R O B E R T L U C E , Massachusetts.
H E N R Y B . S T E A G A L L , Alabam a.
E . H A R T F E N N , Connecticut.
G U Y E . C A M P B E L L , Pennsylvania.
C H A R L E S II. B R A N D , Georgia.
C A R R O L L L . B E E D Y , Maine.
J O S E P H L . H O O P E R , Michigan.
G O D F R E Y G. G O O D W I N , M innesota.
F . D I C K I N S O N L E T T S , Iowa.
W . F. S T E V E N S O N , South Carolina.
T . A L A N G O L D S B O R O U G H , M aryland.
A N N I N G S. P R A L L , New Y ork.
J E F F B U S B Y , Mississippi.
F R A N K L I N W . F O R T , N ew Jersey.
B E N J A M I N M . G O L D E R , Pennsylvania.
F R A N C I S S E I B E R L I N G , Ohio.
M R S . R U T H P R A T T , N ew York.
J A M E S W . D U N B A R , Indiana.
P h i l i p G. T h o m p s o n , Clerk.
II
CONTENTS
Pole, H on. John W ., C om ptroller of the C urrency, statem en t by and
questioning o f___________________________________ _________________ ________________
BRANCH, CHAIN, AND GROUP BANKING
H
C
ouse
o m m it t e e
on
of
B
R
e p r e s e n t a t iv e s ,
a n k in g
and
C
urrency,
Tuesday, February 25, 1930.
The committee met in the committee room, Capitol Building, at
10.30 o’clock a. m., Hon. Louis T. McFadden (chairman) presiding.
The C h a i r m a n . The committee will come to order.
This is the beginning of the hearings on the subjects of branch,
group, and chain banking, authorized under House Resolution 141,
reported by the Committee on Rules February 3, 1930, and passed
by the House on February 10, 1930. So that the record may be
clear, the clerk will insert this particular resolution in the minutes at
this point unless there is objection.
(The resolution referred to is here printed in full, as follows:)
Resolved, T h a t for the purpose of obtaining inform ation necessary as a basis
for legislation the C om m ittee on B anking and Currency, as a whole or by sub
com m ittee, is authorized to m ake a stud y and investigate group, chain, and
branch banking during the present session of Congress.
The com m ittee shall
report to the H ouse the results of its investigation, including such recom m enda
tions for legislation as it deems advisable.
For such purposes the com m ittee, or any subcom m ittee thereof, is authorized
to sit and act at such tim es and places in the D istrict of Colum bia, whether or
not the H ouse is in session, to hold such hearings, to em ploy such experts and
such clerical, stenographic, and other assistants, to require the attendance of
such witnesses and the production of such books, papers, and docum ents, to
take such testim ony, to have such printing and binding done, and to m ake
such expenditures as it deems necessary.
The C h a i r m a n . I would like to say at the outset that this is an
important study, and a valuable amount of material will be accumu
lated during the course of these hearings, and the chairman would
like, so far as possible, to keep out extraneous matter and to keep
the course of the hearings along the lines of the subjects immediately
before the committee.
Of course, as the hearings go along they can not be indexed, but
when completed I hope to have a proper index made as to both
subjects and persons so that any one who reads or wants to study
these hearings may do so with very little trouble as to reference.
I would like to say also at the outset of these hearings that I am
going to invoke the rules of the House in the conduct of these hear
ings and, so far as possible, as the various witnesses appear, I am
going to suggest that they be permitted to make an uninterrupted
statement of their position, and then, with the cooperation of the
committee, I am going to try to work out a plan of questioning by
the members in regular order. In that connection, after each mem
ber has had an opportunity to interrogate the witness, I am going
to suggest that we have more of an open forum if additional questions
are necessary. I hope that when the members of the committee
1
2
B R A N C H , C H A IN , AN D GROUP B A N K IN G
want to interrupt a witness they will first address the chairman of
the committee and secure such permission. I think that program
will tend to smoothen procedure in the committee and make clearer
what is taking place, and, so far as possible, I wish the members of
the committee would make notes as the witnesses bring questions
to their minds, and then propound those questions when they have
the opportunity.
I wish it were possible for us to have agenda prepared in advance,
of the subjects to be covered, but this matter is pretty well defined
and under the rule we are kept strictly to the subject, so that the
probabilities are we will be able to get along nicely without that.
Now, if any members of the committee have any suggestions that
will tend to make these hearings run along smoothly, I would be very
glad to have them at the outset.
Mr. L u c e . In support of the program that the chairman suggested,
I want to ask the permission of the committee to read two or three
sentences from a letter that I received from ex-Governor Benjamin
Strong, of the New York Federal Reserve Bank.
Governor Strong not only had a most beautiful character, but he
was one of the most efficient men that ever came before this com
mittee, and I think we all came to trust and admire his judgment.
In one of his periods of convalescence, he wrote me a letter regard
ing his own experiences before this committee, in which he made
certain suggestions, and one of the things he said is this:
I t has seem ed to m e in all cases where I have appeared before a com m ittee of
Congress th a t m uch tim e was w asted and the opportun ity to obtain m uch valu
able m aterial was m issed by the failure to have agenda in the hands of both
m em bers of the com m ittee and those appearing before the com m ittee, so that
the w itnesses’ statem ents would be consecutive and com prehensive on the one
hand, and so th a t questions by the m em bers of the com m ittee w ould be directed
at the particular part of the subject being discussed.
R epeatedly at these hear
ings questions have been asked m e relating to subjects other than those which
were in m y m ind to discuss but for which I had already m ade preparation, thus
interrupting the narrative, so that once or twice it has only been resumed at a
later hearing, som etim es a day or tw o deferred.
Governor Strong then went on to contrast that with the method
used in an intricate and important hearing in London, where he
appeared before nine members of a commission, the chairman being a
member of the House of Commons. In the course of this, he said:
A s there were three of us appearing at the same tim e, we specified ju st when
questions w ould be asked, in order that consecutive statem ents m ight not be
interrupted, and when the question period arrived, the chairman first com pleted
all the questions which he desired to ask and for which he had m ade notes, and
then in turn called on each m em ber of the com m ission to ask his questions for
w hich he had m ade notes.
A t the conclusion of these nine series of q u estio n s
a som ew hat m ore inform al discussion took place when questions were asked
prom iscuously, all how ever directed to the particular subject we had just d is
cussed, and under the control of the chairman there was no interruption until the
particular line of questioning then under w ay had been concluded.
Then he says that—
T h is particular hearing involved a subject of great com p lexity; in fact, som e
very obscure m onetary questions indeed, and yet our appearance, which involved
hearing three people, was certainly concluded in less than half the tim e required
for m y own statem en t alone at the hearing in W ashin gton, and I confidently
believe th a t the results in the m ore com pact form in which they wrere so produced
were of greater value than when interlarded w ith a vast am ou nt of im m aterial
and irrelevant discussion.
B R A N C H , C H A IN , AN D GROUP B A N K IN G
3
I present this consideration, sir, from a man of wide experience in
these matters, from the point of view of the witness; and the value of
such procedure to the committee and to others is apparent.
So I express my own gratification that your program is to be as
announced.
The C h a i r m a n . Are there any other comments by the members
of the committee?
Mr. B e e d y . A s long as we have witnesses before the committee, I
shall not make any further suggestions, but I had mapped out a plan
of segregating and grouping our witnesses which I should like to
submit to the committee; but perhaps we can do that later in executive
session.
The C h a i r m a n . We now have before the committee Hon. J. W.
Pole, the Comptroller of the Currency, as the first witness. In
accordance with my previous statement, I understand that the comp
troller has prepared himself to make an uninterrupted statement,
after which he will submit to questioning.
N owt, Air. Comptroller, make yourself comfortable and entirely
informal, and be not afraid.
STATEM ENT
OF HON. JOHN W. POLE,
CURRENCY
COMPTROLLER OF THE
Mr. P o l e . Thank you. I appreciate the action of the committee
in permitting me to make this statement uninterruptedly, and, in
view of its length, I will beg the committee’s indulgence, but by reason
of the great importance of the subject I feel that I could not say less.
The C h a i r m a n . Before you proceed with your statement, may I
ask if you will emboch^ in your statement a repetition of }rour recom
mendations contained in your last report to Congress?
Mr. P o l e . There will be a reference to them, but not a repetition.
The C h a i r m a n . I am going to suggest, because of the importance
of that recommendation, that it be placed in the record at this point.
Mr. P o l e . That is my first suggestion, Mr. Chairman.
The C h a i r m a n . All right, sir.
(The recommendation referred to is here printed in full, as follows:)
L e g is l a t io n
R ecom m ended
T h e experience of the postw ar period has been of sufficient duration to perm it
a com prehensive appraisal of the effect of the new economic and social conditions
upon our system of banking.
Briefly stated, it m ay be said th at banking is fo l
lowing in the wake of the trend of business in general tow ard larger operating
units with stronger capital funds and more experienced and highly trained m an
agem ent.
The natural result has been th at the larger cities are being favored
with banking organizations of great financial stability w ith the capacity to render
a better and m ore diversified ty p e of service.
In the principal cities, therefore, in various parts of the country, there have
grown up through mergers and through increases in the variety and volum e of
business banking institutions which for strength of capital and m anagem ent
technique were unknown in the pre-w ar period.
There have been no failures of
any of these types of m etropolitan banks.
T h ey are giving the general public a
safer and higher typ e of banking service than has hitherto been know n.
Their
stability rests upon the great diversity of banking business to which they have
access and to the further fact that they are able to secure the m ost highly trained
and experienced talent.
These banks com prise both unit and branch banking
institutions.
4
B R A N C H , C H A IN , AN D GROUP B A N K IN G
T h e aggregate of all the banking resources in the U n ited States is abo u t
$ 7 2 ,0 0 0 ,0 0 0 ,0 0 0 , held b y a little m ore th an 25,0 0 0 banks (as of June 29, 192 9 ),
b u t 2 5 0 banks hold resources to the aggregate am ou n t of approxim ately
$ 3 3 ,4 0 0 ,0 0 0 ,0 0 0 .
W h ile th e largest and strongest banks with the bulk of the banking resources
are in th e large cities, about three-fourths of all the banks in num ber are in the
sm aller tow ns and cities and m ay be classed as country banks.
I t is these banks
which serve directly the agricultural com m unities.
T h e y operate w ith small
capital funds and are very m uch lim ited in their ability to em ploy a trained
m anagem ent.
T h e econom ic developm ents of the postw ar period have had the
effect of decreasing the opportunities of these banks to operate w ith profit and it
is this situation to which I should like to direct your m ost serious consideration.
W e are faced with the fact th at during the 9-year period from July 1, 1920, to
June 30, 1929, inclusive, about 5 ,0 0 0 banks, nearly all in the agricultural com
m unities, closed their doors and tied up deposits of approxim ately $ 1 ,5 0 0 ,0 0 0 ,0 0 0 .1
Th ese failures have not been lim ited to any one section of the country, although
th ey have been m ost prevalent in the agricultural districts.
U p to N ovem b e r l r
521 banks w ith deposits of about $ 2 0 0 ,0 0 0 ,0 0 0 had suspended during the year
1929.
T h e num ber of failures b y States during the fiscal years ending June 3 0 ,
1921 to 1929, inclusive, is as follow s:
State
and
private
State
and
private
National
M a in e. _
N ew Hampshire
V erm o n t_______ . .
__________
M assachusetts.. . . .
Rhode Island _
C o n n e c tic u t.......
............. ..
3
1
1
15
1
2
Indiana_____
- . ...............
Illin o is.. . .
Michigan ...................
1
W isco n sin ..
.
.................
1 i Minnesota . .
1 j Iow a........................
! Missouri
T otal N ew England
States____ . . . .
23
3
10
2
Y ork
N ew J e r s e y ..................................
Pennsylvania.............. ..................
Delaware
M a ry la n d _______________ __ __
District of C olum bia________
26
0
11
1
1
1
Total Eastern States___
41
....................... ..
V irg in ia .--.
W est VirginiaN orth Carolina.
_____ . .
gouth Carolina
G eorgia... .................................
Florida. - .
Alabam a
M ississippi________
__ ______
Louisiana
_____. . . ._ . . .
Texas____
Arkansas__
. _____ _____
K entucky
T e n n essee.. ...............................
29
21
98
170
293
110
22
40
33
178
80
40
56
Total Southern States. .
1, 170
122
28
8
O hio___
______________________
10
Total M iddle Western
States
North D a k o ta .. __________ .
South D a k o ta .. _______ ______
Nebraska . .
. .
Kansas. . _
.
. ...
Montana . . .
W voming
C olorado.. .
| New M exico___ __ _______ __
O klahom a-.
. .
2
4
12
Total Western S ta t e s ...
21 ;
12 I Washington _ .
.
. . . .
13
Oregon __ . . ...........................
4
..
..
.
California________
3
Idaho
1
Utah .
39
N e v a d a .......................... - ______
8
Arizona.. ________ ______
3
Total Pacific States____
The Territory of H a w a ii..
National
78
68
63
57
320
386
241
13
13
2
8
58
81
5
1, 241
188
385
264
279
182
136
52
60
40
174
59
51
28
12
55
11
16
20
53
1, 572
305
41
36
13
48
13
2
27
8
7
16
25
4
180
63
..
1
Total U nited States____
4, 228
3
697
A s will be observed from the foregoing table the failures of State chartered
banks greatly outnum ber those of the national banks, bu t sm all national banks
have n o t been im m une to the conditions w hich are causing the failures of small
cou ntry banks generally.
A s an illustration of the wide scope of this econom ic
condition, it m ay be said th at in seven States over 40 per cent of all the banks in
existence in 1920 have failed and in six States betw een 25 an d 40 per cent.
In
26 States, or more than one-half the total, over 10 pe)r cent of the banks th a t
were in operation in 1920 have since failed.
W h en it is considered th at no
1 These figures embrace only those banks which actually went into the hands of receivers. T h ey do not
include about 500 banks which suspended business but were later reopened after reorganization, often
resulting in depositors and shareholders voluntarily suffering some loss.
B R A N C H , C H A I N , AN D GROUP B A N K IN G
5
im portan t failures have occurred am ong banks in the larger cities, the ratio of
failures in the country districts is even higher.
W e have, therefore, a strong contrast between city and country bank opera
tions.
W hereas the depositor in a large city bank, whether a wage earner or a
business m an, has had full protection, the depositor in the sm all country bank
has suffered severely from the inability of so m an y of these banks to m eet their
deposit liabilities.
T h e farm ing com m unities have not been afforded the protec
tion for their savings which has been available to depositors in the large cities.
I t is cause for im m ediate concern th at the operating conditions faced b y the
country banks show no prospect of im provem ent under the present system .
There are m any country banks now operated a t a loss and m an y others operating
upon earnings insufficient to ju stify their capital investm ent.
There is not ava il
able to me the earning statem ents of State banks, bu t taking the national banks
as an illustration and the year 1927 as a typical year (later earning figures not
being compiled) 966 national banks operated at a loss and an additional 2,0 0 0
earned less than 5 per cent.
These constituted about 38 per cent of all national
banks in the U nited States.
Com prehensive stu d y of the banking situation for the past nine years clearly
indicates th at the system of banking in the rural com m unities has broken down
through causes beyond the control of the individual banker or the local com
m u n ity.
These causes are of a basic nature and have m any ram ifications through
out the great econom ic and social changes which have occurred in the U n ited
States since 1914.
I shall not atte m p t in this report a detailed analysis of this
situation except to say th at the econom ic m ovem en t awTav from a large num ber
of independent local u tility and industrial operating units tow ard a stronger and
m ore centralized form of operation in the large cities has curtailed the oppor
tunities of the country bank for diversity and extension of business while broad
ening those opportunities for the large city bank.
A n y attem p t to m aintain the present country bank system by force of legisla
tion in the nature of guaranty of deposits or the like, would be econom ically
unsound and would not accom plish the purpose intended.
If in the free course
of business the country bank can not successfully operate as an independent
banking corporation, affording am ple protection to its depositors and its stock
holders, the obligation and responsibility is upon the G overn m ent of the U nited
States, at least so far as the national banks are concerned, to set up a system of
national banking which will insure the rural com m unities against the continuing
disastrous effects of local bank failures.
There have been no general financial panics in this country since the war—
thanks to the Federal reserve system .
A n y bank can have access, directly or
indirectly, to the benefits of the Federal reserve system to the extent of its sound
commercial and business loans and the decline of the country banks has taken
place notw ithstanding the valuable assistance rendered by the Federal reserve
system .
A Federal reserve bank is not charged w ith the responsibility of pre
venting bank failures.
I t is beyond the power of the Federal reserve system , as
it is beyond the power of any governm ental agency, to stand between these
banks and insolvency.
In the absence of legislation to rem edy the conditions above described, private
enterprise has within recent m onths undertaken to m eet the econom ic situation
presented by the growing isolation of the country banks.
Local holding com
panies have been form ed in m any sections of the country for the purpose of
bringing together a num ber of banks into a single operating group.
T h e usual
procedure is for the holding com pany, a State corporation, to purchase a m ajority
of the stock of several banks, one of which would be a large city bank which in
effect becomes the parent bank of the group.
T h e m anagem ent personnel of the
central bank becom es in practice the responsible m anagem ent for the entire
group.
Through such a group system it appears to be possible to m ake a close
approach to a form of branch banking whereby each operating unit leans for
support upon the central bank, or upon the holding com pany, and receives the
benefits of its m oral and financial support; its prestige and good w ill; its exten
sion of the wider type of banking service; and the benefits of its highly trained
m anagem ent.
This holding-com pany m ovem ent is of such recent developm en t th at com
plete statistics are not yet available as to the num ber of com panies in operation
or the num ber of banks taken over.
It appears th at in m any cases some of the
m ost responsible bankers and business m en of the com m u nit}r have been instru
m ental in the organization of these holding com panies and this it would seem is
a sufficient indication of the seriousness of the purpose behind the m ovem ent.
H ow ever, these holding com panies are attem pting to do under the sanction of
6
B R A N C H , C H A I N , AN D GKOXJP B A N K IN G
existing laws, which arc crudely adapted to the purpose, w hat should be m ade
possible in a simpler m anner by new legislation.
If branch banking were per
m itted to be extended from the adequately capitalized large city banks to the
outlying com m unities within the econom ic zone of operations of such banks,
there w ould be no logical reason for the existence of the local holding com pany
and it w ould give w ay to a system of branches operated directly by the central
bank of the group.
These conditions would seem to warrant a further am en dm ent of section 5155 of
the R evised Statutes of the U nited States as am ended b y the act of February 25,
1927 (U . S. Code, title 12, sec. 3 6 ), known as the M cF ad d en A ct, to perm it
national banks, w ith the approval of the C om ptroller of the Currency, to establish
brandies within the trade areas of the cities in which such banks m ay be situated.
These trade areas m ay in some cases be coextensive w ith Federal reserve district
lines; in other cases they m ay be of a more lim ited extent, but in m y judgm ent
th ey should not extend beyond Federal reserve district boundaries, except to
take care of a few exceptional cases where a trade area m ay extend from one
Federal reserve district into another, nor should a bank be perm itted to establish
a branch in another city in which there is a Federal reserve bank or a branch
thereof.
U nder such a system of brandies there would gradually be extended to the
agricultural com m unities from the large city banks a safe and sound system of
banking whicli would render rem ote the possibility of bank failures.
There
w ould, however, be no compulsion upon unit banks to enter a branch organiza
tion.
The tw o system s of banking— unit banking and branch banking— would
no doubt operate side b y side for an indefinite length of tim e; th at is to say,
there would be in every rural section some unit banks well organized, com pe
ten tly m anaged, and held in high esteem by the com m u nity which w ould con
tinue to operate advantageously.
These suggestions for branch banking are m ade not w ith the intention pri
m arily to deal w ith the question of the decline in the num ber of national banks
through defection from the national to the State system s, bu t rather as a rem edy
for w hat appears to be a serious and fundam ental weakness in our system s of
banking both national and State.
Such a grant of power to the national banks
w ould, however, give them such an outstanding operating advantage th at it
would seem reasonable to expect that the exodus of banks from the national
system would practically cease and that m any now under State supervision would
return to the national charter which they have forsaken.
A n y such legislation, based not upon the theory of equalizing the national w ith
th e State bank charter powers but giving a real advantage to the national charter,
w ould be fully justified under existing conditions which seriously jeopardize the
m aintenance of the national banking system .
The State legislatures have for
years given to the State banks operating advantages which the national banks
did not possess and it is in this situation that we find the m otive for the abandon
m en t of national charters.
There is appended hereto a list of 127 large national
b a n k s which have within the past 10 years given up their national charters for the
purpose of operating under State charters.
N am e and location of bank
Capital
Year ended Oct. 31, 1920
Third National Bank of Atlanta
Merchants National Bank of the C ity of New York
Security National Bank of Los Angeles____________
Farmers National Bank of Fresno.
Mercantile National Bank of San Francisco,
$27,
49,
8.
6,
20,
Y ear ended Oct. SI, 1921
National Reserve Bank of Kansas City.
M idw est National Bank & Trust Co. of Kansas City__
Lincoln National Bank of Rochester.
First National Bank of Cleveland________ _ . . . . . .
Union National Bank of N ew ark ______
_________
U nion Commerce National Bank of Cleveland____
Canal-Commercial National Bank of New Orleans
National Bank of Commerce of T oledo_____________
Central National Bank of St. Louis_________________
National Commercial Bank of Cleveland__________
Liberty National Bank of N ew Y o r k _______________
N ational Bank of Commerce of Kansas C it y ______
U nion National Bank of Pasadena_________________
Ridgewood National Bank, Ridgewood____________
National Bank & Trust Co, of Pasadena__________
Missouri.
..do.
New Y o r k ...
Ohio___ . . .
New Jersey..
O hio________
L ouisiana
O hio_____
Missouri
Ohio_____
New York.
Missouri __
CaliforniaN ew York
California
053,
942,
338.
985.
224,
000
000
000
000
000
7
B R A N C H , C H A I X , AND GROUP B A N K IN G
N a m e and loca tion of bank
Year e
i Oct. SI, 1922
F ir ,'T \’ a;
R .o ’ k of F re s n o _________ . . . __________
F irs; N at ,
h ^ .k „ f B e r k e le y _____ ____ ________
F ii-t Nat
P-.iiii. o f B ak ersfield ___________________
Atlantic National B an k of the City o f N e w Y o r k ___
B ank of N( v\ v<,rk N d i'u rial B a n k in g A s s o c ia tio n ..
N atio n a l Suite & < :ty B ank of R ic h m o n d . _______
California. . ._
. .d o ..... .. . _
_ ..d o ...
.
N ew Y o r k .....
_do___
V ir g in ia ... .
$500, 000
300, 000
400. 000
$9,
6,
7,
21,
70,
771. 000
717, 000
127, 000
776. 000
135. 000
1,000, 000
1, 000, 000 15, 851, 000
2 , 000, 000
Y (u r ended Oct. 31, 1923
M o n .i. H i'
L o w r v Ni)
Irv in g N at
B ank of N
M e rch a n ts
lonni Fiank o f San D i e g o .. .. .
: i-iansv of A tla n ta .
.. _
Rank. N ew Y o r k . . . .
.. _______
A m erica. P h ila d e lp h ia ..
.
. .
lonal B an k o f San F r a n c is c o ..
Fiisl-eua
u i o n d T u k of A k ron . . . .
_ . _
Import ^
i raders N ation al Rank of N ew Y o r k ..
Met’rhap ;onai H ink of R a le ig h ...
_ .
...
L u zern e ( '
r N ation al B an k o f \\ llk es-B a rre _____
R atier\ V
au on al n a n k o f N e w > o r k __ __
\ ■!'('
N a tion a l B an k of San f r a n c is c o ___
’ .< . I r v n k of P h ila d elp h ia . . . . ..
N in th
Year e
California.
G eorg ia . _
New Y ork .
.
P en n sy lv a n ia .
California..
O hio. _ .
N ew Y ork . _ .
N orth C arolin a.
P e n n s y lv a n ia .
N ew Y ork
i
1
C alifornia.
P e n n s y lv a n ia . _
0, IOS. 000
21 350.000
207, 035, 000
31, 400, 000
15. 052. 000
22, f 00, 000
13, .0, 000
5, 576, 000
5, 018, 000
12, 062, 000
25. 623. 000
H. .'2. 000
250, 000
1. 000, 000
12,500,000
2. 000, 000
1, 500, 000
1, 500, 000
1,500,000
300. 000
400, 000
1,500,000
2. 000, 000
500, 000
i Oct. 31, 192If
F ou rtn Nrtt.( in.l B an k o f C in c in n a ti______________________
W ells Farg< N:n f»ia l B a n k o f San F r a n c is c o _____________
N a tio n ::! F<> change B a n k o f B a ltim o r e ____________________
L a fa y e tte .National B a n k o f B u ffa lo _______ _____________
C o n tin e n ta l N a tio n a l B a n k <fc T r u s t C o. o f K ansas C ity
N orth e rn N a tio n a l B a n k o f T o le d o ________________________
L on g B eacn N ation al B an k , L on g B e a c h _________________
S econ d N a tion al B a n k o f T o le d o . _. _ ________________ ..
C o rn E xch a n g e N a tio n al B a n k o f C h icag o. ___________
O h io ________
C a lifo r n ia .. M a r y l a n d ...
N ew Y o rk . _
M is s o u r i___
O h io ________
C a lifo r n ia ...
O h io _______
Illin o is ______
12,-118, 000
500, 000
0, 000, 000
1, 500. 000
93,
17,
9,
1 6,
15,
7,
16,
132,
1,000,000 ;
500,000
1, 000 , 000
200, GOO
1,000,000 1
5. 000, 000
806,
532,
128,
490,
692,
112,
477,
302,
000
000
000
000
000
000
000
000
953,
302,
371,
129.
000
000
900
000
Y ear ended Oct. 31, 192-5
F irst N a tio n a l B an k o f O a k la n d ____________ _________ . .
F ifth N a tio n a l B a n k o f th e C ity o f N e w Y o r k ___________
G o th a m N a tio n a l B a n k o f N e w Y o r k . . _________________
N a tio n a l U n io n B a n k o f B o s t o n _______________________ . . .
C aliforn ia _____
N ew Y o r k .
..
._ . . d o __________
M a ssa ch u setts.
1,
1,
1,
1,
000,
200,
500,
000,
000
000 ,
000 ■
000
n,
25.
Bs
17,
Y ear ended Oct. SI, 1926
M a n u fa c tu r e r s <k T rad ers N ation a l B ank o f B u ffa lo ________
C o a l & Iron N atio n a l B a n k o f th e C ity o f N e w Y o r k _______
F irst N a tio n a l B an k o f H a m m o n d ____________________________
Plant, is \
km i B ank o f R i c h m o n d . ______________________
N o r w o o d N a tio n a l B a n k o f G re e n v ille _________________ __ ..
N ation i I \ i h u ^ B an k o f P r o v id e n c e ______________________
F irst N atio n al B a n k o f J a m a ica _____________ ___________ _
C it y N i < 1 >> i k o f P la in fie ld _____________________________
S L .tr N lio n J B nk o f N o r th T o n a w a n d a ________ ________
Idicom x Nat lonal B ank o f H a rtford _ _________________ ___
N a tio n u I \th ng< B a n k o f L o c k p o r t ------ ------------------------------Secon< \ 1urn d B in k o f H o b o k e n ___________________________
F irst N il on u B u k & T ru st C o. o f U tica ___________________
N a tio n a l A m e rica n B a n k o f N e w Y o rk _____________________
N a tio n a l B u tch ers & D r o v e rs B a n k o f th e C it y o f N ew
Y ork .
Y ear ended Oct, SI, 1927
N ew Y o r k _____
___ d o __________
I n d i a n a ________
V ir g in ia ________
S ou th C arolin a
R h o d e I s l a n d ..
N ew Y o r k
N ew J e rs e y ____
N e w Y o r k . __
C on n e cticu t
N e w Y o rk
N e w Jersey
N ew Y o r k .
____d o ______
A m e rica n K xclia n ge-P acific N a tion a l B an k of N e w Y ork _
F irst N a tio n a l B an k of A lb a n y _____ .
W esi B ra n d i N ation al B ank o f W illia m sp ort ___ _______ ..
( 1117CT ^ \ i* m l B m k d T ru s t C o. of C in c in n a ti. „ ..
I lfth ’ h i d \ Mm d H in k o f C in c in n a ti___ ___________
U t u i ir
tv v i u c t irers N a tion a l B a n k of N ew ark
( online re i d N t’ r 1 i rust & Savings R an k of Los A ngeles
O r. >\(ld N il o
1 B ink of D e tr o it.
_ . _____ . . .
A_uu_(..m N ..l.c i..J R a id . of N ew a rk
...
. ___ _
F ra n k lin N a tio n a l B a n k in N ew Y o r k . . ____ ____ _
N ew Y o r k ...
.d o ___
P e n n s y lv a n ia .
O h io .
.
___ d o ___ ..
New J ( r 'e \ .
C aliforn ia . . .
M ich ig a n . _
New Jersey _
N ew Y ork . _
...
500,
600,
500,
2, 000,
3, 000,
1. 350,
2. 000,
2. 000,
500,
800,
■60
ooo ! 264.
000
1", r i 0( 0
000
0, 657, 01 0
20. 3 0 000
000
000
.s "27 000
000
20, 45S oro
000
110, 000
22, 7 » 000
000
17, 662 000
000
000
*’ 2' ’ (( 0
P en n sylv a n ia
.M assachusetts.
Illinois.
I’ eim sy Iv a n i a ..
N ew Y o r k . _
___ d o ____ . ..
M a in e
K en tu ck y .
I, 000,
500.
soo.
500.
1, 500,
300,
400,
350.
000
000
000
000
GOO
000
000
000
__ do____
2, 000, 000
1, 500, 000
250, 000
1, 000, 000
250, 000
1, 250. 000
200, 000
150, 000
000, 000
1, 000, 000
300, 000
700, 000
1. 250, 000
1, 000, 000
2, 000, 000
63, 035, 000
25, 778, 000
5. 433. 000
17, 517, 000
7, 085, 000
20, N71, 000
0, 862, 000
7, r w 000
8 007, 000
17, .‘ 15, 000
t:, (5 >, 000
ts. b53. 000
000
1‘ i.
i-\ ■'"e, 000
4, H i, 000
Year ended October 81, 1928
U n ion N ation al B a n k o f P h ila d elp h ia . _ _ ____ _
C it y N ation al B a n k of H o ly o k e . __
N a tio n a l B an k of C o m m erce in C h ic a g o ..
N a tio n a l Rank of C o m m e r ce in P h ila d elp h ia
H a m ilto n N a tio n a l B a n k of N e w Y o r k . .
B ro n x N a tion al B ank of the C it y of N e w Y ork
F irst \ , .t <>n ’ B ank of B an gor .
... ...
L i b e r : N itj> r ■1 Rank of C o v i n g t o n ... . . . _ .
____
JJ. Oil 0AQ
000
7! 717, 000
ISi. 73., .M)
1 '' .1 600
"yf>. non
000
8.
5, ■'76, (( 0
.
8
B R A N C H , C H A I N , AN D GROUP B A N K IN G
Capital
N am e and location of bank
Y ear ended October SI, 1928— Continued
First National Bank in Colum bus___________________________
Massasoit-Pocasset National Bank of Fall River___________
United Capitol National Bank & Trust Co. of N ew York_
Flushing National B ank, Flushing__________________________
National Bank of Rochester__________________________________
Broad Street National Bank of Philadelph ia...........................
National Bank of North Philadelphia.
National C ity Bank of Los Angeles___
Ohio_____________
M assachusetts.,
N ew Y o r k ______
____ d o ___________
------- do ___________
P e n n sy lv a n ia ...
.d o ___________
California_______
$500, 000
650, 000
5, 000, 000
200, 000
1, 200, 000
500, 000
700, 000
1, 000, 000
N ew Y o r k _____
.do.............. ..
Virginia_______
California_____
P en nsylvania..
M a ryland _____
Texas.................
California_____
N ew Y o r k _____
California_____
New Jersey___
M ichigan______
New Y o r k _____
.do__________
.do__________
do__________
M aine .................
K en tu cky_____
M ichigan______
N ew Y o r k .........
____ do__________
M issouri_______
____ do__________
P en nsylvania..
N ew Y o r k _____
.d o..
Connecticut____
O h i o ................
T exas____________
Ohio_____________
N e w Y o r k ______
North Carolina____ do___________
____ do___________
Connecticut____
1,
,
1, 500, 000
2, 000, 000
4, 000, 000
400.000
1, 000, 000
1, 000,000
$14, 071,000
6, 752,000
53,144, 000
5, 070, 000
22, 558, 000
12, 293, 000
6, 872,000
10, 898,000
Y ear ended Oct. 31, 1929
First National Bank of Brooklyn.
Seventh National Bank of N ew York.
American National B ank of Richmond.
M erchants National Trust & Savings Bank of Los Angeles.
Northern National Bank of Philadelphia.
N ational Union Bank of M aryland at Baltimore.
Mercantile National Bank in Dallas.
First National Bank of Long Beach.
N ational Bank of Commerce in New Y ork.
First National Trust & Savings Bank of W hittier.
Bloomfield National Bank, Bloomfield.
O ld National Bank of Grand Rapids.
