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Branch, Chain, and Group Banking
HEARINGS
BEFORE T H E
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
SEVENTY-FIRST CONGKESS
SECOND SESSION
U N D ER
H. Res. 141
AUTHORIZING THE BANKING AND CURRENCY COMMITTEE
TO STUDY AND INVESTIGATE GROUP, CHAIN
AND BRANCH BANKING
MARCH 12 AND 14, 1930
VOLUME 1
Part 3
UNITED STATES
GOVERNMENT PRINTING OFFICE
100136
WASHINGTON: 1930
COMMITTEE ON BANKING AND CURRENCY
LOUIS T. M cFAD D EN , Pennsylvania, Chairman
JAM ES G. STRONG, Kansas.
RO B E R T LUCE, Massachusetts.
E. H A R T FENN, Connecticut.
G UY E. CAM PBELL, Pennsylvania.
CA R R O L L L. B E ED Y, Maine.
JOSEPH L. HOOPER, Michigan.
G O D F R E Y G. GOODWIN, Minnesota.
F. DICKINSON LETTS, Iowa.
F R A N K L IN W. FO RT, New Jersey.
BEN JAM IN M. GOLDER, Pennsylvania.
FR AN CIS SEIBERLIN G, Ohio.
M RS. RU TH PR ATT, New York.
JAM ES W. DUN BAR, Indiana.
OTIS W INGO, Arkansas.
H E N R Y B. STEAGALL, Alabama.
CH ARLES H. BR AN D , Georgia.
W. F. STEVENSON, South Carolina.
T. ALAN GOLDSBOROUGH, Maryland
AN N ING S. PRALL, New York.
JEFF BUSBY,^Mississippi.
P h il ip G . T h o m p s o n ,
n
Cittk.
CONTENTS
Pole, Hon. John W ., Comptroller of the Currency, questioning o f . ________
hi
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BEANCH, CHAIN, AND GROUP BANKING
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
Friday, March H , 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 ir m a n . The committee w ill come to order.
Mr. Seiberling, you seem to be next on the list this morning to
question the Comptroller.
STATEMENT OF HON. JOHN W. POLE— (Resumed)
Mr. S e i b e r l i n g . Mr. Pole, there has been a good deal said about
the Canadian banking system, and I would like to read into the record
a paragraph from an address made by A. B. Barker, of Toronto,
Ontario. It is found in the Journal of the Canadian Bankers’ Asso
ciation for October, 1929, and I read from page 81 as follows:
M any comparisons are made between the banking systems in Canada and the
United States, but there is one feature which is seldom referred to, and that is
the extraordinary difference in the attitude of the general public in each country
toward its own system. In Canada the banks are not popular, and the criticism
of a certain class is very forcibly expressed in Parliament whenever the oppor
tunity occurs. Across the border, however, this does not seem to be the case,
and the average American freely asserts that, in his country, they have the finest
banking system in the world. Canadians know in their hearts that their own
system is the equal of any, but when opinions are expressed they seem to be
suffering from an inferiority complex, and praise that of every country but
their own.
I suppose, Mr. Comptroller, that the unpopularity of the banks is
due to a large extent on account of the service that they render and
the price at which they render it— is that not so?
Mr. P o l e . I would not like to be put in the position of admitting
the unpopularity of the Canadian banking system in Canada. That
is the opinion of one writer, but there are other opinions which differ.
Mr. S e i b e r l i n g . You think that their system is popular over there?
Mr. P ole. I would say it is popular, with the possible exception of
western Canada.
Mr. S e i b e r l i n g . They do not get anywhere near as large an
amount on their deposits there as we do in this country; they do not
pay as much interest on deposits as we do here.
Mr. P o l e . Of course, the rates of interest which we pay in this
country vary very greatly. In Canada it is much more uniform, and
I think quite reasonable. Certainly the rate at which they lend
money not only in the cities but in the farthest hamlet is very much
more reasonable and very much more uniform than it is here.
Mr. S e i b e r l i n g . I assume that that is a very admirable feature of
their banking system?
Mr. P o l e . It is, indeed.
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BRANCH, CH AIN, AND GROUP BANKING
Mr. S e i b e r l i n g . The failure, however, to pay as much interest on
deposits there is due probably to lack of competition, is it not?
Mr. P o l e . I would not say that. I am not prepared to say that
the average amount of interest which is paid on deposit accounts in
Canada is not as great as it is in this country Do you know that to
be true?
Mr. S e i b e r l i n g I only know what this gentleman says in his
address.
Mr. P o l e . I would not accept that article without knowing some
thing more about it.
Mr. S e i b e r l i n g . This article is written on the subject of savings
deposit accounts, and in the paragraph immediately preceding the
one I read, in speaking of United States savings banks and trust
companies, he says:
These institutions operate savings departments, but they are for real savings,
and for that reason American banks and trust companies are able to pay higher
rates of interest on savings deposits than Canadian banks.
Mr. P o l e . I do not know how authoritative that is.
Mr. S e i b e r l i n g . I do not, either, except that that is said in his
address published here in the Journal of the Canadian Bankers1
Association.
Mr. P o l e . That is undoubtedly his honest opinion.
Mr. S e i b e r l i n g . After my examination of you the other day,
some one said that he thought I was “ out on a limb,” and I want
to put this statement in the record, that, as far as I am personally
concerned, if we are going to concentrate banking in this country and
put it in the hands of fewer people, then I should favor restrictions
upon the rates which may be charged for money, and that is the
connection between my examination and the bill pending before the
committee.
Now, Mr. Qomptroller, you said the other day that you were in
favor of having banks also underwrite securities— is that correct?
Mr. P o l e . Yes, certain classes of securities. The national banks
now have authority to deal in securities of certain types.
Mr. S e i b e r l i n g They are given the authority to deal in industrial
bonds?
Mr. P o l e . Bonds, note», and debentures are the three types of
securities which the law permits them to deal in.
Mr. A w a l t . Under regulation, under our control
Mr. S e i b e r l i n g . But your statement was that you thought _it
was perfectly proper for a large bank to have the right to underwrite
securities, and in these securities would be classed industrial bonds?
Mr. P o l e Bonds, notes, and debentures, under regulation of the
comptroller, under the present law.
Mr. S e i b e r l i n g Let us assume that an industry owes a large
bank in a large center $10,000,000 on notes running for three or four
months and that we have a stringent money market; what is to pre
vent this bank from calling this loan, and, of course, in a stringent
money market they could not go out and borrow $10,000,000 some
other place, and to say to them “ We want a first mortgage on your
property, and we want you to put out a bond issue; we will underwrite
the bonds for you, and we will pay you 90 cents on the dollar, and you
have to give us 8 per cent interest and then you have to redeem these
BRANCH, CH AIN, AND GROUP BANKING
235
bonds at a fixed price; if you do not want to do that, you pay the
loan.”
Is there’ anything to prevent that?
Mr. P o l e . If the notes were due, there would, of course, be nothing
to prevent the bank from requiring their payment under any system
of banking. As to what further arrangements for financing that
interest there might be, would be difficult to answer. If the bond
issue were acceptable, the bank might undertake to refinance it
Under this plan which you just suggested, if the rate of interest were
regulated, I presume that would include bonuses of stock?
Mr. S e i b e r l i n g . Yes, and a lot of things that I have not men
tioned in my question; there are a lot of other things I could have put
in, but did not.
Mr. P o l e . All of that would, of course, have to be taken into
consideration.
Mr. S e i b e r l i n g . If a bank did not have the right to underwrite
the bonds, and that profit was going to some other bank, is it not
possible that they might not call the loan?
Mr. P o l e . I should say that would be possible, if the bank wished
to continue the loan and knew that it was good, that it might retain
it in its portfolio.
Mr. S e i b e r l i n g . Where you put all these transactions into th e
hands of one institution, is there not great danger that just such
manipulations as that will be carried on in order to make a profit?
Mr. P o l e . Those things might happen, Mr. Seiberling, under any
form of banking, as far as I see. The protection of the public against
manipulation is, of course, a question of banking ethics as well as
public opinion, and I am convinced that there will always be plenty
of banking competition in this country which would prevent undue
advantage being taken.
Mr. S e i b e r l i n g . Not on a loan o f the size I have mentioned, in a
stringent money market.
Mr. P o l e . That is a hypothetical question, which w o u ld be very
difficult for me to answer.
Mr. S e i b e r l i n g . Of cou rse, no b a n k w o u ld call a lo a n if it th o u g h t
it w a s re a so n a b ly g o o d in a m o n e y m a r k e t w here th ere w a s p le n ty of
m o n e y , an d ra te s w ere lo w .
Mr. P o l e . Unless under your
proposal it might take advantage o f
a situation to obtain a better underwriting arrangement.
Mr. S e i b e r l i n g . They would not be v e r y apt to do that if the profit
on the underwriting was going to s o m e b o d y else. You have not in
your experience seen many banks working for a profit for other banks,
have you?
Mr. P o l e . Not often.
Mr. S e i b e r l i n g . That is very seldom?
Mr. P o l e . Y e s ; never.
Mr. S e i b e r l i n g . I w a s glad to hear y o u say “ never,” because I
never have.
Now, I want to ask you a few questions along other lines. I have
heard a good deal of criticism of the Federal reserve system in con
nection with the limitation on loans which can be rediscounted. Have
you heard any criticism of that kind?
Mr. P o l e . That is stated in the la w .
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BRANCH, CH AIN , AND GROUP BANKING
Mr. S e i b e r l i n g . I know it is in the law, but have you heard
criticisms of the law, that it is too restrictive in the particular I
mentioned?
Mr. P o l e . I would not say criticism. I have heard the matter
discussed, as to whether perhaps different characters of paper might
be admissible for discount at the Federal reserve banks, such as stock
exchange loans and other classes of secured paper.
Mr. S e i b e r l i n g . How about paper secured by municipal bonds?
Mr. P o l e . I think that has also been discussed.
Mr. S e i b e r l i n g . As a matter of fact, the member banks, in view
of these restrictions, are not getting anywhere near as much service
out of the Federal reserve banks as they could get otherwise— is not
that true?
Mr. P o l e . I think not. I think the liberality with which the Fed
eral reserve bank has dealt with its members is quite remarkable.
Mr. S e i b e r l i n g . But they can not go beyond the restrictions fixed
by statute, can they?
Mr. P o l e . That is true.
Mr. S e i b e r l i n g . Within those limits, they have taken care of the
situation?
Mr. P o l e . Yes.
Mr. S e i b e r l i n g . Here is a large municipal bond house in Ohio that
buys municipal bonds, and they have to carry them in the banks until
they can sell them at, they say, a present rate of 8 per cent. These
bonds only yield about 4K to 5 per cent, and in many cases the rate of
interest is limited by statute. Do you think that if the law could be
amended so that loans with municipal bonds as collateral could be
rediscounted, that would help that situation?
Mr. P o l e . That is a difficult question to answer without giving
full consideration to it. As to whether or not the classes of paper
which might be eligible for rediscount by the Federal reserve banks
should be enlarged is a question which would require a great deal of
thought, and I have not given sufficient thought to it, Mr. Seiberling.
Mr. S e i b e r l i n g . I suppose you will agree with me that municipal
bonds are a security that should be classed as nearly comparable with
Government bonds as any security in the country, will you not?
Mr. P o l e . Speaking very generally, I should say yes. Of course,
there are numerous instances where they are not comparable in any
respect.
The C h a i r m a n . Will you yield there?
Mr. S e i b e r l i n g . Yes.
The C h a i r m a n . I would like to ask Mr. Pole a fundamental ques
tion. Do you consider it good practice to permit the rediscount of
loans secured by Government bonds?
Mr. P o l e . I would see no objection to that. As a matter of fact,
banks indirectly have that privilege now.
The C h a i r m a n . D o you think that brokers’ loans secured by stock
exchange collateral could safely be made subject to rediscount at the
Federal reserve bank?
Mr. P o l e . I have not given that sufficient consideration, Mr. Chair
man.
The C h a i r m a n . D o you think mortgage loans, when given as
security for notes to banks, could be made eligible for rediscount by
Federal reserve banks?
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237
Mr. P o l e . I have not given that sufficient consideration. It is a
very important question.
The C h a ir m a n . Y o u do not care to express an opinion on that?
Mr. P o l e . It requires a great deal of thought, and I would not
be prepared to answer that question now.
The C h a ir m a n . All right, Mr. Seiherling.
Mr. S e i b e r l i n g . When the Federal reserve act was passed, it
was intended to help member banks by rediscounting acceptances
for merchandise, and so forth, was it not?
Mr. P o l e . The Federal reserve banks do purchase acceptances.
Mr. S e i b e r l i n g . But in view of the fact that many corporations
have now financed themselves by the sale of stock and have a large
amount of cash, we do not have acceptances any more to any such
extent as we did have, do we?
Mr. P o l e . Yes, I think the acceptance method of financing trans
actions is increasing rather than diminishing.
Mr. S e i b e r l i n g . It certainly is not in my city
Mr. P o l e . We are developing quite a good acceptance market
now in New York and elsewhere, which was unknown before the
Federal reserve act was passed in this country.
The C h a ir m a n . Will you yield again there?
Mr. S e i b e r l i n g . Yes.
The C h a ir m a n . Does not a good deal of the acceptance business
cover exportation and importation transactions?
Mr. P o l e . Quite largely.
The C h a ir m a n . During the last year and a half, in your observa
tion as comptroller— and, of course, you have jurisdiction over the
banks who hold those acceptances?
Mr. P o l e . Yes.
The C h a ir m a n . D o you consider that acceptances are always a
very liquid form of paper, or has there been a tendency to consider
them as frozen assets?
Mr. P o l e . There may have been instances where acceptances
have not been paid at maturity, but I know of no instance. They
are probably considered in banking circles as the most liquid form of
paper.
The C h a ir m a n . Under recent amendments to the Federal reserve
act, the scope of the service of acceptances has been largely extended,
has it not? In other words, it has been extended to cover goods in
storage in foreign countries, and in process of manufacture?
Mr. P o l e . There have been certain changes in the regulations.
The C h a ir m a n . Does it not cover that particular situation?
Mr. P o l e . I believe that, generally speaking, that is correct.
Mr. S e i b e r l i n g . The Federal reserve banks are piling up an
enormous amount of wealth, are they not?
Mr. P o l e . The capital and surplus accounts of Federal reserve
banks, of course, are growing. Is that what you mean?
Mr. S e i b e r l i n g . Yes.
Mr. P o l e . Yes.
Mr. S e i b e r l i n g . Is there any reason in a situation of that kind
why the law should not be liberalized as to the paper that can be
rediscounted?
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BRANCH, CH AIN , AND GROUP BANKING
Mr. P o l e . Y o u are going back to that same question again. I
have not given sufficient consideration to any changes in that respect
of the Federal reserve act. It is a very involved question.
Mr. S e i b e r l i n g . I would like very much to have you give con
sideration to it and, if you reach a conclusion, I would like very much
to have it in the record.
Mr. P o l e . It is a matter to which the Federal reserve board
itself is giving consideration to, and I have no doubt that at a later
date probably a member of the board might be abJe to give a more
definite answer.
Mr. S e i b e r l i n g . Y o u will agree with me that it would help the
business of the country a great deal if the law could be liberalized
without interfering with the functions of the Federal reserve bank,
permitting the rediscount of a wider range of paper?
Mr. P o l e . Due to a change in the financing o f industry over the
last few years, what is known as commercial paper is decreasing in
volume, but there is usually ample credit to accommodate industry
and agriculture under the present arrangements, and as to whether it
might be found necessary to enlarge the scope of paper which the
Federal reserve bank should discount is quite open to question.
Mr. S e i b e r l i n g . I th in k t h a t is all.
The C h a i r m a n . Mr. Steagall, have you any further questions to
ask the comptroller?
Mr. S t e a g a l l . Not right now.
The C h a i r m a n . Judge Brand, have you any further questions9
Mr. B r a n d . I want to ask just one or two, Mr. Chairman.
Mr. Pole, in your judgment, what effect on business do the decreas
ing of the discount rate and the increasing of the discount rate by the
Federal reserve bank have?