Nanover National Bank of the C ity of New York.
Th ird National Bank of Syracuse__________________
Liberty National Bank & Trust Co. of Syracuse..
Chemical National Bank of New York.
C hapm an National Bank of Portland.
Louisville National Bank & Trust Co., Louisville.
Merchants National Bank of D etroit______________
Arcadia National Bank & Trust Co. of N e w a rk ....
Seaboard National Bank of the City of New York.
Merchants-Laclede National Bank of St. Louis___
State National Bank of St. L ouis____________ _____ _
T enth National B ank of Philadelphia.
C om m u n ity National Bank of Buffalo.
Fordham National Bank in New’ York.
T h am et National Bank, N orw ich______
Norwood National B a n k ________ ______
C ity National Bank of San Antonio.
N ational C ity Bank of A kron___________________________
N a tio n a l B a n k o f N iagara & T ru s t C o ., N iagara F a lls.
Citizens National Bank of Raleigh______________________
M urchison National Bank of W ilm in gton ______________
American National Bank & Trust Co. of Greensboro..
C ity N ational Bank & Trust Co. of Bridgeport________
000 000
200.000
25, 000,000
250, 000
300, 000
800, 000
10, 000, 000
300, 000
400.000
6, 000, 000
400.000
750, 000
2, 000,000
200, 000
11, 000,000
1, 700,000
2, 000,000
1, 000,000
1, 000, 000
500, 000
1, 000,000
200, 000
1, 000,000
1, 000, 000
1, 200, 000
750, 000
1, 000, 000
1, 000, 000
1, 000, 000
23, 025,000
14, 524, 000
21, 774, 000
164, 645, 000
10, 256, 000
11, 052, 000
13, 950, 000
6, 916, 000
684,456,000
5, 639, 000
7, 457, 000
16, 666, 000
209, 026, 000
5, 508, 000
5, 002, 000
233, 708, 000
9, 750, 000
14,679,000
26, 780, 000
5, 666, 000
286, 954, 000
23, 751, 000
21, 667,000
10, 746, 000
23, 596, 000
5, 616, 000
5, 218, 000
5,157, 000
14, 040, 000
15, 461, 000
13, 492,000
8, 679, 000
12, 285,000
11,297, 000
18, 351, 000
Recapitulation by years
Num ber
1920
192L...................
1922 .............
1923
192 4
192 5
_____
5
15
6
12
9
4
Capital
$6,900,000
24, 975, 000
5, 200,000
24, 950,000
16, 700,000
4, 700,000
Resources
j
$112,562,000 ! 1926
____
1927__________
538.978.000
137.380.000
1928...................
500.794.000
1929
310.956.000
T o t a l ..
73,755,000 1
Num ber
Capital
Resources
15
10
16
35
$13,450,000
20.250.000
15.100.000
82.850.000
$241,582,000
456,112,000
222, 230,000
1,966,789,000
127
215,075,000
4,561,148,000
M a n y smaller national banks during this period also relinquished their charters
to go into the State system , but the foregoing list includes only banks of the m etro
politan class.
Follow ing the approval of the M cF ad d en A c t (act of February 25, 1927) several
large State banks were converted into national banks, bu t this gain has been far
m ore than offset by the recent great loss of national charters.
Boards of directors
of banks and their stockholders, in giving consideration to the question of w hether
the corporation should operate under the national or the State charter, are not
m oved b y questions of sentim ent or patriotism .
Th e fact th at a national bank
is an instrum en tality of the Federal G overn m ent designed to fulfill certain public
purposes does not seem to be considered an operating advantage to the bank.
T h e corporation m ust in the nature of the case be m oved alm ost solely b y con
sideration of the m ost profitable use of the capital invested in the enterprise.
In
other w ords, the question of the choice of charter presents to the corporation a
B R A N C H , C H A I N , A N D GROUP B A N K IN G
9
business proposition.
In the history of banking in the U nited States since 1863
banking corporations have switched from State to national and from national to
State charters as the business advantages lay w ith the one or the other.
From
the standpoint, therefore, of the operating banker the grant of the wider branch
banking powers to national banks would be considered by him as an invitation to
enlarge the sphere of his business operations to the greater ad vantage of his stock
holders.
T h e G overn m ent of the U nited States, as distinguished from the national
banking corporation, w ould be concerned prim arily with the question of strength
ening the national banks as Federal instrum entalities and w ith the establishm ent
of a sound system of banking throughout the U nited States.
U nder the existing
trend w ith the operating advantage in favor of the State banks the developm ent
is in the direction of 48 separate and distinct system s of com m ercial banking each
under the supervision, control, and direction of a separate State governm ent w ith
a corresponding disappearance of the national banks from the field.
I t has been said that this situation does not present an)- cause for concern for
the reason that the Federal reserve system which em braces State banks in its
m em bership has m ade the national banking system unnecessary.
T h e Federal
reserve act, however, did not set up a system of banks in the U nited States.
It
did set up a system of coordination of bank reserves and a flexible currency,
which operate ad vantageously for all banks.
T h e approach to equalization be
tween the State and national banks afforded by the Federal reserve system does
not involve a rearrangement of charter powers but an extension of the privileges
and the benefits of the Federal system to State chartered banks.
If therefore, in
addition to these privileges which they derive from the Federal G overn m ent, they
secure from their respective legislatures charter powers giving them certain operat
ing advantages over national banks, the Federal reserve system thus becomes in
directly the m eans of forcing national banks to take out State charters.
T h e announced legislative policy of the so-called M cF ad d en B ank A ct of
February 25, 1927, was parity betw een the national and State system s.
The
purpose of the bill was to m ake the charter powers of national banks approxi
m ately equal in operating advantage to those of the State banks.
N early three
years of operation under that act has dem onstrated that it has failed of its pur
pose in this respect.
The theory of parity between the tw o system s of banks is, in m y opinion,
econom ically unsound.
Com m erce is interstate and is recognized by the C o n
stitution of the U nited States as being fundam entally a national question.
One
of the prim ary purposes of the national bank act of 1863 was to establish a
sound and uniform system of com m ercial banking throughout the country in
order th at com m ercial transactions growing out of the production, the m anu
facture, and the transportation of goods and com m odities from one section of
the country to the other m ight not be hampered by local banking legislation but
should have access to a system of banks operating under Federal authority and
supervision under a single set of rules and regulations and statutory enactm ents
in order that the free flow of com m erce should not be em barrassed by a m ulti
plicity of restrictions having their origin in local political conditions.
Th e proposal for the extension of branch banking which is here m ade wTould
have the direct effect of establishing a strong system of banks in the rural districts
and indirectly it would lead to the gradual restoration of the national banks as
the prim ary system of com m ercial banking in the country.
W hile it would seem to be to the interest of the local bank holding com panies
to convert their groups of banks into branches after the enactm ent of legislation
as above outlined, there m ight possibly still remain in operation some of these
local companies and som e of a wider regional operation.
In view of the fact
th at such companies are outside of all jurisdiction of the Federal G overnm ent
and that they would be in a position to dictate the policies and operations of
such national banks as they controlled through stock ownership, I further recom
m end to the Congress an am en dm ent to the national banking laws which will
bring the operations of such bank holding com panies under som e degree of
Federal supervision where they own the m ajority of the stock of m ore than one
national bank and a further am endm ent to safeguard the additional shareholders’
liability which each such bank holding com pany incurs through the ownership
of the shares of national-bank stock.
The C h a i r m a n . I understand that my recent annual report to
Congress will be placed in the record and I shall attempt to refrain
from repeating the data given therein. In that report attention was
10
br an ch
, c h a in , a n d
group
b a n k in g
drawn to a condition in our system of bank organization which appears
to require legislation to protect the interest of the public. It should,
however, be said at the outset that there seems to be no need for
emergency legislation but rather for an attempt to reach a normal and
fundamental solution.
I will submit for the information of the committee copies of three
formal addresses which were made by me last year, namely, the
Demand for Professional Bank Management, delivered before the
Ohio Bankers’ Association, Columbus, Ohio, February 12, 1929;
Banking and the New Finance Era, before the Maryland Bankers7
Association, Atlantic City, May 23, 1929; and The Need of a New
Banking Policy, delivered before the convention of the American
Bankers’ Association, San Francisco, October 2, 1929. These are
marked “ Exhibit A ,” “ Exhibit B ,” and “ Exhibit C ,” respectively.
I shall not attempt to elaborate further the facts which I have given
relative to bank failures except to bring some of the figures down to
date. In several parts of the country more than one-half of all of
the banks in existence in 1920 have closed their doors and many of
those w'hich are left have little likelihood of success under present
conditions. If such a condition of affairs were localized, that is to
say, were confined to one particular section or subject to the conditions
of one particular industry, general conclusions would no doubt be
unjustified, but such is not the case. During the last 10 years and
continuing at the present time bank failures have been a blight in the
Mississippi Valley, the South, the Southwest, and Northwest. There
are agricultural counties in which every bank has failed. In many
cases it has been necessary to assess shareholders in order to keep
banks alive and it has often happened that a failure occurred after
as many as three such assessments had been paid in vain. The
hardship which these failures have imposed upon depositors and upon
those wdio invest their money in country bank stocks, over such a
wide geographical area, is an indication that there is something
seriously wrong with the system of banking in the rural districts.
Surely a great country like ours should not permit the continuation
of this suffering on the part of that element of the population least
able to bear it if it lies within the power of the National Government
to provide a remedy.
The views which I bring before this committee are not primarily
the result of recent research and the collection of information. I was
myself a country banker. Later, as a national-bank examiner and as
chief national-bank examiner, it became my duty to examine the affairs
of hundreds of country national banks. For more than 20 years I
have been in daily and intimate contact with the operations of our
banking system. No one knows any better than I do that there are
still strong and profitable country banks, and if I had any prejudices
they would naturally be in favor of the system of unit banking to the
sustenance of which I have been devoted for so man}r years. It is
with great reluctance that I have slowly come to the conclusion that
our small independent unit country banks are no longer fulfilling the
purposes of their creation and that there is need for a better, sounder,
and stronger system.
In order to avoid the impression that I am interested only in the
national banks in this discussion, may I take this occasion to emphasize
the fact that the statements I have made with reference to bank fail
B R A N C H , C H A IN , AN D GROUP B A N K IN G
11
ures apply with.equal if not greater force to State banks? The con
ditions which rural banking’ faces in the United States are the same
for both national and State banks, and, as between the two, the
statistics will show that the national banks have shown the stronger
resistance in the ratio of approximately 3 to 1 during the last nine
years. I am confident that your committee will have before it in
the course of these hearings ample information which will lead to
the conclusion that notwithstanding the fact that it is still possible
for many country banks to operate successfully, the system under
which rural banking as a whole is carried on does not provide a
sufficient safeguard either to the depositors or to the shareholders
nor docs it offer a type of banking service adequate for modern
conditions.
Many of the strong and well-managed country banks have found
it necessary at times to discontinue making loans and to build up
and carry large cash reserves for long periods of time. Due to the
fear of “ lack of confidence'’ and in their efforts to be prepared to
withstand sudden withdrawals, some of these banks have restricted
their operations to such an extent that they are of little benefit to
the community in which they are located, and in some communities
have practically ceased to function. Such banks are necessarily
experiencing difficulty in earning a sufficient amount to cover
operating expenses.
We are faced with a banking situation which applies almost entirely
to the rural districts, although it should be borne in mind that there
are also a considerable number of small banks in the larger cities,
particularly in the outlying districts. There were on June 30, 1929,
in the United States, 24,912 incorporated banks. Of this number
20,008 were situated in cities of 10,000 population or less. In other
words, more than four-fifths of all the banks in the United States are
situated in small towns. The average capital of these banks is about
$44,000 and their aggregate capital about $881,000,000. They
are all smal] banks.
I shall submit in this connection, marked “ Exhibit D ,” a statistical
table by States showing the distribution of banks in cities of 10,000
population or less as of June 30, 1929.
It is among these small banks that most of the failures have
occurred. Figures have not been compiled for the entire decade
but for the eight-year period, ending with 1927, 71 per cent of the
banks that failed, national and State, were capitalized below $50,000
each and 88 per cent under $100,000. By far the largest number of
failures occurred among banks having $25,000 capital or less, these
constituting 63 per cent of the failures. The number of failures for
this period was 4,513. These figures are embodied in a chart which
I shall submit, marked “ Exhibit E .”
As to the places in which these failures occurred, 2,039— that is to
say, a little over 40 per cent— were situated in towns and villages of
population less than 500 persons; an additional 1,006, or 20 percent,
failed in towns having between 500 and 1,000 population; an addi
tional 964 banks, or about 20 per cent, failed in towns of from 1,000 to
2.500 population; an additional 584 failures occurred in towns from
2.500 to 10,000 population. In other words, about 92 per cent of the
failures were in places having less than 10,000 population. Reference
is again made to the fact that there are also a number of banks of
12
B R A N C H , C H A IN , AN D GROUP B A N K IN G
small capital in cities above 10,000 population, failures among which
go largely to make up the remaining 8 per cent of the total failures.
I feel quite certain that the figures for 1928 and 1929 will upon
analysis disclose a situation equally as unfavorable as that of the
previous eight years.
I have a charter, “ Exhibit F ,” showing these figures.
During the last decade there were no failures in that class of banks
known as metropolitan banks having a capital of more than $2,000,000.
There were three failures of State banks and one national bank in
the million-dollar-capital class, namely, the Trement Trust Co., Bos
ton, Mass., capital $1,309,000, deposits $15,472,000, which suspended
in 1921; the Citizens Bank & Trust Co., Tampa, Fla., capital
$1,000,000, deposits $13,737,000, which suspended in 1929; the City
Trust Co., New York, N. Y., capital $1,225,000, deposits $7,482,000,
which suspended in 1929; and the Exchange National Bank, Spokane,
Wash., capital $1,000,000 and deposits $11,717,000, which failed
in 1928.
In this connection I desire to state that I am using the term
“ failure” as synonymous with the term “ suspension,” although these
two terms are not always so used. The statistics of the Federal
Reserve Board for bank failures are based upon suspensions; that is
to say, a bank suspends when it is unable or unwilling longer to keep
open its doors for carrying on the business of banking. It some
times happens that such a suspension is followed by a reorganization
of the bank or a rejuvenation of its capital structure with the result
that the bank is able to resume business. However, in many such
cases both the shareholders and the depositors are called upon to
make voluntary sacrifices in order to avoid a receivership with a
resulting burden of loss as great as in some other cases where a
receiver is appointed. On the other hand, the office of the Comp
troller of the Currency many years ago adopted the practice of listing
as a failed bank only those for which receivers have been appointed
and leaving out those which have been restored to operations after
suspension.
For the purpose of this discussion the Federal reserve figures present
a more accurate description of the situation. The two systems of
statistics, however, cause certain variations in figures compiled by
the Federal Reserve Board and by the Comptroller of the Currency,
respectively.
Attention is particularly directed to the circumstances that the
failures of country banks is not embraced in a period of time which
has been closed and upon which we may look only in retrospect. This
error has been made by many writers in making reference to the 5,000
bank failures as though the failures arose out of some past condition,
the chief significance of which is to furnish an argument for or against
a system of banking. It is true that this period had a somewhat
definite beginning which appears to be coterminus with the war
period and is no doubt related to many of the changes in our social
and economic life caused directly or indirectly by the war. Unfor
tunately, the period in which these failures have occurred and are
occurring has not been brought to a close. In the year 1929 there
were 640 bank failures in the United States causing the tying up of
about $234,000,000 of deposits, the greatest of any year in the decade
except 1926. During the first seven weeks of 1930, there have been
B R A N C H , C H A IN , AN D GROUP B A N K IN G
13
155 additional failures. In other words more than 10 years after the
war we are still in the midst of a continuation of a condition which is
causing small banks to fail. The 9-year period ending with Decem
ber 31, 1929, witnessed 5,640 bank failures with aggregate deposits of
$1,721,000,000— scattered very largely throughout those small cities
of less than 10,000 population to which reference has been made.
Of this number 4,877 were State banks and 763 were National banks.
I have not the figures for the actual and final losses to the depositors
in these banks. Many of them are still in process of liquidation.
I shall submit as a part of my statement a table compiled by the
Federal Reserve Board, January 28,1930, marked “ Exhibit G ,” which
gives the bank suspensions by Federal reserve districts, 1921-1929,
showing the number of banks, by districts, each year and the deposits
of each.
There has been prepared for the use of the committee a chart
showing the operating profit and loss of all national banks in the
United States, by States, for the year 1927, and there are in course
of preparation other charts which will be submitted within a few
days, giving the operating profit and loss of all national banks for
the year 1928. I have made a study of these preliminary figures and
they will undoubetdly emphasize the operating difficulites confronting
the small banks.
Your committee knows that a supervisory bank official is always
reluctant to close a bank. He would naturally like to see no bank
failures. The Comptroller of the Currency goes to the utmost
lengths within his power and responsibility—having regard first for
the depositors of the bank— to prevent a national bank from failing,
and the State bank supervisors naturally have the same attitude
toward State banks. Were this not the case and did the Comptroller
of the Currency simply as a matter of machine routine permit national
banks in bad condition to drift into insolvency, and did the State
supervisors take the same attitude, there would, or course, be a
great many more failures added to those already recorded than we
have seen.
In considering the great flood of statistical information which
must be studied in order to discover the causes and effects of bank
failures there is the danger of losing sight of the human and social
aspect of the situation. Every bank failure presents a distinct
phenomenon to the local community. It is a local dramatic event.
Whereas the supervising official may in many cases not be surprised
that the bank has failed and the executive officers of the bank and
perhaps the local board of directors have been struggling for months
or years to keep the bank open, the actual failure comes as a com
plete surprise and a shock to the depositors and in most cases to
those shareholders who are not officers or directors of the bank.
There is no more distressing sight than a group of citizens, men
and women, clamoring before the closed doors of a bank bewailing
the loss of their savings. These losses fall upon the best and most
substantial citizens in the community and many of them never
recover their previous financial condition. Multiply this local event
by nearly 6,000 and scatter it throughout the great agricultural
States of the Union and the magnitude of its effect reaches astound
ing proportions.
100136—30—pt I----- 2
14
B R A N C H , C H A IN , AND GROUP B A N K IN G
It is estimated that 7,264,957 depositors have contributed to the
great total of more than $1,700,000,000 of deposits in failed banks
during the past nine years and that no less than 114,000 shareholders
have suffered losses through these suspensions.
A similar adverse effect is had upon the borrowers of a bank which
fails. When a receiver is appointed his duty is to wind up the
affairs of the bank and to enforce liquidation. Many of the borrowers
may have been doing business with the bank for years and may
have been upon intimate terms with the officers of the bank. This
is especially true of the so-called character loans where the bank
takes an interest in a person who has good character and good
prospects but weak in collateral and who is accommodated each year
or from time to time covering a considerable period. The character
and reputation of such person may be unknown to other banks;
therefore, the credit standing of this class of borrower for the time
being is destroyed. The receiver must demand payment and if
payment is not made he must institute suit and prosecute the case
to judgment in order to gain as much as he can for the depositors.
Notwithstanding every means is employed to soften the blow which
the community has sustained, this enforced liquidation in country
banks works a bitter hardship upon the borrowers— the very type of
borrowers which it has been claimed the unit system of banking is
particularly designed to protect. Failed banks in the United States
have caused within the last nine years the enforced liquidation of
approximately two billions dollars of loans— chiefly small loans.
Many causes have been assigned for these bank failures; in one
section droughts, in another insect pests, in another failure of the
cattle market, in another a drop in the price of w^heat, and so on.
A great many failures have been attributed to mismanagement,
incompetent management, or criminal management; some banks
have been closed on account of single cases of defalcation and
robbery; another cause assigned is that too many rural bank charters
have been granted.
While these various factors may have been the immediate occasion
for the closing of these banks they do not indicate the basic cause.
If one observes the same type of small country bank, situated in
various sections of the country, unable to keep open its doors one
naturally would seek the reason for the general condition. Can not
the basic cause be found in the great economic and social changes
which have come over this country within the past 15 years— the
war period and the postwar period? We have witnessed a revolution
in -the method of transportation and communication in the rural dis
tricts. y Local communities wdiich were at one time economically and
socially independent have been put upon arterial highways which
have drawn them close to the larger cities. It is now impossible for
the country bank to gain that diversification in the banking business
which was possible a few decades ago. The business of the small city
is becoming more and more an adjunct of the business of the larger
commercial centers. Opportunities for independent local financing
are becoming fewer and fewer. The commercial business and the
trust business are going to the large city bank. The country bank is
left largely with real estate and small local loans.
If therefore these fundamental conditions have caused the business
of the small bank to shrink to the point where it becomes unprofitable
B R A N C H , C H A IN , AN D GROUP B A N K IN G
15
for the bank to operate we are met with a basic condition which can
not be cured by palliatives. Several remedies have been proposed
to meet these conditions, the principal of which I shall here discuss.
The remedy most frequently suggested as a protection to the
depositor is some form of guarantee of bank deposits. This guarantee
may take the form of compulsory insurance for the payment of de
posits or compulsory contribution on the part of all banks to pay
deposit losses in failed banks or a direct governmental guarantee
under which the taxing power of the State would be used to pay losses
to depositors in failed banks. Several of the States in the Union have
enacted guarantee of deposit laws but in every case the operation of
the law has proven unsuccessful.
A system of banking with a deposit guarantee superimposed upon
the local bank by governmental authority under which some other
instrumentality than the bank itself undertakes to insure the safety
of deposits, will not prevent the local bank from failing if it can not
maintain a successful operation as a business enterprise. If local
economic conditions are unfavorable to such a bank and if the loans
are not properly made or become frozen after they are made with
reasonable care, the bank will have to close its doors. No system of
guarantee of deposits under such conditions will serve to keep the
bank open. In other words, whereas a system of guarantee of bank
deposits might theoretically give the depositor a 100 ] er cent protec
tion against loss in case of the failure of the bank such a system can not
be said to be a remedy for the failure itself.
In the case where the burden of the system of guarantee of bank
deposits has been carried by the banks themselves, the result has been
that the strong and successfully operated banks have been compelled
to assume liability for deposits in weak and unsuccessfully operated
banks— a responsibility which the stronger banks were compelled to
assume without any power to protect themselves.
It has, I believe, been suggested that the Federal Government, in
so far as national banks are concerned, undertake to set up some
system of deposit guaranty in order to protect the depositors from
the unsuccessful bank administration, either through a governmental
subsidy or through a guaranty to be met by the Federal reserve banks.
While I have not seen a formulation of such a plan it would appear
that any such guaranty wrould be subject to similar objections to
those heretofore adopted by the States. Laws involving the guar
anty of deposits of State banks have been in operation in Kansas,
Mississippi, Nebraska, North Dakota, Oklahoma, South Dakota,
Texas, and Washington, but, with the exception of Nebraska, I
understand, such laws have been repealed.
A member of this committee has introduced a bill providing for
compulsory insurance for the shareholders’ liability in national banks.
This is a different question from the guaranty of deposits and I
take it that this measure is designed to meet only one particular
weakness in our banking system, namely, the frequent inability of the
shareholder to meet the financial liability to the creditors of the bank
imposed upon him by law to the extent of 100 per cent of the par
value of his stock. I shall not attempt here to enter into a discussion
of this measure but I wish to make some general observations on the
•question of shareholders’ liability.
16
B R A N C H , C H A IN , AN D GROUP B A N K IN G
The provisions of the national bank act fixing the individual lia
bility of shareholders were enacted in 1864 as a part of the original
act. It fixed the individual liability in an amount equal to the par
value of the shares held. In other words, the amount of the liability
has no relationship to the question of book value or of market value
of the shares. This individual liability therefore is not equivalent
to the value of the investment of the shareholder in the stock but
simply to the original amount paid in by him.
This additional individual liability was designed as a protection
to the creditors of the bank but not as a full protection. For example,
where the deposit liability of the bank is in proportion to capital o f
10 to 1 it will be readily seen that the additional liability was not
designed as a guaranty of the payment of bank deposits. The bank
with $100,000 paid-in capital and $1,000,000 of deposit liabilities
would carry an additional individual liability upon its shareholders
of only $100,000. To take an extreme case, if all of the capital and
all of the deposits were wiped out by losses, the individual liability
if realized in full would net the depositors only 10 cents to the dollar.
It may have been the presumption of the original framers of the
national bank act that all the shareholders of the national banks
would be persons of substance fully competent to discharge this
individual liability. Otherwise it would seem that the act would
have provided some safeguards to preserve and maintain it. Appar
ently it was not foreseen that the shares of national banks would
find their way into the hands of persons who were financially irrespon
sible. Neither was it foreseen that bank stocks of the large city
national banks w*ould be actively traded in on the securities markets
by investors who had no personal relationship to the bank and little
or no thought of their individual liability when the}7 purchased the
shares.
As a practical matter the question of enforcement by the Comp
troller of the Currency of this individual liability has been confined
during the past 65 years almost entirely against the shareholders in
small country banks. Most of the shareholders resided in the rural
communities and were small business men or farmers. In winding
up the affairs of 815 national banks the records of the comptroller’s
office show that an average of 48.29 per cent has been collected
from shareholders under their individual liability. These figures
do not include numerous cases of assessments against shareholders
to restore the impaired capital of going national banks.
I may take this occasion to say that the enforcement of the indi
vidual liability against national bank shareholders is one of the most
disagreeable duties which the Comptroller of the Currency is called
upon to perform. These shareholders invest in local bank stocks
upon the assumption that it will be a profitable enterprise. Some
of them even feel that the Government of the United States is respon
sible for the operations of national banks. Many of them have no
appreciation of the responsiblities which they incur under the indi
vidual liability clause. When therefore they have lost their original
investment and they are called upon to pay in an amount equal to
the par value of their stock a great hardship is incurred. In numbers
of cases farms have been sold or mortgaged and whole families driven
into bankruptcy through the enforcement of the individual liability.
B R A N C H , C H A IN , AN D GROUP B A N K IN G
17
It would seem therefore that the individual liability of the share
holders of national banks has been an inadequate protection to the
depositors and where enforcement has been attempted, a great
hardship upon the shareholders. Under a system of national banking
created and supervised by the Government of the United States
should not both the shareholder and the depositor enjoy a greater
security?
Several students of the banking situation, recognizing the diffi
culties under which the small country bank now operates, have
suggested as a remedy for the failure of these banks and the improve
ment of rural banking conditions a Federal statute requiring a mini
mum capitalization of $100,000 for national banks and a similar pro
vision by the various States. The theory of this proposal is that
such a provision will automatically decrease the number of country
banks and will compel the formation of stronger banking institutions.
Under this plan if the conventional ratio of 10 to 1 is maintained,
there would be no banks in the United States with deposits of less
than $1,000,000. This proposal is open to several serious objections.
Such a plan to be successful would require complete legislative
cooperation on the part of the State governments as the minimum
capitalization of national banks has always been higher than that
required as a rule by the State laws. The present minimum capitali
zation of $25,000 for national banks as now required is too high for
State banks in many States. In other words, the present capital
requirements for national banks has not had the effect of causing
State legislatures to require the State banks to adopt a similar
standard. On the contrary, Congress, by the act of March 14, 1900,
reduced the minimum capital for national banks from $50,000 to
$25,000, thus lowering the standard toward that of the States.
One of the most natural effects of such an increase to a $100,000
minimum for national banks would be to cause hundreds of national
banks to take out State charters and thus remain in operation. The
operating conditions of the banks in the rural districts are the same
for both national and State banks and any comprehensive remedy
looking to an improvement of the rural banking situation must em
brace directly or indirectly both State and national banks.
There is another feature of this proposal which must be considered.
A banking institution from the standpoint of the investing share
holder furnishes a vehicle for the employment of capital. Such a
shareholder is not required to make his investment with patriotic
motives or with a desire to confer a benefit upon the community.
His motives are the same as those who employ capital in other busi
ness enterprises. In other words, he invests his money in bank stock
with the expectation of a reasonable return in dividends. From the
standpoint of the Government, however, a bank possesses certain
public responsibilities which the Governments, State and national,
have attempted to establish and protect by statutory enactment.
If in pursuance of this aim the Government requires a minimum
capitalization too high for profitable employment in a given local
community no bank would be operative there.
There are thousands of communities in the United States where
banks are now operating which would be deprived of all local banking
services if the minimum capital for country banks were placed at
$100,000. This would mean that these local communities would be
18
B R A N C H , C H A IN , A N D GROUP B A N K IN G
put to the inconvenience of going considerable distances, especially
in the less densely populated agricultural States. Such a$ situation
would naturally result in hoarding of funds and this would be a back
ward step in the development of the country. Banking develops
business in a community and every community should have conven
ient access to banking services. In our desire to create a sound system
of rural banking we must guard against the establishment of safety
at the expense of the convenience of hundreds of thousands of citizens
who ought to have immediate access to banking facilities.
In this connection permit me to survey the distribution of banking
capital in the United States. Taking the figures as of June 30, 1929,
there were in the United States 5,468 incorporated banks with
capital of less than $25,000. There were an additional 5,357 banks
of $25,000 capital; 6,031 banks with capital above $25,000 but not
exceeding $50,000; and 1,073 banks with capital above $50,000 and
up to but not including $100,000. In other words, there were on
June 30, 1929, 17,929 banks in the United States capitalized at less
than $100,000 each. The total number of banks was 24,912, which
leaves only 6,983 banks in the United States having a capital of $100,000 and above, and nearly half of these have only $100,000 capital.
As has been shown, practically all of these small banks are in cities
and towns having a population of less than 10,000.
The only method by which the minimum capital could be raised
to $100,000 would be to bring about the forced merger or consolida
tion of about 18,000 country banks, probably reducing their number
to about 6,000. In the absence of branch banking these newT banks
would be in widely separated communities and that community
would be favored in which the bank was actually situated whereas
the other communities would have to suffer the inconvenience of
traveling to and from a distant bank or suffer the deprivation of all
banking services. I will submit, marked “ Exhibit H ,” a table
showing the distribution of banking capital of all banks in the United
States.
In discussing the question of the reduction in the number of country
banks there should be borne in mind the danger of giving a single
local bank a monopoly upon the banking business of an entire com
munity. If we accept the theory that no country bank should possess
less than $100,000 paid-in capital we must immediately face the con
clusion that in order to provide enough business to support a country
bank of that size it would be necessary in many cases for it to be the
only bank in the community. Monopoly of bank credit is more easily
attained under our banking system upon a small scale than upon a
large one. In a large city there is more likely to be several banks in
competition, but the condition has already arrived in several of the
small cities where there is only one bank left in the community.
This condition never operates to the best interests of the community
as a whole. Should we, therefore, adopt the expedient of reducing
the number of banks by increasing the minimum to $100,000, the
credit of hundreds of separate communities would be in the controlr
respectively, of single independent local banks which would operate
without any local competition.
In connection with proposed remedies for the country bank situa
tion it may be appropriate here to mention some of the aspects of
the relationship of country banks to large city banks as correspond
B R A N C H , C H A IN , AN D GROUP B A N K IN G
19
ents. There have been certain proposals put forward within recent
months which recognize the difficulties which small country banks
face in attempting to operate alone and independent!}^, and which
suggest as a remedy an intensification of the correspondent system.
Under this suggestion the country bank would through voluntary
cooperation draw closer to the large city banks and receive from them
through conferences and contact of personnel the proper guidance
in the direction of safe and sound banking. The technical banking
experience and approved metropolitan banking methods and serv
ices would be made available to all the correspondents of a given
metropolitan bank in so far as the country bank could and would
receive them, and the metropolitan bank would, as compensation,
in return gain a greater volume of banking business by virtue of the
acceleration of the contacts with their country correspondents.
There has grown up over a long period of years the present system
of bank correspondents in the United States. As a general rule the
country bank is a correspondent of some New York bank, as well
as of other metropolitan banks in the large commercial centers. It
is a business relationship which facilitates the interchange of credit
and, with respect to New York City, large deposits of country banks
are from time to time carried with the New York banks for tempo
rary investment. Disregarding, however, the operation of depositing
money on call in New York, the normal relationship between the
country bank and its city correspondent may be reduced to about
four elements: First, the deposit carried with the city bank upon
which interest is paid to the country bank; second, the opportunity
afforded to the country bank to purchase securities from or upon
the advice of the city bank; third, the privilege given the country
bank of borrowing from the city bank; fourth, the opportunity
afforded the country bank of seeking the direction and guidance of
the city bank in questions of bank policy and bank management.
It is the last of these relationships which it is now proposed should
be developed more concretely to the advantage of the country bank.
In this connection, however, it should be observed that a single coun
try bank may have city correspondents in several cities. To which
of these correspondents should the country bank attach itself— to
Newr York City for example or to St. Louis?
It should also be observed that the correspondent relationship
is purely voluntary and therefore not enforceable as a banking policy.
There is no responsibility upon the metropolitan bank for the policies
and operating methods of its country correspondents. Neither is
there an}7 obligation on the country bank to accept the advice of its
city correspondent. On the contrary, experience has shown that
the country banks feel completely independent of their city cor
respondents, being free at all times to change from one bank to
another. There is more concern upon the part of the city bank to
hold the business of its country correspondents than upon the part
of country banks to embrace the tutelage of the city bank.
The system of correspondent banks has been in full force and effect
throughout the postwar period in which we have witnessed small
bank failures at the rate of more than 500 per year. Each of these
failed banks was a correspondent of a New York metropolitan bank
and of other metropolitan banks. There was no obligation on these
city banks to protect the local depositors of their country corre
20
B R A N C H , C H A IN , AN D GROUP B A N K IN G
spondents and no such efforts were expected to be made. The cor
respondent relationship is strictly a business transaction in which
each party receives some advantage. It can easily be understood
how a constructive intensification of this relationship especially upon
the side of bank policy and bank management might prove of great
benefit to the country banks, but I do not see how the development
of such a relationship w^ould prove any positive protection to country
bank depositors in case the country correspondent became insolvent.
In such a case the burden would have to be borne, as it is borne now,
by the community in which the country bank operates. It would
not be transferred to the broader shoulders of the metropolitan city
correspondent.
The city banks are naturally interested in the policies and manage
ment of their country correspondents but the amount of interest
taken and the amount of constructive advice given in each case
depends upon the value of the account of the country bank. The
credit accommodation extended by the city bank is based largely on
the credit balance maintained with it by the country bank.
The remedy most frequently suggested for the failure of small
banks is the inauguration of better bank management. The principal
advocates of this remedy are those familiar with or engaged in banking
as it is carried on by the large city banks. Their study of the small
bank situation— especially the small country banks— has shown
certain weaknesses in management, such as lack of a sound and
definite loan policy; the lack of adequate credit information; the
failure to build up an adequate liquid secondary reserve of securities;
a lack of adequate knowledge of the securities market; the failure to
obtain a diversification of loans, that is to say, too great a proportion
of the loans are made upon the same class of security or credit.
No one who has made a comprehensive study of small country
banks can deny that the above conditions exist. Their chief signifi
cance, however, lies in their comparison with the operations of the
metropolitan banks. It has never been convincingly pointed out
exactly how these small country banks could adopt these more
approved methods of banking. Educational campaigns have been
suggested as a means of bringing the situation home to' the country
banker. In fact, discussion of improving country bank management
has been going on for the past 10 years with no very gratifying
results.
The truth of the matter is that there has been developed in the
United States, under the same banking laws, two definite types of
banking, namely, that carried on by the small country bank and that
of the large city bank. The independent country bank situated in
small towns and villages and serving a limited area, rural in character,
is necessarily restricted to only a limited type of banking.
On the other hand, the metropolitan city bank has become a most
complex instrumentality of finance. It does everything that the
country bank could do and engages in a multitude of activities
besides. It employs a large personnel and establishes different depart
ments each under the administration of an expert in that field. The
president of a metropolitan bank is in the position of an executive of
a great business, supervising and directing the operations of its
various departments.
B R A N C H , C H A IN , A N D GROUP B A N K IN G
21
A mere mention of the departments of such a bank conveys some
idea of the magnitude of its operations and of the great diversification
of its business. There is the commercial department embracing
commercial deposits and commercial loans with ramifications of man
agement and procedure including the work of the loan committee and
the executive committee; the savings department which embraces the
operations of a savings bank; the trust department with all of its com
plicated mechanism for the administration of every type of fiduciary
business and which has in recent years become one of the major activ
ities of modern city banking; the securities department through
which eligible securities are bought and sold— a business which has
grown to tremendous proportions since the war; the publicity depart
ment which takes care of advertising and of giving the public news
from time to time with respect to the operations of the bank; the new
business department which centers its attention on the question of new
business for the bank in all of its departments; the foreign department
which issues letters of credit, foreign exchange and conducts other
foreign business; some banks have a women’s department and a
school-savings department.
How can we compare the operations of such a bank, with resources
above $50,000,000, in addition to its administration of many millions
of trust assets, with a country bank of $250,000 of resources in a town
of 1,000 population? To invite the small bank to adopt the efficient
methods of the large city bank would be to ask it to lift itself by its
own boot straps. As a remedy for country-bank failures the estab
lishment of improved banking methods is theoretically sound but
impossible practically of general realization. The business is too
small in volume, too limited in diversity, and too circumscribed
geographically to create a normal motive for the establishment of
the high type of management possessed by the city banks.
In most of the discussions of branch banking the depositor seems
to have been lost from view. It is said that branch banking will
lead to a restriction upon local loans— that the borrowers will suffer.
To this theory I do not subscribe. It is unreasonable to suppose
that banks will make substantial investments in branches without
any expectation of developing the business of the branch. This
can not be done by draining the community of its cash. It can be
done only by rendering to that community a scientifically balanced
banking service including the making of loans as well as the receiving
of deposits. Doubtless it will be developed during the course of
these hearings that there are many instances where the necessities
of a community have been such that the funds supplied by the
parent bank for loaning purposes have far exceeded those which have
been received in deposits.
Certainty it would be possible for the parent bank to develop a
diversified banking business to protect it against economic depression
in any one /locality or in any one industrial activity or business
enterprise. y l am, however, more concerned with the depositor,
especialty the savings depositor, than with the borrower, and have
therefore approached the question of branch banking as a remedy
from the standpoint of safety" to the depositor and to the local share
holder. It is the importance of this phase of the question which I
desire to bring before your committee for further study.
22
B R A N C H , C H A IN , AND GROUP B A N K IN G
There are great commercial centers in the various regions of the
United States. In these commercial centers there have been devel
oped great metropolitan banks among which there have been no
failures during the period we have under discussion and no depositor
in those banks has suffered a loss. The laboring man and the small
wage earner in these cities is receiving a stronger protection and a
higher and better type of banking service than is possible for the
farmers and small business men who must do business with country
banks. I have therefore put forward for further investigation and
study by your committee the question of the desirability of bringing
these country banks into a more direct and closer relationship to
city metropolitan banks than is possible under any voluntary exten
sion or intensification of the correspondent relationship. If there is
permitted to grow up, through branch banking strong metrolopitan
banks in commercial centers outside of New York City with the right
to open offices in the rural economically tributary communities, it
would naturally follow that in time these small country banks would
to a very large extent become branches or offices of such city banks.
In this connection I wish to discuss for a moment the question of
the concentration of banking capital in the large cities. Under our
present system of banking there has already occurred a concentration
of banking capital in the commercial centers and more particularly
in New York City. The growth of our cities in population and in
commercial importance has naturally led to the growth of larger and
stronger banks. But as your committee knows, it is not only in bank
ing that this concentration has taken place, but rather that banking
has followed the concentiation of capital and centralization of manage
ment in other fields.
The modem city itself is in a much closer relationship to the out
lying territory than was the case a few decades ago when communi
cation and contact were dependent upon horse or intermittent railroad
transportation. Each one of us here to-day has witnessed the com
plete obsolescence of the slow and painful travel by horse on country
roads which have been replaced by paved highways radiating in every
direction from our large cities, upon which travel automobiles at high
rates of speed. Communication by telephone is now almost universal,
having largely displaced the slower methods of communication by
mail and messenger. I do not wish to take up the time of the com
mittee with a sociological discussion of municipal development, but in
considering the question of concentration of banking capital in the
large cities it is necessary to consider the new relationship which
exists between the city and the rural districts.
There were on June 30, 1929, 76 banks in the United States,
National and State, having each a capitalization above $5,000,000,
and there were an additional 335 banks with capital between one
million and five millions, making a total of 411 banks above the
$1,000,000 capital class. Under a regional system of branch banking
the number of banks in this class would increase through the pooling
of the capital of the smaller banks.
At the present time, as I pointed out in my annual report, 250
banks in the United States hold resources to the aggregate amount of
about $33,400,000,000. This is nearly one-half of all of the banking
resources in the United States. Twenty-four banks, National and
State, in New York City alone are capitalized at an aggregate of
B R A N C H , C H A IN , AN D GROUP B A N K IN G
23
1677,014,000 and have combined resources of about $10,791,448,000.
This capitalization of the New York banks is almost comparable in
total to that of the 20,008 country banks situated in towns of 10,000
population or less.
A comparison of the banking situation in 1900 with the present
shows with what rapidity the United States has developed in banking
resources. In that year there were 10,672 incorporated banks of all
classes. The aggregate capital was about $1,150,000,000 and the
total resources about $12,000,000,000— the latter figure being less
by more than $4,000,000,000 than the resources of all the banks in
New York City to-day. Within the short period of three decades
the banking resources of the United States have increased by 600
per cent. This great development in banking resources is reflected
in two aspects; first, in the increased number of country banks which
remained small, and, second, in the growth in size and diversification
of business of the large city banks. The latter are more prosperous
to-day than ever in the history of the country, whereas the country
banks are in a much less favorable position than they were 30 years
ago. The acceleration of the flow of trade to the large cities has been
one of the chief causes of the development of the modern form of
metropolitan banking.
THE
TRADE
AREA
In my annual report I suggested that it might bo found feasible to
permit national banks to extend branches into the trade area of the
city in which they may be situated. I realize that while the term
“ trade area” itself is susceptible of definition, there may be found
some practical difficulties in mapping out a given trade area. Theo
retically of course every city, no matter how small, might be said to
have a trade area but it would prove no solution at all to the rural
bank situation to permit small country banks to establish branches
in such trade areas.
The trade area which I have in mind may be called the metro
politan trade area. Such an area would circumstance the geo
graphical territory which embraces the flow of trade from the rural
communities and small cities to a large commercial center. Branch
banking extended by metropolitan national banks into such a trade
area would natural give to these outlying rural communities and
smaller cities a strong metropolitan banking service.
I am not prepared to attempt to arrive at a legislative formula
which would automatically delimit all of the trade areas in the
United States. It does not seem possible to meet this situation
with such a formula. When the Federal reserve act was before
Congress a similar situation arose with respect to the Federal reserve
districts. In that act. Congress did not attempt to define the bound
aries of the districts but provided that the districts should be approtioned with clue regard to the convenience and customary course of
business and that they should not necessarily be coterminus with any
State or States. The Secretary of the Treasury, the Secretary of
Agriculture, and the Comptroller of the Currency acting as a com
mittee were empowered to lay out the districts.
The 12 Federal reserve districts thus laid out and the subdistricts
within them as established by the Federal Reserve Board constitute
24
B R A N C H , C H A IN , A N D GROUP B A N K IN G
to-day the only areas which have been delimited upon the basis of
the relationship of the flow of trade to banking services.
It may be found advisable to adopt a similar procedure with
respect to the present situation if it is determined that national
banks shall be permitted to have branches in the rural districts. In
this connection the question will naturally arise as to how far the
Federal reserve districts or subdistricts are applicable to this ques
tion of branch banking.
D ECENTRALIZED
BRANCH
B A N K IN G
It has been urged as a consideration against branch banking that
legislation permitting its extension to the rural districts would lead
to the concentration of all of the banking capital in the United
States in the New York banks and under the control of a compara
tively small group of financiers.
It might be possible theoretically to conceive of this situation
arising if Congress permitted the national banks to engage in nation
wide branch banking at the present time, although many students
of banking and many practical bankers are of the opinion that even
wTere nation-wide branch banking permitted by law its spread wrould
be a slow development out from the various commercial centers;
that the country is too large and its financial operations 011 too vast
a scale to permit of complete concentration in New York City.
The banking resources of the United States are constantly increasing
as the country develops industrially and commercially. At the
present time they aggregate about $72,000,000,000 and within
another decade may approach $100,000,000,000. With great com
mercial cities developing in various parts of the country outside of
New York, it wrould seem an extravagant prospect to contemplate
the control over these resources within a few hands in a single city.
However, the proposal which I have brought for the consideration
of your committee wrould, it seems to me, clearly tend to decentralize
banking capital through a system of regional branch banking. The
metropolitan banks in the city of New York have always held a pre
eminent position and under any system of banking which would fol
low the normal course of business they will continue to increase in
size and influence. Notwithstanding this aspect of the matter,
branch banking emanating from commercial centers outside of New
York City into surrounding trade areas would cause the New York,
banks to decrease in relative importance. There would be concen
tration of capital but it would be a regional concentration with local
characteristics. Banks in Detroit, Cleveland, Boston, Atlanta,
NewT Orleans, St. Louis, Buffalo, Minneapolis, and other such local
commercial centers would grow' into institutions fully capable of
taking care of the financial requirements of their trade area com
munities. Instead of nearly all of the largest banks being situated in
New York City there would be in every such commercial center banks
whose resources would approach or exceed a billion dollars. Instead
of being a menace would not such banks become a source of pride to
the community in which they are situated, bringing prestige and new
business to the city and taking out to the rural communities a strong
and highly developed banking service with safety to the depositors
there? Would not such a system of branch banking lead to an active
B R A N C H , C H A IN , AN D GROUP B A N K IN G
25
competition for business which would naturally result in the local
community obtaining cheaper and better banking service?
Some critics of our banking system take the view that we have too
many small banks and that one of the chief causes for bank failures
has been the issuance of an excessive number of charters by the State
and Federal Governments. Theoretically, of course, if no banks
were chartered there w-ould be no bank failures. There is no way by
which the number of banks can be categorically determined in
advance and consequently the laws of all of the States and of the
Federal Government have left the discretion to the supervising
executive officials. It comes dowm to a plain question of human
judgment. If no more bank charters were issued, for example, in
communities where all of the banks had failed the Comptroller of the
Currency or the State banking superintendent as the case may be,
w7ould have to take the responsibility of denying banking services to
such a community even though the new applicants for a charter
possess the qualifications required by law and practice to carry on a
small bank. In view of this situation it can not be expected of the
supervising bank officials to take it into their hands without further
legislative sanction to reform the system of banking in the rural
communities through the process of denying bank charters. M y own
point of view is that the rural communities are not supplied with
adequate banking facilities. I should like to see the people of every
community no matter how' small have access to more than one strong
bank with the banks competing for business. All persons should
have the benefit which comes from a competitive banking service.
Our present system of independent unit country banks can not provide
it. Would not the system of decentralized branch banking which I
have suggested meet this condition?
GOVERNM ENT
CONTROL
It is recognized that a system of branch banking such as I have
suggested would gradually bring about the development of greater
banking institutions in the inland commercial centers and in the larger
seaports of the country. These banks would be strong enough to
resist the ordinary local causes of bank failures on account of the great
diversity of their business. The only danger of failure would be in
the management personnel and it is conceded that any bank or any
sort of business institution can be wrecked through mismanagement
and maladministration. There can be no absolute protection by law
or otherwise against this condition. It can, however, be so greatly
minimized by governmental supervision that the danger of any such
failure will be remote.
Should Congress adopt such a branch banking policy there should
be an expansion and an intensification of Government supervision.
There would have to be a more constant contact with management
policies than now obtains. The number of banks would be less and
it would be easier for the Government to supervise and examine more
closely and more often the operations of such larger institutions. It
should be borne in mind that such a bank would have no difficulty
in securing capable management and that it would, on account of the
great value of good will, be sensitive to public opinion. It wrould not
wish to encounter the just criticism of a Government official.
26
B R A N C H , C H A IN , AND GROUP B A N K IN G
Congress has always recognized the necessity of maintaining ade
quate supervision over the national hanks. The Comptroller of the
Currency now has sufficient power to supervise the national banks
in so far as examination into their affairs are concerned. The time
and method as to examination is left to his discretion except that he
must under the law examine each bank twice a year. What other
powers the Government of the United States should exercise over such
larger institutions which would come into existence under the exten
sion of branch banking I am not prepared at this time to recommend,
but should the committee desire to go further into this question the
office of the Comptroller of the Currency will be at its service.
GROUP
B A N K IN G
In conclusion I feel it necessary to make some remarks with respect
to a comparatively recent banking development which is coming to be
known as group banking. Before proceeding further, however, I
think that we should attempt to get down to definitions. In current
discussions the terms “ chain banking17 and “ group banking” are
sometimes used synonymous and sometimes as opposed to one
another. Frequently the phrases “ chain and group banking” and
“ chain or group banking” are used.
The term “ chain banking'1 has been in use for many years in this
country to describe a condition in which a number of banks were
owned of controlled by the same individual or by a group of indi
viduals. I These so-called chains were situated very largely in the
rural districts and the member banks of the chain were principally
small country banks. This condition was and still is quite prevalent
in the agricultural regions of the West and South. Many of these
chains have come to disaster through the failure of all of the banks
which constituted them. During the many years this type of bank
ownership lias been in existence it was not considered as a trend
toward a fundamental change in our banking system nor did it relate
itself to the question of branch banking. On account of the failures
of several of these chains the term “ chain banking” began to carry
with it an element of disfavor.
The term “ group banking” is of very recent origin and is being
used to describe what appears to be a major movement in our banking
system. The principal factor in group banking is that each group
is centered around a cit}T or metropolitan bank through means of a
holding company, which owns the majority of the stock of each
bank, thereby creating a system of banks more or less integrated in
management with the central bank of the group. Its one common
factor with the older type of chain banking is that several country
banks may be owned by a single agency. In this discussion, there
fore, I shall use the term “ group banking” to mean the ownership
and some element of operating control of several banks through the
medium of a bank holding compan}7.
Official figures have not been compiled which show the number and
distribution of these groups. The holding companies are incorpo
rated under State law, and the Government of the United States has
no immediate access to information concerning their organization.
However, I attach hereto a list of what appears to be the most im
portant corporations which have acquired the stock control of a con
B R A N C H , C H A IN , AND GROUP B A N K IN G
27
siderable number of banks and which are operating these banks under
a group system. This is marked “ Exhibit 1.”
From the character and standing of the bankers and other business
men engaged in some of the principal groups in this new group-bank
ing movement 1 have no doubt that they will be able to work out a
system which will be profitable to the group company and give a
safer and better banking service to the communities in which they
own banks than was possible under the system of rural unit banking.
For reasons heretofore stated, 1 am not in a position to give to your
committee first-hand and authoritative information as to their
operations.
I may say, however, that I naturally look upon this movement
from the standpoint of a supervising official of the Government
rather than from that of an operating banker, that is to say, I am
concerned not with the question whether the movement is profitable
but rather whether it is desirable from the standpoint of the public
as a system of banking. The movement is new— hardly a year old—
and your committee may find that it gives promise of better banking
than the system of rural banking now generally in force. On the
other hand, your committee may find that this new movement may
be regarded as a temporary and transitional development, constitut
ing a normal prelude or introduction to branch banking.
While perhaps my views may be immature, in view of the lack of
opportunity for an exhaustive study of a movement which is so new,
I am inclined to the view that group banking under its existing forms
is not desirable as a permanent system of banking. Where a group
is composed of both State and national banks, as well as of other types
of financial institutions, it becomes practically impossible for an}7
supervising governmental official to ascertain authoritatively and
accurately the financial condition of the group as a whole. Each
corporation in the group is an independent legal entity, some respon
sible to State governments, and some, that is, the national banks, to
the National Government, while other State bank members of the
Federal reserve system are responsible to both State and National
Governments, and this creates a situation in which the public is not
sufficiently protected, in so far as it can be protected by governmental
authority. If a group were all national banks and the holding com
pany were placed under the visitorial powers of the Comptroller of
the Currency it would be possible, although difficult, to supervise the
operations of the group. I may say, however, that if the Comptroller
of the Currency be given visitorial powers over bank holding com
panies engaged in group banking, the Government would be in a
position to obtain information as to their operations and would be in
a better position to regulate and control them by subsequent legis
lation should such action be deemed expedient.
In the case of branch banking the situation is different. Under
the regional plan which I have discussed there would be no need of
an operating holding company. The parent bank would be the only
corporation in operation and it would have offices in various places
within the trade area. There would he only one board of directors
and one set of corporate minutes. The formulation and initiation
of the policy for the bank would be subject to a single responsibility
and the Comptroller of the Currency (or the State superintendent
28
B R A N C H , C H A IN , AN D GROUP B A N K IN G
in case of a State branch system) could at any time determine the
true financial condition of the bank with all its branches.
This concludes the formal remarks which I wished to make to the
committee, and I desire to express my appreciation of your considera
tion. I shall be glad to respond to any questions members of the
committee may desire to ask, and I shall be pleased to return at any
time your committee may desire. I wish also to offer to your com
mittee all of the facilities of my office which may aid you in these
inquiries.
The C h a i r m a n . I want to express, Mr. Pole, the appreciation of
the committee for your splendid statement. I shall tell you now
that the members of the committee will be given an opportunity to
ask you questions, and in all probability, after we have had an oppor
tunity to study your statement, we may ask you to come before this
committee again. In the meantime, we appreciate your offer to
continue to cooperate with the committee as the hearings proceed
and give us any advice that may be of help to us.
Mr. Strong, have you any questions you desire to ask of the
comptroller?
Mr. S t r o n g . I regret I was detained and could not get in until
late and, consequently, did not have an opportunity to hear what
the comptroller had to say. I just heard his last remarks. However,
Mr. Comptroller, your belief is that in a branch bank, with one or
two hundred branches, you could accurately examine that bank with
the force that you have now?
Mr. P o l e . I think not, Mr. Strong. The force would undoubtedly
have to be adjusted, to any new system of banking, which would
create branch systems all over the United States. However, we do
examine two banks now with over 100 branches each, quite satis
factorily.
Mr. S t r o n g . What do you mean by “ quite satisfactorily” ? You
mean to get an accurate estimate and knowledge of their condition?
Mr. P o l e . Yes, sir.
Mr. S t r o n g . How many men does it require to do that, where
there are 100 branches?
Mr. P o l e . That would depend entirely on the resources of the
bank. I could not answer the question without referring to a bank
which is in operation, as a branch system.
Mr. S t r o n g . Well, take the Bank of Italy.
Mr. P o l e . We examine the Bank of Italy with about 40 men.
Mr. S t r o n g . H o w m a n y b ra n ch e s has it n o w ?
Mr. P o l e . Approximately 300.
Mr. S t r o n g . How long does it take those 40 men to exmaine
that bank?
Mr. P o l e . It is what amounts to a continuous examination.
Mr. S t r o n g . They are there all the time with that bank and its
branches?
Mr. P o l e . They are there practically all of the time with the
various branches; that is, they go from one branch to another, which
practically amounts to a continuous examination.
Mr. S t r o n g . Do you think that is a satisfactory examination, to
have to examine one branch and go to another and then to another?
Mr. P o l e . That is only part of it.
Mr. S t r o n g . What is the rest of it?
B R A N C H , C H A IN , AND GROUP B A N K IN G
29
Mr. P o l e . The rest of it is that when we go to a bank we first send
our examiners into the head office and the principal branches and we
have a form which is sent out to every branch in that system calling
for detailed information as to the operation of that particular branch,
which is assembled at the head office, and we use that for the purpose
of compiling the main report. Having done that, we visit each branch
and check the figures back as of the date of the examination and exam
ine it just as though it were an independent bank. I do not mean to
say that it is not difficult. It is difficult to examine an independent
bank. But all in all, it must be considered that it is easily possible to
examine effectively a bank with 100 branches, but not simultaneously.
Mr. S t r o n g . Well, you say in order to examine them, you have
to keep the examiners continuously on the job, going from one branch
to another.
Mr. P o l e . Correct.
Mr. S t r o n g . Suppose the bank was not in good condition: Would
there be an opportunity to pass money or credit from one branch to
another and back to the parent bank during the time that these
examiners were passing from one bank to another, which you say,
takes the entire time?
Mr. P o l e . Y o u mean to send money to the head office of another
bank?
Mr. S t r o n g . D o anything to cover up those conditions which you
would like to discover— passing credits, money, or anything in the
way of securities.
Mr. P o l e . I would say not in any material amount.
Mr. S t r o n g . How long does it take one of your men to examine a
branch bank?
Mr. P o l e . It would depend entirely on the size of the branch.
If it were $50,000,000, it would take a great many men and a good
long time.
Mr. S t r o n g . Are there many branches with $50,000,000?
Mr. P o l e . Yes, sir.
Mr. S t r o n g . H o w m a n y o f th e m ?
Mr. P o l e . I will say very few.
Mr. S t r o n g . Y o u know what I am trying to get at. I am trying
to find out when your examiner goes to the ordinary branch of the
Bank of Italy how long it takes him to examine that branch.
Mr. P o l e . It is impossible for me to answer that. I do not know
what you call an ordinary branch. Some have $200,000 total
resources and some $10,000,000 or more.
Mr. S t r o n g . Y o u know what you call an ordinary branch, do you
not?
Mr. P o l e . I do not know what you call an ordinary branch. You
mean a small country branch?
Mr. S t r o n g . Of course, a small branch bank—one of the branch
banks of the Bank of Italy which exist all over California— one of the
300 or more.
Mr. P o l e . Mr. Strong, I do not know whether I understand you
exactly. Of course, the Bank of Italy has branches all over the State
of California, but they vary in size from $200,000 up.
Mr. S t r o n g . H o w long would it take to examine one of the banks
with $200,000?
100136— 30—
pt
30
B R A N C H , C H A I N , A N D GROUP B A N K IN G
Mr. P o l e . That would depend on its condition.
Mr. S t r o n g . Then you can not give this committee information
as to how long it would take to examine one of those ordinary branches
of the Bank of Italy-----Mr. P o l e . I shall be glad to give this committee categorical infor
mation on how long it has taken to examine any one of these branches.
Mr. S t r o n g . Y ou say you have 40 men who are occupied on this
examination?
Mr. P o l e . Used in an examination of the large California branch
systems.
Mr. S t r o n g . Forty men spending their entire time examining the
Bank of Italy, in this continuous examination.
Mr. P o l e . Y ou misunderstood me. I said when we come to
make an examination of the Bank of Italy, we probably employ
40 men at the start.
Mr. S t r o n g . That is a continuous proposition?
Mr. P o l e . Not with the 40 men. M ay I furnish you with a
detailed list of the time it takes to examine each one of the branches
arid the number of men?
Mr. S t r o n g . I shall be glad to have it.
The C h a i r m a n . Any figures you furnish on this matter will be
inserted in the record.
Mr. S t r o n g . The number of men and time it takes to examine
each branch of which I understand there are about 400. The point
I w^ant to inquire into-----Mr. W i n g o . May I make the suggestion before he gets away from
the statement? The comptroller spoke about the resources of the
branches. I think it might be wise to include a statement of what
he means by “ resources,” and just what they are.
The C h a i r m a n . Mr. Comptroller, I should like to suggest, apropos
of what Mr. Strong said, that you put in a statement of the plan
under which the Bank of Italy is being examined by your department,
so that the committee may understand just how the examination of
one of these large branch banking groups is handled.
Mr. P o l e . I understand perfectly, and I shall be very happy to do
that.
The C h a i r m a n . Particularly instruction from your office, which
have been set up as a plan for examining these banks.
Mr. W i n g o . Might it be well— I do not know whether he wants
to do it in response to that statement— but in response to Mr. Strong’s
question, to show the plan they have perfected; what safeguards they
have got, in a practical way, by examining, against, say, a conspiracy
of a number of officers or employees— take the Bank of Italy for
illustration— covering up a shortage by substitution, or a shifting
when you are checking one branch and before the time you get to
another branch, and have it there on hand.
Mr. P o l e . I understand.
Mr. W i n g o . I think possibly a great many men who will read the
hearings and a great many of the committee would be interested in
knowing, from an economic standpoint, how' you have developed a
system of examination that guards against that difficulty.
Mr. P o l e . Yes, sir.
The C h a i r m a n . Might I further supplement that i t would be
profitable for the committee if you would make a statement also of
your present method of examining other big groups of banks.
B R A N C H , C H A IN , AND GROUP B A N K IN G
31
Mr. P o l e . For instance, the National City Bank of New York.
The C h a i r m a n . Yes.
Mr. P o l e . Of course the National City Bank of New York is not
one of the groups to which you refer.
The C h a i r m a n . Or a bank similar to that, whose branches are
confined to a city, inasmuch as the Bank of Italy is confined to the
State.
Mr. P o l e . I understand what you would like to have. You
would like to have included the method of examination of the National
City Bank of New York, whose branches are confined to the city.
The C h a i r m a n . Or the Chase National Bank. Or any other of
the large banks with many branches in one of our larger cities, so
that the committee will have an opportunity to know how vour
examinations are carried out.
Mr. P o l e . I will be happy to do that.
(The information requested will be inserted in the record at a
later date.)
Mr. S t r o n g . My purpose, Mr. Comptroller, in pursuing this line
of questioning, is that it seems to be a rather difficult proposition.
To put a force of men into the examining of a bank of 400 branches,
which would preclude their passing of credits and funds and securities
from one bank to another if it was in bad condition and the same was
necessary to cover up lack of funds. I do not think, of course, the
Bank of Italy is in such bad condition— at least I hope not.
Mr. P o l e . N o .
Mr. S t r o n g . But here: Take a bank that was in failing condition
and was perpetrating fraud and doing all kinds of illegal and unjusti
fiable acts. Now with a big bank of 400 branches, and you go into
its examination with, say, 40 men. One bank examiner will take
Ine bank and go to another. That would cover but 40 branches.
There will be 360 that will not be visited until the 40 are examined,
ot seems to me it would be a rather difficult thing to detect any
illegal operation of that bank which was going on. That is the reason
I am approaching the question, which it would be very interesting to
have your conclusions on, together with a statement as to the method
of conducting the examinations. I have not had an opportunity to
hear your statement and I would like to waive further cross-examina
tion until I h ave read i t. S o , wi th th at und ers t andi ng, M r. Ch ain n an,
I surrender the witness.
The C h a i r m a n . Mr. Wingo.
Mr. W i n g o . I have no questions at the present time. However,
I might remind the comptroller that the question of a satisfactory
examination is one that is of a great deal of concern to some gentlemen.
For illustration, one of your predecessors testified that he could not
satisfactorily examine a bank of the size of the bank of Italy at that
time, which had only about two-thirds as many branches as now, and
possibly Mr. Strong had in mind that statement of his.
Mr. S t r o n g . Yes; Comptroller Dawes.
Mr. W i n g o . He went into that situation some years ago when he
was comptroller and took the position that it was almost impossible
to prevent these shiftings of assets unless you had a simultaneous
examination of the branches and an adequate force to check them up.
So, I suggest, in discussing this, that you go into that in detail and
show how you overcome that difficulty.
32
B R A N C H , C H A I N , A N D GROUP B A N K IN G
Mr. P o l e . Of course there is no doubt that should there be a general
extension of branch banking in this country, it would be necessary
perhaps to adapt a system of examination to it. However, that
would be an operating difficulty and I have no hestitation in saying
that, with the experience we have already had in the matter of the
examination of branches that, to a reasonable degree, we regard them
as satisfactory. It is true it is not as simple as examining an inde
pendent bank, but, after all, it is an operating difficulty th^t can be
met. It might be necessary to put on 400 men, to use an extreme
illustration, but if we did, the bank pays for it. While it is not easy
for me to convey to your committee just precisely the technical
details in which we .proceed with a bank examination, it is a measure
which can be met and satisfactorily so.
Mr. W i n g o . In other words, you are satisfied, from your experience,
that that is an administrative difficulty that may be overcome
satisfactorily?
Mr. P o l e . I feel that way, and I feel that our examinations are
quite satisfactory. Of course, the banks themselves are very vitally
interested in our examinations. In addition to the examinations
which we make, the banks themselves have a traveling force of ex
perts spot-checking everything that goes on in the system, and I
shall be very glad to furnish the committee with any information
along those lines that I think will be enlightening.
Mr. W i n g o . Another thing. To-day there is not a very clear
conception in my mind— and I think that difficulty may be experi
enced by some others— of the distinction that you make between
group banking and chain banking. Do you, at the moment, recall
a distinctive illustration of each that you might use or feel free to
use without embarrassment in connection with any individual case?
Mr. P o l e . Perfectly so. I would say that in the chain— what
we call a chain of banks-— there is in the State of Arkansas, as an
illustration, a chain of some 55 banks, which, I am informed, are
actually controlled by a single individual.
Mr. W i n g o . N o w , you call that a chain. In other words, here
are 55 independent banking corporations that have separate local
corporate entities and one individual, whom wre both have in mind,
owns a controlling interest in those 55 separate corporations. You
call that a chain?
Mr. P o l e . Yes, sir.
Mr. W i n g o . Now, give us an illustration of a group bank, as
contradistinguished from the chain.
Mr. P o l e . An illustration of the group bank is where a holding
corporation is formed and that holding corporation proceeds to
purchase independent banks, usually within its trade area, either
through an exchange of its stock or for cash and the control of each
one of those banks is held through stock ownerships by the corpora
tion.
Mr. W i n g o . Now, I do not catch that difference. Take, in the
first instance, now, the chain bank: That gentleman owns the control
through an ownership of the stock of those 55 different corporations?
Mr. P o l e . Individually.
Mr. W i n g o . If he were to transfer that to the, let us say, A B C
Banking Corporation, and that corporation were to take over the
B R A N C H , C H A IN , A N D GROUP B A N K IN G
33
controlling shares of stock of those 55 banks, you would call that a
group banking system?
Mr. P o l e . Yes, sir; a group banking system.
Mr. W i n g o . After all, the mechanics are the same; the ownership
is the only difference, in that it is in one individual in one instance or a
group of individuals, whereas, in the other instance, the ownership
is in the control of a holding corporation?
Mr. P o l e . They are similar in characteristics.
Mr. W i n g o . I s that the only distinction— that which you have
given?
Mr. P o l e . That is, I might say, about the only distinction, except
as to the methods of operation, which is all important.
Mr. W i n g o . What are the differences in methods of operation?