Mr. P o l e . That would d e p e n d very largely on what the condition
of the country was at the time of the rate change. Yesterday the
rate was lowered from 4 to 3% per cent.
Mr. B r a n d . What was the reason assigned for that?
Mr. P o l e . The effect of that, in my judgment, would be almost
entirely psychological, which would be good.
Mr. B r a n d . Y o u say i t w o u ld h a v e a g o o d effe ct o n b u sin ess?
Mr. P o l e . The psychological effect, I think, would be good.
Mr. B r a n d . It is 3% per cent now in the New York Federal Reserve
Bank; that is the rate they reduced it to, on yesterday. Suppose that
thirty days from now, this bank runs it up to 4% or 5 per cent; what
effect would that have?
Mr. P o l e . I could not answer that question. That would depend
upon the condition of the country at that time. I could not answer
that question now.
Mr. B r a n d . Well, it would have a different effect than decreasing
it, would, would it not?
Mr. P o l e . Judge, you are asking me what would happen in thirty
days time if the discount rate were increased or decreased. I can not
answer that, because I do not know what the necessity for any change
might be in thirty days from now. I would like to answer your
question if I could, but I think it would be difficult for me to venture
any guess on a proposition of that kind.
BRANCH, CH AIN, AND GROUP BANKING
239
Mr. B r a n d . They have reduced it now from 4 per cent to 3% per
cent, as has already been stated. What effect, in your judgment,
will this reduction have on farm commodities, and on prices generally?
Mr. P o l e . I think that the psychological effect of a reduction in the
rediscount rate at this time is decidedly good. As to whether it
would have any practical effect as far as the bank’s loaning rate is
concerned, I can hardly believe that it would have any effect at all.
Mr. B r a n d . It would have some effect, would it not, if they put
it back to 4 K?
Mr. P o l e . Banks are borrowing very little now from the Federal
Reserve banks.
Mr. B r a n d . That is one reason, I suppose, why they reduced it
to 3K per cent, is it not?
Mr. P o l e . M y opinion is that the particular reason for the reduc
tion in the rate at this time would be to perhaps create a little easier
feeling on the part of the public that money was easy, and that there
was no particular reason for retrenchment, but that business could go
ahead with the reasonable assurance that money would continue to
be cheap and plentiful.
Mr. S e i b e r l i n g . Mr, Brand, if you will get the United States
Daily for this morning, you will see that it gives the reason why the
rate is down.
Mr. B r a n d . I have not had a chance to read to-day’s issue of this
paper, but at the same time I want to get Mr. Pole’s opinion about it
I had intended to ask this the other day, without knowing, of course,
that it was going to be reduced from 4 per cent to 3% per cent yester
day, but others prolonged their questions, so that I did not have the
opportunity.
Now, Mr. Pole, it would make a decided difference in the prices of
farm commodities and in the prices of all other things that people
have to buy if the\ should run it up say thirty days from now to
4% or 5 per cent?
Mr. P o l e . I think there is not much question of that, Judge.
Mr. B r a n d . M r Pole, do you think that any such power as that
ought to be lodged in the hands of seven men?
Mr. P o l e . I think there should be no ch a n g e in th e n u m b e r of m en
in which such power is lodged.
Mr. B r a n d . In any given number of men, or a reasonable number?
Mr. P o l e . I have not given any thought to the question, as to
whether or not the membership of the Federal Reserve Board should
be reduced or increased.
The C h a ir m a n . Will the gentleman yield there?
By your answer, I am inferring that the Federal Reserve Board
fixes the discount rate—is that correct?
Mr. P o l e . The Federal Reserve Board approves or disapproves
any change in the discount rate.
The C h a ir m a n . Do they ever initiate, or have they ever initiated,
a rate?
Mr. P o l e . That would be a question that you w ould have to inquire
of the Board.
The C h a ir m a n . But you are a member of the Federal Reserve
Board?
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BRANCH, CH AIN , AND GROUP BANKING
Mr. P o l e . I have been a member since I have been Comptroller
of the Currency.
The C h a i r m a n . During your term of office as a member of the
Federal Reserve Board, have they ever initiated a change in the
discount rate?
Mr. P o l e . Not to my knowledge
The C h a i r m a n . Referring to Judge Brand’s question about the
lowering of the discount rate to 3% per cent, that is the lowest rate
since the summer of 1927, is it not?
Mr. P o l e . I b e lie v e so.
The C h a i r m a n . What effect did the lowering of the discount
rate have in the summer of 1927?
Mr. P o l e . It had a stimulating effect.
The C h a i r m a n . Stimulating to what extent?
Mr. P o l e . I was not a member of the Federal Reserve Board
then.
The C h a i r m a n . N o ; but you have an observation.
Mr. P o l e . A marked extent.
The C h a i r m a n . Is it not a fact that it did stimulate commodity
prices about 3 per cent?
Mr. P o l e . It did stimulate commodity prices, but to what extent
I would not be prepared to say.
The C h a i r m a n . It stimulated speculative activities too, did it
not?
Mr. P o l e . I th in k so.
The C h a i r m a n . And it resulted in the export of a large amount
of gold, did it not?
Mr. P o l e . There was a considerable amount of gold exported
about that time, but as to whether or not that was the reason for it,
I could not say.
The C h a i r m a n . Well, inasmuch as the rate is now lowered to 3%
per cent, do you think that similar results will come about?
Mr. P o l e . It might have that tendency.
The C h a i r m a n . D o you think it might encourage speculation?
Mr. P o l e . That was embraced in your question. I say, it might
have that tendency.
The C h a i r m a n . All right.
Mr. S t e a g a l l . Just in that connection, with your permission, Mr,
Brand-----Mr. B r a n d . Yes,
Mr. S t e a g a l l . It was the avowed purpose of the Federal Reserve
Board, and was made known to the public some months back, that
the rate should be fixed with reference to its effect upon speculation,
was it not?
Mr. P o l e . I know of no such statement on the part of the board.
Mr. S t e a g a l l . Maybe I have not expressed myself clearly in a
technical way.
Mr. P o l e . It is possible that such a statement might have been
made, but I say that if it was made I am not familiar with it.
Mr. S t e a g a l l . Well, in any event, the board did issue a warning,
the avowed purpose of which was to notify the public that the rates
would be adjusted in order to affect the situation unless the necessity
for it was removed. That happened, did it not?
bran ch
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241
Mr. P o l e . The act passed clearly indicates that Federal reserve
credit is not intended to be employed in speculative transactions.
Mr. S t e a g a l l . I understand that, and I am not raising any question
about that. The inquiry up to the point where I came into the dis
cussion was with respect to the effect of the change or the various
changes in rates and as to what purpose was contemplated by those
changes, and, as I understand the situation, this change that was
recently made was not accompanied by any public statement from
the Federal Reserve Board— is that right?
Mr. P o l e . As far as I know.
Mr S t e a g a l l . But heretofore the board has issued statements to
the public respecting changes in rates and the purpose sought to be
accomplished by those changes— is not that true?
Mr. P o l e . There have been statements made by the Federal
Reserve Board, but my recollection is vague as to the particular
language of them. Those statements of course could be supplied for
the record if you desire them.
Mr. S t e a g a l l . Mr. Pole, I believe you said in answer to a question
by Mr McFadden that the Federal Reserve Board did not initiate
rates. As a practical matter, is not this true, that no Federal reserve
bank acts in a matter of that sort without a full consultation and
understanding with the Federal Reserve Board9 That is the way
those changes are made, is it not?
Mr. P o l e . I think that is not a fact.
Mr. S t e a g a l l . D o you think in practice that the Atlanta bank
would ever change its rate to the extent of the change recently made
in New York without first taking up the matter for discussion with
the board here?
Mr. P o l e . Yes.
Mr. S t e a g a l l . They do that?
Mr. P o l e . Yes.
Mr. S t e a g a l l . I had this thought, that the mere technical expres
sion describing what the board does with respect to the initiation of a
rate was a sort of a technical differentiation that meant little in
practice. It was my idea that in a matter of that importance, the
district bank would bring the Federal Reserve Board into conference
so that such action would not be said necessarily to have been initiated
by the Federal Reserve Board, nor, on the other hand, would it have
been done independently of them, but that, as a practical proposition,
it would be in the nature of joint action.
Mr. P o l e . A s a practical proposition, Mr. Steagall, it is sometimes
by certain banks discussed prior to any change on the part of such
bank, but not generally so.
Mr. S t e a g a l l . What is the practice of the Federal Reserve Board
with reference to changes proposed by the different Federal reserve
banks?
Mr. B r a n d . Y o u mean as to the rate of discount?
Mr. S t e a g a l l . In the matter of fixing the rates of discount?
Mr. P o l e . Whenever there is a rate change proposed, the board
discusses the question very thoroughly and approves or disapproves it.
Mr. S t e a g a l l . Have there been instances where the Federal
Reserve Board disapproved such rates?
Mr. P o l e . Yes.
Mr. S t e a g a l l . H ow m a n y in sta n c e s o f th a t k in d ?
242
BRANCH, CH AIN, AND GROUP BANKING
Mr. P o l e . I am not prepared to answer that.
Mr. S t e a g a l l . What occurred when that situation arose?
Mr. P o l e . When the Federal Reserve Board disapproves a ratef
the rate remains unchanged.
Mr. S t e a g a l l . Have there been instances where a rate was put in
effect, and announced by a district bank, and then for lack of approval
of the Federal Reserve Board, that rate would be withdrawn or
changed?
Mr. P o l e . There may have been such instances, Mr. Congressman.
Mr. S t e a g a l l . What would you think of legislation to fix a uni
form rediscount rate?
In the first place, let me ask you this question: What would you
think of requiring a uniform rediscount rate for all the banks, the
12 banks?
Mr. P o l e . That is entirely too large a question to answer off-hand.
Mr. S t e a g a l l . Each bank has access to the loaning facilities of all
the other banks, has it not?
Mr. P o l e . Yes.
Mr. S t e a g a l l . It is one great system under one control, as far as
the Government is concerned?
Mr. P o l e . Yes.
Mr. S t e a g a l l . That leads to the other question: What would you
think of fixing the rediscount rate by law?
Mr. P o l e . I have not given consideration to that question and
could not answer it off-hand. It is far too important.
Mr. B r a n d . As I understood you, Mr. Pole, none of the 12
Federal reserve banks on its own responsibility decreases the discount
rate without first consulting the Federal Reserve Board?
Mr P o l e You misunderstood me. I said that the rates were
initiated by the banks themselves and were subject to the approval
or disapproval of the board.
Mr. B r a n d . Suppose that the board disapproves a proposed in
crease or decrease; is that final and binding on the proposing bank?
M r P o l e . The board has the right to approve or disapprove.
Mr. B r a n d . Have you ever known of the Federal Reserve Board
disapproving any rate, either a decrease or increase in the discount
rate, proposed by the New York Federal Reserve Bank?
Mr. P o l e . Yes.
Mr. B r a n d . Was it a decrease or increase?
Mr. P o l e Both.
Mr. B r a n d . I am surprised to hear that.
Nowr, Mr. Steagall, of Alabama, Mr. Chairman, has asked two ques
tions that I intended to propound, so I will finish very briefly.
Mr. Pole, does not the Federal Reserve Board recognize that they
have full authority under the Federal reserve act to suggest to any
Federal reserve bank an increase or decrease in the discount rate?
Mr. P o l e . I do not know what the opinion of the board is on that
subject.
Mr. B r a n d . Have they, in any given instance, suggested to any of
the banks, within your knowledge, a decrease or increase in the dis
count rate?
Mr. P o l e . If they have, I am not aware of it.
Mr. B r a n d . I am going to ask you another broad question. Do
you not think that the Federal Reserve Board feel that they have the
b r a n c h , c h a in , an d g rou p b a n k in g
243
authority, under the provisions of the Federal reserve act, to increase
or decrese the discount rate so as to effect the prices of farm com
modities and the prices of every other thing people purchase?
Air. P o l e . I c o u ld n o t sp e a k fo r th e b o a r d , Mr. B r a n d .
Mr. S t e a g a l l . Your question w as whether, under the provisions
of the law% they contend that they have that authority?
Mr. B r a n d . Yes.
Mr. P o l e . It is a question o f interpretation
I would not b e
authorized to speak for the b o a rd on that subject.
Mr. B r a n d . Mr. Pole, let m e g e t down to a more practical and
personal proposition.
As I understand, in one of the counties of the State of Georgia, and
I know it is so of one or two counties in the State of Alabama, and I
know it is so of one of the counties in Mr. Stevenson’s district, every
bank in the county has failed. Take the State of Georgia; it has
repealed the law which authorized the establishment of branch
banks. That county has no banking facilities, on account of three
banks having failed in the last 60 days.
Now, what system of banking would you advise the people of such a
county as that to adopt, where they can have no branch bank under
the law— would you advise either the chain or the group banking
proposition?
Mr. P o l e . Between ch ain and group banking, I prefer group
banking.
Mr. B r a n d . Then, under th e law of Georgia, it permitting no
branch banking at present, the Atlanta banks, for instance, could
establish a bank down in that county where there are now no banks,
could they?
Mr. P o l e . An independent bank, the stock of which might b e
owned by certain persons who were interested in the Atlanta bank.
M r . B r a n d . I t w o u ld h a v e to b e an in d e p e n d e n t b a n k , b u t it
w o u ld b e w ith in th e c lassificatio n o f grou p b a n k in g ?
Mr. P o l e . The majority of the stock perhaps might be controlled b y
the holding company in Atlanta.
Mr. B r a n d . A s our la w exists at present, there is no opportunity
for those people to establish a branch bank in that particular county,
is there, under the McFadden bill or any other bill?
Mr. P o l e . N o , assuming that your Georgia law does not permit the
organization of a State system of branches.
Mr. B r a n d . They have repealed that law.
Do you not think, and is it not your opinion, that it lies within the
power of the Federal Reserve Board, by adopting a policy of deflation
or inflation, absolutely to control the price of farm commodities,
thereby having the effect to increase or decrease the same?
Mr. P o l e . I think action might be taken b y the Federal Reserve
Board which would affect the prices of commodities.
Mr. B r a n d . Like cotton, for instance, and wheat and corn. It
has done it in the past, has it not?
M r . P o l e . I th in k th e prices o f c o m m o d itie s , as I sa id b e fo re ,
h a v e b e e n affe cte d b y th e ra te ch an g e s.
Mr. B r a n d . Does not the board so construe its Federal Reserve
Act as to give its board the authority— if the board wishes to exer
cise it— to adopt such a policy as to run the prices of farm commodi
ties down, cotton for instance?
244
BRANCH, CH AIN, AND GROUP BANKING
Mr. P o l e . A s I stated before, Judge, assuming that you have ref
erence to the increase or decrease in the discount rate, those changes
are initiated by the Federal reserve banks themselves and not by the
Federal Eeserve Board.
Mr. B r a n d . I was talking about the effect that it would have.
Suppose that the Federal reserve banks get together and decide that
they are going to deflate the prices of all farm commodities, and their
action is approved by the Federal Reserve Board— and you say that
they generally approve what they ask.
Mr. P o l e . I did not s a y th a t.
Mr. B r a n d . I thought you said that they generally approved.
Mr. P o l e . Not at all. I said quite the contrary. I said they d id
not always approve.
Mr. B r a n d I said generally.
Mr, P o l e . I w o u ld n o t go so fa r as to sa y th a t.
Mr. B r a n d . Suppose that the 12 Federal reserve banks did decide
that the prices of wheat and cotton are too high, and that their action
were approved by the Federal Reserve Board; could they not effect
a substantial decrease in the prices of cotton, wheat and corn?
Mr. P o l e I could not answer that question, Judge.
Mr. S e i b e r l i n g . May I ask just one question there?
Mr. B r a n d . Yes.
Mr. S e i b e r l i n g . Mr. Comptroller, is it not a matter of quite
current knowledge th a t the deflation following the war, which re
sulted in the big collapse in 1921, was caused by the Federal reserve
banks extending credit so as to keep Liberty bonds at par that had
been sold to the public?