Take the banks owned by the individual or controlled by him: What
change in the operations of those banks would there be if he would
transfer his holdings to a holding corporation and it became, in your
definition, a group bank operation? What change would occur?
Mr. P o l e . In the case of the individual, who owns as an individual
the stock— the controlling stock— of these various banks, these banks
are usually— while under his domination to a certain extent— operated
independently of each other. In the case of a group-bank system,
the holding corporation has usually one main, large metropolitan
bank, and the management contact with these various members of
the group is very much more vital than in the case of the chain.
Mr. AVi n g o . Take the case we have in mind: I heard it rumored
possibly that the individual had transferred to a corporation that is
under his individual control, as a matter of fact— did it not revolve
around a Little Rock bank that he controlled and did they not do
their business and was not their chief correspondent in Little Rock
that he dominated?
Mr. P o l e . I think the group to which you have reference did own
shares in the bank in Little Rock and probably controlling shares.
Mr. W i n g o . A s a matter of fact, did not this individual control,
with his officers, attorneys, and employees, one big banking corporation
in Little Rock— was the president of it?
Mr. P o l e . I am not informed as to that.
Mr. W i n g o . A trust c o m p a n y ?
Mr. P o l e . I really do not know.
Mr. W i n g o . I think I catch the point of distinction, though. You
call it a group system where a corporation, as a holding company, has
a metropolitan bank and then controls, through stock ownership, a
number of other banks— that while maintaining their separate cor/ poration entities, they also control these other corporations?
Mr. P o l e . That is a very nice distinction. The principal difference
between a group and a chain is that the group always has some form
of central management while the chain has not.
Mr. S t e v e n s o n . And that corporation-----The C h a i r m a n . The gentleman from South Carolina is out of
order. He did not address the Chair.
Mr. S t e v e n s o n . Pardon me, Mr. Chairman. May I ask the
witness a question?
The C h a i r m a n . Y o u m a y .
Mr. S t e v e n s o n . The holding corporation maintain a very strong
supervisory control by auditors usually which audit at least once
34
B K A N C H , C H A IN , AXI ) GROUP B A N K IN G
every two weeks the transactions of everyone in the group. Is not
that the rule?
Mr. P o l e . I think that is generally the rule.
Mr. S t e v e n s o n . Where one man merely owns the controlling stock
in a great many, which you describe as a chain, that system is not so
rigidly enforced, is it?
Mr. P o l e . I think that is more or less correct; they ru n more or
less independently.
Mr. S t e v e n s o n . The stock being held by the corporation, which
they get from a State, are those corporations so organized as to be
liable for a stockholder’s liability? You know, a State can grant
a charter and, in a great many cases, limit the things for which the
corporation can be liable.
Mr. P o l e . Of course the national-bank stock in every case is liable
for assessment.
Mr. S t e v e n s o n . The stockholder is.
Mr. P o l e . Yes, sir; and if it becomes necessary to assess the
stock which is in the hands of a corporation, of course, we would
assess the corporation as you would an individual.
Mr. S t e v e n s o n . Yes, sir.
Mr. P o l e . If the corporation had no assets other than the stock o f
the banks assessed of course it would be uncollectible.
Mr. S t e v e n s o n . Yes, sir.
Mr. P o l e . But a corporation would probably hold, in addition to
bank stocks, other securities, and I think a majority of those corpora
tions wThich have already been formed could readily meet such
liability.
Mr. S t e v e n s o n . I want to ask a question which has been referred
to here. You discussed pretty fully the question of putting the limi
tation on stock in banks to such a large amount as it wTould give a
monopoly in any one community; in other words, they wrould be able
to establish more than one bank. WTe are met with the same argu
ment in the establishment of these branches, that the very strong
metropolitan banks could establish branches in all communities where
a unit bank, which was trying to operate, would be run out of business
and the metropolitan bank, in that way, could acquire a monopoly.
That is the principal argument we meet. What is your view about
that? Is there a danger of that?
Mr. P o l e . There is no doubt, in my mind, that if branch banking
were permitted we would eventually have a branch banking system
and not very many unit banks. However, I think that is looking
pretty well ahead. Branch banking, under the regional system
would develop so gradually that it would take many years before the
unit bank was entirely out of existence, if it ever went entirely out of
existence.
Mr. S t e v e n s o n . This question arises: When they get out will it
be the tendency or will it not— that is the argument that is used
entirely almost— to have the territory apportioned among the various
institutions that have the branches so that there will be a branch of
one bank in community A and no other branch of any other bank
would be placed there and the branch of another bank would be
established in community B. That is going on and I think the comp
troller is entirely familiar with it, in my State. The banks have
almost all failed except these banks— group and chain.
B R A N C H , C H A IN , AN D GROUP B A N K IN G
35
Mr. P o l e . And branch sy s te m s .
Mr. S t e v e n s o n . Yes; branches also. We have them all operating,
and but for them a large part of our territory would be utterly bereft
of banks. They have apparently divided the State among themselves
and group A puts a bank in my town and group B puts a branch in
Darlington, 30 or 40 miles away, and so on, and they are leaving
each community with one bank, and that is the cry that is going to
be made, as I see it. However, unless they had done this, we would
have been in a terrible fix. It has done more to commit me to some
system of the kind you have described than anything I know o f—
the practical effect.
Mr. P o l e . I do not know what would happen, but I can easily
understand that in South Carolina the competition between branch
banking systems— and the two to which you have referred are branch
banking systems— the thing has not arrived at a point where compe
tition is keen enough for banks to go in, each of them, in the same
place, because there are locations without banking facilities where
the opportunity is better and banking service is needed. Later on,
when South Carolina becomes properly covered with branch banks,
if it ever does, the arrangement you referred to might not prove
attractive. I know in California branch systems are operating side
by side in numbers of towns, and there is no trade arrangement
between them, but they are in keen competition to give the best
banking service that is possible.
Mr. W i n g o . Mr. Chairman-----The C h a i r m a n . Mr. Wingo.
Mr. W i n g o . I believe I will defer further questions to a later date.
I have really forgotten the line I was on.
Mr. D u n b a r . Mr. Pole, the Bank of Italy is an illustration of the
branch banking system. I understood you to state to Mr. Wingo
that the operation of those banks in Arkansas was an illustration of
the chain banking system?
Mr. P o l e . That is correct.
Mr. D u n b a r . Now, then, I gathered the impression, when you
w~ere talking about Arkansas, that it was controlled by individuals
rather than by a partnership or corporation.
Mr. P o l e . By an individual.
Mr. D u n b a r . An individual?
Mr. P o l e . Yes, sir.
Mr. D u n b a r . I s the Bank of Italy controlled by an individual?
Mr. P o l e . N o ; it is controlled b y , as far as stock ownership is con
cerned, a corporation.
Mr. D u n b a r . Then, that is an illustration of a chain banking
system controlled by a corporation?
Mr. P o l e . That is a branch banking system.
Mr. D u n b a r . What is the difference between them?
The C h a i r m a n . Will you yield a moment?
Mr. D u n b a r . Certainly.
The C h a i r m a n . Y o u were not here when we opened the hearings.
We are proceeding under a regular order. I mention this so that
you may know it. I am calling the members, according to their
seniority, to question the witness, and you will come on later. I beg
your pardon for interrupting you. I did not wish to interrupt you,
but I do want to see this program followed.
36
B R A N C H , C H A IN , A N D GROUP B A N K IN G
Mr. D u n b a r . Then you proceed according to the seniority of the
members of the committee?
The C h a i r m a n . Yes.
Now, Mr. Goodwin.
Mr. G o o d w i n . Mr. Pole, in the establishment of a branch banking
system throughout the country, would you require legislation in the
several States so as to make them uniform?
Mr. P o l e . I would not.
Mr. G o o d w i n . You think the National Congress has authority to
establish branch banking systems for the national banks without
legislation?
Mr. P o l e . I understand from my counsel that is correct.
The C h a i r m a n . Mr. Goldsborough.
Mr. G o l d s b o r o u g h . Mr. Pole, I understand from you, your view
is if the legislation, such as you have in mind, were adopted by Con
gress, it would tend to disestablish the great concentration of banking
resources in New York and tend to concentrate them in various cen
ters, such as New York, Detroit, St. Louis, Baltimore, San Francisco,
and Dallas, and other places. You do think, as I understand, that
it will tend to a centralization in those various centers?
Mr. P o l e . Unquestionably.
Mr. G o l d s b o r o u g h . N o w , have you considered this question from
any other standpoint than the standpoint of bank technique; in other
words, have you considered the political implications which would
necessarily arise from the concentration of credit in a great center?
Have you considered it from that standpoint at all?
Mr. P o l e . I h a v e .
Mr. G o l d s b o r o u g h . Let us assume, for the purposes of illustra
tion— because I have no reason to suppose this will happen— but let
us assume that, in my own State, for instance, the banks of Balti
more were to get control of the resources and credit structure of the
rural communities, such as in southern Maryland, western Maryland,
and on the Eastern Shore of Maryland, which is the section "that I
happen to come from. Did you apprehend that the Members of
Congress, for instance— I will take Members of Congress for purposes
of illustration. Do you have in mind that the Members of Congress
from the rural part of Maryland would not be representative of the
genius of their communities but would be dominated and controlled
by the financial system, which had its root and base in Baltimore
city?
Mr. P o l e . Well, I would not think so any more than it is the case
now. I think on the Eastern Shore of Maryland you have one of the
important systems of group banks.
Mr. G o l d s b o r o u g h . I did not ask that question, but I do not
want to interrupt you. Just proceed, sir.
Mr. P o l e . If I understand you, you mean would the interest in the
locality in which a branch might be situated be lost— would the inter
est be less in that localit}7— is that what you mean?
Mr. G o l d s b o r o u g h . I mean what I attempted to say, but I may
not have made myself plain. What I have in mind is this, that all
the business in this country is done on credit, of course.
Mr. P o l e . Yes.
M r. G o l d s b o r o u g h . Y ou can not do business any other way,
because there is not enough money to go around.
B R A N C H , C H A IN , AND GROUP B A N K IN G
37
Mr. P o l e . Yes, sir; at least 90 per cent done on credit.
Mr. G o l d s b o r o u g h . N o w , if this system, which you have in mind,
resulted in the concentration of credit and resources in these centers
which I have in mind— would not the political conditions in the
rural districts— would not those who are supposed to represent the
rural districts be controlled not by the sentiment existing in their
own communities, but by the powers in these centers of credit which
you spoke of?
M r . P o l e . I sh o u ld s a y n o t at all.
Mr. G o l d s b o r o u g h . You think not?
Mr. P o l e . I sh o u ld sa y n o t a t all.
Mr. G o l d s b o r o u g h . Why?
Mr. P o l e . Because the local touch in these smaller communities
is not lost in any way. I thought that is what you had in mind. In
almost all instances where branch banks are operated or where group
bank are operated in small sections, there is almost always a lot of
interest in that local unit of the group or the branch, and there is
usually a local advisory committee consisting of two or three people,
and I can not feel that there will be any such state of affairs as you
speak of.
Mr. G o l d s b o r o u g h . Y ou h a ve n e v e r b a d — 1 beg y o u r p a rd o n . I
th o u g h t y o u h a d finished.
M r . P o l e . I do n o t k n o w th a t I am in a p osition to speak v e ry in
te llig e n tly on th a t p o in t, h o w e v e r.
A ir . G o l d s b o r o u g h . Y ou h a v e n o t given th a t p a rtic u la r q u e stio n
the sam e m a tu re th o u g h as y o u h a v e the q u e stio n s w h ich arise m ore
n a tu ra lly in the m in d of a m a n w ho has b een a b ank er and w h o is
p rim a rily c o n cern ed in the sta b ility o f a b a n k in g s y s te m ?
Mr. P o l e . I have given a great deal of thought to that and I reply
that I do not think there would be any such condition arising as you
suggest.
M r. ’’G o l d s b o r o u g h . Now, you remember that two or three years
ago the Senate desired to investigate the public utilities, and that by
virtue of the enormous control which the public utilities had of the
political forces nationally, they, themselves, were able to direct the
course of the investigation and transfer it from the Senate to the Fed
eral Trade Commission. That is, when I say they transferred it, they
were able to control the situation in the Senate to such an extent that
it was transferred from the Senate to the Federal Trade Commission.
I do not know whether you are familiar with that condition or not.
Mr. P o l e . I understand your point of view there, but as the group
bank or branch bank has been developed up to the present point
I do not think it can be said that the interests of the local communi
ties have been in any degree lessened; in fact, I think they have
been increased by the upbuilding of an institution which is neces
sarily one which appeals more to the people of that community by
way of local pride.
Mr. G o l d s b o r o u g h . N o w , would you be surprised if the sugges
tion were made that the influence of the city correspondent banks—
even the city correspondent banks— is felt very sharply by those
holding public positions, such as an office as Representative in Con
gress, in the country? That is the condition. I do not want to say
that arbitrarily, but you would be surprised if the suggestion were
38
B R A N C H , C H A IN , AN D GROUP B A N K IN G
made that that condition was felt already even when the relation
ship is only that of a correspondent bank.
Mr. P o l e . Well, I can not conceive of such conditions as that,
Mr. Goldsborough, unless it would be through the channel of what
might be called controlled deposits.
Mr. G o l d s b o r o u g h . N o w , what I have in mind is this— that the
point of view of the local bank is dominated very largely by the
point of view of the city correspondent bank. That is what I have
in mind, and that point of view is always reflected out to the legis
lators.
Mr. P o l e . I think that is one of the points that might be cured
by branch banking. At the present time the city correspondent is
probably the banking connection of a public utility. That public
utility has its plants and offices in various small towns in which
correspondents of the same bank may be located. The city corre
spondent, through a contact or through representation on the board
of directors of the utility company, would control that deposit and
it would reach out to the small community so that if you did not
behave, as a small banker, the city correspondent would probably
be able to control that deposit you had been receiving from the local
utility and place it elsewhere.
Mr. G o l d s b o r o u g h . Y o u say if the local banker did not behave.
Mr. P o l e . If the local banker did not meet its wishes.
Mr. G o l d s b o r o u g h . That is the idea. You hit the nail on the
nead the first time.
Mr. S t r o n g . There is no doubt about that.
Mr. P o l e . That, however, I think, would be cured largely by the
branch banks, Mr. Goldsborough, because the city bank, which
controlled this important deposit, would project itself into this
community and it would have no independent unit. It would be a
matter of indifference, then, whether the deposit were placed at
headquarters or distributed among the local banks in the communities
from which it arose.
Mr. G o l d s b o r o u g h . Mr. Pole, let us assume that, through a given
congressional district, you have these branch banks centered in some
great city, like Detroit, St. Louis, Baltimore, or New York, as the
case may be, and let us assume that your Representative in Congress
from that district— his views about finances were controlled by what
he deemed to be the best interests of his Congressional district, and
rural life in America. Let us assume that he felt that urbanization
was progressing too fast in this country; that he felt a large proportion
of city population was unassimilated into what we understand to be
American life: Now, then, what would happen to him and his
independent thought I am discussing-----Mr. P o l e . I am not a politician, Congressman.
Mr. G o l d s b o r o u g h . I have not finished the question, and I
should like to do so because I think it is important— what would
happen to him if he persisted in representing what he thought and
believed to be the true sentiment of his district; continued to feel
it necessary for the rural districts to be independent politically in
order to control this condition in the cities I have mentioned? What
do you suppose would happen to him if he asserted himself, in view
of the fact that the district was covered by branch banks that repre
sented the city point of view?
B R A N C H , C H A IN , AN D GROUP B A N K IN G
39
Mr. P o l e . Mr. Goldsborough, that is a hypothetical question
which it would be very difficult for me to answer.
Mr. G o l d s b o r o u g h . It is not hypothetical. Those of us who have
been in politics know it is a very practical question.
Mr. P o l e . I really could not answer that question.
Mr. G o l d s b o r o u g h . One more question, and then I think 1 am
through. There is evidently pressure coming from various sources
for an extension of branch banking, because these things never become
politically acute or never become political issues until there is pressure
concentrated on Congress from one source or another.
Mr. P o l e . Yes.
Mr. G o l d s b o r o u g h . Y ou will be surprised when 1 tell you that
at our first meeting— a thing which never happened before since I
have been a member of this committee— every member of the com
mittee was in his seat when the gong sounded, and it was all because
of this proposed discussion on branch, group, and chain banking.
Would you feel that you could freely give your opinion as to where
the pressure is coming from for this extension of branch banking in
the rural districts?
Mr. P o l e . I think I started a great deal of it myself, Mr. Goldsborough. I think, in addition to that, that the bankers associations
and the various bankers in the metropolitan centers-----Mr. G o l d s b o r o u g h . Exactly.
Mr. P o l e . Have realized that something is necessary to protect
the small communities against the bank failures which have occurred
in such large numbers over a period of years.
Mr. G o l d s b o r o u g h . Then, your aspect of the situation is some
thing like this: That this pressure is coming from the metropolitan
banks and not from the rural districts themselves and that the point
of view of the metropolitan banks is not selfish at all, but simply
for the purpose of helping and assisting the rural communities?
Mr. P o l e . In a large measure I would say the latter is true in a
very large measure.
Mr. G o l d s b o r o u g h . You think-----Mr. P o l e . May I answer that?
Mr. G o l d s b o r o u g h . Yes.
Mr. P o l e . At the same time there is considerable pressure coming
from the rural communities. There are many country bankers who
are in favor of branch banking.
Mr. G o l d s b o r o u g h . That I am not prepared to dispute. 1 do
not know. It does not exist in any locality I am familiar with. I
would say, Mr. Pole, as far as 1 am concerned, that since the begin
ning of the present Congress I have had a vast amount of correspond
ence on this general situation, and the only opposition to the general
position which I have taken has come from large city banks.
Mr. P o l e . Yes.
Mr. G o l d s b o r o u g h . N o w , the difficulty the rural man has is
something like this: He realizes when you control the credit of a
community, you control all the capital— and that is the answer—
and he is unable to feel that the attitude of the city banker is philan
thropic. He is forced to feel that the city banker is conducting his
business as a business man should— for honest private purposes.
That to me is a very controlling interest. All the pressure, as far
40
B R A N C H , C H A IN , AN D GROUP B A N K IN G
as I know, that is significant at all comes from the big metropolitan
banks.
Mr. P o l e . I think there is pressure from hundreds of country
State banks, Mr. Congressman, and also I think if we could take a
poll of the number of people interested in a change of the banking
system, among those, thousands of people who have lost money in
those country banks, it is even more representative than the opinion
of the country banker. He is the man who usually bas been lost
sight of.
Mr. G o l d s b o r o u g h . D on’t you think, as a matter of fact, Mr.
Pole, there is already too great concentration of bank resources in
this country?
Mr. P o l e . I would say that there is too much concentration of
banking resources. It would be fortunate if it could be decentralized.
Mr. G o l d s b o r o u g h . N o w , Mr. Pole, I received this morning— I
do not want to get into individual cases, because I rather think that
is not the standpoint from which I want to approach the subject—
but I received this morning from some one in California, a deposit
slip which is used by the Bank of Italy and, on the back of it, it says
“'Bank of Italy covers California/’ and then it has a map of Cali
fornia with the intersecting lines which show branches that exist in
that State. To me that is a very unusual document. I should like
the committee to see it, and will you pass it around, please— indicating
rather, I am afraid, a position of arrogancy on the part of the Bank of
Italy due to its undoubted control of the banking resources of that
State. I did not imagine that any institution would have the hardi
hood to issue a paper of that kind.
The C h a i r m a n . Have you any further questions, Mr. Golds
borough?
Mr. G o l d s b o r o u g h . That is all.
The C h a i r m a n . Under the arrangement the committee made the
other day, we were to begin these hearings at 10.30 and end at 1
o ’clock. It is now 5 minutes to 1. What is the pleasure of the
committee?
Mr. F o r t . It seems to me before we go on with other witnesses
we really ought to finish any questioning by the members of Mr.
Pole, and the program on the floor of the House this afternoon is
almost insignificant, unless it has been changed since I came out. It
is nothing but a bill to change the mileage allowances and per diems
allowed witnesses summoned before House committees, and I think
the House could get along without us on that, and I wonder if w~e
could not go on this afternoon and get Mr. Pole’s views thoroughly
developed before we take up the next witness we propose to call?
The C h a i r m a n . There w^as no intention to take up another witness
before the committee until we completed with Mr. Pole. I should
like to ask Mr. Pole if it wrould be convenient for him to come back this
afternoon at 2.30 or would he prefer to come back to-morrow morning
at 10.30 o ’clock.
Mr. P o l e . I have some very important engagements this after
noon, Mr. Chairman.
The C h a i r m a n . Under those circumstances, it is probably better
to adjourn until to-morrow.
Mr. B e e d y . Mr. Chairman— —
The C h a i r m a n . Mr. Beedy.
B R A N C H , C H A IN , AND GROUP B A N K IN G
41
Mr. B e e d y . Apropos the question asked by the gentleman from
Maryland (Mr. Goldsborough) as to where this pressure is coming
from for branch banking, do I not understand it to be your position,
Mr. Pole, that this pressure is an economic urge, the result of an
economic evolution and tendency in all lines of business, which is
now being voiced by bankers not only in the cities but in the rural
communities as well?
Mr. P o l e . Precisely so.
Mr. B e e d y . And referring again to the question about centraliza
tion, you say there is already probably too much centralization of
credits. I presume you refer to the fact that to-day the great cen
tralization of the credits and financial operations is in the cities of
New York and Chicago, possibly.
Mr. P o l e . New York, Chicago, and St. Louis.
Mr. B e e d y . And do you not contend that the establishment of
other branches by national banks would have a tendency to decen
tralize the concentration of credits, making more independent of the
three centers to which you have referred, the various other natural
industrial areas?
Mr. P o l e . There is 110 doubt in my mind that that is what branch
banking would result in.
Mr. B e e d y . You would not contend that the policy which you
advocate would result in further concentration of power?
Mr. P o l e . The policy which I advocate is a policy of further
decentralization.
Mr. B e e d y . But whatever you may claim for branch banking, I
understand you do not claim for it any guarantee of the reelection of
Members of Congress?
M r. P o l e . I think that covers my thought.
Mr. F o r t . When will we get the exhibits to which you referred in
your testimony?
Mr. P o l e . They are not here. I have only the one copy with me.
The C h a i r m a n . In view of the fact that Mr. Pole has only one
set of exhibits, which are material to each one of us here, it will be
impossible for us, by to-morrow morning, to have an opportunity to
look over those exhibits and the fact that to-morrow is Calendar
Wednesday and our committee has the call, I want to raise the ques
tion with the committee, and I shall be glad to have a suggestion, as
to whether or not it would not be better to have the matter go over
until Thursday.
(Discussion off the record.)
The C h a i r m a n . Very well; we will adjourn to meet to-morrow
morning at 10.30, when the hearings will be resumed and be con
tinued to 12 o ’clock.
(Whereupon, at 1 o ’clock p. m., the committee adjourned until
Wednesday, February 26, 1930, at 10.30 o ’clock a. m.
H
C
o use
o m m it t e e
on
R e p r e s e n t a t iv e s ,
B a n k in g a n d C u r r e n c y ,
of
Wednesday, February 26, 1930.
The committee met in the committee room, Capitol Building, at
10.30 o’clock a. m., Hon. Louis T. McFadden (chairman) presiding.
The C h a i r m a n . The committee will come to order.
42
B R A N C H , C H A IN , AN D GROUP B A N K IN G
STATEMENT OF JOHN W. POLE— R esum ed
The C h a i r m a n . I would like to repeat what was said in the com
mittee the other day as to procedure, before we began the hearings,
and also to state now, the Comptroller of the Currency being in the
midst of his testimony, that an invitation has been extended to the
Secretary of the Treasury to be here, or any members of his depart
ment; also the Federal Reserve Board has been notified of these
hearings and they perhaps will have the opportunity to appear next,
after which the officers and directors of the 12 Federal reserve banks,
and after them, persons connected with group, chain, and branch
banking operations. I want to make it perfectly clear, of course,
that during the hearings the committee will hear all phases of the
question.
Mr. S e i b e r l i n g . You mean in the order in which you name them?
Mr. P o l e . Group, chain, and branch, in the order named?
The C h a i r m a n . No; all together, collectively. I want to mention
that there are on the committee two outstanding antibranch bankers
that we have knowledge of— Mr. Strong, of Kansas, and Mr. Golds
borough, of Maryland.
Mr. S t r o n g . Guilty as charged.
The C h a i r m a n . I presume there are others, and the chairman
would be glad if those members will confer with him as to any possible
witnesses against any of the branch, chain, or group banking pro
posals, or any other members of the committee that have suggestions
to make, so that we can get word to the witnesses.
Mr. S t e a g a l l . Let me submit an inquiry.
The C h a i r m a n . I should like to furnish my statement. There
are advocates of branch banking, but I do not know whether there
are any advocates of chain or group banking on this committee, and
if those or any other members know of persons who would like to
be heard, the chairman would be glad to confer with those members,
so that their witnesses may be invited to appear before the committee.
Mr. S t e a g a l l . I want to suggest to the chairman that I thought
there were a number of members of the committee— and I s&y this
because the chairman seems to want to discuss the attitude of the
committee for the record— I thought it was understood there were a
number of members of this committee who were against branch bank
ing, and I thought the chairman of the committee was among those
members.
Mr. S t r o n g . I thought there were 15 or 20.
The C h a i r m a n . The chairman was simply trying to arrange this
matter so that the members of the committee can confer with one
another and the chairman as to witnesses.
Mr. L e t t s . I assume no one would undertake to say that the chair
man of the committee had polled those mentioned in favor of branch
banking— for myself, I want to say that I want to try to maintain
an open mind.
The C h a i r m a n . The chairman desires to state that he is not
intending to define the attitude of any member of this committee.
I am rather in hopes that the entire membership of the committee will
maintain a judicial attitude in regard to this whole matter until these
hearings are completed.
B R A N C H , C H A IN , AND GROUP B A N K IN G
43
Mr. H o o p e i i . I should like to put myself on record in the same way
Judge Letts has done. I came here to gain information and possibly
act on that information after it is gained.
Mr. S t r o n g . I sh a ll reserve m y d ecision u ntil a fte r these h earin g s
h a v e c lo se d , an d th e n I shall ren der it a g a in st b ra n ch b a n k in g .
Mr. L e t t s . That is what we call a truly judicial attitude.
Mr. S t r o n g . That is an atittude in favor of the people.
Mr. S t e a g a l l . In that connection, just a word: If members
declare their attitude— I do not think it is necessary that this ail be
said— I think the members of the committee who have served with
me here for years will agree that I have an open mind in so far as the
information and arguments are concerned, and I hope I shall always
be that way. This subject of banking and finance, is, of course,
one of the most intricate things in the world and if I know myself,
I am the last man in the world that wants to deny himself any informa
tion that anyone wants to offer.
The C h a i r m a n . I have a letter from the Secretary of the Treasury
in answer to the invitation which the chairman sent him in regard to
these hearings which I think should be read at this point. It is dated
February 24, 1930.
(The letter is as follows:)
D epartm ent
of
the
T reasury,
Washington, February >Jh 1930.
I have your letter of February 21 in which you
inform m e that your com m ittee will be pleased to hear m y opinions in respect of
the study undertaken by your com m ittee in pursuance of the authority granted
under H ouse Resolution 141, covering the subiect of group, chain, and branch
banking.
In this connection I call your attention to the statem ent contained in m y
Annual R eport to Congress for the fiscal year 1929, which reads as follow s:
“ In banking, as in other enterprises of this country, there is increasing evidence
of a m ovem ent tow ard larger operating units.
The num ber of branches of banks
in operation lias increased and more recently there has been a growth also in the
num ber of groups in which several independent banks are operated m ore or less
as a single system .
B oth of these developm ents reflect, changes in the underlying
economic situation.
“ Branch banking has alw ays existed in this country to a lim ited extent in one
form or another.
A t the present tim e the Federal reserve act and the national
bank act, as am ended in 1927, authorize national m em ber banks to establish
branches in foreign countries and in insular possessions of the United States, and
all m em ber banks to establish (.'ranches within the corporate lim its of the center
in which the head office of the parent bank is situated and in which State laws
perm it State banks to operate brandies (with certain restrictions as to the size of
centers in which branches may be established by national banks.)
A t the end
of June. 1929, State-w ide branch banking was perm itted in nine States and in the
D istrict of C olu m bia; branch banking in more lim ited form was specifically
perm itted in 11 S tates; and in 23 States the operation of branch system s was
specifically prohibited.
“ In June, 1929, out of a total of 8 ,7 0 7 m em ber banks in the Federal reserve
system , 354 were operating 2/291 branches.
This represents an increase of
130 branches during the year.
On the sam e date 818 banks, including both
m em ber and nonm em ber, were operating a total of 3 ,4 4 0 branches, an increase
of 210 for the year.
T h e developm ent of branch banking which is perm itted by
existing legal arrangem ents has facilitated the adaptation of banking facilities to
requirements of urban areas.
“ M ore recently there has been a rapid increase in the organization of group
system s of banks.
Such groups comprise one or m ore banks th at are brought
under unified control and some degree of centralized m anagem ent through
acquisition by an individual or corporation of controlling interest in their stock
issues.
A lthough technically each bank in a group is a separate corporation
operating w ith its own capital funds and under the direct supervision of a local
board of directors, a certain degree of unity is achieved for the group as a whole.
M y
D ear
M r.
C h a ir m a n :
44
BRANCH, CH AIN, AND GEOUP BANKING
A t the end of June, 1929, it was au th oritatively reported th at there were in
existence at the tim e 230 group system s of banks in the U nited States, which
em braced about 2,0 0 0 banks.
Group banking is a means of accom plishing in a
m easure the objects of m ore extensive branch banking system s than are perm itted
under the Federal reserve act or under existing legal arrangem ents in m ost
States.
A lthough banking groups m ay be expected in m ost instances to
strengthen the banks which they control, the organization of such groups places
great responsibilities upon the controlling interests, and is a m atter of vital
interest to State and national supervisory agencies.
“ In view of the fundam ental econom ic situation which has given im petus to
the organization of group banking system s and to the grow th in branch banking,
it is desirable that these developm ents be carefully studied.
In the m ean tim e
it is hoped that any further extension of group and branch banking organizations
will proceed with m oderation, and th at hasty legislation, either to liberalize or
to constrict lim itations now in effect, will be avoided.
Our banking structure,
the product of m any years of experience, is part of an intricate econom ic fabric
whose parts are closely adjusted to one another, and a too rapid reorganization
w ould be likely to create serious and costly disturbances th at w ould affect the
entire country.
“ Th e tim e has come when it would seem to be wise to undertake a thorough
stu d y of the situation with a view to determ ining the soundness of the p resent-day
tendencies, and m ore particularly the lim its of the econom ic units w ithin which
branch banking m ay be advantageously p erm itted .’ ’
I m ay add that because of the m ore direct concentration of responsibility I
believe th at branch banking is on the whole sounder than chain or group banking,
bu t th at even branch banking should be lim ited to definite econom ic areas.
As to what those econom ic areas should be, I am not prepared to state at this
tim e w ithout further study or thought.
I should prefer, therefore, to defer m y
appearance before the com m ittee until I have had an opportunity to stu d y the
facts which I hope your com m ittee will develop.
M a y I add that I think it fortunate that your com m ittee has undertaken this
stu d y at this tim e, and that I am confident th at m uch good will be derived from
a careful ascertainm ent of all the facts in connection with the m ovem en t which
has been proceeding w ith great rapidity in the banking field.
Very sincerely yours,
A. W . M e l l o n ,
Secretary of the Treasury.
H on . L o u is T . M c F a d d e n ,
Chairman Committee on Banking arid Currency,
H ouse of Representatives.
Mr. S t r o n g . I think the Secretary misstates the law at present
when he says that in States that permit branch banking the national
banks are permitted to have branch banks in the communities. That
is not the law. The law is that they are permitted to have branch
in the cities in which located.
Mr. G o l d s b o r o u g h . Mr. Chairman, I move that we proceed in
the order outlined at the beginning of the hearings.
The C h a i r m a n . Y o u had finished, Mr. Goldsborough?
Mr. G o l d s b o r o u g h . Yes, sir.
The C h a i r m a n . Mr. Busby.
Mr. B u s b y . I had in mind asking a few questions with regard to
tne effect of the different methods of banking on the people of the
country who use the facilities afforded by banks. M y questions will
not be directed so much to the security of the stockholder and bank
operators and to the depositors as they will be to the borrowers and
users of the banks.
The statement of the comptroller gives us the information that
24 banks in New York City-----Mr. F o r t . Showed $10,791,000,000 of assets or resources.
Mr. B u s b y . Twenty-four banks, national and State, in New York
City alone are capitalized at an aggregate of $677,000,000 and have
B R A N C H , C H A IN , AN D GKO I T
B A N K IN G
45
combined resources of $10,791,000,000. I will ask the comptroller
if that is not a considerable concentration of money and banking
resources of the country in one (‘enter?
Mr. P o l e . Very obviously.
M r. B u s b y . N ow , much of the money and much of these resources
are gathered into New York City because of the fact that these banks
are used as correspondents of the smaller banks throughout the entire
Nation, is it not?
Mr. P o l e . That is very largely true, Mr. Congressman.