Mr. P o l e . There are some who entertain such an opinion as that.
Mr. S e i b e r l i n g . Y o u do not know whether that is a fact or not?
Mr. P o l e . As to what their reasons might have been for a low
rate of rediscount, I would not precisely be able to say.
Mr. S e i b e r l i n g . When they found that they could not keep Lib
erty bonds at par— and they went down, I think, to 85, was it not?
Mr. P o l e . I think it w as.
Mr. S e i b e r l i n g . Then they contracted the credit, because t h e y
could not go any further.
Mr. P o l e . Credit was contracted, but as to whether it w a s b e
cause they could not go further or not is debatable.
Mr. S e i b e r l i n g . The object o f liberalizing credits was not a c c o m
plished, and they had to reverse the thing.
Mr. B r a n d . I had not finished my question, Mr. Pole, in connec
tion with the increasing and decreasing of the discount rate. ^ I
asked the question if the board did not feel that they had authority
to adopt a policy, in connection with the banks, which would have
the effect of decreasing or increasing the price of farm commodities,
if they saw fit to adopt such a policy?
Mr. P o l e . Y o u are asking me, Judge, to represent the opinion of
the board, and I can not do that.
Mr. B r a n d . Do they not claim that they have that authority?
Mr. P o l e I do not know what th e board does claim, Judge.
Mr. B r a n d I do not mean to ask an unfair question.
Mr. P o l e . I know you do not.
Mr. B r a n d . That is all I care to ask .
The C h a ir m a n . Mr. Goldsborough?
BRANCH, CH AIN, AND GROUP BANKING
245
Before you start, Mr. Goldsborough, I would like to finish with
Mr. Pole for this period. Later on, of course, we will have to have
Mr. Pole back again, but I am trying to arrange to finish with him
to-day. I do not want to hurry you unduly, Mr. Goldsborough, but
we still have Mr. Busby and Mr Dunbar, and if you can arrange it
so that we can finish with Mr. Pole to-day, I think we should do so.
Mr. P o l e . It is very k in d of von, Mr Chairman; I sh o u ld appre
ciate it very much.
The C h a ir m a n . The Comptroller has been very liberal in giving us
his time, and he has also given us very material information.
Mr. G o l d s b o r o u g h . Mr. Pole, getting back to what seems to be
a little closer to the subject that we are here to discuss, I understood
you to say a few minutes ago that you favored group banking over
chain banking. Did I understand you correctly?
Mr. P o l e . Of the two, I should prefer group banking.
Mr. G o l d s b o r o u g h . Y ou do not think that either type of banking
is sound or good, do you?
Mr. P o l e . I would not undertake to say th a t, Mr Goldsborough
Mr. G o l d s b o r o u g h . Do you favor chain banking?
Mr. P o l e . I d o not.
Mr. G o l d s b o r o u g h . D o you favor group banking?
Mr. P o l e . A s an ultimate s y s te m , I do n o t.
Mr. G o l d s b o r o u g h . H ow clo you distinguish betw een an ultimate
system and the system that is existing at this time?
Mr. P o l e . Under the present law, branch banking is not possible.
Group banking is possible under the present law, and I know of very
many instances where groups have been formed which have resulted
in great benefits to the communities in which they are operating, so
that there is much good in group banking
I also know of individual
chains of banks which are operating successfully and are well and
carefully managed; but, speaking of them as systems of banking, I
much prefer the branch banking idea.
Mr. G o l d s b o r o u g h . I understand, but do you care to say whether
or not you approve of chain and group banking? You answered
before, but then you appeared to have modified your statement.
Do you care to make a direct statement as to whether you do or do
not approve of group banking or chain banking as being sound in
theory?
Mr. P o l e . I do not approve of chain banking. I do not approve
of group banking as a system of banking which is best adapted to
this country.
Mr. G o l d s b o r o u g h . N o w , w o u ld you favor legislation which
would make chain banking impossible if it were possible to formulate
such legislation, as chain banking is now” conducted?
Mr. P o l e . Yes.
Mr. G o l d s b o r o u g h . Would you favor legislation, if such were
possible, which would do away with group banking, as now con
ducted?
Mr. P o l e . That involves the question as to what legislation would
be offered to take the place of group banking, I think. If you ask
me the question whether group banking should be abolished, and
undertake to unscramble those groups which have already been
formed, I would not be in favor of that, but I would be in favor of
r
100136— 30— y o l 1 pt 8---------- 2
246
BRANCH, CH AIN , AND GROUP BANKING
regulating those groups by the extension of supervisory powers on
the part of the comptroller. But as to legislation which might affect
the future expansion of group banking, I think that I should be in
favor of limiting that and regulating it.
Mr. G o l d s b o r o u g h . You would not be in favor of stopping it
for the future and making it impossible either to increase the size
of the present groups or form other groups in the future?
Mr. P o l e . I think that that would correct itself automatically, if
banks were given the privilege of extending, through the method of
operation of branches.
Mr. G o l d s b o r o u g h . Of course I know your view on branch bank
ing and if you would rather not answer my question, sir, it is per
fectly satisfactory to me. I would rather have you say you do not
prefer to answer than seem to evade it.
Mr. P o l e . It is a pretty involved question; you are asking me what
I would rather do-----Mr. G o l d s b o r o u g h . M y question was not involved. Read the
question.
(The reporter read the question.)
Mr. G o l d s b o r o u g h . That question certainly is not involved, as
far as I can tell.
Mr. P o l e . It would depend upon what you have to offer in place
of group banking. If such legislation as you speak of proposed to
give something in place of group banking, I would say yes to your
question. If it offered nothing at all by way of substitute legislation,
my answer would be no.
Mr. G o l d s b o r o u g h . Your answer is, as I understand it, this, that
if you can not have branch banking, you prefer group banking to
the unit banking?
Mr. P o l e . Yes, sir.
Mr. G o l d s b o r o u g h . I think, in your various-----Mr. P o l e . May I add something there?
Mr. G o l d s b o r o u g h . Yes.
Mr. P o l e . Under proper regulation.
Mr. G o l d s b o r o u g h . I may be confusing what you have said with
what others have said, and I am not sur$ that you made the state
ment that I am now about to refer to.
In the various addresses you delivered this summer, or in your
report to the Federal Reserve Board, I believe you stated, did you
not, one reason for the extension of the right to establish branches
of banks, was the fact that these groups were being formed that you
you did not approve of? I may be wrong about that. That is only
my recollection. I know that has been said a great many times.
Mr. P o l e . I have made objections to the group banking system,
Mr. Goldsborough, in my addresses, my particular reasons being that
it is difficult to supervise groups of banks by reason of the fact that
many groups are composed of national banks, of member banks,
and of nonmember State banks, some of which we have jurisdiction
over and some of which we have not, and for other reasons, and I
think I have usually said as an ultimate system, I was very much in
favor of branch banking as against group banking.
Mr. G o l d s b o r o u g h . Your idea is, I suspect, that if it were per
mitted further to extend branches in accordance with the plans which
BRANCH, CH AIN, AND GROUP BANKING
247
you have suggested, that that would tend to abolish or do away
with group banking, automatically?
Mr. P o l e . I feel q u ite sure that th e g r o u p s themselves, at least
in a large number of cases, would prefer to operate under the branch
system rather than the gro u p system and I think t h a t that w o u ld
automatically change from one to th e otln r.
Mr. G o l d s b o r o u g h . N o w , the State of California has had extensive
systems of branch banking for quite some \* irs, has it not?
Mr. P o l e . Y e s .
Mr. G o lds b o e o uGh . The group banking b-ogan, I think, not more
than two years ago, Is not that right? I do not mean in California;
I mean anywhere, as far as we know it?
Mr. P o l e . I think that is correct, including California.
Mr. G o l d s b o r o t j g h . Including California?
Mr. P o l e . Yes, sir.
Mr. G o l d s b o r o t j g h . N o w , is it not a fact that in California there
has been a great extension of group banking, as in other parts of the
United States?
Mr. P o l e . I should say by no means.
Mr. G o l d s b o r o t t g h . Well, I did not anticipate that answer, but
the December number of the Federal Reserve Bulletin states what I
am saying to you now.
Mr. P o l e . Oh, does it? I am perfectly w illin g to accept your
statement for it. I was not aware that group banking had developed
in California to the same degree that it had in other States.
Mr. G o l d s b o r o t j g h . I did not bring the Bulletin with me. I did
not anticipate that answer.
Mr. P o l e . I am surprised when you make that statement but no
doubt your information is correct.
Mr. G o l d s b o r o l t g h . Of course, if my premises are not correct, it
is not worth while to discuss it further— that is, if my premises do not
agree with yours.
M r. P ole . That is a question of fact.
Mr. G o l d s b o r o t j g h . O f f a c t ; y e s.
Mr. P o l e . Decidedly so.
Mr. G o l d s b o r o t j g h . Assuming that is the fact, certainly branch
banking in California did not interfere with the development of
group banking in California?
Mr. P o l e . Well, Mr. Goldsborough, branch banking is not per
mitted any more in California than it is in any other State.
Mr. G o l d s b o r o t j g h . But it has been extended so much further
than any other States-----Mr. P o l e . Not since the passage o f the McFadden Act. These
systems were inaugurated and in operation prior to that time.
Mr. G o l d s b o r o u g h . Y e s .
Mr. P o l e . N o branches have been created outside of the cities
since that time.
Mr. G o l d s b o r o u g h . They have state-wide branch banking there
too?
Mr. P o l e . Neither can a large bank or any other bank operate a
system of branches unless it wishes to remain outside of the Federal
Reserve System.
Mr. G o l d s b o r o u g h . Well, the point I was emphasizing or trying to
emphasize, was that branch banking had not stopped group banking.
248
BRANCH, CHAIN, AND GROUP BANKING
Where branch banking has been in existence in a very practical way
it has not interfered with group banking, where you indicate your
branch banking system would probably do away with a system that
you probably disapprove of.
Mr. P o l e . There is no branch banking now.
Mr. G o l d s b o r o u g h . In California?
Mr. P o l e . They can not extend their branch banking systems and
remain in the Federal Reserve System.
Mr. G o l d s b o r o c g h . I am thoroughly aware of it. But they do
h a \ e branch banking and have it all over the State and it has not
stopped group banking.
Mr. P o l e . It would stop group banking, in my opinion, if those
groups were permitted to operate under a branch system. But it is
because there is no right for a bank to operate branches that the
group systems are developing
Mr. G o l d s b o r o u g h . Then, as you said a few moments ago, the
group system is a lesser evil than the unit system?
Mr. P o l e . I said that a group system was preferable to the chain
system.
Mr. G o l d s b o r o u g h . You said it was preferable to the unit system,
also?
Mr. P o l e . Yes; I would agree with that.
Mr. B r a n d . What do you mean by “ unit system ” ?
Mr. G o l d s b o r o u g h . Independent banks.
The C h a i r m a n . Will you yield fo r a q u e stio n ?
Mr. G o l d s b o r o u g h . If you can defer your question, I would
appreciate it, because I think I have something going now.
The C h a i r m a n . I think this is in line with your questions.
Mr. P o l e . I want to ask, in line with .the questions that have been
put and answered, in regard to chain and group banking: You have
recommended that branch banking be extended to trade areas and
stop there. I think that is correct, is it not?
Mr. P o l e . Yes; except that I-----The C h a i r m a n . Y o u have also said that you would like to pro
hibit the control of those main banks in trade areas by another group
or bank; for instance, like—
Mr. P o l e . A consolidation of a large group so as to form a banking
monopoly.
The C h a i r m a n . Yes
Mr. P o l e . I h a v e .
The C h a i r m a n . If you stop there, group banking and chain bank
ing will continue as it is now operated under State law, will it not?
Mr. P o l e . It might do so.
The C h a ir m a n . Then, under your plan, you would not stop group
and chain banking in the United States?
Mr. P o l e . There might still be chains and groups formed after the
passage of such branch banking legislation as I have suggested.
The C h a i r m a n . It is all proceeding under State law now, and no
national law could forbid the continuance of State group and chain
banking, could it?
Mr. P o l e . The fact that the Federal reserve system might, as a
condition of membership, impose such conditions as would make it
impracticable, might stop it.
The C h a i r m a n . Is that your suggestion for controlling it?
BRANCH, CH AIN, AND GROUP BANKING
249
Mr P o l e . I made no suggestions for controlling that, Mr. Chair
man
The C h a i r m a n D o you care to make a suggestion?
Mr. P o l e . Not a t th is tim e .
The C h a i r m a n . Well, inasmuch as you have asked for an extension
of branch banking to trade areas and you have expressed your unquali
fied opposition to group and chain banking-----Mr. G o l d s b o r o u g h . Not to-day, but previously, as I understand
it. To-day he defends group banking over unit banking, as I under
stood his answer.
The C h a ir m a n . I think it would be helpful to the committee if
you will tell the committee just how you propose to stop group and
chain banking under your plan of extending branch banking in trade
areas.
Mr. P o l e , M y plan is this: If banks are given the right to operate
branch systems, the advantages would be such as to automatically
convert these groups and chains into branches for the most part.
Mr. G o l d s b o r o u g h . Mr. Pole, the arguments which have been
made by you, I think, as well as others, in favor of branch banking,
have been that it is necessary to do it in order to enable the national
bank system to compete with State banking systems which do permit
branch banking. That is a fact, is it not?
Mr. P o l e . That is a factor.
Mr G o l d s b o r o u g h Y o u distinguish between a fact and a factor?
Mr. P o l e . Yes.
Mr. G o l d s b o r o u g h . 1 see. Now, Mr Pole, suppose it were prac
ticable for Congress to pass legislation which would entirely stop
branch banking within the States. Would you still then recommend
an extension of branch banking by the Federal Government?
Mr. P o l e . Yes
Mr. G o l d s b o r o u g h . Suppose it were possible for Congress to pass
legislation which would stop chain and group banking right where it is
within the States— State banks— would you then think it proper for
Congress to pass legislation which would stop further group or chain
banking among national banks?
Mr. P o l e . Not, without offering something in its p la ce
Mr. G o l d s b o r o u g h . Do you not think in communities where
banks have failed on such a scale as to indicate there was something
radically wrong, that the community had failed first before the bank
had failed0
Mr P o l e Under the present system that m ig h t be correct.
Mr. G o l d s b o r o u g h . Is it not a fact, Mr. Pole, that this condition
of failures, which you have testified to, and which has been made a
matter of comment in numerous articles by yourself and others during
the last six or eight months, is almost entirely directly attributable
to the after-war conditions in this country?
Mr P o l e . No. The number of banks which have failed includes
a large number of banks which have been organized since the war.
Mr. G o l d s b o r o u g h . Well, I do not know about the percentages.
Mr P o l e It is at least 10 per cent.
Mr G o l d s b o r o u g h . How is th a t?
Mr. P o l e . At least 10 per cent o f failures have been of banks which
have been organized since the period referred to.
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BRANCH, CH AIN, AND GROUP BANKING
Mr. G o l d s b o r o u g h . I will change the question. Is not substan
tially all of the 90 per cent of banks which were in existence prior to
the w and which have failed since the war, have not these failures
rar
been the result of after-war conditions?
Mr. P o l e . I should say not.
Mr. G o l d s b o r o u g h . D o you not believe it is true to a very great
extent?
Mr. P o l e . T o an extent, Mr. Goldsborough
Mr. G o l d s b o r o u g h . Have you any idea to what extent?
Mr. P o l e . Well, to a considerable extent.
Mr. G o l d s b o r o u g h . D o you think it is fair, in attempting to
conduct a judicial— I am not referring to these hearings here— in
attempting to argue this matter judicially, do you think it fair to
lay the great accent which has been laid on the failure of small banks
since the war in the last nine years, as any real evidence of the break
ing down of the unit system?
Mr. P o l e . I do, indeed.
Mr. G o l d s b o r o u g h . You have just said that you thought afterwar conditions were very largely the cause of these failures. You
could not tell to what extent. If you can not tell to what extent,
but you think to a large extent, how are you in a position to say?
Mr. P o l e . I think failures have been accentuated to a considerable
extent by the economic conditions in the agricultural sections of the
country, but I do not think that is the basic reason.
Mr. G o l d s b o r o u g h . Mr. Pole, is it not a fact that banks have
been gradually failing and trying to hold on and one w^ould be a little
stronger than another and then first one would fail and then another,
almost ail due entirely to after the war deflation? Banks filled
with frozen paper, bad mortgages, etc., have been just hanging on and
gradually, first one then another, would fail as time went by. We
countrymen have understood that to be the condition.
Mr. P o l e . I agree that that has had its effect.
Mr. G o l d s b o r o u g h . N o w , if th a t is th e ca u se , if th a t is th e re a s o n ,
it d o e s n o t c o n s titu te an a r g u m e n t a g a in st th e u n it s y s te m . If a
m a n h a s g o t a p im p le on his h a n d an d it m a y b e c a u se d fr o m f ifty
d iffe re n t d ise a se s, n o d o c to r w o u ld s a y , a r b itra r ily , it w a s b e ca u se
o f s o m e d isea se h e w a s in te re ste d in , y o u k n o w .
Now, Mr. Pole, I have made rather careful inquiry from the
Bureau of Investigation of the Federal Reserve Board and I may be
mistaken— I will not undertake to tie them into this because they
may say I am wrong and they might not have meant exactly wiiat
I thought was in their minds— but I am strongly of the opinion that
they think that a substantial number of these failures which have
happened in the last nine years, are directly caused by the after-war
deflation.
Mr. G o l d s b o r o u g h . Do you think it is possible— practically pos
sible— for a bank of $25,000 capital to make a success?
Mr. P o l e . There are such banks that can be made successful and
are successful to-day.
M r. G o l d s b o r o u g h . D o you think it is possible for a bank with a
less capital than $25,000 to succeed?
Mr. P o l e . There are undoubtedly banks with less than $25,000
capital succeeding.
BRANCH, CH AIN, AND GROUP BANKING
251
Mr. G o l d s b o r o u g h . A mere illustration is never convincing, but
m 1909, I was the attorney in the set-up of banks in my own com
munity with a capital stock of $12,000. They both have been wonder
fully successful.
I sent for the last statements of each bank, but I have had only one
answer so far. This institution has been in extence in a little place of
300 inhabitants for nearly 21 years now. It has absolutely around it
nothing but a rural community and is surrounded, within a radius
of 7 or 8 miles, by large banks in county seats— comparatively
large banks. That bank paid a dividend of 6 per cent from its
inception. Since 1918 it has paid a dividend of 20 per cent. It has
always paid 4 per cent on savings deposits. It has about $4 in the
savings deposits to every $1 it has in commercial deposits, and its
stock is now worth 8 for 1 Its capital stock is $12,000; surplus
$75,000 and undivided profits, $7,928.80, according to this last
statement
Its deposits are $780,000 plus. It pays its cashier
$3,200 a year That is the Hidshoro, Queen Anne, Bank of Hillsboro,
M d'
The other bank I liave m mind is the Goldsborough Bank of Golds
boro ugh, Md , a village of about 150 inhabitants. It has done nearly
as well.
Do you think that the banking business is like any other business?
If you are a good banker, you bank makes money and if you are not
a good banker your bank does not make money? Do you not think
that is the real crux of the situation?
Mr. P o l e . I think that is a very important phase of it and much
more important, perhaps, than the question of economic conditions
to which you refer
I assumed these banko to which you refer were not affected by the
economic conditions?
Mr. G o l d s b o r o l g h . Y e s s i r ; after the war thev were loaded up,
but came out all right.
Mr. P o l e . By reason of good management?
Mr. G o l d s b o r o u g h . By reason of good management; yes. The
section, the eastern shore of Maryland, is just as distinctly rural as
Iowa. I am satisfied of that.
Mr. P o l e . M y point is that the reason for the bank failures in
communities is not entirely-- I think you used the word— due to
economic c o n d i t i o n s because these banks, as you say, were just as
subject to them as other banks in rural communities, It survived and
other banks failed.
Mr. G o l d s b o r o u g h . Mr Pole, with the good roads we have now
and telephones radio and frequent bank meetings and the very,
very close touch that the country banks are in now with the metro
politan banks, do you not think that country bank management is
improving very, very rapidly, especially in the last 10 years, just
as the country doctor or country lawyer and other professional men
are gradually reaching the average level?
Mr. P o l e . We have in our office so very, very many evidences of
poor bank management, Mr. Goldsborough, that it is doubtful, in
my mind, as to whether the better element among the bankers is
finding a resting place among the small country banks. I doubt very
much whether the management of country banks, speaking generally,
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BRANCH, CHAIN, AND GROUP BANKING
has improved, perhaps in proportion to the other branches of business
and professions.
The C h a i r m a n . Will y o u yield a m o m e n t?
Mr. G o l d s b o r o u g h Just one other question, if you can reserve
that.
I have an article that I cut out of some paper yesterday
I think
it is the Marylander and Herald, probably one of our local papers.
It is in the pot metal type and evidently taken from some city paper.
A survey of State banking departments by the State bank division, American
Bankers Association, discloses a distinct tendency the last five years to take
bank supervision out of politics, to increase the discretionary powers of bank
commissioners, to lengthen their terms of office, to supply them with adequate
forces of qualified examiners and to relieve banking departments of duties foreign
to banking, says a recent statement
Then the statement continued, and finally this is said:
The office of bank commissioner is now operated as an independent department
of State government in 34 States,
Do you not think that the management of country national banks
is comparable to the management of country State banks?
Mr. P o l e . Yes.
Mr. G o l d s b o r o u g h And do you not think that the management
of country State banks is being greatly assisted by the increasingly
efficient State bank departments?
M r. P o l e . N o doubt the State banking departments do render a
great deal of assistance to the executives of the banks in the matter
of management
Mr. G o l d s b o r o u g h . N o w , Mr Chairman, I beg y o u r pardon. I
wanted to finish that line.
The C h a i r m a n . Have y o u finished w ith the w itn e ss?
Mr. G o l d s b o r o u g h . Oh, no.
I gather from what }rou stated the other day, that you thought
mergers in the central reserve cities of New York and Chicago had
proceeded far enough
Did I interpret what you said correctly?
Mr. P o l e . I do not recall having made such a statement as that,
Mr. Goldsborough.
Mr. G o l d s b o r o u g h Weil, my recollection is quite distinct, but,
of course, I may be wrong Mr Busby thinks you stated you are in
favor of larger banks
Mr. B u s b y . M y recollection is that in a very short answer you
stated that you were not in favor of larger banks than now existed in
centers like New York and Chicago
Mr. A w a l t . He did not say that
Mr. B u s b y . Then, the answer is, he did not say that
Mr. P o l e . Let me answer my own questions.
(Discussion off the record.)
Mr. G o l d s b o r o u g h . I will put my question another way. M y
recollection of the statute is that the Comptroller of the Currency has
to approve mergers.
Mr. P o l e . Consolidation
Mr. G o l d s b o r o u g h That is the same thing, as far as I know
Mr. P o l e . Practically so I might qualify it by saying that the
Comptroller of the Currency approves consolidations, but a bank
has the right to purchase the assets and assume the liabilities of
BRANCH, CH AIN, AND GROUP BANKING
253
another bank, without approval of the comptroller, which is, in
effect, a merger without the approval of the comptroller.
Mr. G o l d s b o r o u g h . Mr. Pole, last summer the Guaranty Trust
Co. and the National Bank of Commerce consolidated, did they not,
in New York?
Mr. P o l e . Yes
Mr. G o l d s b o r o u g h . Was that consolidation approved by the
Comptroller o f the Currency?
Mr. P o l e . No, sir; i t w a consolidation under State charter, the
^as
national bank going into liquidation
The comptroller’s approval
was not necessary.
Mr. G o l d s b o r o u g h . N o w , Mr. Pole, suppose the National City
Bank and some other large institution in N e w York wanted to con
solidate— re a lly wanted to do it an d made up th eir minds to doit, and
set the machinery to w ork with the vast in flu en ce they have, to get
the consent of any Comptroller of the Ciirrew*\ 9
Mr. P o l e . Y e s.
Mr. G o l d s b o r o u g h The only thing he could do would be to grant
the permission?
Mr. P o l e . Not at all.
Mr. G o l d s b o r o u g h . The only practical thing to do?
Mr. P o l e . Not at all
M r . G o l d s b o r o u g h . I am not referring to \ ou , you u n d e rsta n d
Mr. P o l e . I u n d e rsta n d .
Mr. G o l d s b o r o u g h , You never were subject to that ordeal, were
you, of trying to resist a situation of that kind?
Mr. P o l e . Of that magnitude, n o ; but of considerable magnitude,
yes.
Mr. G o l d s b o r o u g h . It is not pleasant, is it,?
M r . P o l e . By n o m e a n s, b u t it is d o n e.
Mr. G o l d s b o r o u g h . It is done up to a certain point and then
resistance breaks down inevitably.
What I am trying to get at is this: Of course, your theory is that
under this trade area plan of yours, there would be sufficient compe
tition always to protect the rural communities from autocratic credit
domination.
M r . P o l e . T h a t is m y feelin g .
Mr. G o l d s b o r o u g h . Is it not a fact that as groups get larger an d
get further away from smaller groups, they inevitably get closer an d
closer in their manner of approaching things and in their point of
view and in their selfish interests? There is pretty near consolidation
there at the top. Now, two, three, four, five, or six very large
institutions in a city who, together, dominate the credit situation,
gradually find it to their interest not to fight each other but to
cooperate in their policies, and so, even though they do not consoli
date, is there not a tendency for them so to cooperate in matters of
policy with those who are nearly as strong as they are, so as practi
cally to do away with any real competition? That is my experience
in other walks of life.
Mr. P o l e . With regard to banks, I w o u ld not see why there would
be any more reason for diminishing competition than there is now.
Banking competition is rife in the cities. Just because they were*
permitted to put out small branches in that direction or this direction,
do you think that would make competition any less keen? With
254
BRANCH, CH AIN, AND GROUP BANKING
enlarged opportunities for banks, would competition be any less
keen? I should think not. I think it would be accentuated.
M r. G o l d s b o r o u g h . Y o u do n o t th in k g r a d u a lly a n d m o r e g r a d
u a lly th e y w o u ld find t h a t it w as to th eir in te re st to m erg e to s to p
c o m p e titio n ?
Mr. P o l e . I think there might be a certain amount of merging
going on, as there is to-day, but I do not think the time would ever
come when the banking business of the country would be consolidated
in a very few hands. Banking is a business, and if properly conducted
is a profitable business and a necessary business, and I see no reason
why competition should not be keen.
Mr. G o l d s b o r o u g h . Now, Mr. Pole, in this country at this time,
we are going through an epoch which is, by a great many, viewed with
great alarm. There is a tendency to consolidate in every industry
and in every walk of life. Of course, it is very evident in public
utilities and chain stores and in mail-order houses, and three things
that are right on the surface and that we all see. But it is so in every
other business. It is so in the professions; for instance, take the legal
profession as an illustration. A man buys an automobile and he
insures it. If he has an accident he is represented by the insurance
company. The insurance company, in turn, has a law firm in some
city which represents it, so that the country lawyer is gradually
eliminated.
The same thing exists among the doctors; in other words, what I
am driving at is this tendency has gotten into the final place it would
drift to and that is the learned professions. Now, it is a tendency.
It may be that 25 or 30 years from now, we will all sleep in the
country and all work in the city, because there will not be any other
place to work and that our farming will be done by great corporations
who own thousands and thousands of acres of land and that work
the farms by machinery. This may be inevitable and it may not be
possible to stop it no matter how much we may deplore it.
As I see it, any monopoly of credit will accelerate that situation
more than anything else, because credit controls everything else
economic in the community and is it not the province of statesman
ship, if it has any, to rather restrain that tendency than accelerate it,
until, of course, it becomes clearly demonstrated that you are in an
actual economic cycle?
Is there any reason why we, as legislators, should sit here and
deliberately formulate a plan to accelerate that condition unless we
think it is a good one? It certainly can not be that the people in the
country are suffering for want of banks. I will guarantee we can sit
here from now to the first of July, Mr. Pole, and you will not find a
single country banker here asking that his bank be transformed into
a branch banking system or any community coming here and asking
for a branch banking system.
That is my question. Do you think it is the part of legislators,
who have the public interest at heart and who are bond to visualize
the future, in so far as they can, to accelerate a condition of that
kind or to restrain it in so far as it can be done?
Mr. P o l e . I do not think it is the part of legislators to participate
in such acceleration, but under my suggestion of a branch banking
system, the question of decentralization of credit is a very important
part of it. I think you will find in very many sections of the country
BRANCH, CH AIN, AND GROUP BANKING
255
to-day, that the presidents and executive officials of independent bank
are importuning the large group bankers to admit them into their
systems. That is my information from those people who are in that
business. That, of course, is a matter than can be easily demon
strated, during the hearings as they develop.
Mr. G o l d s b o r o u g h . That is all, Mr. Chairman
The C h a i r m a n . Mr. Dunbar.
Mr. D u n b a r . You stated a few moments ago, decentralization of
credit is a very important object to be attained by branch banking.
Is that right? ‘
Mr. P o l e . Yes
Mr. D u n b a r . The other day 1 made the statement that the argu
ment was used by proponents of the Federal reserve system in favor
of the passage of the bill, that decentralization of banking credits
would be diverted from New York and I understood you to state
that the Federal reserve banking system had decentralized credit
from New York, but that the credits had grown in other communities,
giving the impression that centralization of banking credits was
effective in New' York
Now, I g e t m y -—
Mr. P o l e . I am not agreeing to that
Mr. D u n b a r . I know you are not.
M r . P o l e . I am n o t ag reeing to th a t b e in g a correct s ta te m e n t o f
w h a t I said.
Mr. D u n b a r
Mr. P o l e . I
Pardon m e . What did you say?
said that while undoubtedly there had been a large
increase in deposits in New York, I was not prepared to say they
were out of proportion to the increase of deposits in other parts of the
country.
Mr. D u n b a r That is what I understood you to say and perhaps
I did not make my observation and thoughts clear,
Mr. Carter Glass, who was the author of the Federal reserve act,
in a speech made the statement that the operations of the Federal
reserve system had centralized credit in New York City, and I talked
to him yesterday He said that, it was absolutely true that the oper
ations of the Federal reserve system had increased, to a very, very
great extent, the centralization of credit in New York City. You do
not agree with him?
Mr. P o l e . I agree with him, but I do not know whether it h a s
increased out of all proportion to the increase in other sections of the
country. There is no doubt but that it has increased in New York.
Mr. D u n b a r . His idea was that it had disproportionately increased
and to all intents and purposes, had increased beyond the intention
of the proponents of the bill.
Mr. P o l e . I am not prepared to say
Mr. D u n b a r Have you any record of the statements of the credits
of banks in New York City before the passage of the Federal reserve
act, together with other cities? Of course, now, they have very
greatly increased, but have you those statistics from which we could
obtain an idea of the proportionate increase in the respective cities?
M r . P o l e . Y es.
Mr. D u n b a r . Will you publish them in your remarks?
Mr. P o l e There will be no objection to publishing them.
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BRANCH, CH AIN ? AND GROUP BANKING
(The figures referred to are in course of preparation and wilF be
furnished later.)
Mr. D u n b a r . Y o u said that the capital and surplus o f the Federal
Reserve System had very largely increased-----Mr. P o l e . Yes, sir.
Mr. D u n b a r . The amount of the franchise tax paid to the Federal
Government last year by the Federal reserve-system banks, was
$2,900,000. How is the amount arrived at that they shall pay the
Federal Government?
Mr. P o l e . After paying a 6 per cent dividend to their shareholders.
The Federal banks are permitted to increase their surplus and their
earnings until it equals the subscribed capital, after which 10 per
cent of the earnings go to surplus, and the balance goes to the Govern
ment as a franchise tax.