Mr. B u s b y . Most of those funds placed there by banks throughout
the country, are used to make what is commonly known as brokers'
or call loans by the New York banks, are they not?
Mr. P o l e . Not most of them. A very small proportion of the
total of the deposits in New York banks is used in brokers ’ loans. As
a matter of fact, 1 think at the very peak only about two billion
dollars of the banks of New York City.
Mr. B u s b y . I find that on October 2, 1929, the brokers’ loans in
New York City were $6,804,000,000. I find that as the crisis was
reached in the bond market or the stock market, that brokers’ loans
had decreased $3,476,000,000, or 51 per cent of the amount of the
loans outstanding in October, 1929. Now I will ask the comp
troller if that condition is not due very largely to the fact that the
credit and currency of the country is centered at that one point
through our system of banking?
Mr. P o l e . I would not say that that fact is demonstrated by those
figures. It is true that the principal stock market of the country is
in New York and necessarily any trading would have to be there; so
the six billion of loans you are speaking of, I thank that, as far as my
recollection serves me, as much as $3,000,000,000, or 50 per cent of
them, were loans for others and loans for others represented funds,
of corporations and individuals, which were scattered all over the
United States and the world which have found their way to New York
for the purpose of being placed by the banks, but not for them, on
the stock exchange.
Mr. B u s b y . But for our system of banking and concentrating the
money and banking credits in New York Cit}r, would it be possible
to have the kind of financial catastrophe that we have had in the
stock market in recent months?
Mr. P o l e . I should say that under any system of banking, it
might be possible to have a disastrous calamity on the stock exchange,
if the general public were disposed so to invest their funds. I can not
imagine that the difference in the system itself, such as I have sug
gested, would have a great deal of effect on the stock market, because
funds may be transferred to New York by corporations and individ
uals which may represent the major share of funds available, and
under any system they may be diverted to any point the holder of
such funds may direct them.
Mr. B u s b y . Does not our system of banking, and would not our
system of banking, if followed in the course you suggest, tend to
funnel the funds of the country into New York City as the center of
credit?
Mr. P o l e . Our present system of banking, you mean?
Mr. B u s b y . Well ; our present system of banking; yes.
100136—
30— p t
1--------- 4
46
B R A N C H , C H A IN , AN D GROUP B A N K IN G
Mr. P o l e . Yes; I should say that it does, and I have that in mind
in suggesting that it might be that this situation would be corrected,
if the bank resources of the country were further decentralized through
regional branch banking.
Mr. B u s b y . I must say that I can not follow your reasoning in
trying to secure the result that you predict from the method that you
propose. But to give your proposition due consideration at this
point, the branch-banking system or the chain-bank system, which is
proposed, and whether these systems, or either of them, suggested by
you, would decentralize the currency to several points of the country,
and whether or not the situation we are talking about would not be
remedied any?
Mr. P o l e . I can not imagine that the system of banking would
have very much effect on the New York stock market.
Mr. B u s b y . Well, if our system of banking carries money from
every bank in the countiy to the New York banks, it would naturally
have a tendency to cause those banks to make broker loans or call
loans, and thereby increase the tendency of the people to play the
stock market throughout the country.
Mr. P o l e . Our present system of banking is conducive to funds
flowing to New York, which, of course, is the financial center of the
country. M y suggestion to the committee in regard to a develop
ment of banks in the larger metropolitan centers, would cause the
funds in New York to be less concentrated. I would develop very
much larger systems all over the country, and the funds would be
employed locally.
Mr. B u s b y . N o w , another thought: In 1919 to 1921, during the
deflating period, Mr. E. H. H. Simmons, in an address before the
Chicago Stock Exchange on May 9, 1929, states that the broker loans
were deflated to the extent of 60 per cent during that crisis. What
I am trying to understand is if the banking system does not tend
toward building up those periods of speculation on the New York
Stock Exchange, and, through a collapse of the pyramiding of the
prices of securities— whether that does not cause the financial
situation we find in the country to-day?
Mr. P o l e . I should say not, Mr. Busby. I should say it is not
the fault of the system of banking which wre have at this time.
Mr. B u s b y . I notice that last fall the paper values, within a
very short period of time, on the stock exchange depreciated
$35,000,000,000. Now, somebody lost that much financial standing,
did they not?
Mr. P o l e . Not necessarily.
Mr. B u s b y . That is where the little fellows all got out, is it not?
Mr. P o l e . Y o u refer to them as paper profits?
Mr. B u s b y . That is, a bookkeeping status.
Mr. P o l e . I should say that it made no difference to a man’s
actual net worth. He might have lost what he had won on the
market, but I would not say that he was any worse off in the end
than in the beginning through the loss of paper profits.
Mr. B u s b y . The banks did not lose anything during that period;
or, if they lost anything, it was very little during that period of
deflation in stock, did they? Do you recall?
Mr. P o l e . The banks themselves were not speculating in stocks.
They were carrying customers, perhaps.
B R A N C H , C H A IN , AN D GROUP B A N K IN G
47
Mr. B u s b y . And they dropped many customers during that period?
Mr. P o l e . Well, I think perhaps the customers dropped the banks.
Mr. B u s b y . Well, you put it that way; but the customer is the
one w7ho iost the money. Is not that true?
Jvlr. P o l e . In a great many instances.
Mr. B u s b y . This may not appear to have any connection with
the subject the committee is considering, but yesterday you told us
of a few small losses by country banks. I say “ small” in compari
son with the great catastrophe we are passing over— the great catas
trophe connected with the stock market collapse we are passing
over. Does not that situation grow out of the banking arrangements
of our country, and was that situation not just as effective^ detri
mental to the commerce of the Nation as the losses in the small
banks you are talking against?
Mr. P o l e . N o . I should say by no means.
Mr. B u s b y . If you can explain to me why we have come to this
period of financial distress not as a result of the New York Stock
Market collapse, and yet it does not affect the people as much as
the breaking of a few small banks, I shall be much obliged to you.
Mr. P o l e . I think you misunderstand me. I did not say it has
not arisen from any such cause. It seems to me that the thousands
of small failures can not be brushed aside in any such light phrases.
Mr. B u s b y . I said comparatively, or I mean to say “ compara
tively.”
Mr. P o l e . Because that is the basis of my belief that a change in
our system of banking in this country, both national and State,
becomes necessary, by reason of those failures.
Mr. B u s b y . Just a moment on this: You say it is estimated that
7,264,000 depositors have contributed to the great total of more than
$1,700,000,000 of deposits in failed banks during the last nine years?
Mr. P o l e . Yes.
Mr. B u s b y . And that 114,000 shareholders have suffered losses
through the suspension? Do you have any figures to show the amount
of the losses that were passed on to the depositors by reason of these
failures? You give the amount of the deposits, but not the amount
of the losses.
Mr. P o l e . Yes. Of course, that is problematical at the present
time because the banks are still in process of liquidation and it would
be difficult to forecast any percentage of recovery which the depositors
might have.
Mr. B u s b y . That would run to the amount of-----Mr. P o l e . I could say that liquidation of the national banks—
and of course these are not national banks only; there are many more
State banks than national banks— our liquidation of the national
banks would be probably 65 or 70 per cent.
Mr. B u s b y . Of the amount involved?
Mr. P o l e . Of the amount involved; that is, as 763 is to 4,877, for
instance, of national to State banks, and I am not advised as to what
the liquidation on the State banks is.
Mr. B u s b y . Sixty-five per cent of the deposits involved in both
banks would be lost?
Mr. P o l e . No; would be recovered over a period of many years.
Mr. B u s b y . I want to get through and I know the rest of you want
me to. Another question that I should like to ask is-----Mr. P o l e . Y o u understand that those are national banks?
48
B R A N C H . C H A IN , AN D GROUP B A N K IN G
Mr. B u s b y . Yes. A bank takes the depositor's money and the
depositor is at the mercy of the management of the bank— I say
mercy in the sense that he is bound to accept their judgment and
management. What is your idea about its being fair and proper to
require banks to insure the people who deposit their money in the
banks against the loss of their money?
Mr. P o l e . I think the idea is unsound.
Mr. B u s b y . What do you think about a general insurance to the
depositors by the banking institutions against loss where they place
their money in the bank for safe keeping?
Mr. P o l e . Nothing at all.
Mr. B u s b y . Y ou sa y it is u n so u n d , h a v in g entire m a n a g e m e n t o f
th e in s titu tio n in the h a n d s o f th e directo rs an d b a n k officers— w h y
w o u ld it b e u n so u n d fo r th e m to assure th e h o n e st d e p o sito r th a t th e y
w ill h o n e s tly re tu rn to h im th a t w h ic h he h a s h o n e s tly d e p o s ite d ,
wTh e n called fo r?
I sh o u ld like to k n o w w h y it is u n s o u n d .
Mr. P o l e . I would point to the practical experience of the States
of Mississippi, Kansas, Nebraska, North Dakota, Oklahoma, South
Dakota, Texas, and Washington.
Mr. B u s b y . I am not asking about the type of laws they have.
Mr. P o l e . It is a form of a guarantee of deposits.
Mr. B u s b y . No; I am not asking about that.
Mr. P o l e . The insurance would be a form of guarantee of deposits.
Mr. B u s b y . But not the form we have in my State-----Mr. P o l e . I am not speaking particularly of your State. There
are no two laws in these States which are similar— yes; similar, but
not alike.
Mr. B u s b y . Let me explain the idea that I am trying to convey.
Mr. P o l e . And that, without exception the principle has completely
fallen down.
Mr. B u s b y . The basis on which these laws were enacted is that the
banks, in a body and individually, shall contribute to a central fund
which shall be applied to the claims of depositors in failed banks in
the order in which the amounts have been adjudged proper claims
against the central fund, is it not?
Mr. P o l e . A similar law has been in force in some States.
Mr. B u s b y . What I am referring to is a bank capitalized with
$50,000 stock and has $200,000 or even a million dollars in deposits,
why would it not be perfectly sound for that bank to take out an
insurance policy with some reputable insurance company, guarantee
ing to the people who put their faith and trust in that bank, that this
bank will return to them that which it has received from them?
What would be wrong with that type of insurance?
Mr. P o l e . What insurance company, in the first place, would in
sure $57,000,000,000 of deposits? IrLow wrould you insure the deposits
of the Chase National Bank, which has $105,000,000 with $135,000,000
surplus and, roughly figuring, a billion dollars in deposits— you would
not discriminate between the large and small banks in regard to the
question of additional safeguards.
Mr. B u s b y . You ask a question in answer to my question. I am
sure a system could be worked out where the risk would be taken
over. But you can not expect people to come up with an insurance
proposition before you lay down a plan and provide a premium to
carry this, and almost every risk under the sun is being insured, and
B R A N C H , C H A IN , AN D GROUP
B A N K IN G
49
the smaller banks especially could be cared for in that way, and an
inspection of those banks be had by the insurance companies, and
you need not say that each bank should stand on a parity in the rate
of the risk that should be applied to that bank to insure it against
loss.
Mr. P o l e . The systems which have been in force which contem
plate the protection of the depositor have been universally unsuc
cessful. The price has to be paid by the going banks and it has often
been such a burden on them as to even put them out of business.
Mr. B u s b y . I know that system has been, but the system I am
talking about has never been tried.
Mr. P o l e . I would not like to express an opinion on any new
system which I had not had an opportunity to stud}'.
Mr. B u s b y . M y idea w as th a t w e w ou ld get new ideas on p roper
pro ced u re an d th a t is the reason I asked th e q u e stio n .
Mr. P o l e . I should say that, in the light of experience,
any system
of insurance of deposits or guarantee of deposits is, in my opinion,
entirely unsound.
Mr. B u s b y . Out of respect for the other members of the committee
who want to ask questions, 1 shall desist .
The C h a i r m a n . The gentleman will have another opportunity
to ask questions later on.
Mr. Letts, of Iowa.
Mr. L e t t s . Mr. Chairman-----Mr. B r a n d . Would you object to my asking two questions at this
point?
Mr. L e t t s . Certainly not. Go ahead.
Mr. B r a n d . 1 just want to ask Mr. Pole first: You can furnish and
will furnish to the committee, the amount of the franchise tax paid
by each of the 12 Federal reserve banks since the act was passed
and the organizations of the banks established, per year, and showing
the amount each one of these banks paid down to and including the
year 1929? Mr. P o l e . 1 shall be glad to do so, Judge.
Mr. B r a n d . S o that we will know what each b an k has paid down
to and including the year 1929.
/M r . P o l e . Yes, sir.
Mr. B r a n d . This is a question 1 want information about: Of
course it is well understood by the big bankers and members of the
committee who associate with big banking institutions— but will you
define briefly the difference between group banking and chain banking
as compared with branch banking— either now or later on?
Mr. P o l e . I think perhaps it would be very proper if I might use
the same language I used yesterday.
Mr. B r a n d . I do not want you to do that. I heard that. Clearly
define what is chain banking and group banking as compared with
branch banking.
Mr. P o l e . Chain banking consists of a number of banks in which
an interest, not necessarily a controlling interest, is owned by one or
more individuals.
Mr. B r a n d . Individuals or individual banks?
Mr. P o l e . Individuals. They have their separate corporate en
tity and operate entirely independently, but there is a greater or less
control by reason of the interest which is owned by the individual or
50
B R A N C H , C H A I N , AND GROUP B A N K IN G
individuals, which more or less directs the policies of this chain o f
banks.
The group bank is a number of banks. Fifty-one per cent or
more, usually, of the stock of each is owned by a holding corpora
tion, and by reason of the ownership the policies of this group are
directed by this corporation. In the corporation there is usually one
major bank from which the others radiate and the policies are directed
or influenced by the heads of those banks, Avho are usually the chief
interested parties in the corporation. Management control is the
principal difference.
Mr. B r a n d . And these banks which you refer to own, as I under
stand, the majority of the stock in all the unit banks?
Mr. P o l e . They may own the majority or all the stock except the
directors’ qualifying shares.
Branch banking is different. A metropolitan bank, usually, with
branches scattered over its district. A single corporate entity.
Mr. B r a n d . I understand what branch banking is. The other
two I did not clearly understand.
Mr. P o l e . Have I made that clear, Judge?
Mr. B r a n d . I think I understand them now.
Mr. S t e a g a l l . I was not here yesterday, much to my regret, having
been called to appear before the hospitalization board on a matter
of great interest to my State, and I did not get the benefit of the pro
ceedings yesterday and I am not informed as to the rule which the
committee adopted with respect to the manner in which we should
proceed. I have no desire to interfere with the rule, whatever it is.
It is all right with me. But I have some questions right in connection
with the statement which Mr. Pole has just made. If it h desired
to go along on the line of subjects under discussion, I shall be glad to
proceed or wait, just as the chairman indicates, which would be more
in accordance with the rule.
The C h a i r m a n . The rule we are working under is to call on the
members of the committee according to their seniority. We are going
ahead under that procedure. In accordance with the rule adopted
yesterday, you are the next one on your side to be called. Mr. Letts
has now been recognized under that rule.
Mr. S t e a g a l l . That is all right with me.
Mr. S t r o n g . Will you yield to me for a short question, Mr. Letts?
Mr. L e t t s . Yes; but not for long.
Mr. S t r o n g . Mr. Brand, I want to suggest, in getting information
from the comptroller in regard to the amounts paid in excise or
franchise taxes by the national banks— I want to inquire whether it
would not be well to put in the record the amount of their earnings
and expenses.
Mr. B r a n d . That would show the net income.
Mr. S t r o n g . I think that would be helpful to the committee.
Mr. L e t t s . I have two or three lines of inquiry which I should
like to indulge in. The gentleman from New Jersey— Mr. Fort—
has informed me that he must be away to-morrow and would like
to go on to-day with his questions. However, there is one matter
that I should like to open up because Mr. Fort undoubtedly knows a
great deal about the matter and it is something that I think has a
pertinent connection.
B R A N C H , C H A IN , AND GROUP B A N K IN G
51
Yesterday I was very much interested in the line of questioning
of the gentleman from Maryland— Mr. Goldsborough— and the
answers of the comptroller. The questions indicated that, in the
mind of the gentleman from Maryland, the plan to extend branch
banking presented some serious political dangers. I understood,
from the answers of the comptroller, that he was not greatly con
cerned about that matter and that perhaps he felt that the dangers
suggested were more apparent than real.
But I want to ask now whether or not the comptroller, upon an
assumed state of facts— and I want to get his opinion— assuming
that the issue in a State should be the control of the appointment
of the supervisor of banks, who would have the power of issuing
charters and the power of appointing inspectors and examiners and
directing the examinations, and that a banking interest might be
come so powerful that they could control the nominations in the
primaries and elections of officers, and, in that wav, secure the person
desired for the important position of supervisor of banks. Would
you then say that the situation presented a political problem that
was a menace and ought to be avoided?
Before answering that question, I will say that 1 have tried to
embody in that question a state of facts that I think has existed. I
am told that, at the least gubernatorial election in the State of Cali
fornia, the Bank of Italy made a determined light for Mr. Young,
who is now the governor of that State, upon the issue that they
should know that the person in whom they are interested would be
the superintendent of banks. I understand he gets a salary of $10,000
a year and I understand that they expressed their desire and made the
request of every employee of their banks and of every branch that
they should see that Mr. Young was nomniated at the Republican
primaries for governor. I am told, too, that they went further than
that and made the request of their depositors. I am not so sure
of it. I think it can also be shown that, at the general election in the
fall, they sent out a ticket in which they expressed their preference
for every State office and for every congressional office and for Senator
in the United States Congress. The ticket that they espoused was
elected. Mr. Young was elected governor and the favored candidate
was made superintendent of banking.
Now, perhaps you can tell me how accurate those facts are and
whether or not, if it is true, it does not, in fact, present a very serious
political problem and show that perhaps there is a real danger, in a
political sense, such as was indicated by the gentleman from Mary
land in his line of inquiry.
Mr. P o l e . I have heard, Mr. Letts, that the appointment of a
superintendent of banks in some States is regarded as more or less
of a political appointment, but I am sorry 1 can not answer you as
to the status quo of the political situation in regard to-----Mr. L e t t s . If my facts are substantially correct, would you say
that there is presented a serious question as to the advisability of
the policy which you advocated toward the extension of the branch
banking system?
Mr. P o l e . It is a question which would be exceedingly difficult
for me to answer.
Mr. L e t t s . I will excuse you from that. But now, as I understand
the matter, we have been talking of the Bank of Italy. Now, there
52
B R A N C H , C H A IN , AN D GROUP
B A N K IN G
is also what, is called the Bancitaly Corporation. I do not know
that I have a correct understanding of that and so I want to inquire
of you— is that a holding company?
Mr. P o l e . It might be called a subsidiary company.
Mr. L e t t s . I understand that the Bancitaly Co. holds a la rge part
of the stock of the Bank of Italy and of all of the branches.
Mr. P o l e . I have no access to the books of the Bancitaly Co.
Mr. L e t t s . I s the Bancitaly Co. a banking institution9
Mr. P o l e . It is n o t.
Mr. L e t t s . It is a holding company?
Mr. P o l e . Yes. I presume it holds certain securities.
Mr. L e t t s . Does it do more than hold stock?
Mr. P o l e . I think that their charter gives them rather a wide
latitude. I, however, am not informed.
J Mr. L e t t s . They are not subject to examination9
Mr. P o l e . No; they are not subject to examination by the Federal
Government.
Mr. L e t t s . Are the Bank of Italy and the branches of the Bank
of Italy under national charter or State charter or both9
Mr. P o l e . The branches are under national charter.
Mr. L e t t s . H o w about the Bank of Italy?
Mr. P o l e . The Bank of Italy is a national association and, neces
sarily, the branches are a part of the Bank of Italy— one branch being
just as much a part as any other branch.
Mr. L e t t s . I s there just one charter?
Mr. P o l e . Just one charter.
Mr. L e t t s . And covers all branches?
M r. P o le . Yes, sir; covers all branches.
Mr. L e t t s . Now, I understand that more recently the Bank of
Italy people have organized the Trans-American Co. Can you tell
me anything about that?
Mr. P o l e . Yes. I would not say that the Bank of Italy has formed
that. The Trans-American Corporation was formed a number of
years ago and is, itself, a holding company.
Mr. L e t t s . That is organized, however, and operated b y the same
group of people?
Mr. P o l e . I should say not. I should say that it has entirely a
different personnel.
Mr. L e t t s . Distinct?
Mr. P o l e . Distinct from the Trans-America Corporation— the
Bank of Italy personnel; yes.
Mr. L e t t s . Is that personnel entirely different?
Mr. P o l e . A s far as its officers are concerned, I think so.
Mr. L e t t s . Of course I have no knowledge of it and am asking
for information.
Mr. P o l e . A s far as m y knowledge goes.
Mr. L e t t s . M y understanding is that the Trans-America Co. is
a holding company to put into operation the policies of the Bancitaly
Co., by extending beyond the State of California; that they intend
to reach out and do the same things in other parts of the country that
the Bancitaly has done within the State. Am I correctly informed as
to that?
Mr. P o l e . I think, in the published statement of their assets,
which is made periodically, a number of stocks of banks over the
B R A N C H , C H A IN ,
AND GROUP B A N K IN G
53
country were included, among them being, for instance, the National
City Bank and the Chase National Bank— large banks and small
banks in different parts of the country.
The C h a i r m a n . Will you yield to me, Mr. Letts?
Mr. L e t t s . Yes.
The C h a i r m a n . I think it might be helpful, at this point, to
observe that the Trans-America Corporation is a Delaware Corpora
tion and not only owns sufficient stock of the Bancitaly Corporation,
but a sufficient amount of stock in the Bank of America to control
the policies of each one of those corporations. The Bank of America
includes the Bank of America in New York and the Bank of America
in California.
Mr. L e t t s . Well, I thank the chairman for that statement, and
I want to add this, that I have not very much knowledge about these
matters and am seeking information, and I am very happy to have
that statement.
The C h a i r m a n . 1 might add further that my understanding is
that the control of these various operations which were formerly
vested in the Bancitaly Corporation and the Bank of America, both
New York and California, as well as the firm of Blair & Co., are now
operated under the Trans-America Corporation or TransamericBlair Co. control.
Mr. L e t t s . I wonder, Mr. Comptroller, if at some later time you
could supply us with the information to show whether or not the
personnel in these corporations is the same, or just what the facts
are in respect to that.
Mr. P o l e . I will be glad to go as far as I can. But may I sug
gest that perhaps you might wish to call a member of the official
family of the Bank of Italy and the Trans-America Corporation, and
they will be glad, I am sure, to give you full information on their
activities. I have no official information in regard to the cor
porations.
Mr. L e t t s . My only thought was-----Mr. P o l e . Except the Bank of Italy which is a national asso
ciation.
Mr. L e t t s . I think it would be desirable to know whether or not
these companies are advancing along the same polic}7 and whether
or not controlled by the same influences. Those are the things I
am interested in knowing.
I do not care, Mr. Chairman, to pursue this further at this time.
I do have one or two other things that I should like to go into, but
I shall be glad to yield to the gentleman from New Jersey, Mr. Fort.
Mr. F o r t . I am sorry to ask the committee to break the standing
order, but I have an engagement for to-morrow of a year’s standing
out of the city.
The C h a i r m a n . Y o u may proceed, Mr. Fort.
Mr. F o r t . Mr. Pole, there has been some reference to the size of the
aggregation of banking resources in the city of New York. Is it not
true that in every major country in the world there is a concentration
of banking control and banking resources in what is called the finan
cial capital of the nation, usually the same as the political capital,
because it is also the largest city?
Mr. P o l e . I should say that that is true of the principal countries
of the world, as far as I know.
54
B R A N C H , C H A IN , AN D GROUP B A N K IN G
Mr. F o r t . Y ou said this morning the banks were not purchasing
stocks. It is true, is it not, that many State banks enjoy the power
of purchasing stocks?
Mr. P o l e . M y reference was only to the national banks.
Mr. F o r t . It is also true that many, both State and national, banks
have what is called security affiliates through which they purchase
stocks.
Mr. P o l e . That is largely true.
Mr. F o r t . Is it not true that some chains of banks exist in States
where banks are permitted to own directly the stock of another bank?
It know it is true in my own State and I will make that statement.
Mr. P o l e . I have no information on that.
Mr. F o r t . With reference to the power aggregated in groups, there
is a rumor— I do not care to name the Federal reserve district— but
there is a rumor that in one Federal reserve district in this country
two bank-stock holding companies to-day own enough banks to give
them the voting power to elect the directors of the Federal reserve
bank in that district. Do you know whether or not that is a fact?
Mr. P o l e . M y belief would be that it is not the fact.
Mr. F o r t . It is possible, however, under our present loose system
of permitting groups and bank-stock holding companies, is it not?
Mr. P o l e . It is a potential possibility.
M r. F
ort.
Y
ou
h a v e heard th e ru m o r to w h ic h I h a v e refe rre d ?
Mr. P o l e . I have not. I think I know the locality of which you
speak.
Mr. F o r t . That, if true, would be a very serious danger, would it
not, to confer on one banking group the power to control the board
of the Federal reserve bank in any district in this country?
Mr. P o l e . I rather doubt it. You know how the Federal reserve
directors of a bank are elected?
Mr. F o r t . If one group could control the majority of banks in
two groups, which elect the directors, they would control, would
they not?
Mr. P o l e . There might be a possibility of such a thing.
Mr. F o r t . And you would regard it as undesirable that that
condition should exist?
Mr. P o l e . I w o u ld .
Mr. F o r t . And, in our general consideration of this situation, we
should endeavor to avoid that possibility?
Mr. P o l e . I th in k so.
Mr. F o r t . I take it in the great bulk of your discussion, Mr. Pole—*
which I may say parenthetically is the strongest presentation of your
position that I have seen anywhere, and is a very fine one— you are
assuming that we have the power to permit national banks to extend
their branches throughout an economic area?
Mr. P o l e . Yes, sir.
Mr. F o r t . But no law we could pass could extend the jurisdiction
of State banks beyond the States in which they are chartered?
Mr. P o l e . No, sir.
Mr. F o r t . S o your idea looks to the strengthening of the national
bank system?
* Mr. P o l e . That is my one thought.
Mr. F o r t . Your main reasoning is that we need larger and stronger
banks? Your main desire for having the branch bank system
extended------
B R A N C H , C H A IN , AN D GEOUP B A N K IN G
55
Mr. P o l e . I would not say that. I would say my main reason for
suggesting any change in the system is that we need stronger banks
and not necessarily larger banks.
Mr. F o r t . I was using the two as almost synonymous. We do not
need stronger banks in the major cities, do we?
Mr. P o l e . I would say that we do.
Mr. F o r t . Still larger and stronger than the institutions known as
the National City in New York or the Continental-Commercial in
Chicago?
Mr. P o l e . Not larger in the central reserve cities. I am speaking
of the country as a whole.
Mr. F o r t . I am speaking of the central reserve cities. The banks
are now adequate to handle the banking needs of those communities?
Mr. P o l e . As far as I k n o w .
Mr. F o r t . The aggregation— just parenthetically— the aggregation
of financial resources in New York is, in large part, due to the enor
mous foreign balances maintained there?
Mr. P o l e . You speak of “ foreign” as foreign countries? The
large part-----Mr. F o r t . A large part?
Mr. P o l e . I think so.
Mr. F o r t . It has been understood that 12,000,000,000 of foreign
money has been out on call during the last—
Mr. W i n g o . You do not mean foreign nations?
Mr. F o r t . Deposited by persons living in foreign nations.
Mr. W i n g o . But you did not mean foreign governments?
Mr. F o r t . No. I was in a foreign country last year where I was
told very nearly every insurance company and banking company
had all its loose money on call in New York City. If a single city is
•attracting practically the entire mass of this foreign money, it might
be wise to divert as much as possible of our domestic moneys else
where, might it not?
Mr. P o l e . I think a decentralization, as far as possible, would be
advisable.
Mr. F o r t . In connection with the policy you have advocated,
there is no general concurrence among the larger banks of the country,
is there?
Mr. P o l e . I have not made a sufficient survey, Mr. Fort, to
answer that question.
Mr. F o r t . I am not saying that that is anything against your
policy. Indeed, my own view is that we should legislate at this time
before there is any such concurrence and the resultant pressure upon
Congress.
Mr. P o l e . I understand some New York banks are not expressing
themselves favorably toward a branch banking system.
Mr. F o r t . But some of them are?
Mr. P o l e . I know of no recent expression of opinion of a New York
metropolitan bank in favor of rural branch banking, and I think there
are a great many others that have not expressed themselves favorably,
although, taking the metropolitan banks of the country as a whole,
I think there is a very strong feeling that some change in the system
•of banking is necessary, and as far as I get it, the preponderance of
opinion is in favor of some system of branches.
56
BE A N O H , C H A I N , A N D GROUP B A N K IN G
Mr. F o r t . In connection with your general idea, which is to
strengthen the country’s bank systems-----Mr. P o l e . Yes.
Mr. F o r t . Have you given any thought to the idea of limiting the
size of the city where the central institution, which might have
branches in the country districts, could have its headquarters?
Mr. P o l e . I have not given a great deal of thought to that, Mr.
Fort, and have deemed it best to leave that to the discretion of the
supervising officer under some general principle laid down by Congress.
Mr. F o r t . I have noticed in your remarks that in two or three
places you speak of larger commercial banks outside of New Y o rk ,.
Mr. P o l e . Yes.
Mr. F o r t . As requiring strengthening— as desirable places to
centralize further banking power?
Mr. P o l e . Yes.
Mr. F o r t . Did you make the statement “ outside of New Y ork ’’
deliberately to exclude New York, or simply-----Mr. P o l e . I have made no particular reference to New York.
Mr. F o r t . You used that phrase two or three times.
Mr. P o l e . Outside of New York, but not in that connection.
M y recommendation to Congress was that branch banking should be
extended within the trade area of a city in which a bank might be
located, the effect of which would be to develop a system around the
larger metropolitan centers, including the New York City trade area.
Mr. F o r t . M y owTn opposition to branch banking legislation three
or four years ago was, in large part, based on this: Rather than to
permit banks to have a number of branches in the cities, we should
forbid branch banking in the cities, but should extend them through
the country sections. It has seemed to me— and I wonder how much
thought you have given to it— that we might prevent the concentra
tion of banking power— which we are all afraid of— in a few hands,
by adopting your suggestion in part; not by permitting the great
metropolitan Federal reserve city banks to have branches out through
the country, but by working toward the building of stronger banks in
the cities of forty or fifty thousand, which are scattered through
practically all the States, by permitting them to have branches
throughout their trade areas.
Mr. P o l e . I should answer that by stating that the area must be
large enough to permit of ample diversification.
Mr. F o r t . I agree that it must be large enough for such diver
sification.
Mr. P o l e . And I doubt whether limiting it to the areas which you
suggested would in many cases enable the bank properly to diversify
its investments.
Mr. F o r t . That, after all, is the problem that determines whether
a bank is sound or not— diversification of investments?
Mr. P o l e . I think so.
Mr. F o r t . Is there not a complete shifting of what is regarded as
good banking, or rather of banking necessity, in the last 20 years,
with the enormous growth of corporate enterprises in place of indi
vidual enterprises?
I have seen figures somewhere as of a recent date, that only 18 per
cent of the loans of all banks were on name paper.
B R A N C H , C H A IN , AN D GROUP B A N K IN G
57
Mr. P o l e . I could not say as to the figures, but I know that the
loans on corporate securities have increased.
Mr. F o r t . S o , the banker must know the value of the securities
that are used as collateral in connection with the loans rather than
the character of the borrower?
Mr. P o l e . That is true in the metropolitan banks.
Mr. F o r t . But not in the country banks?
Mr. P o l e . N o , sir.
M r. - F o r t . Have you given any thought to the provision that is
applied customarily to insurance companies by many States, which
requires a company to have not only its capital but surplus funds
proportioned to its capital, before it can start operations?
Mr. P o l e . There is no law requiring a national bank to have a
surplus when it starts operation. As a practical matter, it is rarely
that a bank does start without 10 to 20 per cent surplus.
Mr. F o r t . I am getting at that now. If that proportion were
made larger and were made mandatory, without increasing the
loaning limit of the bank, might that not tend to strengthen the
country banks?
Mr. P o l e . I think that such increase would tend to strengthen
the country banks, but it would be equivalent to saying that a bank
shall commence business with a larger capital.
Mr. F o r t . Except that the capital controls the loaning limit. I
am suggesting a requirement for increasing the capital funds without
increasing the individual loan limits.
Mr. P o l e . I think, regardless of whether the capital funds are
expressed as capital, surplus, or profit, it would be necessary, of
course, that a fair return should be made on it. There are many
communities where banking services are urgently needed that
perhaps could not earn a reasonable income on a larger capitalization.
Mr. F o r t . N o w , about your shareholders’ liability: In some
European countries, where they have an uncalled capital system, it is
required that the stockholder cover his liability for the balance of the
call by collateral, and the uncalled capital is then subject to call by
the directors without waiting for receivership. Would not something
of that sort reinforce our stockholders’ liability provisions in this
country?
Mr. P o l e . I think it would reinforce the stockholders’ liability
to that extent.
Mr. F o r t . And in many cases would it not avoid suspension if the
directors exercised their power to call for the capital the moment
they were in trouble?