Mr. D u n b a r . After the war, the amount o f money p a id to th e
Federal Government, instead of being $2,900,000 was $60,000,000 a
year, or twenty times more than now paid by the Federal reserve
banks. Was that because their earnings were so much greater a t
that time in proportion to their capital stock?
Mr. P o l e . Obviously, I would say so.
Mr. D u n b a r . Then, the Federal reserve banks are not making as
much money now as they did nine years ago?
Mr. P o l e . I th in k so m e o f th e m are an d so m e are m a k in g less
Mr. D u n b a r . Not in the aggregate, because in the aggregate they
paid last year to the Federal Government $2,900,000, instead of
$60,000,000 annually some 9 or 10 years ago.
Mr. P o l e . Those complete figures on the earnings of the Federal
reserve banks have been furnished the record, Mr. Dunbar.
Mr. D u n b a r . I k n o w , b u t I w o u ld lik e to k n o w s o m e reason fo r
th e fa c t--------Mr. B u s b y .
M ay I suggest this, that the building program of the
Federal reserve banks has taken $160,000,000 out of the earnings
for the last year or two?
Mr. D u n b a r . Would that affect the amount of the franchise taxpaid by the Federal reserve banks?
Mr. P o l e . Yes, sir.
Mr. D u n b a r . And the suggestion was made the other d a y that
the amount of the franchise tax paid to the Federal Government might
be used to reimburse depositors in the national banks which have
failed. Would the $2,900,000 pay the losses— be sufficient to pay
the depositors in national banks which have failed and which did not
pay their depositors 100 cents on the dollar?
Mr. P o l e . It will be impossible to tell that because banks which
have failed last year have only started on their liquidation and it
will depend on how they liquidate. I think that $2,900,000 would
not be nearly enough to pay that.
Mr. D u n b a r . Another question: The Federal reserve bank has
reduced its discount rate to 3 per cent. What is the amount of
discount of the Bank of England to-day?
Mr. P o l e . Four per cent.
Mr. D u n b a r . The reduction of the Federal Reserve rate to 3%
per cent, if it is less than the rate charged by the Bank of England—
does that cause an outflow of gold from the United States to England?
BRANCH, CH AIN, AND GROUP BANKING
257
Mr P o l e It might make some little difference.
Mr. D u n b a r . It might make some little difference?
Mr. P o l e Yes, sir.
Mr. D u n b a r . Then, that outflow of g o ld from the United States
to England would reduce the available credit of our banks?
Mr. P o l e . Well, the gold reserve would have to be very materially
reduced before the Federal reserve banks would feel the effect of that.
Mr. D u n b a r . I note in financial newspapers that great importance
is paid to the outflow of gold from the United States on our business
and credit systems.
Mr P o l e . Yes, sir
Mr. D u n b a r . So that if there is any outflow due to the 3% per cent
rate, notwithstanding our business men can obtain money at a less
amount, it would pretty near balance the situation?
Mr. P o l e . I do not think, under the present circumstances, there
will be very much outflow of gold. The Federal reserve banks
themselves are probably almost at their high point as to gold reserve,
so that the difference would not affect, in a practical way, the amount
of credit which could be extended by the Federal reserve system.
Mr. D u n b a r . During the last year, the Federal reserve banks
were criticised for raising the rates for the purpose of preventing
speculation I do not say they did so, and you would not care to
commit yourself on that subject anyway. But was not a large amount
of the speculation due to the fact that last year the corporations of
the country loaned their surplus for the purpose of speculation?
Mr. P o l e . That was a very important factor.
Mr. D u n b a r . The Federal Reserve Bank officials were apprehen
sive all along that the debacle of speculation would result just as it
did, were they not?
Mr. P o l e . I can not speak for the Federal Reserve Bank officials.
Mr. D u n b a r . But you believed that?
Mr. P o l e . I think that may be correct.
Mr. D u n b a r . Now, another question. You have heard a great
deal about the unit bank and about its being driven out of business
by branch banking. Branch banking would drive the unit banking
system out of existence, according to my notion, the same as chain
stores to-day are driving out the individual stores in our respective
towns.
Mr. P o l e . Y o u are making that statement?
Mr. D u n b a r . I am making that statement. Does it agree with
your idea?
Mr. P o l e . No.
Mr. D u n b a r . You do not believe that branch banking would drive
out the unit banks?
Mr. P o l e . It has not done so where branch banks are in operation.
Mr. D u n b a r . How could a branch bank go into a community with
several banks of $100,000 capital and have available to loan in that
community $200,000 to a corporation or an individual instead of
$20,000 and not drive those other banks out? Would not that be a
natural sequence?
Mr. P o l e . Well, you are assuming a great many things there, Mr.
Dunbar. In the first place, if the banking facilities in the particular
community to which you refer w^ere ample, it might not be possible
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BRANCH, CH AIN , AND GROUP BANKING
for the branch bank to go in there, with its branches, unless it pur
chased one of the going banks.
Mr. D u n b a r . I know it could not go in there without the consent
of the Comptroller, and also unless it could be shown that the branch
bank was needed.
Mr. P o l e . That is my answer, substantially.
Mr. D u n b a r . Yes, but it is my opinion that branch banking would
go into all these communities. They would find some reason for
being established and these unit banks would be eliminated and caused
to cease to exist— the local unit banks which we have. Now, you do
not believe that?
Mr. P o l e . Not necessarily. A great many unit banks will tell you
they do not want any better competition than a branch of a city bank.
Mr. D u n b a r . That is all, Mr. Chairman.
The C h a i r m a n . Have you any questions, Mr. Busby? We have
just five minutes left.
(Discussion off the record.)
The C h a i r m a n . The committee will stand adjourned until Tuesday
morning at 10.30 o ’clock a. m.
(Whereupon, at 12.55 o ’clock p. m., the committee adjourned until
Tuesday, March 18, 1930, at 10.30 o ’clock a. m.)
BBANCH, CHAIN, AND GROUP BANKING
H
C
o use
o m m it t e e
on
of
B
R
e p r e s e n t a t iv e s ,
a n k in g
and
C
urrency,
Wednesday, March 12, 1980.
The committee met in the committee room, Capitol Building at
10.30 o’clock a. m., Hon. James G. Strong (acting chairman) presiding.
Mr. S t r o n g . The committee will come to order, please. The
chairman has left with me his list of names of members of the com
mittee to be called in their order, but, before starting to call them,
I want to put into the record a letter handed me by Congressman Box
of Texas, written to him by one of his constituents on this subject.
Mr. B e e d i . About what?
Mr. S t r o n g . Branch, group, and chain banking— on this subject.
I would like to have the clerk read it.
(The clerk thereupon read the letter referred to, at the conclusion
of which reading, the following occurred:)
Mr. B e e d y . Mr. Chairman, I was thinking, as the letter was
being read, that we are just starting in on these hearings. I, person
ally, would like very much to show every courtesy to Congressman
Box, but I am wondering if it is not going to be rather dangerous
and lead to a great deal of misconception, if we start printing letters
indiscriminately in the record.
For instance, I think the use of the word “ chain” in that letter is
not strictly correct.
Mr. S t r o n g . I think he refers to branch banking in Canada.
Mr. B e e d y . Exactly; and when he makes his references to the
Canadian banks, he is speaking about branch banking.
I do not think we ought to let these generalizations go into the
record when the party is not here to be questioned. He makes somevery sweeping assertions in his letter and on just what he bases them,
the committee has no means of knowing. While I do not want to
take an arbitrary stand, I should like to know what the committee
thinks about it.
Mr. F o r t . It also seems to me that here we are getting a very
strong statement from Mr. Pole, and it breaks the continuity, in
the record, of his testimony and of his questioning, to insert some
thing like this into the middle of it.
Mrs. P r a t t . Mr. Chairman, I want to say that I have received
innumerable letters along that line. The question of banking is
particularly interesting to my district, but I agree with Mr. Beedy
and w
rith Mr. Fort that it is simply cluttering up the record to permit
Members of the House to bring in the letters they receive from con
stituents-----Mr. B e e d y . And every letter introduced would prompt another
Congressman to bring in an opposing letter to match it.
259
260
BRANCH, CH AIN , AND GROUP BANKING
Mrs. P r a t t . Would it not lead to the introduction of a tremendous
amount of correspondence?
Mr. S t r o n g . Mr. Box handed it to me, stating that with the
man’s experience, as given in the letter, and his visits to Canada,
he thought it would be helpful to the committee. He did not want
to come before the committee himself, but wanted to have the letter
placed in the record.
I have presented the request, and if you want to refuse it, all
right.
Mr. F o r t . I do not think the statement should go into the record
without an opportunity to examine the witness.
Mr. S t r o n g . If the committee wants to bar this letter, all right.
Mr. S e i b e r l i n g . It is difficult to discriminate among the letters.
For instance, I have a circular letter from some radio company
protesting against certain features of branch banking.
Mr. L e t t s . Why would it not be a safe rule to permit members
of the committee to introduce such letters as they think important
and which come to them personally, and to bar others, unless the
action of the committee is to the contrary?
Mr. F o r t . That does not open the door to any cross-examination
of the witness, as to his information. I think we are going to get
a lot of information that way, and that we should have an oppor
tunity to cross-examine those making the statements.
Mr. L e t t s . You may have a letter from some one in your district
that you think contains some important facts, and you, personally,
can tell us something about the man and about his experience.
Mr. F o r t . I have a lot of them.
M r . L e t t s . S o I th o u g h t, in m y su g g e stio n , w e o u g h t n o t to b a r
le tte r s offered b y m e m b e r s o f th e c o m m itte e .
Mr. G o l d s b o r o u g h . Would it not be better
to take the letters
and use them as the basis for cross examination?
Mr. S t r o n g . Whom would you cross examine?
Mr. G o l d s b o r o u g h . When you take a witness, you could say,
“ I have received such-and-such a letter,” and ask him about the
statements contained in that letter or letters, and then it would give
him a chance to answer.
Mr. F e n n . It seems to me since these hearings have been so well
advertised throughout the country and a special rule adopted toward
them in the House, gentlemen interested in them should take the
opportunity and occasion to come here themselves. Personally, I
have no objection to the introduction of the letters, except from the
standpoint of encumbering the record. You will get one letter one
way and another the other way. I think these ex parte statements
are of no particular value They are of no value to me, and I think
the other members will take the same view.
Mr. G o l d s b o r o u g h . If you have a letter that you think is perti
nent, you can then ask the witness about it.
Mr. B e e d y . In order to get the sense of the committee, and in
order not to seem to make this personal in its application to Mr.
B ox’s request, I move that the committee do not include in the record
any letters except those which are submitted by witnesses who are
testifying, in amplifying statements which the witnesses make before
the committee.
Mr. F e n n . I second the motion.
BRANCH, CH AIN, AND GROUP BANKING
261
Mr. S t r o n g . I just want to call attention to the fact that it is the
habit of the chairman very often to introduce matters sent to him.
Mr. B e e d y . He can do it through witnesses.
Mr. G o l d s b o r o u g h . That, then, includes the chairman?
Mr. B e e d y . Yes.
(The motion was carried.)
STATEMENT OF J. W. POLE—Kesumed
Mr. S t r o n g . Mr. Luse is the next interrogator, but he is delayed,
and Mr. Fenn is the next.
Mr. S e i b e r l i n g . Does this letter go out of the record?
Mr. S t r o n g . It is not included in the record. The chairman has
adopted the plan of going down the committee, according to the rank
of the members, giving them each another chance to cross-examine
Mr. Pole, and you are next, Mr. Fenn.
Mr. F e n n . I have no othe questions.
Mr. S t r o n g . Mr. C a m p b e ll is n e x t
He is absent. Mr. Beedy
is next.
Mr, B e e d y . I do not care to question Mr. Pole.
Mr. S t r o n g . Mr. Hooper is n e x t
Mr. H o o p e r , I have not asked any questions yet, because I was
away when my turn came. I should like to ask one or two questions
that have been brought up or suggested by the letter that was read
here.
I will say to Mr Pole that my attention has been called to a letter
which covers the b a n k in g situ a tio n in Canada. The Canadian system,
Mr. Pole, is a system of what sort of b a n k in g 0
Mr. P o l e . Branch banking.
Mr. H o o p e r . The banking business in Canada is largely done by a
small number of large banking organizations, such as the Bank of
Montreal, the Bank of Nova Scotia, the Royal Dominion Bank of
Canada, and others of that kind—-is not that true?
Mr. P o l e . Yes, sir
Mr. H o o p e r . This is typical of branch banking? The banks
which the Bank of Montreal controls out through the Dominion of
Canada are branches of that bank, are they not?
Mr. P o l e . The question has to do with the branch banking system
as it is operated in Canada?
Mr. H o o p e r . In th e Dominion of Canada.
Mr. F e n n . May I interrupt a moment?
Mr. H o o p e r . Certainly.
Mr. F e n n . The Canadian banks have not only branches through
out Canada proper, but I know the Bank of Nova Scotia, the Bank of
Montreal, and the Royal Bank of Canada, and others have branches
in the West Indies, too.
Mr. P o l e . Yes, and overseas.
Mr. F e n n . The banks in general-----Mr. P o l e . I had not quite finished my answer.
Mr. F e n n . I wanted to point out how widely that system is operat
ing.
Mr. P o l e . Very widely. The branch banking system in Canada
differs very materially from the branch banking system which I
100136— 30— v o l 1 p t 3------- 3
262
BRANCH, CH AIN , AND GROUP BANKING
suggested, the difference being that they cover the entire country.
M y plan would be to develop a branch banking system within re
stricted trade areas.
M r . H o o p e r . Y o u r idea, Mr. Pole-----Mr. P o l e . Instead of having 10 banks, as they have in Canada,
the probability is that we would have several hundred banks in this
country.
Mr. H o o p e r . 1 was not trying to contrast the system in Canada
with that of the United States, but what I wanted to ask you was:
Bank failures are very rare in Canada, are they not?
Mr. P o l e . Very rare.
Mr. H o o p e r . And they have banks operated through the small
towns, through the rural regions of the Dominion, in much the same
way as in the United States?
Mr. P o l e . Very much so.
Mr. H o o p e r . Y o u will find branches of the Bank of Montreal or
of the Bank of Nova Scotia in the small villages of 500 or 1,000 in
Canada, as you will find branch banks or State banks of similar size
in the United States?
Mr. P o l e . Yes, sir; in competition with one another.
Mr. H o o p e r . The reason why there has been a scarcity of failures
or a dearth of failures in the Canadian small towns, has been that the
large banks protect the institution if trouble comes to the branch— is
not that true?
M r. P ole . Yes, sir.
Mr. H o o p e r . And in Canada, at least, branch banking has worked
out very much to the advantage of the financial situation in that
country?
Mr. P o l e . I am under that impression.
Mr. F e n n . I do not think they have ever had any other system
Mr. P o l e . N o , sir; not within recent years.
Mr. F e n n . I suppose there is no other country in the world that
has the dual system that we have?
Mr. P o l e . N o , sir.
Mr. F e n n . I think you stated to Mr. Fort a few days ago that the
tendency in all the principal countries of the world— England, France,
Germany, and other great European countries— is the same tendency
as in the United States; namely, the centralization of the banking
business in the capital, which is usually the metropolis of the country?
Mr. P o l e . That is true, with the possible exception of some little
difference with regard to the system which is in force in Germany.
They have a number of small independent banks in Germany in addi
tion to the banks operating from the large centers, and the record of
failures of these small independent banks in Germany last year was an
imposing number.
M r. H
ooper
T h e y h a v e a la rge n u m b e r th ere?
Mr. P o l e . Yes, sir.
Mr. H o o p e r . And that w as not true of the other-----Mr. P o l e . Among th e small banks,
Mr. H o o p e r . One or two more questions.
In your preliminary statement you mentioned various reasons for
the lack of success of the small banks located in small places remote
from the larger centers9
Mr P o l e . Yes, sir.
BRANCH, CH AIN, AND GROUP BANKING
263
Mr. H o o p e r . Y o u spoke of the lack of diversification, for instance.
I assume that same lack of diversification would be found in Canadian
towns of small size?
Mr. P o l e . Yes, sir.
Mr. H o o p e r . In the West they would be lending' money on wheat
or on wheat lands, and in the forest territory, where lumber is pro
duced, that would be the principal item?
Mr. P o l e . Yes, sir.
Mr. H o o p e r . I suppose in Canada, as well as the United States,
there is not the general diversification in the banking loans in the
small towns as in the large centers, like Montreal and Toronto?
Mr. P o l e . N o .
Mr. H o o p e r . What, then, would you say is the reason that the
Canadian bank system has proved more solid and sound in the way
of absence of failures than in the United States?
Mr. P o l e . I think their system is responsible for the absence of
failures largely by reason of the fact that the metropolitan banks are
more scientific in their management and are enabled to diversify and.
absorb such losses as occur.
Mr. H o o p e r . Is the banking system of Canada superior to the two
systems in the United States— do you think, generally speaking?
Mr. P o l e . The results of the situation, with regard to the ru ral
districts, are far more satisfactory.
Mr. H o o p e r . D o you think that the bankers of the higher grade
in Canada are, generally speaking, abler men, in their line of business,
than in the United States?
Mr. P o l e . I should be unable to answer that
Mr. H o o p e r . What I was seeking to find out was the reason why,
in a country with 8,000,000 of people, with less opportunity for
developing genius along those lines, why the Canadian system, for
a long time, has really been more stable, as far as failures are con
cerned, than our own, as it apparently is?
Mr. P o l e . I th in k an in d e p e n d e n t u n it s y s te m , such as ou rs, is
less a b le to care fo r a gen eral situ a tio n th a n a b ran ch banking s y s te m .
Mr. S t r o n g Will you tell us, if you know, to what extent the
Government controls these banks in Canada? What is the Govern
ment control over banks?
Mr. P o l e . There is very little Government control. There is no
system of examination m Canada. Reports are filed with the com
missioner of banking and are analyzed by him, in addition to which
the banks are examined by certified public* accountants, which
accountants are approved by the banking department.
Mr. S t r o n g . Mr. Pole, you stated that you thought that, under
your plan of branch banking in the United States, we would have
many more hundred systems of branches than they do in Canada.
Will you explain to me why you arrive at that conclusion?
Mr. P o l e . M y reason for that, Mr. Chairman, is that under my
proposal, a system of branch banking would be developed from the
metropolitan centers
Undoubtedly, if opportunities were given
banks m such centers of operating branch systems there is no reason
why there should not be a very large number of important groups
developed from each metropolitan center.
Mr S t r o n g Would not that be true in Canada?
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BRANCH, CH AIN, AND GROUP BANKING
Mr. P o l e . They have a nation-wide branch banking system there;
M y suggestion is that we have a regional branch banking system.
Mr. S t r o n g . Would that prevent a branch banking system from
excluding others?
Mr. P o l e . It would prevent them from operating nation-wide.
It would not prevent the growth of a big branch system within a
restricted area.
Mr. S t r o n g . Would not there be a likelihood of a monopoly
within the big area?
Mr. P o l e . I think there would be bank competition throughout
this country, and I see no reason why there should be a greater
fear of monopoly beyond the metropolitan area than there is within
the cities now.
There is plenty of competition in the different cities. To extend
the areas would not make for lessened competition. I think it w
’ould
stimulate it. The opportunities for profit would be greater.
Mr. S t r o n g . Mr L u c e is here now, and we will ask him to proceed
with his cross-examination.
Mr. L u c e . Mr. Pole, it requires some ingenuity to think of some
question that has not been asked you already.
Mr. P o l e . I think you are right, Mr. Luce. I was afraid the com
mittee had overlooked the fact the committee might want to call
other witnesses than myself
Mr. L l c e . We look to you as the main fount of information.
I shall try not to cover ground already covered.
I wish to address myself to the broader principles at stake rather
than to details. Let me sketch hastily the background for my
questions
About 30 years ago the country got very much excited over monop
oly from the formation of big business institutions of one sort or
another. It would seem as if every generation must go through a period
of excitement over the question of monopoly and, judging from the
speeches in the Senate recently, we are entering another spasm of that
sort and it would be of use, I think, to bring out whether the present
situation in banking will add any fuel to the flame.
First, let me say that the people got alarmed 30 years ago over the
obnoxious features of monopolies, price cutting, rebates, the destruc
tion of small competitors, and other processes that were supposed to
be particularly exemplified in the Standard Oil Co. Has it come to
your observation that the extension of branch banking so far has
produced evils of that sort?
Mr. P o l e . A far as I knowT Mr. Luce, the branch banking systems
,
which are in operation in this country and abroad have been rather
conducive to keener competition than is in existence in a great many
parts of our country under the unit system of banking.
Mr. L u c e . Y o u might w^ell elaborate that, if you .will, and show us
how that develops— through the placing of branches in the same place
by two banks, for example.
Mr. P o l e . In very many places in Canada and in very many
places in England, in comparatively small places, there are as many
as two, three, and even four branches of large metropolitan bnaks,
and they carry to those small communities the complete banking
service of those important metropolitan institutions, and I have never
BRANCH, CH AIN , AND GROUP BANKING
265
heard but what competition among the branch banking systems is
anything but extremely keen.
Mr. L u c e . In California, or elsewhere, have there been any in
stances brought to your attention where a branch of a great bank has
tried, by any unfair methods, such as price cutting or what would
correspond to it in the banking world— where such tactics have been
adopted by a big bank in order to destroy a little bank?
Mr. P o l e . I do not know that I can recall any instance of the kind.
In California, in every important town, there is, as far as I know, no
banking monopoly. The branch banking systems are operating in
keen competition with one another in many towns, in addition to the
unit banks.
Mr. L u c e . Now, turning to the question suggested by the develop
ment in my own neighborhood, it has been observed that the striking
tendency in banking in New England is the entrance into the invest
ment field. More and more our national banks are resorting to
investments for the use of their funds.
I am not prepared to admit that it is the function of Congress to go
beyond securing safety in the matter of banks, but even that factor
may enter into what I want to call to your attention. You are, of
course, aware of the growth of trust companies in New England.
They have larger opportunities for business and greater chance to go
into promoting. Of course, you are familiar with the fact that some
of our sizable trust companies failed as a result of going into the
investment business.
If it is the function of the Government to interfere in such emer
gencies, is it your expectation that branch banking— that is, the con
centration of banking into few groups— would increase or diminish
the likelihood of investment banking, assuming for the moment that
investment banking has its objections?
Mr. P o l e . M y b e lie f is th a t th e d istrib u tio n o f securities w o u ld be
a p a r t o f th e b a n k ’ s regu lar b u sin ess m u c h m o re th a n it is t o -d a y and
t h a t th eir im p o r ta n c e as u n d erw riters an d d istrib u to rs m ig h t be
d e v e lo p e d e v e n to th e p o in t th a t th e b u lk o f th e in v e s tm e n t b u sin ess
in th is c o u n tr y m ig h t e v e n tu a lly b e d on e b y th e la rge b a n k s .
Mr. L u c e . We have hitherto conceived the purpose o f commercial
banking to be what I might call the brief aid it gives to commerce and
industry rather than long-time investment of capital.
Are you quite sure that the present tendency is altogether admirable?
Mr. P o l e . The attitue of the people of this country is changing
very rapidly with regard to investments. The business of banking is
also rapidly changing until to-day banks have become great institu
tions, operating in every financial direction, and there have been
recently instances where banking corporations have underwritten and
distributed independently of New York, unusually large underwritings
and I think, under proper regulations, there would be no reason to
anticipate any very great danger in the extension of such activitiy.
Mr. L u c e . N o w , le t m e b rin g y o u r a tte n tio n to a p a r tic u la r p hase
of th e in v e s tm e n t o f m o n e y s ; th a t o f th e sa v in g s a c c o u n ts o f large
n u m b e rs o f p e o p le a n d , on an a v e ra g e , a sm a ll a m o u n t fr o m each.
Anyone who has watched the progress of things in our neighbor
hood— I speak only from that information— I will not say views with
alarm, but views with much interest the entrance of commercial
266
Bit VXt'H, r H A IN , AND GBOFP BANKING
banking into the handling of the small savings of the people. In
Massachusetts we have thought such savings peculiarly deserving of
governmental protection. To illustrate, we went so far as to insist
that no savings bank and national bank should exist in the same room;
they should not exist in the same building unless there was a solid wall
without any opening between the two; the reason, of course, being
that it was thought umvise to permit the commercial bank to have
resort to the small savings of the people.
There have been several disastrous failures, as the result of the
opportunity of national banks to invest the savings of the people.
Yet, to-day, I find in a national bank— and a very good bank, too;
not a great bank, but a successful bank, where I have a small deposit—
I find a wicket there for savings accounts, and I see here and there
advertisements of Christmas savings clubs, and pretty soon they will
have birthday savings clubs and wedding anniversary savings clubs—
and it is suggested that we may have to have baby clubs, to o ; in other
words, the national banks are making a drive all over the country to
take away the business of the savings banks: to get that money to
invest in commerce or in industry or in various business activities,
involving the investment of large amounts of capital.
We have very strictly confined the use of the people’s savings— and
I always use the word “ people” with some fear of being suspected of
demagogerv. However, I know of no other way to characterize the
savings of millions of persons who desire, first of all, protection of
their money and, secondarily, a fair amount of interest.
B y the way, I might say that I am constantly irritated in Wash
ington by observing the announcement of national banks that will
pay as much as 3 per cent and sometimes 3K or even 4 per cent for
savings, when, in the savings banks of my own State, I think no bank
is paying less than 5 per cent, and I think some are still continuing to
pay 5% percent. The magnanimity of the Washington banks amuses
me
[Laughter ]
Now7 I am very much concerned about this proposal to concentrate,
,
in commercial institutions, without these safeguards in the matter of
investments, what has resulted from the thrift of many millions of
our people.
In Massachusetts we have also a requirement strictly limiting the
class of securities that the savings banks can buy and it is a common
thing to use that as an illustration of perfect safety. You will find
it in banking literature— the protection thrown around the savings
banks by the Massachusetts law It is a standard that other States,
to some extent, try to reach I fear not enough, as yet.
Is it your judgment that it is a wise thing— and of course I am
going somewhat beyond the instant problem before us, assuming we
are really making a study of the whole banking system of the coun
try— do you think it is a wise thing, a prudent thing, to put savings
7
of the citizens of the co u n ty at the command of commercial institu
tions, with the many dangers that accompany the lending of money
for commercial projects?
Mr. P o l e . Congress has given national banks the right to accept
savings The matter has been subject to a great deal of discussion
as to whether or not savings deposits should be invested in certain
characters of securities In the case of national banks, I think the
lawr is unfortunate in that it permits banks to enter into a contract
BRANCH, CH AIN, AND GROUP BANKING
267
with its savings depositors, gi\ing the bank the right to require 30 or
60 days’ notice before withdrawal. Occasionally this has resulted in
a preference of the regular depositors- the demand depositors—
because the clause has been put into effect. There is, of course, no
notice required with respect to demand depositors.
I personally have felt that if this 30 or 60 day clause is going to be
maintained the savings investments should be segregated for the
savings depositors, and those investments should be regulated Under
such circumstances, I think, there would be no danger
Mr. L u c e . At present there is nothing in the way of intermingling
of all the funds of a national bank, is there?
Mr. P o l e . Nothing at all
Mr. L u c k I do n o t g et clear in m y m in d w h a t m ig h t be th e effect
o f th e e x ten sion o f b ra n ch b a n k in g u p o n th is p a r tic u la r fe a tu re o f th e
situ a tio n
Do y o u th in k it w o u ld co n d u c e to grea te r or to less safety
for sa v in g s d e p o sits, if we had b ra n ch b a n k in g , th a n if w e h a d th e u n it
b a n k in g ?
Mr. P o l e I think it would be conducive to much greater safety
in that a large part of the deposits, of rural districts are saving de
posits and the result, over the last 10 years, has been very disastrous
to savings depositors under our unit system of banking, under branch
banking as I have heretofore pointed out there would be few bank
failures, and consequently greater safety to the savings depositors.
Mr. L u c e It would be quite practicable, under branch banking, to
require the segregation of the savings deposits?
Mr. P o l e I th in k it would, if Congress saw fit to d o so.
Mr. IjUCE When the McFadden bill, so-called, was passed a few
years ago, in view' of this particular phase of the question, I was a
great deal exercised about the permission given to banks to invest a
larger part of their money in real estate loans M y view, however,
did not prevail, and banks now have a much larger opportunity to
lend with real estate as the security
Have you any knowledge as to how far that has been used? Of
course, in a most general way, has it resulted in a considerable increase
in real estate loans by the national banks?
Mr. P o l e . Some banks have taken advantage of the liberality in
the law to extend their investments in real estate. There is, however,
another aspect of the matter and that is that banks acquire, in pro
tection of debts, which have been previously contracted, perhaps as
much real estate as they invest in under the McFadden Act directly.
Mr. I / t c e That provision was the result of competition between
national banks and State banks or, what we, in our neighborhood,
call trust companies
It w h s pointed out to us that a man who came
into a national bank and could not get a loan, backed up by his prop
erty, would go across the street to his State bank, so that the national
bank lost a customer, which brings me to a still broader aspect of this
whole problem
There is, in economics, the familiar law known as Gresham’s law,
under which the baser metal drives out the costlier metal We have
in this country, existing side by side, twT systems— the national bank
o
system and the State bank system
In many States State banks have
much more freedom of action than national banks. It seems to me,
in hearing the arguments in this room for 10 years, that, perhaps
268
BRANCH, CH AIN, AND GROUP BANKING
quite unconsciously, a great war is going on— an economic war—
between the two systems, and that the State banking system is the
baser instrument of the two.
Do you have any apprehension that no legislation we might be
able to pass will prevent the poorer system from driving out the better
system? In answering that, you might also comment upon what will
be the effect of the branch banking system on trust companies and
State banks of the country. Would it tend to lessen-----Mr. P o l e . It would depend very largely upon the provisions of the
act. It would undoubtedly take a long time, under present conditions,
for the principles of the Gresham law to apply with complete effect.
On the other hand, I can not conceive of the national system driving
the State banks out of business, unless the provisions of the national
banking act were made so attractive as to invite them into the national
system.
Mr. L u c e . You would make it a matter of moral suasion rather
than compulsion?
Mr. P o l e . By all means
Mr. L u c e . Is it not a fact that in this great flood of bank failures
that we have had in the last 10 years, the State banking systems have
shown themselves greatly inferior to the national banking systems?
Mr. P o l e . O v e r th e c o u n tr y as a w h o le ; y e s .
Mr. L u c e . And if we were to assume that it is our function to
protect, as far as possible, the depositors, particularly those w ho make
T
savings deposits, is there any place where we can stop short of putting
the State banks out of business?
Mr. P o l e . Under a branch system, as heretofore suggested, Mr.
Luce, I think that the particular attraction would be the element of
safety which appeals to the public at large, and if the general impres
sion got out that the branches of a national bank were a safer place
to deposit money than in an independent State bank, I believe that
the State banks would naturally become less and less important in
that community and that the branch of the national bank would
become more important— from the standpoint of safety, if for no
other reason.
Mr. L u c e . That is all I have to ask.
Mr. S t r o n g . Mr. Beedy.
Mr. B e e d y . Inasmuch as you have passed me, may I ask now a
question suggested by Mr. Luce's questions?
Mr. S t r o n g . Certainly.
Mr. B e e d y . If it becomes desirable for a closer supervision of
banking by the Government, would the concentration of the banking
business in branch banking groups tend to increase or diminish the
efficiency of such Government supervision?
Mr. P o l e . T h e s y s te m o f su p e rv isio n w o u ld h a v e to b e a d a p te d
to th e n e w s y s te m , w^hich c o u ld b e e a sily d on e.
Will you ask that question again, please?
Mr. B e e d y . If it becomes desirable for a closer supervision of
banking by the Government, would the concentration of the banking
business in branch banking groups tend to increase or diminish the
efficiency of such Government supervision?