Mr. P o l e . In a comparatively few cases, but not generally, I
would say, Mr. Fort. I explained yesterday— and I think you were
not here— that if the entire assessment on capital were collected, it
would only mean 10 cents on the dollar to creditors.
Mr. F o r t . On the liability?
Mr. P o l e . On the liability.
Mr. F o r t . But not 10 cents on the dollar on the total amount of
the losses?
Mr. P o l e . We have the right of assessing that-----Mr. F o r t . But you have collected only 40 per cent?
Mr. P o l e . Fifty per cent average, I think, in the cases o f insol
vencies.
58
BRANCH, CH AIN , AND GROUP BANKING
Mr. F o r t . Y o u take the view, do you not, Mr. Pole— well, I will
put it this way: It is the correct statement, is it not, that under
modern conditions, this Congress, through its control of the Federal
Reserve system, really has the power, if it sees fit, to lay down a bank
ing code, and the States would have to follow it?
Mr. P o l e . There is no doubt in my mind that that is so.
Mr. F o r t . We could do it by denying them membership in the
system and in other ways.
Mr. S t e v e n s o n . I did not catch that last. What was it? * You
stated there were a number of ways and you stated one of them.
Mr. F o r t . A number of ways of forcing compliance by State
banks with any code we chose to enact.
Mr. S t e v e n s o n . I am much obliged.
Mr. F o r t . Has not one of the troubles been overpayment for the
purchase of other banks, in order to create branches— payments in
excess of value?
Mr. P o l e . I know of no trouble that has arisen from that source.
Mr. F o r t . No trouble?
Mr. P o l e . No.
Mr. F o r t . When a bank does buy a branch, through the purchase
of stock of another bank, does the comptroller’s office require them
to write off everything down to the capital and surplus of the pur
chased bank?
Mr. P o l e . When a national bank purchases a State bank?
Mr. F o r t . Yes.
Mr. P o l e . We do not have the authority to prevent a bank
from purchasing the assets and assuming the liabilities of a State
bank, but do approve consolidations, and we are always very careful
to see that the State bank is reasonably clean before we permit the
consolidation.
Mr. F o r t . Suppose they purchased a State bank at $500 a share
value for its stock? The actual capital and surplus value of that
bank is $250 and the balance is good will. Do you require them to
write those assets down to $250 instantly?*
Mr. P o l e . When they purchase the assets we have nothing to say
as to the arrangement between the banks. There is nothing to pre
vent a bank from paying for good will.
Mr. F o r t . But do you allow them to carry that good will in any
form whatever?
Mr. P o l e . Not in any form.
Mr. F o r t . But some States still do?
Mr. P o l e . I do not know that. It is not true as to national banks.
Mr. F o r t . Y o u talked somewhat concerning diversification of the
activities of modern banking, and made a very strong presentation—
that it is spread out into trust powers and security affiliates, and all the
rest of the powers that modern banks exercise. Does not that very
diversification of power, involving, as it does, through trusteeships,
the control of billions of assets in addition to the bank’s own resources,
make centralization of the control of our banks an extremely dan
gerous thing in this Nation?
Mr. P o l e . It does tend, of course, to increase the responsibility of
the larger banks, because the trust business is growing tremendously.
However, with a system of branch banking, where great banks would
B R A N C H . C H A IN , AND GROUP BAN F TNG
59
grow up in the metropolitan centers, that it tends to decentralize
that responsibility to a very large extent.
Mr. F o r t . I have only time for about one more question out of
the number I wanted to ask.
If we ever authorize the program which you suggest, or any other
of the extension of branch banking, as a practical matter can wre ever
unscramble it if we do not like it afterwards? For instance, if we
permit bank a in St. Louis to establish branches throughout its trade
area embracing a large part of the State of Missouri, once established,
there is no way that that bank, in justice to the stockholders of the
bank, can ever be unscrambled?
Mr. P o l e . A s a p ra ctic a l m a tte r , it w o u ld be d ifficu lt.
Mr. F o r t . S o it involves a very major policy which should be
settled by the Congress of the United States rather than by the dele
gation of the authority7 to someone else? I mean, wiiether wTe should
have that?
Mr. P o l e . I am thoroughly in accord with that.
Mr. F o r t . I think, Mr. Chairman, that is all I have time to ask.
We have to adjourn in two minutes, if we have the call to-day. I am
sorry, as I have some other questions.
The A c t i n g C h a i r m a n (Mr. Strong in the Chair). You may
proceed a little while longer, Mr. Fort.
Mr. F o r t . Mr. Pole, in the failures that you spoke of yesterday,
I do not recall that you gave the proportion of failures between State
and national banks. Is that in any of your exhibits?
Mr. P o l e . Not in any of the exhibits, but I made the statement
that it was in the ratio of approximately three to one.
/M r. F o r t . In favor of which?
Mr. P o l e . In fa v o r o f th e n a tio n a l b a n k s.
Mr. F o r t . That is, the national banks were the one or the three?
Mr. P o l e . The national banks w^ere the smaller, in ratio, to the
number of banks that failed.
Mr. F o r t . What is the proportion between national and State
banks throughout the country?
Mr. P o l e . About 18,000 State banks and 7,500 national banks.
Mr. F o r t . Were the failures in the proportion of 3,000 State
banks to 1,000 national banks?
Mr. P o l e . Yes.
Mr. F o r t . S o that the failures— the percentage of failures of
national banks was as great as the State banks?
Mr. P o l e . There were 763 national and 4,877 State bank failures.
Mr. F o r t . N o w , that is what I am getting a t ; in other words, the
code of banking and the requirements of banking that w^e have set
up for national banks, have proven more efficacious in preventing
bank failures than the general codes of the States?
Mr. P o l e . By three to one.
Mr. F o r t . So that w e can start, in any of these proposals regarding
branch, group or chain banking, with the knowledge that one thing
that should be done for the banking systems of the nation is to
tighten up either the supervision or the regulations or the laws
under which the State banks operate?
Mr. P o l e . That seems to be necessary.
Mr. F o r t . Has the matter of the development of branch bankinggone far enough so that it is possible for anyone to venture a guess
60
BRANCH, CH AIN , AND GROUP BANKING
as to whether the loans made by the branches— that is to say, if
a given branch has deposits of 10 per cent of the bank’s total resources
or deposits, is there any way through which, or could it be discovered
wThether the depositors in that branch get ten per cent of the loans,
or not?
Mr. P o l e . Are you including the groups of banks?
Mr. F o r t . No;"branches.
Mr. P o l e . Yes; I should say it has gone far enough to show that.
I think the probability is that the California banks will make a
very satisfactory showing along that line. In a great many instances,
we shall find that there is far more money loaned to the community
than it furnishes in deposits, in order to stabilize conditions and
advance money to farmers, etc.
Mr. F o r t . What would be a way to get at that fact statistically?
Mr. P o l e . I should think the way would be to call witnesses from
either one of those banks, and I think those statistics wTill be right on
the tips of their fingers.
Mr. F o r t . That would be very helpful. Increased capital re
quirements would accomplish one of the purposes you have in mind,
through limiting the number of banks, and thereby reducing over
head and increasing the possibility of profit?
Mr. P o l e . Yes.
Mr. F o r t . Y o u spoke about the necessity of profit.
Mr. P o l e . Limiting the number of banks but increasing the
number of banking offices would give the banks a wider opportunity
for earnings.
Mr. F o r t . And, through the reduction of overhead, enable greater
profits. Now, what I have in mind is-----M r . P o l e . P e r d e p o sits, fo r in sta n c e .
Mr. F o r t . If we have now a small community
struggling to keep
three $25,000 banks going and, by making the minimum capital
limit $50,000 or $75,000— the limit of capital in such a community—
the one resulting bank would have a far better chance of profit than
the three banks now?
Mr. P o l e . Undoubtedly.
Mr. F o r t . And, therefore, that would, to some extent, solve
this problem?
Mr. P o l e . I think to some extent. Of course, those communities
would be denied what is very helpful, namely, competitive banking
facilities, we should not have a monopoly of the banking business
even in the small communities.
Mr. F o r t . If we are going to suggest the idea of permitting branch
banks all through the trade areas of such a city as St. Louis, should
not we simultaneously prevent the consolidation of banks in St. Louis,
if you are after competition through the branches?
Mr. P o l e . That is a big question, Mr. Fort.
Mr. F o r t . I appreciate it, but I am trying to think through these
problems. If our object in permitting branch banking through the
trade area— and I am not hostile to your proposition— if our object
is to produce competitive banking in the smaller towns and cities
through having the branches of two different St. Louis banks located
there, and decentralizing these resources, should we permit two St.
Louis banks having branches in those towns to consolidate in St.
Louis?
B R A N C H , C H A IN , AN D GROUP B A N K IN G
61
Mr. P o l e . I am inclined to think in that case that the natural
economic development should be permitted to find the solution to
such a problem. I should like, however, to give further consideration
to that question.
Mr. F o r t . Mr. Pole, there is a great deal of belief— and I do not
know whether there is any real foundation for it; it might only be
gossip— that if the stock, market deflation had not come just about
when it did the New York banks wTould have been reduced to approx
imately five or possibly four groups or individual institutions?
Mr. P o l e . Through consolidations?
Mr. F o r t . Through consolidations, purchases, mergers, and so
forth. I am not ordinarily afraid of large organizations, but would
you feel that we ought to, in establishing any such system of branch
banking through the trade areas, permit the banking of America,
by any chance, to get down into so few hands as that might involve?
Mr. P o l e . I doubt very much if that condition would prevail for
very many years to come.
Mr. F o r t . Should we adopt machinery that would permit it ever
to prevail?
Mr. P o l e . I am not prepared to go into that at this time. That is
too large a question to answer without further study.
Mr. F o r t . I appreciate your desire not to commit yourself to a
proposition until you have reached a conclusion. I would not want
to do it, if I were in youc place.
In connection with this matter of setting up branch systems, chains,
or whatever they may be, through purchase or absorption of smaller
banks by larger banks, have you given any thought to the wisdom
of requiring that absorption to be by the exchange of stock and not
permitting cash purchases?
Mr. P o l e . I think that that might be quite desirable.
Mr. F o r t . That would remove the incentive to speculative profit
to individual insiders of the larger banks?
Mr. P o l e . I think so. Of course, the methods now used are
frequently by the exchange of stock.
Mr. F o r t . They are frequently, but there is a tendency to consider
the possibility of speculative profits to be made out of the smaller
banks through a sale for cash.
Mr. P o l e . That is true.
Mr. F o r t . And it would, in the long run, make those purchases be
considered solely from their economic worth, if all speculative deals
could be eliminated?
Mr. P o l e . Yes, sir; if they could be eliminated.
Mr. F o r t . In connection with all of this, does the comptroller’s
office feel that there should be any distinction between the require
ments for the investment of savings deposits from those of commercial
deposits?
Mr. P o l e . I think that the comptroller’s office has never expressed
itself on that point. However, my own opinion is that inasmuch as
banks are privileged to require of a savings depositor rs much as 30
or 60 days’ notice of withdrawal, occasionally the 60-day clause is
invoked, which has the effect of giving the demand depositor a pre
ference over tile savings depositor. M y feeling has always been that
since the banks are privileged to require 60 days’ notice on savings,
100136—30—p t 1----- 5
62
BRANCH, CH AIN , AND GROUP BANKING
that the investment of such savings should be segregated for their
benefit.
Mr. F o r t . That is my idea, plus the idea that we have educated
the American people, in some States, at least, to the idea that a
savings bank is the ultimate of responsibility, and where the word
“ savings” is used, we should not allow it to be depreciated in the
public mind by the possibility of savings depositors losing their thrift
money.
Mr. P o l e . I think that is a very sound theory.
Mr. F o r t . Have you given any thought, in connection with this
whole thing, to the major question of security affiliates and their
propriety in connection with modern banking?
Mr. P o l e . A great deal.
Mr. F o r t . Have you reached a final conclusion? If not, I do not
want to ask you to express any.
Mr. P o l e . I have reached the conclusion that the comptroller’s
office feels that it should have some supervisory powers over affiliated
corporations.
Mr. F o r t . I h a v e n o t re a ch e d a final co n c lu sio n m y s e lf, b u t I a m
a sk in g th is q u e stio n s im p ly to d e v e lo p th e id e a .
Mr. P o l e . It is possible that had we visitorial
powers, we might
suggest some legislation.
Mr. F o r t . Is it customarily the fact that the affiliated corporation
does its borrowing with the bank which it has the affiliation?
Mr. P o l e . I think that is sometimes true.
Mr. F o r t . If it is true that modern banking is increasing in loans
on collateral, is there not, in the combination of the security affiliate
and the bank— is there not danger in that situation of using the national
bank’s resources for speculation in stock— through the affiliate?
Mr. P o l e . By loaning to the securities company?
Mr. F o r t . Yes.
Mr. P o l e . Of course, the loaning limit of the national bank would
be applicable to the securities company as well as to any other
corporation or individual.
Mr. F o r t . On collateral?
Mr. P o l e . On collateral; yes, sir.
Mr. F o r t . And that loaning limit would be proportionate to its
capital?
M r. P ole . The capital of the national bank.
Mr. F o r t . The thing that is stirring in my mind— and I do not
know that I can make it clear—is this: Is there not danger from the
consolidation of the security affiliate and the bank, in the fact that
the market value of the security affiliate is directly reflected in the
market value of the bank stock, quite a tendancy psychologically, to
transform a banker into a man who considers the fluctuations of the
security market?
Mr. P o l e . Of course, the bare fact that the stock of a securities
company is frequently tied up with the stock of a national bank—
the connection, of course, is very close, and I think that the public
recognizes that condition.
Mr. F o r t . I do not want to talk about myself, but I happen to be
the president of a security affiliate owned by certain insurance com
panies of which I am the manager. Is there not a psychological
danger of the bank taking off the security affiliate’s hands, perhaps,
its syndicated obligations that have not gone very fast to the public?
BRANCH, CH AIN , AND GROUP BANKING
63
Mr.
It might be possible.
I have seen it happen. You have spoken of the 1 0 - t o - l
relation between deposits and capital. In the customary accepta
tion, that is what it is assumed to be. Is there any necessity for th e
change of that proportion in the case of branch banks— either way—
any necessity or propriety?
Mr. P o l e . I should regard that as a fair capital requirement.
Mr. F o r t . If your theory of branch banking, through the trade
area, is adopted, do you feel that the liability of sudden withdrawals
of deposits from a bank is greater or less?
Mr. P o l e . I should say that they would be infinitely less.
- Mr. F o r t . Therefore, it might be possible for the bank properly to
increase the total of its deposits in reference to its capital?
Mr. P o l e . I would not be in favor of that. I think, as a maxi
mum, 10 per cent of the deposit liabilities should be required as
capital funds.
Mr. F o r t . Capital and surplus?
Mr. P o l e . Capital and surplus; yes, sir.
Mr. F o r t . I think that is all.
Mr. S t e v e n s o n . M ay I ask Mr. Fort to ask just this question on
that point— whether it is contemplated in the branch banking organ
izations, such as he refers to, to segregate a certain amount of capital
to each branch, and allocate it so that the capital represents-----Mr. F o r t . I do not think that would be possible.
Mr. P o l e . That would not be m y idea.
Mr. S t e v e n s o n . M y own State has that provision. It is not in
our national act.
Mr. F o r t . I want to apologize for taking so much time.
The A c t i n g C h a i r m a n (Mr. Strong in the chair). The committee
will stand adjourned until to-morrow morning at 10.30 o'clock a. m.
(Whereupon, at 12.20 o ’clock p. m., the committee adjourned until
Thursday, February 27, 1930, at 10.30 o ’clock a. m.)
P o le .
M r. F o r t.
H
C
ouse
o m m it t e e
on
of
B
R
e p r e s e n t a t iv e s ,
a n k in g
and
C
urrency,
Thursday, February 27, 1930.
The committee met in the committee room, Capitol Building, at
10.30 o’clock a. m., Hon. Louis T. McFadden (chairman) presiding.
The C h a i r m a n . The committee will come to order.
STATEM ENT OF HON. JOHN W . POLE, COMPTROLLER OF
CURRENCY (R esum ed)
THE
The C h a i r m a n . Mr. Pole, you have, I understand, something you
want to put into the record in response to questions that were asked
of you yesterday.
Mr. P o l e . Mr. Brand asked me for the earnings and expenses of
each Federal reserve bank and the franchise tax which had been paid
to the Government from 1914 to and including 1929.
Mr. S t r o n g . I s that gross income?
Mr. P o l e . Gross income and net income, and the amount of fran
chise tax which has been paid to the Government.
64
B R A N C H , C H A IN , AN D GROUP B A N K IN G
The C h a i r m a n . Without objection, it will be placed in the record
at this point.
(There was no objection, and the statements referred to are here
printed as follows:)
Earnings and expenses of Federal reserve banks— Gross and net earnings o f Federal
reserve banks, arid disposition made of net earnings, 1911^-1929
[Figures for each Federal reserve bank are given in Table 83]
Earnings
j
Disposition of net earnings
! Dividends
paid
Trans
ferred to
surplus 1
!
1914-15_____________________
191 6
191 7
191 8
191 9
192
192
192
192
192
0
1
2
3
4
S
i
;
!
'
*2 ,17 3 ,25 2 : -$ 1 4 1 ,45 9
5,217,998 i 2, 750, 998
9, 579, 607
16,128,339
67,584,417 52,716,310
102,380,583 78,367,504 ;
149, 294, 774
_______ 181,296,711 '
| 122,865,866 i 82,087,225
!
50,498,699 16. 497, 736
j 50,708,566 i 12, 711, 286
_______ ___________ | 38,340,449 1 3, 718, 180
192 5
1 9 2 6 .._______ _______________
192 7
192 8
192 9
|
I
!
i
j
41,800,706
47,599,595
43,024,484
64,052,860
70, 955, 496
T o ta l________________ j 904,628,021
9,
16,
13,
32,
36,
449, 066
611, 745
048, 249
122, 021
402, 740
515,215,982
Franchise
tax paid to
U . S. G ov
ernment 1
$217, 463
1, 742, 774
6, 801, 726
5, 540, 684
5, 011,832
$1,134, 234
$1,134, 231
48,334,341 _____________
70,651,778
2,703,894
5, 654,
6, 119,
6, 307,
6, 552,
6, 682,
018
673
035
717
496
82,916, 014
15, 993, 086
-6 5 9 , 904
2, 545, 513
- 3 , 077, 962
60, 724, 742
59, 974, 430
10, 850, 605
3, 613, 056
113, 646
6,
7,
7,
8,
9,
958
169
539
463
912
2, 473, 808
8, 464, 426
5, 044,119
21, 078, 899
22, 535, 597
59, 309
818, 150
249, 591
2, 584, 650
4, 283, 231
90,672,459
277, 433, 949
915,
329,
754,
458,
583,
Profit ( + )
or loss ( — )
carried
forward
-$ 3 5 8 , 922
+ 1, 008,224
+509, 413
- 1 , 158,715
147,109, 574
1 Am ounts paid as franchise tax for 1922 includes additional franchise tax payments for prior years w ith
drawn from surplus account on December 31, 1922, as follows: For 1920, $270,389; for 1921, $3,129,673.
The C h a i r m a n . Mr. Seiberling, you are next on the list.
Mr. L e t t s . I had not concluded, Mr. Chairman.
The C h a i r m a n . I beg your pardon. You had yielded to some
one.
Mr. L e t t s . Yes; I yielded to Mr. Fort.
The C h a i r m a n . Very well; suppose you continue with your
questions.
Mr. L e t t s . Mr. Pole, yesterday I asked you something about the
Bank of Italy and the Bancitaly Co. Do you regard the system out
there as a branch system, or is it a group system?
Mr. P o l e . Branch system, sir.
Mr. L e t t s . How do you distinguish between the two systems?
Mr. P o l e . Between the branch and the group systems?
Mr. L e t t s . Yes.
Mr. P o l e . The group system is a number of individual, separately
incorporated institutions, the stock of which is owned by a holding
corporation. A branch bank is a bank with branches located at
various points over the State, and the entire resources of the parent
bank are carried to any point where there may be a branch. These
branches are a part of the bank itself.
Mr. L e t t s . T o make it clear, the group system is composed of
separate identities, but the stock is controlled by one holding com
pany—is that correct?
Mr. P o l e . That is correct.
B R A N C H , C H A IN , AN D GROUP B A N K IN G
65
Mr. L e t t s . Would you say, then, that the system in California
is a pure branch system, or is it a mixture? Is it not true that most
of the stock, or a large part of the stock, of the Bank of Italy is held
by the Bancitaly Co.?
Mr. P o l e . I am not informed as to where the stock of the Bank
of Italy is, but I think it may be chiefly held by the Trans-America
Corporation.
Mr. L e t t s . Assume that some considerable part is h e ld by either ;
assume that the control is held by the Bancitaly Co. or the TransAmerica Co., would you not say that it is in effect a g r o u p system
just as much as if each of these branches were separate entities?
Mr. P o l e . I would say not, because the stock of the Bank of
Italy may be held by as many as 16,000 or 20,000 different people
and in part by the Trans-America Corporation.
Mr. L e t t s . I am assuming that the control is so held.
Mr. P o l e . That is the control of a single bank.
Mr. L e t t s . I u n d e r sta n d , b u t th a t single b a n k involves the c o n
sid eratio n o f m a n y b ran ch es.
Mr. P o l e . You must regard that as a single bank.
Mr. L e t t s . Yes; th a t is true.
Mr. P o l e . A single corporate entity.
Mr. L e t t s . But, as to the practical effect, is it not
the same as
if the branches of the Bank of Italy were separate entities controlled
by the policies of the Bancitaly Co.?
Mr. P o l e . It might be said that there are some similar charac
teristics, but different in that a bank, the stock of which is held as
a member of a group, has a separate board of directors; it has a
separate set of minutes; it has a separate set of officers and is oper
ated to all intents and purposes as an independent unit, whereas
the Bank of Italy is a corporation in San Francisco, which has its
various offices scattered over the State, but just as much a part of
the organization as the head office itself is.
Mr. L e t t s . The group system, to be effective, however, would
place the control of the stock of the members in the holding company?
Mr. P o l e . Yes; usually.
Mr. L e t t s . A n d th a t pla ces the p o w e r, the d ire ctin g p o lic y , w ith
th a t h o ld in g c o m p a n y ?
Mr. P o l e . That would
not be admitted by the groups, I think.
They claim that each group is an independent unit and acts inde
pendently through its local directors.
Mr. L e t t s . I can see that there would be a great advantage in that,
in having the policies of the members controlled as far as possible by
those that are familiar with conditions in the country or community,
but that independence could only exist so long as it did not come in
conflict with the policy of the holding corporation.
Mr. P o l e . It could not exist indefinitely. Of course, the board of
directors is elected bv the shareholders, and if the corporation held
the majority of the shares at the annual meeting, they could elect
their own directors, who would elect their officers, and their policies
would thereby be enforced.
Mr. L e t t s . Assuming that the holding corporation b u y s up the
controlling stock, it would alwaj^s have the power to control the elec
tion of directors, would it not?
Mr. P o l e . Y e s ; u n d o u b te d ly .
66
BRANCH, CH AIN, AND GROUP BANKING
Mr. L e t t s . And in that way they get this power.
Mr. P o l e . Yes.
Mr. L e t t s . And that power could be political, as I indicated
yesterday, or it could be economic, and reach out in a great many
ways.
Mr. P o l e . And be quite effective.
The C h a i r m a n . Would you yield there, Mr. Letts?
Mr. L e t t s . Yes.
The C h a i r m a n . I would like to ask Mr. Pole whether there is not
an embodiment in this particular situation that you referred to of
unit banking, branch banking, chain banking, and holding company
banking?
Mr. P o l e . There is in what might be called the trans-America
group, Mr. Chairman, but I am speaking of the Bank of Italy as a
separate corporation.
The C h a i r m a n . In that you have national banks and you have
State banks.
Mr. P o l e . In the Trans-America Corporation?
The C h a i r m a n . Yes; and you have international banking as well.
Mr. P o l e . I am informed that that is true. Of course, I have no
means of knowing officially what the Trans-America Corporation
holds in the way of bank stocks.
The C h a i r m a n . In other words, here is an illustration of the
different forms of banking which this committee are inquiring into;
this is a typical instance where all the elements that enter into our
inquiry are embodied in one group.
Mr. P o l e . Within the Trans-America Corporation?
The C h a i r m a n . Within the Trans-America Corporation.
Mr. P o l e . Yes.
The C h a i r m a n . That is all.
Mr. P o l e . That may be correct, but not within the Bank of Italy.
Mr. L e t t s . The point I want to make clear is this, that when we
see the Bank of Italy and its operations and its policies, we have not
seen the whole picture; we still have to go back of the screens and see
the Bancitaly Corporation or the Trans-America Co. and understand
the policies that control from those sources?
Mr. P o l e . There is a picture back of the Bank of Italy, un
doubtedly.
Mr. L e t t s . You have advocated the extension of the branchbanking system. Would you safeguard that in any way to prevent
the policies of the parent bank and the policies of the branches to be
controlled by an inner group, somebody back of the screens, in that
manner?
Mr. P o l e . I would recommend some such authority be given.
Mr. L e t t s . And could that be safeguarded in some such w a y ?
Mr. P o l e . I think it would be possible to work out a plan.
Mr. L e t t s . I s there any way to prevent any stockholder from
selling his stock to whom he might wish?
Mr. P o l e . There is no way I know of, Mr. Congressman.
Mr. L e t t s . Then a holding corporation could acquire it, if the
possessor of the stock were willing to sell?
Mr. P o l e . Yes.
Mr. L e t t s . S o at this time at least we have that danger before us.
In other words, if there is a danger in group banking, we ought to
BRANCH, CH AIN , AND GROUP BANKING
67
avoid that danger if we are going to branch banking as a system to
be preferred.
Mr. P o l e . I have suggested in m y report to Congress that there
should be given to the comptroller some supervision over these
holding corporations.
Mr. L e t t s . The holding corporations are not under national
charter.
Mr. P o l e . That is true.
Mr. L e t t s . And so Congress could not give you that supervision.
Mr. P o l e . Well, I think that in so far as they held stocks of a
national corporation, it might be possible for Congress to do so.
Mr. L e t t s . Now; just to follow that thought a little further, I am
aware of the tendencies of the times, I think, toward centralization
of power, political, economic, and financial. We see it in the control
of the power resources of the country; we see it in the distribution of
foodstuffs and merchandise; is it not quite conceivable that some
very small group could control the policies of the power corporations,
such as the American Gas & Electric Co., for instance, and control
the policies of the great food distributing companies and other
merchandising corporations? Now, while you feel that the system
that you advocate, of extending branch banking, would decentralize
banking resources, is it not quite apparent that we are centralizing
in a very much greater degree the power to control production, to
control distribution and price, and are we not putting the consuming
public at the mercy of a comparatively small group of persons that
may financially be able to do the very thing,that I am speaking of
by uniting their forces?
Mr. P o l e . Through a branch banking s y s te m ?
Mr. L e t t s . The control of the banking policies of the country, the
control of power, the control of the distribution of foods and all that
sort of thing always cause me to think back to the time of Roose
velt; he became a great hero because he went out with the “ big stick”
to break up combinations, which he did in the interests of the con
suming public; and, now, are we not drifting very rapidly in the other
direction, arid is it a wholesome indication?
Mr. P o l e . I th in k , u n d er the p la n s I h a v e su g gested to C o n g re ss,
th a t the re su lt o f th e e xten sion o f the b r a n c h -b a n k in g p riv ile g e w o u ld
cause to sp rin g u p all o v e r the c o u n tr y la rge o r g a n iza tio n s, an d w h a t
m ig h t be term ed lo ca l c e n tra liz a tio n .
K ir. L e t t s . I u n d e rsto o d th a t to be y o u r re c o m m e n d a tio n .
Mr. P o l e . I think it would be decentralized as far as the largest
cities of this country are concerned.
I do thing, also that consideration might be given to the question
of consolidations of these large units after they had been formed.
Mr. L e t t s . And to interlock their directorates?
Mr. P o l e . And to interlock their directorates. I think it is an
important phase of it.
Mr. L e t t s . I understand your thought in that connection, but as
soon as you have decentralized by encouraging the development in
St. Louis, Kansas City, Omaha, and other places over the country,
would not some one come forward immediately and combine those
large units?
Mr. P o l e . That is what I have in mind, that perhaps some restric
tions should be put on such consolidations. Of course, that is going
n now, in the form of group banking.
68
BRANCH, CH AIN, AND GROUP BANKING
Mr. L e t t s . N o w ; can you tell me what the fee system is that is
employed by holding companies— if I make that clear by the ques
tion?
Mr. P o l e . What the fee system is?
Mr. L e t t s . Yes. I do not know that I have a clear understand
ing of it, but I think that some such system as this prevails, that they
not only realize upon the stock of their subsidiaries which they hold,
but they charge their subsidiaries a fee for service and in that way
make the holding companies really profit-taking devices and they
can be so operated as to permit the subsidiaries to show only moderate
earnings and to make the big money flow into the holding company.
I understand that is accomplished by some kind of a fee system.
They charge for some kind of service, but what that service is I do not
know; I do not know whether it is a convenient device or just what it
is, but I would like to have some light on that.
Mr. P o l e . I know of no such arrangement, Judge.
Mr. L e t t s . Mr. Pole, you have advocated diversification. How is
that accomplished among the members of a group or in the branches
of a banking system? Is it by shifting the paper from one institu
tion to another?
Mr. P o l e . I think that is one way it is done among members of a
group; the sale of paper by one bank to another.
Mr. L e t t s . Every bank would have a reasonable amount of paper
of this character and of the other character so as not be loaded up,
as in my part of the country, with real/estate loans entirely, or some
thing of that kind; that would make the paper of the bank more
diversified and more liquid?
Mr. P o l e . Such funds are shifted in a group system. Of course,
there is not much doubt but what the management corporate of
these groups would see to it that nothing happened to any member of
the group, and in that respect it has something of the protection of
the branch banking system.
Mr. L e t t s . N o w ; the members of groups could be both national
banks and State banks, and be located in various States?
Mr. P o l e . Yes.
Mr. L e t t s . And subject to different States’ laws?
Mr. P o l e . Y e s .
Mr. L e t t s . And the Comptroller of the Currency would have
jurisdiction over some, but not over others?
Mr. P o l e . Yes.
Mr. L e t t s . Is th a t a w h o le so m e situ a tio n ?
Mr. P o l e . Quite unwholesome.
Mr. L e t t s . Can it be corrected?
Mr. P o l e . I think it can not except with difficulty. We do enter
into arrangements with the superintendents of banks of the States in
wiiich members of a group or chain may be situated, and arrange
to examine these banks at the same time with the State authorities.
Having done that, we compare notes and arrive at our conclusions
after consultation, but it is difficult to make these arrangements.
Mr. L e t t s . At least it would be possible to shift good paper from
a bank in one State to a weak bank in another State, and perhaps
from a national bank to a State bank, or the reverse of that, so that
you would not have the power to examine fully nor would a State
examiner have the necessary power to do that?
B R A N C H , C H A IN . AN D GROUP B A N K IN G
69
Mr. P o l e . That is correct. That is particularly true of the chain
banks.
Mr. L e t t s . And it could be of the groups?
Mr. P o l e . It could be of the groups. If we suspect anything of
that kind going on, and there are usually evidences of these things,
we arrange to take care of such a situation but it is subject to those
very difficulties to which you refer.
Mr. L e t t s . And that would operate, in a group system or a chain
system, to prevent an examiner, whether from your office or from
a State department, really to find that a bank is in fact insolvent?
Mr. P o l e . It might operate that wTav. However, in justice to
these important groups, I might say that I think the majority of
them endeavor to operate their system either under the national law
or the State law, and if they are not all under one system, when
they acquire them, they usually have it in mind to convert them so
as to operate under a single system as far as possible.
Mr. L e t t s . In the conduct of banks under the group system, and
the chain system, where paper is shifted from one bank to the other,
does the bank which transfers the paper indorse it or not?
Mr. P o l e . The custom is not to indorse it. However, there is
usually a moral responsibility recognized.
Mr. L e t t s . But that is not a responsibility that could be enforced
in the interest of creditors?
Mr. P o l e . There might be such an arrangement.
M r . L e t t s . Y o u w o u ld h a v e to sh o w an a g re e m e n t, eith er express
or im p lie d , in order to do th a t?
Mr. P o l e . Yes.
Mr. L e t t s . Or negotiations of some character if they did indorse?
Mr. P o l e . Yes.
M r . L e t t s . T h e n there w o u ld be a c o n tin g e n t lia b ility w o u ld
there n o t?
Mr. P o l e . Yes.
Mr. L e t t s . And what relation would that contingent liability have
to the matter of rediscounts?
Mr. P o l e . That would be limited— an indorsement of that kind
would be limited to the capital stock of the bank under section
5202. The bank could not become liable to another bank in excess
of its capital.
Mr. L e t t s . Now, in these systems, is it recognized that a member
bank will have the power to reject undesirable paper that is offered
to it, or would the parent organization have power to thrust that
paper upon the member bank?
Mr. P o l e . It would have no power to thrust paper onto a bank.
It would be within the power of the bank to refuse any paper, because
it is a separate corporation and acting under a separate board of
directors, and the practice to which you refer is not at all a common
practice except under perfectly legitimate proceedings.