BRANCH, CH AIN, AND GEO UP BANKING
269
Mr. P o l e . M y idea would be to make the supervision of the banks
more efficient than it is to-day. I think it would be easier to do that
under branch banking, in that there would be fewer banks to examine.
Mr. B e e d y . Then, your answer is— —
Mr. P o l e . And, by adapting a better method of examination than
is in force to-day, the advantage would all be in favor of branch
banking.
Mr. B e e d y . Your answer is, then, that the concentration o f bank
ing business into branch banking groups would make it easier fo r
the Government to make a supervision o f the banking business
which would result in an added element o f safety to the depositors?
Mr. P o l e . 1 th in k so, b y reaso n o f th e fa c t that, u n d e r a b ra n ch
b a n k in g s y s te m , w here la rge in s titu tio n s w o u ld d e v e lo p , th e q u e s
tio n o f p o lic y w o u ld be g iv e n m o re c o n sid e ra tio n th a n u n d e r the
d e ta ile d e x a m in a tio n s w h ich are m a d e o f u n it b a n k s t o -d a y .
It might be, even, that there would have to be a more or less con
tinuous examination going on. The Government would probably
have a much closer contact with the executive committees and with
the directors of banks, so that it would have first-hand knowledge o f
any change in banking policy, as applied to any particular institution.
Mr. B e e d y . That is all, Mr. Chairman.
Mr. S t r o n g . Mr. Goodwin.
Mr. G o o d w i n . Do you have any record of any failures in th e
Canadian banking system, as it has been operated?
Mr. P o l e . Yes; there have been failures.
Mr. G o o d w i n . Of the parent bank as w e ll as of the branches?
Mr. P o l e . Yes.
Mr. G o o d w i n . Have these failures been of large proportions?
Mr. P o l e . There have been no failures of recent years. M y
recollection is that the last failure was, about 10 years ago, of the
Home Bank of Canada.
Mr. G o o d w i n . I tuink several days ago, in answer to my question
at that time, you stated that, in your opinion, supported by the
advice of your counsel, branch banking could be permitted under
the national law in those States where branch banking, is by the law
of those States now prohibited.
Mr. P o l e . That was the advice of counsel
Mr. G o o d w i n . Is that advice in writing?
Mr. P o l e . Yes, and will be supplied for the record.
Mr. G o o d w i n . Y o u also stated that, in your opinion, no national
bank should be chartered with a capital of less than $100,000; that,
is, it could not operate successfully and profitably with a capital of
less than $100,000. Did I understand you correctly?
Mr. P o l e . I said that that had been recommended by several as,
a remedy for the existing situation; that no bank should be estab
lished with a capital of less than $100,000. It was not my recom
mendation.
Mr. G o o d w i n . If that should be adopted, would that apply to
banks already chartered? Would they have to comply with the
same law as to capitalization?
Mr. P o l e . I do not know what Congress could do in that direction.
I assume that that law would not be retroactive, if any such law
were passed
270
BILIK CH, CHAIN, AND GROUP BANKING
Mr. G o o d w i n . It would apply only to those banks which may
be chartered in the future?
Mr. P o l e . It is not my suggestion at all that banks should be
limited to $100,000. I have already expressed opposition to it.
Mr. G o o d w i n . That is all, Mr. Chairman.
Mr. S t r o n g . Mr. Letts.
Mr. L e t t s . Mr. Pole, when I questioned you before, it was largely
with respect to the Bank of Italy and the Bancitaly Corporation and
the Transameriea Corporation I have before me what purports to
be a reprint from a report recently compiled by the research depart
ment of the Los Angeles stock exchange. Have you seen that report?
Mr. P o l e . I have not, Mr. Letts.
Mr. L e t t s . I have no way of knowing whether the information
contained in it is authentic. It is stated here that the information and
figures are obtained from sources deemed reliable. It shows that the
Transamerica Corporation is a holding company, total capital invest
ment, over $1,150,000,000; that its subsidiaries perform a wide variety
of functions, including banking in all its phases; insurance, real estate,
the financing of investments, brokerage business, securities, under
writing, and many other things
I find this statement:
The size of this combination is roughly indexed by the fact that its work is
not only nation-wide but world-wise; that its controlled subsidiaries operate 525
banking offices and numerous investment houses.
It contains a table showing the holdings of the Transamerica Cor
poration, indicating that it holds 99.6 per cent of the stock of the
Bank of Italy, which is a banking concern; that it holds 99.93 of the
Bancitaly Co. of America, sureties, realty, and so forth, and
various other banking houses; the Bancitaly Mortgage Co., total
invested capital $1,983,817; owned 100 per cent by the Transamerica
Corporation; that it owns the California Joint Stock Land Bank,
capitalized at $1,399,050— 100 per cent; that it owns the Pacific
National Fire Insurance Co., capitalized at $3,000,000, by possessing
100 per cent of its stock; the Bancitaly Agricultural Credit Co.,
capitalized at $1,006,620; possessing 100 per cent of that stock; in
addition to that it has banking operations and investments operations
in Italy.
The information contained would indicate that within eleven
months after its organization, the Transamerica Corporation paid a
stock dividend of 150 per cent. Would the fact that this stock
dividend was paid in September, 1929, have any relation to the
contention which was made by Mr. Busby a few days ago, that the
Bank of Italy was bankrupt at the time its holdings were taken over
by the Transamerica Corporation—w^ould it have any bearing 011
that inquiry, would you say? I think Mr. Busby showed some figures
which indicated a sharp decline in the value of the stock of the Bank
of Italy. Have you given any thought to that?
Mr. P o l e . I have not seen the circular to which you refer. If you
are speaking of any evidence of the Bank of Italy being bankrupt, of
course we are very certain there is nothing like that
Mr. L e t t s . I was wondering if there was incident to the taking over
of this stock by the Transamerica Corporation-----Mr. P o l e . I have no official information as to the stock dividends
or any transactions in connection with the Transamerica Corporation
BRANCH, CH AIN, AND GEOUP BANKING
271
Mr. B u s b y . Mr. Letts, if you will permit, I will make a short
statement and give you what I said the other day.
M r. L ett s. Y es.
Mr. B u s b y . It was
this, that on June 5, 1928, the Bank of Italy
stock on the San Francisco Exchange had reached 293. On June 11
a drive was made by certain competitive banking interests on the
Bank of Italy standing, and before night on June 11 this stock, which
that morning opened at 286, had been driven down to 125. On the
11th of October following that, the Transamerica Corporation was
organized for the purpose of taking over all the stock, or as much
stock as it could get in hand, of the Bank of Italy, the Bancitaly
Corporation, and the other subsidiaries that you have alluded to in
the pamphlet you hold in your hand, and their stocks were taken over
Now, the Transamerica Corporation stock w as exchanged on the b asis
of one and three-fourths shares of Transamerica stock for each Bank
of Italy share. The Bancitaly Corporation, which was an im estn ent
and trust corporation owned by the Bank of Italy, stock was exchanged
for Transamerica Corporation stock share for share. At the present
time the Transamerica Corporation stock is quoted on the stock
exchanges of the country at 45. Now, one and three-fourths times
45 would be 78% that the Bank of Italy stock would sell for if it w ere
in existence against 293, where it stood when it started its skidding
performance.
M y proposition w that that w a virtual failure of the institution
ras
ras
with its 299 branches, a failure from the standpoint of its maintaining
its financial integrity among the other business institutions of the
country.
That is all I desire to say now.
Mr. F o r t . The gentleman has overlooked the fact that in b etw een
there was a 150 per cent stock dividend, so that he has to take his 78
and multiply it by 2)i, for each shareholder now has 2}{ shares for each
one he then had.
Mr. B u s b y . I intend to go into that later.
Mr. L e t t s . That, of course, was the gist of my inquiry
Mr. B e e d y . That would make the present worth of that stock 192
plus.
Mr. B u s b y . Taking that phase o f it, i t h a s dropped a t least 1 0 0 ,
'Bnd other banks in the same locality h a v e not dropped so much
Mr. B e e d y . H o w does that compare with the drop in other bank
stock in the recent crisis— National City, for instance, and some of the
strongest banks in the country?
Mr. B u s b y . National City B a n k stock ran up so high that it split
into $20 shares and so mystified the public that they did not k n o w
what happened.
Mr. L e t t s . I w ill pass th a t fo r th e m o m e n t.
Mr. P o l e . May I say this for the record, that I think it is only fair
to say that the fluctuations of the stock of the Bank of Italy or the
Transamerica Corporation have been a matter of comment, but the
condition of the Bank of Italy has not changed in any way and is
just as good now as it was before these fluctuations took place, and, as
I said the other day, it is a bank that has grown steadily during all
of these stock transactions and ramifications from a very small bank
to a bank of more than a billion dollars in resources.
272
BRANCH, CHAIN, AND GROUP BANKING
Mr. B u s b y . I would like to add one thing in reply to what Mr.
Fort said about the Bank of Italy stock, and that is that the friends
that I have who have Bank of Italy stock have not been let in on any
such bonanza as Mr. Fort pointed out. They do not know anything
about that share dividend, if it happened, and I very seriously doubt
that.
Mr. L e t t s . This is a stock dividend o f the Transamerica Corpora
tion.
Mr. B u s b y . The holders of Bank of Italy stock are still in the lurch
which I described.
Mr. L e t t s . I am only speaking of the Transamerica Corporation.
Mr. F o r t . That was the price the gentleman used, the price of
Transamerica Corporation stock translated into Bank of Italy.
Mr. L e t t s . I shall pass that for the time being. It is somewhat
aside from my general inquiry.
I note this statement with respect to the expansion policy of the
Transamerica Corporation:
This great combination is in a position to assure itself profits in many fields.
Its banks provide the funds necessary for any desirable deal; its own investment
houses underwrite stocks and bonds, which may be marketed and protected by
its wide-flung bond houses and securities companies; its banking and investment
houses can divert tremendous business to its insurance company; its banking
offices may act as agents for the farm loan and real estate mortgage companies;
its real estate companies can help to liquidate foreclosed real estate of other
departments, its stock trading and brokerage companies have tremendous sources
of information and almost ulimited financial support.
Now, I would like to inquire of the comptroller whether or not this
information is to his knowledge substantially correct?
Mr. P o l e . I have no information with regard to the expansion pro
gram of the Transamerica Corporation. It does not come under our
su
’
^T 1 ''
am interested in, as perhax
„ i icstions the other day, is
that a very serious consideration exists in connection with this feat
ure, that if we accept branch banking as the less of three evils, per
haps— branch banking, chain banking, and group banking— are we
avoiding the pitfalls and the dangers that are incident to group
banking after all? Does not this report indicate that the Bank of
Italy with its 300 branches is controlled, after all, by a holding com
pany through the medium of its board of directors that sits back of
the screen, subject to no supervision or regulation whatever as a
banking organization, and is there any way to safeguard the Nation
against such control of the banking interests and banking policies of
the country through the medium of one or more strong holding com
panies if w e go to the branch banking system as advocated in your
formal statement0
Mr. P o l e There should be some control of and some supervisory
power over holding corporations, and I suggested in my report to
Congress that that be gi\ eii to the comptroller where the stock of the
national banks is held in large part by such corporations.
Mr. L e t t s . Well, if seems quite clear that by simply going to
branch banking we are not avoiding the dangers that are incident to
group control.
Air. P o l e Of course, the Transamerica Corporation is one which is
engaged in the business of both group and branch banking. Thepar-
273
BRANCH, CH AIN, AND GROUP BANKING
ticular activity of the Bank of Italy is a branch banking operation.
Now, as to whether Congress would want to legislate prohibiting the
entire capital stock, with the possible exception of directors qualifying
shares being held by such a corporation, that would be a matter that
I should think might have consideration. Under the present laws, of
course it can not be prohibited.
Mr. L e t t s . Mr. Chairman, I w o u ld like at this point to insert in
the record the information which I find in this report. It is brief,
and the information will be of interest.
Mr. S t r o n g . If there is no objection, it is so ordered.
(The pamphlet referred to is reproduced below.)
T
r a n s a m e r ic a
C
o r p o r a t io n
[A reprint from a report recently compiled b y the Research Department of the Los Angeles Stock Exheange.
and figures herein while obtained from sources deemed reliable are not guaranteed]
Statements
INTRODUCTION
Transamerica Corporation is a holding company organized to coordinate the
work of a number of financial institutions. Total capital investment is over
$1,150,000,000. Its subsidiaries perform a wide variety of functions, including
banking in all its phases, insurance, real estate sales, and financing, investment
and brokerage service, securities underwriting, and many others. The size of
this combination is roughly indexed by the fact that its work is not only nation
wide, but world-wide; that its controlled subsidiaries operate 525 banking
offices and numerous investment houses.
It is difficult to visualize the extent of the Transamerica system, or to estimate
the amount of capital invested in it. The table set forth on the following page
presents a general outline of the structure, omitting minor subsidiaries.
Holdings of principal banking and auxiliary companies controlled or effectively
controlled through Transamerica Corporation
Total invested
capital
Com pany
Bank of Italy, N . T . & S. A „_ _
B ankitaly Co. of Am erica-------T h e Bank of America National
Association, N . Y .
Bancamerica-Blair Corporation
Banking, 294 offices_
_
Securities, realty, etc..
i
j
York.
Security underwriting, 31 offi
ces.
Bank of America of California. _ Banking, 148 offices in Cali
fornia.
Corporation of A m e r ic a - . ........ Holding com pany for 8 banks. _
Oakland B ank------------------------- Banking, 12 offices in Cali
fornia.
Banca d ’America e d ’ Italia___ Banking (in Italy), 29 offices..
Ameritalia (corp ora tion ).......... Investment business in Italy.. }
Bankitaly Mortgage C o_______ Dealers in mortgages_______ _
California Joint Stock Land Farm loans__________________
Bank.
Pacific National Fire Insurance Fire insurance..
Co.
Bankitaly Agricultural Credit Farm loans____
Co.
Shares
owned
$106,253,731.00
400, 000,000. 00
74, 451,204. 00
1,991,941
1,299,125
705, 501
99.60
99. 93
49. 30
49.30
Per cent
53,000,000.00
705, 501
33,068,432.00
778, 292
97.29
20, 000, 000. 00
6, 461,752. 00
778. 292
14, 390
97. 29
71.95
23,100, 000. 00
1,983,817. 00
1,399,050. 00
804,112
10, 000
9, .160
100.00
100. 00
3,000, 000. 00
50,000
100.00
1,006,620.00
10,000
100.00
40.20
DEVELOPM ENT
Transamerica Corporation was organized in October, 1928, to bring under a
single ownership the Bank of Italy and Bancitaly Corporation, together with a
number of smaller cooperative companies. From the resulting reorganization
the present Bank of Italy, N . T . & S. A., and Bankitaly Company of America
emerged, as the two principal subsidiaries of Transamerica. Bankitaly Mortgage
Co., Bankitaly Agricultural Credit Co., National Bankitaly Co., California Joint
Stock Land Bank, Pacific National Fire Insurance Co., and Commercial Holding
Co. were the remaining original subsidiaries.
274
BRANCH, CHAIN, AND GROUP BANKING
The corporation’s first year has witnessed a steady development. The first
major incident was the acquisition of control of the Bank of America National
Association, in March. A portion of it was exchanged for a stock interest in the
underwriting and investment banking firm of Blair & Co. Shortly thereafter the
investment arm of the Bank of America National Association was merged with
Blair & Co. to form the Baneamerica-Blair Corporation. The Bank of America
National Association and the Baneamerica-Blair Corporation are now ow.ned
share-for-share by the same stockholders, and form one of the strongest links of
the Transamerica chain.
Control of the Bank of America of California was obtained in June, and The
Oakland Bank (Oakland, Calif.) and the Pacific National Bank (Los Angeles,
Calif.) have also been acquired this year. The nine Pacific National Bank offices
have been absorbed by the Bank of Italy, N. T. & S. A ., and the Bank of America
of California.