Mr. L e t t s . I am leading to this point: If in a system of that kind,
group system or chain system, it was found that some part of the
system was going to fail, that some banks were going to fail, they
would have the power of strengthening some and making a selection
as to which ones would fail and which would survive. In other
words, they would be able to determine what communities would
70
BRANCH, CH AIN, AND GROUP BANKING
suffer the loss and what ones would gain by the manipulation, would
they not?
Mr. P o l e . Technically that is correct.
Mr. L e t t s . But you do not apprehend that such a thins; would
happen?
Mr. P o l e . A s a m a tte r o f p ra ctic e , I can n o t c o n c e iv e o f a n y m e m
b e r o f a g ro u p fa ilin g u nless th e g r o u p as a w h o le fa ile d .
Mr. L e t t s . That would be true of chains, but it is
not neces
sarily true of groups, is it?
Mr. P o l e . Not necessarily, but it is quite likely that the group
could not permit any of its members to fail without endangering
them all.
Mr. L e t t s . In other WT>rds, is it not possible that the group plan
might be a matter of convenience to the strong and result in dis
advantage to the weak, and that applies not only to the banks but to
the communities which they serve?
Mr. P o l e . Of course, the group system of banking is more or less
new. I think it has only been in effect not to exceed two years, and
nothing like that has so far developed.
Mr. L e t t s . That reminds me of something I overlooked.
I
intended to ask you how long the Bank of Italy has been in building
itself up to its present proportions?
Mr. P o l e . Oh, 15 years. I reserve the right to correct that.
The C h a i r m a n . Will the gentlemen yield?
Mr. L e t t s . Yes.
The C h a i r m a n . Might I suggest that the real coming-out party
of the Bank of Italy was at the time of the earthquake disaster in
San Francisco, in 1906?
Mr. L e t t s . At any rate, it showed a very rapid development,
did it not?
Mr. P o l e . Quite rapid development.
Mr. L e t t s . In the examination of a branch bank, will the public
have detailed information with respect to the condition of the
branches, or will they get aggregate results of all the branches?
Mr. P o l e . The statement which is issued by the Bank of Italy
exhibits the condition of the bank as a whole, without reference to
any particular branch.
Mr. L e t t s . Suppose that the banks out in Iowa were in a system
of that kind, a branch bank system; would it be possible for the
people to Iowa to know the real condition of the Iowa bank?
Mr. P o l e . Of an individual branch?
Mr. L e t t s . Yes.
Mr. P o l e . N o , I think there would be no such information avail
able to the public.
M r . L e t t s . D o y o u th in k th ere w o u ld b e n o o c c a sio n fo r it ?
Mr. P o l e . I do not think there would be the slightest occasion
for
it. The full strength of the bank would be carried to the farthest
hamlet in Iowa.
Mr. L e t t s . In your prepared statement of a few days ago, you in
effect made a statement that a supervising bank official is always
reluctant to close a bank, and you intimated that your office operated
along that line, and that State bank supervisors naturally have the
same attitude toward State banks, and further on in your statement
BRANCH, CHAIN, AND GROUP BANKING
71
you made the statement that oftentimes supervising officials are sur
prised that the bank has failed.
Mr. P o l e . Did I say that?
Mr. L e t t s . N o , I am mistaken. You said that “ The supervising
official may in many cases not be surprised that the bank has failed,
and the executive officers of the bank and perhaps the local board of
directors have been struggling for months or years to keep the bank
open, and the actual failure comes as a complete surprise and a shock
to the depositors, and in most cases to the shareholders who are not
officers or directors of the bank.”
That is some of your language; is it not?
Mr. P o l e . Yes.
Mr. L e t t s . N o w , I think that is the stand taken by banking
departments, but I have never been able to see the philosophy of it.
I have seen cases where banks have been kept open, where the exam
iner and the members of the board and the officers of the bank all
knew that the bank ought to close, and yet up to the very hour of
closing such banks took such deposits as were offered by the public.
I have seen cases where it has been found that banks ought to be
closed, and yet they were reluctant to do it and struggled along, as
you indicate here, for months or years to keep them open. Is this
fair treatment to the public?
Mr. Pole, I notice that in some part of your formal statement you
stated that your principal concern and interest is in the depositor,
but does a policy of this kind operate to the advantage of the depos
itor? I have seen a number of little banks out in Iowa fail after the}’'
had paid two and sometimes three assessments of 100 per cent in the
endeavor to keep the bank open, and they finally had to lose them.
Mr. P o l e . Yes.
Mr. L e t t s (continuing). Very much to the disadvantage of the
shareholders, and conducted in a manner that kept the public in
ignorance of the condition, and the bank would go on accepting the
public’s money, to the ruin of the depositors, and I have often won
dered how a policy of that kind really can be justified. In other
wT>rds, why should a banking institution, when it is found by the
examiner to be weak and insolvent and unable to go ahead, not be
closed? Why is not that the fair thing to do, having in mind the
interests both of the shareholder and the public?
Mr. P o l e . Of course, if a bank is found insolvent by our depart
ment it is closed. However, banks fail through many different
causes. It may be that the assets of a bank are in the opinion of
the board of directors and in the opinion of the examiners good but
slow\ The directors will frequently come down in a body to Wash
ington and insist that the examiner is too drastic in his classifications,
that these loans are collectible, that they understand the people of
the community, that they know all about them and that we do not.
That means that the bank is probably in a very frozen condition, but
not insolvent. There may be an unusual demand for funds, but by
reason of the frozen condition of that bank they are unable to realize
fast enough to meet the demands and the bank has to close regardless
of the fact that it may be considered by us and by its own board of
directors as solvent, as a going institution.
Mr. L e t t s . D o y o u r e xa m in e rs in q u ire in to the policies o f b an k s,
or only as to the a ssets of b a n k s?
72
B R A N C H , C H A I N , AND GROUP B A N K IN G
Mr. P o l e . We go into every phase of the bank’s operation.
Mr. L e t t s . I am unable to speak concerning national banks, but I
know the policy prevailed for many years in my State of State insti
tutions hiring someone to run the bank who could not live on the pay
that was given him, and where he was encouraged by the directors
to take on every kind of a side line that is imaginable, to write
insurance, fire and life, to negotiate loans on land with the insurance
companies, to connect himself with some automobile agency, to the
point where in a comparatively short time he would have personal
transactions that he as a bank official must deal with and where his
opportunity for personal gain was entirely at variance with the
welfare of the institution that he represented.
In other words, say that a man wanted to buy a farm, and he wished
to borrow more than the farm could reasonably carry; he would be
permitted first to negotiate a loan with some insurance company, and
the bank official would get a commission, doing that as an individual,
and then perhaps he would tell the borrower that he did not have
security enough and that he ought to have more fire insurance, and
then he writes the fire-insurance policy and tells the borrower that he
had better carry more life insurance, and he writes that policy and
gets fees and commissions all along the line. Some customer of the
bank may be buying an automobile, and a bank official finds it
convenient to accommodate that customer at the bank if he buys the
right kind of an automobile, and all that sort of thing.
Now, is there not some way that we can protect the public against
that kind of banking?
Mr. P o l e . In the course of our examinations, if we find that the
outside duties of any officer interfere with the proper conduct of the
bank, it is naturally a matter of criticism, and we try to have those
matters of criticism corrected.
Mr. L e t t s . Would it not be a wholesome thing if we had something
in the law, and also in our State laws, that would prevent officials to
pass upon loans and deal with the public who may be engaged in any
business that would give them an interest which is contrary to the
welfare of the bank?
Mr. P o l e . I doubt whether that would be a practical thing in a very
small bank. In the more important banks, I think that is a usual
policy.
Mr. L e t t s . Mr. Chairman, that is all I have to ask at this time.
Some time later I may wish to examine Mr. Pole a little with respect
to his analysis of land depreciation in the agricultural sections of the
country, but I do not care to do that at this time, if I may have that
opportunity at some later time.
The C h a i r m a n . Yes; the members will be given a chance to do
that after we have carried out this routine.
Mr. Steagall is next.
Mr. S t e a g a l l . Mr. Pole, the picture drawn by Mr. Letts respect
ing the small realizations going to depositors in insolvent banks
hardly represents the situation as applied to the national system,
does it?
Mr. P o l e . The liquidation of national banks, I think the report
of insolvent division shows, is about 65 per cent.
Does that answer your question?
Mr. S t e a g a l l . Well, that is the average?
B R A N C H , C H A IN , AN D GROUP B A N K IN G
73
Mr. P o l e . Oh, yes, that is the average.
Mr. S t e a g a l l . S o I guess that answers that question.
Somewhere I saw— maybe in one of your recent reports— that the
liquidations completed of national banks that were insolvent showed
a realization of 79 per cent, leaving a loss of 21 per cent on eight
hundred and some odd number of banks liquidated during the past
10 years. Is that right?
Mr. P o l e . I do not carry that figure in my mind. I will be glad to
insert that in the record, Mr. Steagall.
Mr. S t e a g a l l . What I was attempting to do is to refresh your
memory on that point. I may be in error about it, but somewhere
in a hurried looking over of your report or something else— unless
I am confused in my recollection— I saw those figures, that the
losses in the banks where liquidation had been completed were 21
per cent. It impressed me very much. And, if that is true, 65 per
cent would not quite do justice to the situation, would it?
Mr. P o l e . On that hypothesis, you are correct.
Mr. S t e a g a l l . N o w , since my reference to your report was made—
if it was your report— would you adhere definitely to the statement
that only 65 per cent had been realized?
Mr. S t e v e n s o n . Here are the exact figures. It is 70 per cent.
The C h a i r m a n . I would suggest at this point that the statement
appearing in the comptroller’s report on this matter be placed in the
record, and without objection that will be done.
(There was no objection, and the excerpt referred to is reproduced
below.)
NATIONAL
BANK
FAILURES
D uring the past year receivers were appointed for 79 national banks.
O f this
num ber, 72 were failures and 7 appointm ents of receivers were m ade in order to
enforce stock assessm ents necessary to be paid under contract to succeeding
institutions which purchased the assets of the bank, sold under a guarantee from
stockholders, paying creditors in full.
O f the 72 actual failures, 2 were restored
to solvency, leaving 70 to be liquidated b y receivers.
This com pares w ith 54
actual failures for the previous year, 2 of which were restored to solvency, and
the appointm ent of receivers for 7 banks to enforce stock assessm ents.
The
capitalization of the 79 banks for which receivers were appointed during the
past year was $ 6 ,5 7 5 ,0 0 0 , com pared with the capitalization of the 61 banks for
which receivers were appointed during the previous year of $ 4 ,1 3 5 ,0 0 0 .
Th e total of assets of the 79 banks for which receivers were appointed during
the
past year, including additional
assets
acquired
after suspension, was
$ 6 2 ,6 1 2 ,5 0 0 .
Stock assessments in the am ou nt of $ 5 ,4 4 0 ,0 0 0 had been levied as
of Septem ber 30, 1929, b y the com ptroller against the shareholders of these banks.
The records of the division of insolvent national banks of the com ptroller’s
office do not show as a failure the suspension of the First N ational B ank of
Lagrange, T e x ., w ith assets of $ 1 ,2 1 3 ,8 1 2 .0 2 .
Th e suspension occurred April 30,
1929, and the bank remained in the hands of an examiner in charge until M a y
20, 1929, on which date it resum ed business.
D uring the past year tw o banks, each w ith assets of over $ 1 2 ,0 0 0 ,0 0 0 , becam e
insolvent, and the receivers were appointed.
Im m ed iately arrangem ents were
m ade with local institutions for the purchase, a t par and interest, of such of the
assets of the failed banks as were considered acceptable to the purchasing banks.
T h e results wrere th at in the first institution 50 per cent was m ade im m ediately
available to its creditors, and in the second 60 per cent was im m ediately paid,
thus relieving the local financial situation at once.
Since such sales of assets,
funds have been accum ulated for p aym en t of additional dividends of 25 per cent
to the creditors of the first-m entioned bank, who received a first dividend of 50
per cent, and funds have been accum ulated for p aym en t of additional dividends
of 30 per cent to the creditors of the second-m entioned bank, who received a first
dividend of 60 per cent, thus assuring the p aym en t of 75 per cent and 90 per cent,
respectively, to the creditors of these banks within 12 m onths after their failure.
74
BBANCH, CH AIN, AND GKOUP BANKING
T h is new m ethod of liquidation has been follow ed in several sm aller failu res,
and has proved m ost effective in relieving at once the acute financial situations
which follow bank failures.
From the date of the first failure of a national ban k in the year 1865 to O ctober
31, 1929, 1,313 national banks were placed in charge of receivers.
O f this n u m
ber, 72 were restored to solvency and perm itted to resume business, leaving 1,241
to be administered b y receivers.
O f these so adm inistered, 4 2 6 (26 less th an
reported at the close of 1928) are still in process of liquidation and 815 have been
entirely liquidated and the trusts closed.
T h e capital of the 1,313 insolvent national banks at the date of failure was
$ 1 4 3 ,6 7 0 ,4 2 0 .
The capital of the 72 banks th a t were restored to solvency was
$ 1 2 ,1 8 0 ,0 0 0 .
T h e capital of the 426 banks th at are still in receiverships is
$ 3 2 ,5 2 4 ,5 0 0 , and the capital of th e 815 banks th a t have been com pletely liqui
dated was $98 ,9 6 5 ,9 2 0 .
The book value of the assets of the 1,2 4 1 adm inistered receiverships, including
assets acquired after suspension, aggregated $ 8 5 3 ,9 9 3 ,9 6 9 , in addition to wThich
there were levied against shareholders assessm ents aggregating $ 9 2 ,3 1 5 ,7 4 0 .
T o ta l collections by receivers to Sep tem b er 30, 1929, from these assets, including
offsets together w ith collections from sto ck assessm ents, am ounted to 56.01 per
cent of the total of such assets and stock assessm ents.
The disposition of such
collections was as follo w s:
C ollection s:
Collections from assets, including o ffs e ts________________________ $485, 442, 981
Collections from stock a ssessm en ts_______________________________
44, 614, 8 17
T o ta l________________________________________________________________
Disposition of collections:
D ividends paid to creditors on claims proved aggregating
$ 4 6 4 ,8 3 8 ,2 2 7 _______________________________________________________
Paym ents to secured and preferred creditors, including offsets
allowed and paym ents for the protection of assets_________
P a ym ent of receivers’ salaries, legal and other expenses______
Cash returned to shareholders_____________________________________
Cash balances with the com ptroller and receivers_____________
T o ta l________________________________________________________________
530, 057, 798
279, 772, 948
200,
33,
4,
12,
336,
259,
167,
521,
130
329
798
593
530, 057, 798
In addition to this record of distribution there were returned to shareholders,
through their duly elected agents, assets of a book value of $ 1 6 ,2 1 1 ,6 2 4 .
Th e 426 banks th at were as of O ctober 31, 1929, still in charge of receivers and
in process of liquidation had assets, including assets acquired subsequent to their
failure, aggregating $ 3 3 9 ,5 1 7 ,5 5 7 . T h e capital of these banks was $ 3 2 ,5 2 4 ,5 0 0 ,
and there had been levied by the C om ptroller of the Currency to Septem ber 30,
1929, stock assessm ents against their shareholders in the am ou nt of $ 2 8 ,9 2 4 ,5 0 0 .
T h e collections from these assets, includin g offsets, together w ith collections from
stock assessm ents, am ou nted to 5 2 .2 4 per cent of such assets and stock assess
m ents as shown by receivers’ last quarterly reports under date of Septem ber 30,
1929.
T h e disposition of such collections wras as follow s:
C ollections:
Collections from assets, including o ffsets________________________ $178 , 488, 168
Collections from stock assessm en ts_______________________________
13, 999, 442
T o ta l________________________________________________________________
D isposition of collections:
D ivid end s paid to creditors on claim s proved aggregating
$ 1 8 9 ,3 8 8 ,7 3 1 _______________________________________________________
P aym ents to secured and preferred creditors, including offsets
allow ed and p aym ents for the protection of assets---------------P a ym en t of receivers’ salaries, legal and other expenses______
C ash returned to shareholders_____________________________________
C ash balances w ith com ptroller and receivers__________________
T o ta l________________________________________________________________
192, 487, 6 10
8 6 ,4 9 3 ,0 8 5
82, 323, 457
10, 799, 4 75
350, 0 0 0
12, 521, 593
192, 487, 6 10
BRANCH, CHAIN, AND GROUP BANKING
75
From the date of the first failure of a national bank in 1865 to the close of
O ctober 31, 1929, 887 receiverships were liquidated and the trusts closed, or the
affairs thereof restored to solvency.
Included in this num ber are the 72 banks
restored to solvencj^ (2 in 1929) and 103 th at were liquidated during the year
1929.
These 815 banks had assets, including assets acquired subsequent to their
failure, aggregating $ 5 1 4 ,4 7 6 ,4 1 2 . T h e capital of these 815 banks was $ 9 8 ,9 6 5 ,9 2 0
and there were levied b y the C om ptroller of the Currency stock assessm ents
against their shareholders in the am ount of $ 6 3 ,3 9 1 ,2 4 0 .
The collections from
these assets including offsets, together with collections from stock assessm ents
as shown b y receivers’ final reports am ou nted to 58.41 per cent of such assets
and stock assessm ents.
T h e disposition of such collections was as follow s:
Collections:
Collections from assets, including offsets________________________ $306, 954, 813
Collections from stock assessm en ts_______________________________
30, 615, 375
T o ta l_______________________________________________________________
Disposition of collections:
D ividends paid to creditors on claims proved aggregating
$ 2 7 5 ,4 4 9 ,4 9 6 _______________________________________________________
Paym ents to secured and preferred creditors, including offsets
allowed and paym ents for the protection of assets________
Paym ent of receivers’ salaries, legal and other expense_______
Cash returned to shareholders_____________ _______________________
T o ta l_______________________________________________________________
337, 570, 188
193, 279, 863
118, 012, 673
22, 459, 854
3, 817, 798
337, 570, 188
The average percentage of dividends paid on claims proved against the 815
receiverships that have been finally closed, not including the 72 restored to
solvency, which paid creditors 100 per cent, was 70 .1 9 per cent. If offsets, loans
paid, and other disbursements were included in this calculation, the disbursements
to creditors would show an average of 79 .1 3 per cent.
Expenses incident to the administration of the 815 closed trusts, such as re
ceivers’ salaries, legal and other expenses, am ounted to $ 2 2 ,4 5 9 ,8 5 4 , or 3 .88 per
cent of the book value of the assets and stock assessments administered, or 6.65
per cent of collections from assets and stock assessments.
Th e assessments
against shareholders averaged 6 4 .0 5 per cent of their holdings and the total
collections from such assessments as were levied were 48 .2 9 per cent of the am ount
assessed. The outstanding circulation of these closed receiverships was $ 3 8 ,0 6 0 ,477, secured by U nited States bonds on deposit w ith the Treasurer of the U nited
States of the par value of $ 4 0 ,5 0 6 ,9 2 0 .
During the year ended October 31, 1929, 103 receiverships were closed in addi
tion to which 2 banks were restored to solvency.
The total assets of the 103
receiverships, including assets acquired subsequent to suspension, aggregated
$ 4 4 ,9 2 4 ,7 9 0 . The capital pf these banks was $ 5 ,2 2 5 ,0 0 0 , and the total assessments
against shareholders levied by the C om ptroller of the Currency aggregated
$ 5 ,2 2 5 ,0 0 0 .
The collections from these assets, including offsets, together with
collections from stock assessments as shown by receivers’ final reports, am ounted
to 54.72 per cent of such assets and stock assessments. Th e disposition of such
collections was as follows:
Collections:
Collections from assets, including offsets_________________________ $24, 911, 473
Collections from stock assessm en ts_________________ _______________
2, 532, 490
T o ta l_________________________________________________________________
D isposition of collections:
D ividends paid to creditors on claim s proved aggregating
$ 2 5 ,7 1 4 ,5 9 0 ____________________________________________ _____________
Paym ents to secured and preferred creditors, including offsets
allowred and pa ym en ts for the protection of assets___________
P aym ent of receivers’ salaries, legal and other expenses_______
Cash returned to shareholders______________________________________
T o ta l_________________________________________________________________
2 7 ,4 4 3 ,9 6 3
12, 653, 830
12, 561, 313
2, 224, 420
4, 400
27, 443, 963
76
BliANCH, CH AIN, AND GROUP BANKING
T h e average percentage of dividends paid on claim s proved against the 103
receiverships th at were finally closed in the year ending O ctober 31, 1929, not
including the 2 banks restored to solvency which paid creditors 100 per cent, w as
4 9 .2 per cent.
If offsets, loans paid, and other disbursem ents were included in
this calculation, the p aym en t to creditors would show an average of 6 5 .8 6 per
cent.
Expenses incident to the adm inistration of these 103 trusts, such as
receivers’ salaries, legal, and other expenses, am ounted to $ 2 ,2 2 4 ,4 2 0 , or 4 .4 3 per
cent of the book value of the assets and stock assessm ents adm inistered, or 8.1
per cent of collections from assets and stock assessm ents.
T h e assessm ents
again st shareholders averaged 100 per cent of their holdings and the to ta l collec
tions from such assessm ents as were levied were 4 8 .4 6 per cent of th e am ou n t
assessed.
T h e financial operations of the division of insolvent national ban ks from Sep
tem ber 30, 1928, to Septem ber 30, 1929, were as follow s:
C ollection s:
C ash on hand Sept. 30, 1 9 2 8 ________________________________________ $13, 158, 682
46, 802, 8 86
Collections during the year, including offsets____________________
T o ta l_________________________________________________________________
D isposition of collections:
D ividends p a id ________________________________________________________
Secured and preferred claim s p a id _________________________________
Expenses p a id _________________________________________________________
R eturned to shareholders in cash___________________________________
C ash on h a n d __________________________________________________________
T o ta l_________________________________________________________________
Mr.
P ole.
May
I
answer categorically?
59, 961, 568
28, 939, 840
15, 863, 280
2, 632, 455
4, 400
12, 521, 593
59, 961, 568
[Reading:]
If offsets, loans paid, and other disbursem ents were included in this calculation,
the pa ym ent to creditors would show an average of 6 5 .8 6 per cent.
Mr.
Stevenson.
I read it [reading]:
If offsets, loans paid, and other disbursements were included in this calculation
the disbursements to creditors would show an average of 7 9.13 per cent.
Mr. P o l e . What are y o u reading from?
Mr. S t e a g a l l . That is in the report of the Comptroller of the
Currency for December, 1929. That is where I got my figures.
Since seeing this, I remember definitely where it was.
Mr. P o l e . What page is that?
Mr. S t e a g a l l . On page 24, in the third paragraph from the
bottom of the page.
Mr. S t e v e n s o n . That includes offsets, and the other excludes
them; that is the only difference. The actual payment in cash was
65 per cent.
Mr. P o l e . I will be glad to insert the facts in the record. I think
we may assume, for the purposes of your inquiry, however, that it is
between 65 and 70 per cent.
Mr. S t e a g a l l . Mr. Pole, I would not for a moment attempt to put
my judgment about technical matters of this kind against yours, but
I think I was justified in the conclusion I reached from the statement
in this report. I suggest that you read it again.
Mr. W i n g o . If the gentleman will yield, may I read this statement
and possibly it will show where Mr. Steagall got his idea?
On page 24 of the Report of the Comptroller of the Currency of
December 2, 1929, about the middle of the page, under that tabula
tion of figures, there is this statement:
If offsets, loans paid, and other disbursements were included in this calcula
tion, the disbursements to creditors would show an average of 7 9.13 per cent.
B R A N C H , C H A IN , AN D GROUP B A N K IN G
77
Possibly that is what the gentleman from Alabama has in mind.
It illustrates the old story that you can take figures to prove anything.
Air. S t e a g a l l . That statement includes everything, and means
that the creditors got 79.13 per cent.
Mr. P o l e . In 815 banks which have been liquidated, 70.19 per
cent was paid to general creditors. If preferred and secured claims
are included the average would be 79.13 per cent.
Mr. S t e a g a l l . That is right.
Mr. P o l e . And the other figure which I read has reference to the
more recent closing of receiverships during 1929.
Mr. S t e a g a l l . I am speaking of the 815 banks completely liqui
dated out of 1,300 and some number?
Mr. P o l e . Roughly, yes.
Mr. S t e a g a l l . The fact is, Mr. Pole, that the best standard or
guide that could be found on that question, that is to say, on the
question of the amounts realized to creditors of national banks that
are insolvent and liquidated, is the actual experience gained in
liquidations and so the record show^s that national banks, insolvent
and liquidated completely, have paid 79.13 per cent.
Mr. P o l e . Yes, sir.
Mr. S t e a g a l l . According to your report.
Mr. P o l e . Yes.
Mr. S t e a g a l l . Of course, that report was carefully compiled?
Mr. P o l e . Yes.
Mr. S t e a g a l l . And is better than off-hand recollection?
Mr. P o l e . Yes; of course, that includes offsets, the debtor’s own
deposit as against his own loan, loans paid, and so forth. Otherwise
it would be 70 per cent.
Mr. W i n g o . May I interrupt and point out that that statement
also includes the payment of receivers’ salaries and legal and other
expenses of $22,459,854, does it not?
Mr. P o l e . That is correct.
Mr. W i n g o . Of course, it is fair to say upon the other side that it
included a stock assessment of $30,615,375, less cash returned to share
holders of $3,817,798, which I suppose represented the amount of the
assessment which waain excess of the actual requirements.
Mr. P o l e . That is right.
Mr. S t e v e n s o n . But the creditors themselves got 79.13 per cent.
The man who owed $100 and had on deposit $1,000 got the offset;
he received $900.
Mr. P o l e . In the course of time. In some cases it covered a
period of years.
Mr. S t e a g a l l . In that calculation, the expense of liquidation
amounted to 6 per cent plus, did it not?
Mr. P o l e . Six per cent plus.
Mr. S t e a g a l l . S o that my statement that the losses were only 21
per cent was correct.
Mr. S t e v e n s o n . Will the gentleman yield?
Mr. S t e a g a l l . Yes.
Mr. S t e v e n s o n . Y ou mean the loss to the depositors, do you not?
Mr. S t e a g a l l . Yes. I am not talking about the stockholders.
We are talking about those who dealt with these stockholders; and we
are not worrying about them.
100136— 30— p t 1—
6
78
B R A N C H , C H A IN , A N D GROUP B A N K IN G
I want to ask you, first, in order to refresh my own recollection,
how far back these liquidations go?
Mr. P o l e . That is from the beginning of time.
Mr. S t e a g a l l . That is my understanding.
Mr. S t e v e n s o n . Since 1 8 6 5 .
Mr. S t e a g a l l . That is what I understood to be the fact.
Now, how much was the total loss during that time to depositors
in the banks completely liquidated?
Mr. P o l e . May I supply those figures later?
Mr. S t e a g a l l . Yes.
(The figures referred to are as follows:)
D ivid end s paid to creditors on claim s proved, aggregating $ 2 7 5 ,4 4 9 ,4 9 6 ,
am ou n ted to $ 1 9 3 ,2 7 9 ,8 6 3 , showing a loss to general creditors of $ 8 2 ,1 6 9 ,6 3 3 .
Mr. S t e a g a l l . Mr. Pole, I dislike to repeat matters that have been
discussed here extensively day before yesterday when I could not be
present. I had to attend a meeting of the hospitalization board.
I will try to avoid things that I feel sure have been covered and will
read the record on those things in the hearings later; but I want to
ask you this: There has been an increase in the number of insolvent
banks during recent years, has there not?
Mr. P o l e . Quite a marked increase. I can give you the exact
figures, if you would like to have them.
Mr. S t e a g a l l . If they have not been inserted in the record, I
should very much like to have them. I want to avoid repetition;
but if they have not been put in, I would like to have them.
Mr. P o l e . They are in the exhibit.
Mr. S t e a g a l l . If they are, it is not necessary to encumber the
record, and I do not desire to do that; but there has been a large
increase.
How long has this increase existed or how long since it began?
Mr. P o l e . There appeared to be rather a definite beginning,
which was about 1920, I should say.
Mr. S t e a g a l l . Let me ask you this: Do you mean to say there was
an increase in 1920 as compared to the entire period of national
banking experience prior to that time?
Mr. P o l e . Commencing about 1920 to 1921.
Mr. S t e a g a l l . Yes, sir. How did the percentage of the failures
run during the years after the inauguration of the Federal reserve
system down to this period of 1920?
Mr. P o l e . Before 1920— much less pronounced than since 1920.
Mr. S t e a g a l l . I do not believe I made myself quite clear in my
question. What I was seeking to develop in the question was this:
Whether or not there was an immediate increase of insolvencies
following the inauguration of the Federal reserve system or was
there a decrease for the first six years prior to this period of 1920, in
which you say the increase began.
Mr. P o l e . I would say there was a normal number of failures up
to 1920.
Mr. S t e a g a l l . And what you mean when you say a normal
number is that the national bank system moved along about as
usual?
Mr. P o l e . Yes, sir.
Mr. S t e a g a l l . In that regard?
79
B R A N C H , C H A IN , AN D GROUP B A N K IN G
Mr. P o l e . Yes, sir.
failures.
I shall be glad to furnish detached list of
N um ber of bank failures each year ended June 30, 1901^-1920, inclusive
State an d1
private
1904.
1905.
1906.
1907.
1908.
1909.
1910.
1911.
1912.
1913.
102
57
37
34
132
60 |
28
56
55
40
National Total
Spdvatned 1
122
79
45
41
156
i
II
1914...............................
1915...............................
i91 6-_.......................
1917_______________
1918...............................
1919...........................
1920_________________
96
110
41
35
25
42
44
T o ta l__________
994
1
'
i
1
1
21 |
14 1
13
7
2
1 |
5
176
117
124
54
42
27
43
49
1,170
i
Mr. S t e a g a l l . One of the prime purposes and thoughts back of
the enactments of the Federal reserve law was to furnish a reservoir
and supply of credit that would make bank failures less frequent,
was it not?
Mr. P o l e . I do not think that was one of the purposes of the
Federal reserve system to make bank failures less frequent. It was
to give banks greater latitude in their loaning power and greater
ability to serve the needs of the country. As to bank failures, I do
not think it contemplated that the Federal reserve banks would
undertake to keep the banks from becoming insolvent.
Mr. S t e a g a l l . No; I do not mean that it was the business of the
Federal reserve system to keep banks from becoming insolvent, but
it was my understanding always that the philosophy underlying the
Federal reserve act was that we would have a credit reservoir to which
resort could be had in time of emergency and that one of the benefits
to follow would be that a bank in distress would have somewhere to
go to get relief and tide over the period of difficulty?
Mr. P o l e . It did serve such a purpose.
Mr. S t e a g a l l . N o w , I understood you to say it did not; that
following the enactment of the Federal reserve law, things moved
along as they had and there had been no effect on the national bank
system in that regard.
Mr. P o l e . If we had not had the Federal reserve system I do not
know what would have happened. There is no doubt the Federal
reserve system did render great assistance to banks which, of necessity,
would have had to go to their correspondents and there is a question
whether they could have been accommodated. The Federal reserve
funds were used quite liberally, as I am quite sure you know.
Mr. S t e a g a l l . That is the thought I had. I have some limited
information, I think, regarding the benefits extended by the Federal
reserve system in its early operations— cases of emergency, which,
as I have thought must have saved banks from failures in many
instances which otherwise would have gone to the wall.
Mr. P o l e . The Federal reserve banks of the various districts put
many banks in funds which enabled them to stay open, whereas,
otherwise, they might have closed.
Mr. S t e a g a l l . It has been one of my reasons for my devotion to
the Federal reserve law, that it has granted relief in emergencies,
80
B R A N C H , C H A I N ; AN D GROUP B A N K IN G
so often, and, I thought, in a very helpful way. Such was true for
a while, I am sure.
Well, that brings us down to this point, that the fact that we had
this increase in failures or insolvencies certainly is not due to defects
inherent in the Federal reserve system itself?
Mr. P o l e . By no means.
Mr. S t e a g a l l . It has grown out of conditions, whatever they may
be, that have brought about these insolvencies, notwithstanding the
relief facilities afforded by the Federal reserve banks in time of
emergencies.
Mr. P o l e . That is true.
Mr. G o l d e r . Will you bring out, if you please, the relationship of
the failures of the number of banks, other than member banks,
compared with State banks, during the same period?
Mr. S t e a g a l l . That is some information we ought to have in this
record. I suppose, in some of these reports somewhere it is to be
found. I would imagine that had been developed before now.
The C h a i r m a n . Will you yield to me?
Mr. S t e a g a l l . Yes, sir.
The C h a i r m a n . Can you furnish that information, Mr. Comptrol
ler?
Mr. P o l e . Yes.
The C h a i r m a n . Then, without objection, it will be put in the record
at this point.
N um ber and deposits of all banks in United States 1 at the end of June, 1 9 2 0 , and
number and deposits of banks that suspended from January 1, 1921 , to December
31, 1929
M em ber banks
Total all
banks
Nonm em ber
banks
National
State
NUM BER OF BANKS
T otal num ber of banks in operation at
the end of June, 1920....... ....................
N u m b er of banks that suspended from
Jan. 1, 1921, to Dec. 31, 1929__________
Ratio of banks that suspended during
1921-1929 to total banks in operation
in June, 1920 (per cent)............................
30, 079
8, 025
1,374
20, 680
5, 640
763
231
4, 646
18.8
9.5
16.8
22.5
$8, 224,105, 000
$16, 073, 040, 000
138, 450, 000
1, 227,172, 000
1. 7
7. 6
DEPOSITS
Total deposits of all banks in operation
at the end of June, 1920_______________ $41, 445, 376,000 $17, 148, 231, 000
Deposits of banks that suspended from
Jan. 1, 1921, to Dec. 31, 1929__________
1, 721, 402, 000
355, 780, 000
Ratio of deposits of banks that sus
pended during 1921-1929 to deposits
of all banks in operation in June, 1920
4. 2
2. 1
(per cent)__________________ ____________
1 Exclusive of Alaska and island possessions (60 banks).
Mr. G o l d e r . Mr. Steagall was bringing out the fact that the
Federal reserve was in nowise responsible for the increase in failures
and I think if we can show an equal number of failures outside of
the-----Mr. S t e a g a l l . I think it properly comes in line with the sugges
tion you made.
Mr. W i n g o . You mean other than member banks?
BRANCHj
CHAIN,
AND GROUP B A N K I N G
81
Mr. G o l d e r . Other than those connected with the Federal re
serve system.
Mr. S t e a g a l l . A s 1 remember your testimony yesterday-—and I
will ask you to repeat it because there is no harm in repeating that—
what is the proportion of failures of national banks, in the national
system, as compared with the State banks?
Mr. P o l e . During the period— —
Mr. S t e a g a l l . Take the last 10-year period, since this failure
situation has been so accentuated.
Mr. P o l e . There were 750 national banks against 4,700 State
banks. The ratio, in proportion to number of banks, was approxi
mately three to one.
Mr. S t e a g a l l . N o w , do you mean to say that the proportion—
that the failures would be about one national bank out of seven
State banks that failed0
Mr. P o l e . Between six and seven. If you do not consider the
fact that there are twice as many or nearly three times as many
State banks as national banks-----Mr. S t e a g a l l . I am leaving that out of the first question. There
is about one national bank to six or seven Stare banks to fail?
Mr. P o l e . Yes; about one to six or seven.
Mr. S t e a g a l l . What proportion of the national banks have failed
as compared to the proportion of State banks that have failed; in
other words, what percentage of the national banks have failed in
this 10-year period or 9 years or whatever it is?
Mr. P o l e . Approximatelv 9 per cent over the 9-vear period ending
1929.
Mr. S t e a g a l l . Here is what I am talking about: You have given
me the percentage of the national banks that have failed as 9 per
cent. That is what 1 want. What per cent of the State banks have
failed during that same period?
Mr. B u s b y . I call your attention to page 4 of your first statement,
in which you have that ail figured our. The answer is 71 per cent.
Mr. S t e a g a l l . 71 per cent? No; those figures are not right.
Mr. B u s b y . Seventy-one per cent that failed were State banks.
Mr. W i n g o . That is not the question he asked.
Mr. S t e a g a l l . What I want to know is what per cent of the
State banks have failed?
Mr. S t e v e n s o n . That is a very important item.
Mr. P o l e . Twenty-two per cent of all State banks in existence
June 30, 1920.
Mr. S t e a g a l l . About twice the percentage of State banks have
failed as compared with national banks?
Mr. G o l d s b o r o u g h . Will you find out at this point, what per
centage of the banking resources failed?
Mr. S t e a g a l l . I am coming to that. What was the percentage
of the resources involved in the national banks that failed as com
pared with the resources of the State banks that failed? If you can
put the figures in the record— I think it would be more direct to ask,
What were the resources of the national banks that failed, and what
were the resources of the State banks that failed.
Mr. P o l e . Your former question— there were 9 per cent of the
national banks that failed over the period in question and 22 per
cent of the State banks. That is in answer to your former question.
82
B R A N C H , C H A I N , A N D GROUP B A N K IN G
Mr. S t e a g a l l . M y next question is, What were the resources of the
national banks to fail first, and next, What were the resources of the
State banks that failed?
Mr. P o l e . I shall have to furnish that.
Mr. S t e a g a l l . Then, when you furnish the amount in dollars
and cents of resources of the national banks that failed and the
State banks that failed, in that connection give also the amount of
resources of the entire national system and the entire State system.
Mr. W i n g o . And also reduced to a percentage basis in both
instances.
Mr. P o l e . We have that information but I do not happen to carry
it in my head.
Mr. G o l d e r . I think on page 28 you will find the requested infor
mation in this report.
Mr. S t e a g a l l . Just let Mr. P o l e furnish that information.
M r . P o l e . I w ill b e gla d to fu rn ish it.
Mr. S t e a g a l l . Mr. Pole, we have had, this year, I believe you
said, 155 failures.
Mr. P o l e . We have had 155 up to February 2 1 . There were
three additional national-bank failures this week and several addi
tional State banks.
Mr. S t e a g a l l . At that rate, how many bank failures will we have
this year?
Mr. P o l e . Well, that would be about 1 0 0 a month, would it not?
Mr. W i n g o . I figure, if you take the first seven weeks of the year
and continue at that ratio, it would be 1,140 for the year.
Mr. P o l e . Yes.
Mr. S t e a g a l l . What proportion of these failures down to the
21st, I believe you said it was, are national banks? In other words,
how many national banks have failed this year up to that time?
Mr. P o l e . T w e n t y -o n e .
Mr. S t e a g a l l . How many of these 155 were banks of less than
$100,000 capital? Have you those figures?
Mr. P o l e . One hundred and thirty of them.
Mr. S t e a g a l l . We had two in my State o f more than $ 1 0 0 ,0 0 0
this year.
Mr. P o l e . I will be glad to furnish that information.
Classification of banks suspended during the period January 1 to February 2 1 ,
1930, according to capital stock
1
N um ber of banks with capital stock of—
j
Total, j National
all banks ! banks
i
State
bank
members
N on
member
banks
1
Less than $100,000___________________ _______________________________
$100,000______________________________________________________________
Over $100,000________________________________________________________
N o t available
. ______________________ . . .
T o ta l________________ _____ ______
...
. —
______________
130
8
15
12
14
4
4
3
155
22
4
1 Private banks.
Mr.
Mr.
W i n g o . If
Steag all.
the gentleman will yield-----Yes.
1
113
4
10
i2
129
B R A N C H , C H A IN , AN D GROUP B A N K IN G
83
Mr. W i n g o . The fact remains that the great bulk of failures this
year, like they have been for the last nine years— for the immediate
nine years preceding— are mostly small country banks?
Mr. P o l e . Almost entirely small banks.
Mr. W i n g o . That is the striking fact that I think would interest
us, that the largest £>art of the failures are among what you class as
country banks.
M r. P o l e . Y es.
Mr. W i n g o . And very few large
Mr. P o l e . Very few.
Mr. S t e a g a l l . I want to ask
banks failed?
you where these failures have
occurred, speaking geographically?
Mr. P o l e . This year, you are speaking of?
Mr. S t e a g a l l . We are discussing now the whole thing— this nineyear period we are talking about.
Mr. P o l e . Taking the total number of banks on June 30, 1920, as
a basis, in the State of Vermont, there were no failures.
In the District of Columbia there were no failures.
In the State of NewTHampshire there was one failure.
In the State of New Jersey there were three failures.
In the State of Massachusetts there wTere six failures, or 1.3 per
cent.
In the State of Connecticut there were three failures, or 1.4 per
cent.
In the State of Maine there were three failures, or 1.9 per cent.
In the State of New York there were 26 failures, or 2.5 per cent.
In the State of Pennsjdvania there were 40 failures, or 2.6 per cent.
In the State of Maryland there were 11 failures, or 3.9 per cent.
In the State of California there were 31 failures, or 4.3 per cent.
In the State of Delaware there were two failures, or 4.3 per cent.
In the State of Ohio there were 55 failures, or 4.8 per cent.
Of all the banks which were in existence in 1920 in the State of
Rhode Island three banks failed, or 6.3 per cent.
In the State of Kentucky there were 43 failures, or 7.4 per cent.
In the State of Wisconsin there were 75 failures, or 7.7 per cent.
In the State of Illinois there were 138 failures, or 8.6 per cent.
In the State of Alabama there were 32 failures, or 9.1 per cent.
In the State of Nevada there were 3 failures, or 9.1 per cent.
In the State of Virginia there were 45 failures, or 9.2 per cent.
In the State of Michigan there were 66 failures, or 9.4 per cent.
In the State of Mississippi there w^ere 34 failures, or 9.6 per cent.
In the State of West Virginia there were 34 failures, or 10 per cent.
This is of all banks in existence, State and national, June 30, 1920.
This number has failed:
In the State of Indiana there were 115 failures, or 10.9 per cent.
In the State of Tennessee there were 66 failures, or 12.1 per cent.
In the State of Louisiana there were 34 failures, or 12.7 per cent.
In the State of Utah there were 18 failures, or 13.5 per cent.
In the State of Washington there were 56 failures, or 14.2 per cent.
In the State of Oregon there were 43 failures, or 15.5 per cent.
In the State of Kansas there were 223 failures, or 16.5 per cent.
In the State of Missouri there were 296 failures, or 17.9 per cent.
In the State of Texas there were 299 failures, or 18.9 per cent.
In the State of Arkansas there wTere 95 failures, or 19.5 per cent.
84
B R A N C H , C H A IN , AND GROUP B A N K IN G
In the State of North Carolina there were 125 failures, or 20.1
per cent.
In the State of Colorado there were 89 failures, or 22.1 per cent.
In the State of Minnesota there were 411 failures, or 27 per cent.
In the State of Oklahoma there were 266 lailures, or 27.7 per cent.
In the State of Nebraska there were 339 failures, or 29.3 per cent.
In the State of Iowa there were 528 failures, or 29.9 per cent.
In the State of Arizona there were 27 failures, or 31 per cent.
In the State of Idaho there were 72 failures, or 32.4 per cent.
In the State of Wyoming there were 60 failures, or 30.5 per cent.
In the State of Georgia there were 319 failures, or 43.2 per cent.
In the State of Montana there were 203 failures, or 47.1 per cent.
In the State of North Dakota there were 429 failures, or 47.8 per
cent.
In the State of South Carolina there were 227 failures, or 49.2 per
cent.
In the State of New Mexico there were 62 failures, or 50 per cent.
In the State of South Dakota there were 394 failures, or 58.8 per
cent.
In the State of Florida there were 190 failures, or 71.7 per cent,
of all the banks which were in existence June 30, 1920 to 1929,
inclusive.
Mr. S t e a g a l l . I do not suppose you are prepared, at the moment,
to give the figures on the last year and this year, geographically, and
if you will put them in your statement, I will be glad to have them.
Mr. P o l e . These figures for the last year?
Mr. S t e a g a l l . For th e la st y e a r ; y e s, sir.
Mr. P o l e . I can give you them now.
Mr. S t e a g a l l . Very well, sir. I did not suppose you had them
on hand.
Mr. P o l e . Six hundred and forty banks failed in 1929. By Fed
eral reserve districts, none of them failed in the first district; 6 banks
failed in district No. 2, 3 banks failed in district No. 3, 14 bsnks failed
in district No. 4, 59 banks failed in district No. 5, 117 banks failed in
district No. 6, 93 banks failed in district No. 7, 44 banks failed in
district No. 8, 84 banks failed in district No. 9, 193 banks failed in
No. 10, 11 banks failed in No. 11, 16 banks failed in the twelfth
Federal reserve district, making a total of 640 banks.
Mr. W i n g o . M ay I interrupt the gentleman right there?
Mr. S t e a g a l l . Certainly.
Mr. W i n g o . In connection with these statistics, at this point, I
want the record to carry a citation to your exhibits E and F. Exhibit
E shows that the bank suspensions during the 8-year period, 1921 to
1928, inclusive— that 88.6 per cent of those failures or suspensions were
in banks of $100,000 and less capitalization, and as to sizes of towns
in that same period, 87.7 per cent of those failures occurred in towns
of 5,000 and less in population; in other words, 88 per cent plus were
banks of $100,000 and less capitalization, and 87.7 per cent were in
towns of 5,000 and less population.
In other words, the great bulk of failures were small banks in
small towns.
Mr. P o l e . That is correct.
Mr. G o l d e r . I should like to ask if the principal causes of most of
these failures were loans— mortgages on land values?
BRANCH, CH AIN, AND GROUP BANKING
85
Mr. S t e a g a l l . The gentleman asks, or desires me to ask, if the
principal cause of the failures was loans on land values. You spoke
of frozen assets and, of course, we understand to some extent, at
least, that is covered by loans on real estate or tied up in real estate.
Mr. P o l e . I referred to frozen assets in the particular illustration
which I drew at that time.
Mr. S t e a g a l l . Yes, sir.
Mr. P o l e . I would not say that the causes of the bank failures
are in large part, or in an important part, on account of real estate
loans or loans based on real estate. This is not the controlling
factor.
Mr. S t e a g a l l . Are you familiar— I am sure you are—with the
legislation passed two years ago, or about that time—I will not give
the date— in which we permitted national banks to increase the
amounts of their loans on real estate?
Mr. P o l e . That was under the McFadden bill?
Mr. S t e a g a l l . Yes. Do you remember the increases permitted
by that act? The figures escape my mind. Some of us favored it
and some did not, but finally the legislation went through. I do
not mean to play the role of “ I told you so,” but I was one of those
who did not think it was the proper thing to do.
Mr. P o l e . There was no change in the law with respect to the
appraisals of real estate or its loaning value. There was a difference
in the length of time for which a loan on real estate might run and
the aggregate amount of loans on real estate which might be made
with respect to the savings deposits, the amendment being to allow
a bank to loan up to 50 per cent, whereas formerly it was 33% per
cent.
Mr. S t e a g a l l . I though the former amount was 25 per cent, but
I am sure you remember the figure better than I do.
Mr. P o l e . Yes.
Mr. S t e a g a l l . So evidently we did not help the situation with
that legislation. Mr. Pole, as I understand you, you regard the
independent unit banking system, as compared to branch banking,
chain banking, or group banking, as the best banking system for
our country in so far as the system can function efficiently and meet
the demand for banking facilities.
Generally speaking, you think that is the banking system to be
desired? If I understand your position, you do not think that the
system, as we have it, has worked successfully and you think there
should be some changes?
Mr. P o l e . That is my recommendation to Congress.
Mr. S t e a g a l l . Yes; but fundamentally you regard the unit system
as the best system, do you not?
Mr. P o l e . Not fu n d a m e n ta lly . I h a v e a s e n tim e n ta l a tta c h m e n t
fo r it.
Mr. S t e a g a l l . But so far as it is practicable, that is the system
you prefer? In other words, we want to adhere to it and get away
from it only so far as developments make it necessary to do so.
Mr. P o l e . The reason 1 want to get away from the present rural
banking system is that it does not offer protection to the rural com
munities.
Mr. S t e a g a l l . But you would not want to get away from it any
further than it is necessary to do so in your judgment, in order to
take care of the situation?
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BRANCH, CH AIN, AND GROUP BANKING
Mr. P o l e . If it properly took care of the situation I would be in
favor of it.
Mr. S t e a g a l l . Putting it bluntly, if I understand your view—
and I am not finding fault with you for that view— but you have
certain reasons for your attitude. Whether those reasons are con
clusive I do not know, but there are some reasons for the view that
you have that the present unit banking system, in the smaller com
munities, as manifested in our smaller banks, is defective, to say the
least, from some cause. I agree with you as to that, and it is to
remedy that that you would depart from the system, and, as I under
stand you, only so far as necessary.
Mr. P o l e . That is the basis of my recommendation.
Mr. S t e a g a l l . That being the case, would not this be the logical
course to follow in our legislation— the unit system being the prefer
able plan— as you suggest, certainly for sentimental reasons among
others, it is the system to which we have been accustomed and it is
the system we have been taught to believe in and I think everybody
agrees, is preferable if it can be kept sound and practicable and made
to meet the requirements of the country— but that being true, I agree
with you in that there are defects in the present system, but the
unit system being preferable, should not we follow this course in our
legislation— that of trying, if we can, to perfect the unit system or at
least remove its defects and wherever it can be done to cure ineffi
ciencies as far as possible and abandon the system only to the extent
that we find ourselves unable to save it and make it operate
successfully?
Mr. P o l e . I would not be able to answer that question, Mr.
Steagall, unless I knew what plan you had in mind for perfecting it.
Mr. S t e a g a l l . I am not speaking about plans. I do not know
that I have any. I have some thought about it, but I should hesitate
to say that I have a plan to remedy a situation which is regarded as so
difficult. It might be presumptuous. I have some suggestions in
that connection which I think might be helpful. I would not say
I have a plan that would save it, but if we could eliminate the defects
and restore it I should think it the thing to do. Evidently the unit
system of banking worked for many years all right, but somehow
recent developments have brought about difficulties that did not
exist for a long time, certainly difficulties out of proportion to the
difficulties encountered for a long period— if we can find these defects
and remedy them and get them out of the way, I think we might say
that we would all agree that is the preferable thing to do.
Mr. P o l e . If we could make the unit system effective-----Mr. S t e a g a l l . That is what I had in mind.
Mr. P o l e . I think there would be no reason for any change.
Mr. S t e a g a l l . Let me ask you this: How do you account for the
increase in our difficulties in our unit banking system during this
recent period of years, since 1920, about which we have talked?
Mr. P o l e . One of the important basic reasons is the fact that the
small country bank is not able to earn sufficient to take care of its
normal losses, its increasing expenses, and its diminishing business.
Mr. S t e a g a l l . It is a difficulty, however, that seems to have man
ifested itself only during these recent years?
Mr. P o l e . It has been accentuated since the war.
BRANCH, CHAIN, AND GROUP BANKING
87
Mr. S t e a g a l l . The system worked all right down to the period
about which you were talking?
Mr. P o l e . I would not say so. I would not say that any system
is working all right with the bank failures in any circumstances run
ning into the hundreds. I think the difficulties of earning a proper
return on invested banking capital in small communities have greatly
increased since the war, but for a number of years before the war,
there was a tendency toward diminishing opportunities for the small
bank to make earnings. The cost of operations was getting heavier
and heavier as time went on and net earnings were decreasing, so
that the trend was not in the right direction. If a bank can not earn
a fair return on its capital investment, that bank is eventually going
to fail.
Mr. S t e a g a l l . Of course the system which has that inherent diffi
culty in it will bring trouble.
Air. P o l e . Undoubtedly.
Mr. S t e a g a l l . N o w , you have answered my own thought, in my
own language. Unquestionably, generally speaking, the difficulty
which has brought about the increase in failures, grows out of the fact
that banks have been unable to make the proper earnings— these
banks that have failed.
Mr. P o l e . Sufficient to pay its increasing' operating expenses and
its losses.
Mr. S t e a g a l l . What has brought about that changed condition?
How do you account for their inability to make sufficient earnings?
Mr. P o l e . Well, there are a great many things.
Mr. S t e a g a l l . Let us talk about them. That is what I wanted
you to discuss.
Mr. P o l e . In the first place, rates of interest in country banks
have not increased.
Mr. S t e a g a l l . Y o u m ea n b y th a t, of c o u ise , the in te re st receiv ed
b y the b a n k s on lo a n s?
Mr. P o l e . The interest
received by the banks on loans have not
increased because, in small c o u n t r y banks, they have, for years, been
about as high as they could very well be.
The expenses of operating banks have been materially— very
materially— increased. The opportunities of the country banks have
diminished in that the small town has become less of a factor by
reason of the improvement in roads and the quick transportation
which takes people to the cities to do their business and their banking,
frequently, instead of doing it in the small town.
Heretofore, in years gone by, a community has been more or less
independent, with its locally operated utilities, its light plants, ice
plants, and wagon factories, and so forth, all of which have been
removed and tho^e things have gone to the cities and now are con
trolled by large corporations and those opportunities have been
removed.
There has been a change in corporate financing within the last 10
years. Heretofore large corporations and small corporations, simi
larly, would borrow* seasonally, whereas now they have financed
themselves through reorganization of their capital structures. That
has removed the opportunities from the banks and such things as
that have made it very difficult for a bank to stay on an even keel.
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B R A N C H , C H A I N , AN D GROUP B A N K IN G
Mr. S t e a g a l l . Y o u would not say that the difficulty has grow^n
out of the inability of the banks to make loans?
Mr. P o l e . N o , sir; they do not have any trouble in making loans,
but they generally have to be satisfied with loans of a different
quality-----Mr. S t e a g a l l . That is what you mean— not that they are not able
to make loans enough, but the loans they have now are not as satis
factory as previously?
Mr. P o l e . Banks in small communities have to be satisfied with
small local loans and real-estate loans which frequently are slow and
unsatisfactory, resulting in a greater percentage of losses than in
years gone by.
Mr. S t e a g a l l . I remember having discussed with Mr. Williams,
who was Comptroller of the Currency, the matter of interest rates
which were being received by national banks. He issued some
stubborn orders regarding the enforcement of the law which pro
hibited a national bank from receiving interest in excess of the law
of the State in which the bank did business, and that was back at the
time of the inauguration of the Federal reserve system.
Mr. P o l e . Yes; later than that; about 1918.
Mr. S t e a g a l l . Mr. Williams did that in 1915. That is a matter
about which I have some recollection, because I came to Congress
that year and I remember the first time I discussed it. A bank in
my district liquidated on account of that order and paid everybody
in full, including the stockholders. Many thought it was an unreason
able thing, but it was not. There has been no change in the interest
rates that banks receive since that order, as I have been advised.
Is not that right? So that that order fixing the limitation on interest
charges by the national banks went into effect some years prior to the
time that these increased insolvencies developed?
Mr. P o l e . I think that order, Mr. Steagall, was not an important
factor in the return which a bank receives on its invested capital.
I think it had reference, as I recall it— and I do remember it very
well— as to whether or not a bank should be permitted to make a
minimum charge of a $1 or 50 cents.
Mr. S t e a g a l l . I am speaking about the interest rates. I have
not yet reached the matter of charges on collection of checks. He
put into effect an order that the banks must observe the law. The
law did provide, long before that, that the banks should not charge
an interest rate above the interest rate charged in the State in which
it was doing business, and it had been discovered that it was violated,
and he put that order into effect in 1915.
Mr. S t e v e n s o n . That did not affect State banks at all.
Mr. S t e a g a l l . N o ; but it did affect the national banks, all national
banks that were members of the Federal reserve system.
Mr. P o l e . I would not say that that was a material factor. I do
not think the small banks generally observed it, and if they had, I do
not think it would have been an important factor.
Mr. S t e a g a l l . The deposits have substantially increased all
along, have they not?
Mr. P o l e . They have not materially increased in the rural dis
tricts. They have, in the metropolitan districts.
Mr. S t e a g a l l . But not in the rural districts?
Mr. P o l e . N o ; not anything like the proportion of increase in the
larger centers.
B R A N C H , C H A IN , AND GROUP B A N K IN G
89
Mr. S t e a g a l l . Y o u referred a moment ago to the matter of charges
that the little banks impose for the collection of checks. That right
was taken away from the banks about— now, when was it? Y o u
remember it better than I do.
Mr. P o l e . That was when the par collection system was put
into effect by the Federal reserve banks, two or three years after
the system w~ent into operation.
Mr. S t e v e n s o n . About 1917.
Mr. S t e a g a l l . What amount of earnings did that take away?
How did that affect the situation? That is certainly one factor
entering into this matter of the ability of these banks to make
sufficient earnings to succeed properly.
Mr. P o l e . I think it was the contention of a great many small
banks, Mr. Steagall, that it affected their earnings.
Mr. S t e a g a l l . That was a considerable item with the little
country banks, was it not?
Mr. P o l e . It was probably a considerable item.
Mr. S t e a g a l l . That is what I had always thought. 1 have had
this statement made to me, and I do not say it is true, because I
am not sufficiently informed to pass on it, but the statement is often
made that many of these little banks get enough out of their col
lection charges to pay their salary accounts and a big part of their
running expenses.
Mr. P o l e . I think that would be true in very few instances, and
if they did, they were probably making exorbitant charges.
Mr. S t e a g a l l . I think that was true in some cases. I think that
wherever that was the case their charges should be regulated, but
evidently the taking away of collection privileges was one of the
things that entered into the calculation, out of which grows their
ability to make earnings. Personally, I always thought that that
right should not have been taken away from the little banks. Maybe
I was unduly sympathetic and maybe my views were not always
sound, but I thought there should be a statutory regulation of the
matter to protect the public against unfair charges but not deny
them any aid and make them do the work for nothing, which was
generally for larger banks and wholesale houses.
Mr. P o l e . Yes.
Mr. S t e a g a l l . There is a long story in that connection with refer
ence to the legislation which was passed, which finally gave authority
to the Federal Reserve Board to enforce its will in that matter, but I
do not care to enter into that discussion now. I wanted to ask you
this: How much— and this is a matter I should not have to ask you
about, but I do not have the figures before me— how much of the
earnings of the Federal reserve system have gone in*the Federal
Treasury since the inauguration of the system?
Mr. P o l e . I supplied that information for the record this morning.
Mr. S t e a g a l l . Did y o u ?
Mr. P o l e . Yes.
Mr. S t e a g a l l . Then, I will not ask you to repeat it. Of course, it
will be true, will it not, that the small return that a member bank
receives from the Federal reserve bank, which is limited to 6 per
cent, on its stock, is one of the items that enters into the matter of
their inability to make sufficient earnings?
Mr. P o l e . I should say by no means.
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BRANCH, CH AIN , AND GROUP BANKING
Mr. S t e a g a l l . Y o u th in k n o t?
Mr. P o l e . I think not. Federal reserve bank stock is one of
their securities upon which they get 6 per cent and on which the yield
is better probably than the average yield on their total investments.
Mr. S t e a g a l l . They have to carry, in addition to that stock-----Mr. P o l e . That is another matter. I am merely speaking from
the standpoint of the investment in the Federal reserve stock.
Mr. S t e a g a l l . In addition to that, they carry 7 per cent of their
demand deposits and 3 per cent of their time deposits-----Mr. P o l e . In the Federal reserve banks; that is true.
Mr. S t e a g a l l . And on which they get nothing?
Mr. P o l e . On w^hich they get nothing.
Mr. S t e a g a l l . That would be one item, or course.
Mr. P o l e . Yes.
Mr. S t e a g a l l . And it ought to be taken into the calculation and
in connection with their earnings?
Mr. P o l e . Yes ; that is a consideration.
Mr. S t e a g a l l . That, of course, would apply only to banks that
are members of the Federal reserve system?
Mr. P o l e . Yes, sir.
Mr. S t e a g a l l . And our greatest failures, of course, are not in the
Federal reserve system?
Mr. P o l e . The greatest number of failures are of banks not in the
Federal reserve system.
Mr. S t e a g a l l . However, this is true, we are striving— those of us
who have responsibilities as legislators or otherwise— for the improve
ment of the national banking system. Of course we would not
attempt to treat the State system as our pattern or anything like
that, and we, of course, are pleased that the national system can make
a better showing. It has many advantages.
You discussed yesterday, with Mr. Busby, the matter of the
guarantee of deposits. I believe he suggested that an insurance
method might be advisable, but that did not appeal to your judgment.
Mr. P o l e . Not at all.
Mr. S t e a g a l l . Would there be insurance facilities sufficient to
meet the requirements if we should attempt to say to the national
banks of the country that they should insure their deposits?
Mr. P o l e . I could not say about that.
Mr. S t e a g a l l . There would be at least some question about that,
would there not?
Mr. P o l e . I am not informed as to what the insurance companies
can do.
Mr. S t e a g a l l . This difficulty would occur, however, would it not,
that if we put a law into effect now— now or six months or a year
from now— saying that all national banks must insure their deposits,
the practical effect w^ould be to automatically close every bank that
wras not able to get insurance, would it not?
Mr. P o l e . I think that there are many banks over this country
which enjoy such confidence on the part of their patrons that it
would make no difference to them whether they were insured or not.
Mr. S t e a g a l l . But if the law should require them to insure and
insurance companies would not take them, they would have to go
out of business?
Mr. P o l e . Yes.
BRANCH, CH AIN, AND GROUP BANKING
9t
Mr. S t e a g a l l . There could be no law passed compelling insurance*
companies to take them.. So, the practical effect would be those
banks that were unable to pass muster before the insurance com
panies, would have to go out of business? And in that situation,
we would not have the friendly, helpful hand of the Comptroller o f
the Currency, with his constructive and sympathetic attitude in
dealing with banks, to say whether or not a national bank should
close or not, but some inexperienced representative of an insurance
company in New York would go down to South Carolina or Alabama
and look into a bank and decide whether it should be closed or insure
its deposits and keep open.
Mr. P o l e . They would have to decide whether or not it was a
good risk. I imagine there would be a few banks whose risk they
might not care to assume.
Mr. S t e a g a l l . You discussed yesterday the guarantee system as
it had been attempted in certain States. I do not care to go into that
in detail. I am taking so much of your time and so much of the time
of the committee I want to hurry along, but this is true, is it not,
that the State, as a unit, would afford much weaker facilities for put
ting into effect a guarantee system established and borne by the
banks themselves, than would be the case if the whole United States
should be made the unit and the guarantee system undertaken by
the national banks of the whole country with its vast resources; it
would necessarily, of course, be stronger and beetter able to under
take that burden and responsibility. That necessarily would be ture,
would it not? I am not attempting to commit you to the idea that
they should do it. That is another matter, but certainly they would
be very much better able to do it than the weak little banks in what
some one said in one of the Senate debates— in one of our “ back
ward” States?
Mr. P o l e . Yes.
' Mr. S t e a g a l l . Of course, in that event, you would have the entire
area of the United States, and a crop failure in one State would not
pull down the whole system, which can happen in a small State unit.
You would have all the big national banking system back of it which
would, of course, make it much less hazardous and burdensome for
them than would be the case where it w~as limited to the individual
States.
Mr. P o l e . Are you speaking of a guarantee of the funds by the
United States Government to cover all the States and all the banks?
Mr. S t e a g a l l . I am speaking of a guarantee system patterned
after those in the States.
Mr. P o l e . That would be of the National Government?
Mr. S t e a g a l l . If the national banks themselves attempted to
guarantee their deposits as the State banks have attempted to guar
antee their deposits. I am not saying it is a desirable thing. Of
course there would be a vast difference with the vast United States
as compared with the small banks of small States.
Mr. P o l e . I rather doubt that for the reason that if you are going
to penalize national banks any further they might go into the State
systems.
Mr. S t e a g a l l . I am not talking about that phase of it.
Mr. G o l d e r . What do you mean by “ guaranteeing deposits” ?
92
B R A N C H , C H A IN , A N D GROUP B A N K IN G
Mr. S t e a g a l l . A guarantee system patterned after the State
systems, and their systems had— and most of them with which I
have had any acquaintance— a plan by which each bank was assessed
so much annually to set up a fund out of which to realize sufficient
to take care of depositors when the bank was closed or something like
that. As a rule it seems not to have worked well in some of the
States.
Mr. P o l e . That is true.
Mr. S t e a g a l l . I share th e v ie w --------The C h a i r m a n . Will you yield to rne?
Mr. S t e a g a l l . Yes.
The C h a i r m a n . I understand the State guarantee plan has failed
in every State in which it has been put into operation, and they have
discontinued it in every State except Nebraska, and Nebraska’s
governor is calling a special session of the legislature now to repeal
that law.
Mr. S t e a g a l l . I have never had faith in the guaranty system as
the States have adopted it and I am not surprised that it has not
worked well. I am not fully informed as to how it has worked in
the various States and therefore I do not care to go into details about
that.
Mr. S t e v e n s o n . Before you leave that point, would you mind
one question? I shall not be able to be in another of these meetings
for a couple of weeks.
Mr. S t e a g a l l . I a m g la d to y ie ld .
Mr. S t e v e n s o n . On that very question yesterday the comptroller,
being asked about depositors requiring or being given security by
banks, the comptroller expressed the opinion that it is not a sound
policy, with which I agree. But I want to ask the comptroller this:
Is it not the rule that the United States Government requires for
every one of its deposits, the bank to put up absolute security for its
money and pay interest on it?
Mr. P o l e . That is true as far as the United States Government is
concerned.
Mr. S t e v e n s o n . And we have our Government which supervises
this whole business insisting on a preferential provision for itself,
which is admittedly unsound for the other depositors. Is not that
true?
Mr. P o l e . Of course every depositor in every bank is interested
in the safety of a Government deposit.
Mr. S t e v e n s o n . To a small extent— a very small extent.
Mr. P o l e . If you were to require the banks to give security to its
depositors that it would be very impracticable.
Mr. S t e v e n s o n . It would simply force the banks to loan out every
bit of their deposits in order to have the securities in order to place
the securities; in other words, the bank would simply become a loaning
agency for the depositor and take the security and turn it over ,o him.
It is not a sound policy, and I have questioned, for a long time, the
justice of the United States Government stepping in here and having
an absolute preference over the small depositors when they require
absolute gilt-edged security for every deposit they make, and make
them pay interest on it.
Mr. P o l e . It is the custom to secure public funds of all character—
not only the United States Government, but also municipal, State,
and county funds.
@FedFRASER