The latest developments are new organizations. Bancamerica-Blair has
organized Interstate Equities Corporation to act as an investment trust, probably
to take a primary interest in Bancamerica-Blair underwritings, and had financed
it to a large extent privately. Intercoast Trading Co. has, on the other hand,
been financed one-third by Transamerica and two-thirds by Transamerica stock
holders under rights. The Intercoast Trading Co. is operated to deal substan
tially in stocks listed in Los Angeles and San Franciso, and should be a powerful
and profitable addition to the Transamerica group.
EARNING S
Transamerica in 1928 reported earnings of $97,373,000 on the companies in
the original Transamerica group, equal to $11.12 per share on Transamerica’ s
8,747,594 shares then outstanding.
For the first half of 1929 Transamerica reported earnings on the companies in
the group of $49,185,173, equal to $5.47 per share on the average number
(8,988,631) of shares outstanding during the half-j^ear. However, these earnings
do not include undistributed earnings of Bank of America National Association,
Bancamerica-Blair Corporation, Bank of America of California, Oakland Bank,
and certain other companies in the group in which Transamerica;s holdings are
less than 99 per cent. It would appear that the $49,185,173 of earnings come
mainly from the original Transamerica companies.
The 150 per cent stock dividend which was recently paid has, of course,
increased the number of shares outstanding, and reduced the earnings per share.
In terms of the new stock the half-year’s earnings per share become $2.14 on
22,996,725 shares now outstanding. The number of new shares to be outstanding
shortly will be 23,226,692.
D IVID EN D S
Transamerica has paid a quarterly dividend of $1 per share in cash since its
organization, and in April and July of this year also paid 1 per cent in stock.
These payments were made on the old stock, prior to the 150 per cent stock
dividend. The number of outstanding shares was multiplied by two and onehalf when the 150 per cent stock dividend was paid to stockholders of record
September 10, 1929. Dividends on the new stock will be at the annual rate of
$1.60 in cash and 4 per cent in stock dividends. This is the exact equivalent of
the dividend paid on the old stock.
YIELD
Based on the dividends of $1.60 per annum and 4 per cent per annum in stock,
Transamerica (new) yields the following as of the prices listed below:
Price:
Percent
$50________________________________________________________________________
$55________________________________________________________________________
$60________________________________________________________________________
$65________________________________________________________________________
7.
6.
6.
6.
20
90
67
46
E X PA N SIO N POLICY
Transamerica has made a policy of expansion through the exchange of Transamerica stock for those of the desired companies, and the ability of its manage
ment is manifest in the steady progress and development of such subsidiaries.
BE\NCH , CHAIN, AND GROUP BANKING
275
This great combination is in a position to assure itself profits in many fields.
Its banks provide the funds necessary for any desirable deal; its own investment
houses underwrite stocks and bonds, which may be marketed and protected by
its wide-flung bond houses and securities companies; its banking and investment
houses can divert tremendous business to its insurance company; its banking
offices may act as agents for the farm loan and real estate mortgage companies;
its real estate companies can help to liquidate foreclosed real estate of other
departments; its stock trading and brokerage companies have tremendous
sources of information and almost ulimited financial support.
Transamerica is now strongly entrenched in California and New York, has
important European branches, and through Bancamerica-Blair, National
Bankitaly Co , and America Investment Co. has an underwriting and investment
business which is nation-wide. Expansion in New York and California is still
going forward. Furthermore, there is talk of liberalizing the banking laws to
permit national banks in every State to have branches, and such legislation
would possibly result m Transamerica’s embarking on a vigorous program of
bank expansion
Certainly there is no reason to believe that Transamerica’ s
expansion program is complete, and the banking field is one which offers the
greatest opportunity to its diversified facilities.
While it is generally assumed that Transamerica Corporation is now acting as
a holding company exclusively, controlling only its known subsidiaries, many
well-informed people believe that the Transamerica subsidiaries are acquiring the
stock of prospectiv e additions to the Transamerica chain
ASSET
VALUES
Transamerica’s balance sheet of December 31, 1928, gave total cash and
investments of $1,093,449,250, equal to approximately $125 per share on 8,747,594
shares outstanding
This would indicate a book value of $50 per share on the
new stock
MAN iO EM EN I
While the Transamerica Corporation is generally conceded to be controlled by
the group of financiers associate*1 with \ P Gianni ui in the original development
.
of Bank of Italv and Bancitaly Corporation, the board of directors includes
prominent bankers and business men from practically all of the merged organiza
tions
The former moving spirits of the Bank of America, N. A., Blair & Co.,
and other merged companies have been taken into the Transamerica directorate,
which now numbers 22 people
Experience in every phase of the widespread field
covered by Transamerica is thus to be found on the board of directors,
Transamerica’s 22,996,725 shares are owned by more than 135,000 stockholders,
making an average holding of approximately 170 shares
While there are, no
doubt, many large holdings of Transamerica, there are also many thousands who
have bought a few shares as a permanent investment
Transamerica officials
have announced that they hope to increase the number of stockholders to 500,000,
and a special effort is being made to sell the new shares recently authorized in
small amounts, preferably to individuals living outside of California. These
policies are intended to develop a large sympathetic and geographically-scattered
group of stockholders, who will provide the nucleus for a growing clientele, and
will help to mold a friendly public attitude toward the corporation.
DIRECTO RS OF TRAN SAM ER IC A CORPORATION
A. P. Giannini, president Transamerica Corporation, San Francisco, Calif.
V J Mount, president Bank of Italy, N T & 8, A., San Francisco, Calif.
James A. Baeigalupi, director Bank of Italy, N T & S. A., San Francisco, Calif.
P. C. Hale, vice president Bankitaly Co. of America, San Francisco, Calif.
A. Pedrini, vice president Bankitaly Co. of America, San Francisco, Calif.
L. M . Giannini, president Pacific National Fire Insurance Co , San Francisco,
Calif
A. E Sbarboro, vice president Pacific National Fire Insurance Co., San Fran
cisco, Calif
W . E. Blauer, vice president Bankitaly Mortgage Co and vice president
California Joint Stock Land Bank, San Francisco, Calif
Dr A, H Giannini, chairman board of directors, The Bank of America, N . A ,
New York City,
&
276
BRANCH, CH AIN , AND GEOUP BANKING
Edward C. Delafield, president The Bank of America, N . A ,, New York City.
J. E. Rovensky, vice president Bancamerica-Blair Corporation, New York
City.
Leon Bocqueraz, chairman board of directors, Bank of America of California,
San Francisco, Calif
E. J. Nolan, president Bank of America of California, Los Angeles, Calif.
C. N Hawkins, vice XJresident Bankitaly Agricultural Credit Corporation,
Hollister, Calif.
W . H . Snyder, vice president Commercial Holding Co., New York City.
George A. Webster, vice president Commercial Holding Co., San Francisco,
Calif.
W . F. Morrish, vice president Corporation of America, San Francisco, Calif.
C. R. Bell, vice president Corporation of America, San Francisco, Calif.
Elisha Walker, president Bancamerica-Blair Corporation, New York City.
Harry Bronner, vice president Bancamerica-Blair Corporation, New York City
Hunter S. Marston, vice president Bancamerica-Blair Corporation, New York
City.
W . W . Garthwaite, president The Oakland Bank, Oakland, Calif.
Mr. L e t t s . There is just one other question, Mr. Comptroller.
Have you given any consideration to the tax question? Many of our
States are finding it necessary to reexamine their tax plans, and one
question that exists in the minds of many of the legislators is whether
or not the national banks are bearing their proper part of the tax
burden of the States.
Have you given any consideration to that problem?
Mr. P o l e . Yes. The comptroller’s office is on record as being in
favor of the existing section 5219. No recommendation was made
by me, so that the former recommendation that we do not advocate
any change in that stands. However, the matter is being given con
sideration by the American Bankers’ Association and is being investi
gated very thoroughly, which may possibly enable us to offer some
suggestions at a later date.
Mr. L e t t s . Under a branch system, the parent bank would place
in each state only such assets and banking facilities as were deemed
to be necessary to meet the conditions and to render the appropriate
service— is that not correct?
Mr. P o l e . Yes.
Mr. L e t t s . In relation to chain merchandising, we find that it is
never possible to find enough in stock and wares on the shelves in
January, when the assessor makes his visit, to furnish any kind of a
proper tax basis. An individual merchant, a unit merchant, may
have, we will say, $150,000 worth of stock on his shelves, and he is
assessed accordingly. A chain hardware store across the street from
him will have about $3,000 worth of stock on its shelves, and a requi
sition sheet lying on the manager’s desk, and when he sells a hoe or
a hatchet, he writes “ h oe” or “ hatchet ” on his requisition sheet, and
sends that to Chicago or to some other center, and the stock is in that
way replenished, to the point that in many instances there chain
merchandising corporations are obviating the difficulties and the ex
pense incident to storage by getting away from storage, by keeping
their merchandise in transit and using their railroad cars for their
storage purposes.
Will we have any corresponding difficulties in that regard if we go
to branch banking?
Mr. P o l e . I do not know what amendments there might be in the
law with respect to such a contingency, Mr. Letts, but this I do know,
that whatever new methods of taxation must be adopted to cover such
BRANCH, CH AIN, AND GROUP BANKING
277
a situation, the branch bank would be far better able to meet that
expense than would the unit bank.
Mr. L e t t s . I think that is all.
Mr. S t r o n g . Mr. Fort.
Mr. W i n g o . Judge Letts, his answer assumes that Congress by
legislation might affect that matter. There might be another ques
tion that would arise that nothing but a Federal Court could deter
mine, that it was beyond the power of Congress to grant that power.
Congress can not grant taxing power to the States at all. We might
say to the States that they can tax these banks as they please, that
we will make no restrictions, and yet the difficulty to which Judge
Letts points would be one that would still have to be met.
As an illustration, suppose that you had your parent bank in Mem
phis, Tenn. It is a foreign corporation so far as Arkansas is concerned,
and all the efforts of the Arkansas Legislature to enforce its taxation
might meet with the same situation that arose in the case that was
settled in the Supreme Court, in the Western Union case, under what
they called the Wingo Corporation Act that I was the author of in
the State senate.
So it is not so easy as you suggest, that Congress should simply
handle it.
Mr. P o l e . It was not my idea that that would be necessarily an
amendment by Congress, but it might be by a change in the State laws
with regard to taxation, and I feel that section 5219 that, as far as we
are concerned, banking capital shall not be assessed at a greater rate
than other similarly invested capital, is for the time being satisfactory
Mr. W i n g o . I thought, however, that he was calling attention to
the difficulties that might arise.
Mr. L e t t s . M y particular point is this, if I may make it plainer,
and if you will pardon me, Mr. Wingo, that there will be no invested
capital represented by the branch. The invested capital will be in
the parent institution.
Mr. P o l e . Well, 1 would not be able to answer offhand on an
intricate question of taxation as to what modifications the State might
find necessary to make in such a contingency.
Mr. L e t t s . Well, of course, if there is no invested capital, that
can not be made the basis of taxation, and yet the States should have
some part of its tax burden borne by an institution which renders that
service and has that privilege within the community.
Mr. P o l l . The States do not ordinarily overlook the opportunities
for adjusting their taxing systems-----Mr. L e t t s . It is a very difficult question
Mr. P o l e . Extremely.
Mr. L e t t s . In my State we have a tax commission that is making
a study o f that matter and that has been looking into the matter for
a long time, and I think that in a great mam States thev are finding
that it is quite necessary that they reexamine their tax methods,
they must get on some kind o f a new basis, because there \m\ e been
so many new and n o v e l situations arise in business and the manner
of handling property
Mr W i n g o . Mr. Chairman, if I may right tbn \ i -till think that
the comptroller does not catch the point I am seeking to in press
upon him, that it is not an eas\ matter, either i'or ( on gress .>r the
100136— 30— v o l 1 p t 3------- 4
278
BRANCH, CHAIN, AND GROUP BANKING
States, to handle this question. We will take the illustration that I
used awhile ago. The parent bank is in Memphis, and it says that
Arkansas is in its trade territory. It will have, say, several small
branches like they have in these small villages on these plantations
across the river in Arkansas where they will have an office open two
or three days a week, and the Legislature of Arkansas, under the
decisions of the courts, can not arbitrarily say that they will assess
them on the basis of their capital, because the courts say that they
can not do that, that they have tried that once. The corporation
will take the position that it has a desk and so much furniture in
Arkansas, but the physical deposits are not there, that they are in
Memphis. Three days in the week there are some papers brought
there by the manager in his bag, and that is all that is there outside
of the furniture. It will take a more ingenious law or plan than
anyone in this room has worked out whereby that State can tax
other than the actual physical furniture in that branch.
That is the difficulty 37 are thinking of, Judge Letts, is it not?
ou
Mr. L e t t s . Precisely.
Mr. L u c e . May I interpose a statement there? For about thirty
years I have made my bread and butter out of a corporation that
does business both in Massachusetts and Newr York, and during that
time every year we have had to apportion the amount of capital
used in each of those twro States, and it has not proved to be an
insurmountable proposition.
Mr. W i n g o . For the corporation?
Mr. L u c e . For the corporation.
Mr. W i n g o . I am familiar with that apportionment business, and
it is not satisfactory to the States. The corporation always to the
State, “ Challenge our apportionment if you w ant to, and into the
T
courts we g o /’ and they cite certain decisions of the courts to sup
port them.
Mr. L e t t s . Would it be as easy and as simple as you indicate,
Mr. Luce, if you had a parent organization in New York City, with
branches throughout the entire Nation?
Mr. L u c e . It makes no difference what the comparative size of
the corporation is. The proposition is not to tax the material assets
of the corporation, but we are asked to furnish figures from which
a computation may be made as to the relative proportionate use of
that capital in the two States.
Mr. L e t t s . That was just a harmonious plan that was used to
take care of your situation, was it not?
Mr. L u c e . I am not sure about that.
Mr. L e t t s . It was a harmonious plan of taxing companies in one
State and the other?
Mr. L u c e . Oh, n o ; m y State holds that it has the right to tax the
capital used.
Mr. L e t t s . I understand that, but how did you make this ap
portionment?
Mr. L u c e . We do not make it. We furnish the figures and let
them make it. We give them the figures of our business.
Mr. L e t t s . But who had authority to make that apportionment?
T
Mr. L u c e . The tax commissions of the two States.
BRANCH, CH AIN, AND GROUP BANKING
279
Mr. L e t t s . Well, it was by m u tu a l and satisfactory agreement
that they were able to arrive at it, and there is nothing in the law of
either State that controlled the matter, as I understand it.
Mr. L u c e . The law of Massachusetts has a yardstick by which it
measures the amount of capital used in Massachusetts.
Mr. L e t t s . But that would not be binding in m y State.
Mr. L u c e . But, as a matter of fact, the thing works out without
any difficulty.
Mr. L e t t s . By the harmonious action o f th e officials that are
charged with the duty o f levying the tax.
Mr. L u c e . Of course, it is possible that one State might claim that
a much larger proportion of the capital is used in its borders than
the other State would be able to admit.
M r. L etts . And would not the difficulties be multiplied in putting
branches in 48 States?
Mr. L u c e . W e ll, I can o n ly an sw er th a t as fa r as i k n o w th e th in g
d o e s n o t h a p p en .
Mr. L e t t s . Y ou do not have difficulties?
Mr. L u c e . Not in my State of a n y ap p re ciab le con se q u e n ce .
Mr. L e t t s . A good many of the States n o w feel th a t there must be
bome kind of a readjustment along those lines.
Mr. B e e d y . It think, for the purpose of the record, that it ought
to appear that there is no proposal before th e committee at the present
time that would authorize the establishment of branches in 48 States.
At best, the only proposal that has been suggested is the limitation
of branches within the areas of 12 commercial districts, so that your
question would simply go to the extent of the size of the branchbanking system.
Mr. L e t t s . I take it that Congress might decide now to permit
branches within certain trade areas, and another Congress might
ta k e another step at a later time, and it is quite conceivable that it
might become nation-wide.
Mr. B e e d y . Oh, y e s.
Mr. W i n g o . I do not want the comptroller put in the attitude of
saying on the record that the question of taxation would be an easy
one, which it is not. I suppose he recognizes that the taxation
problem is a very difficult one, and, with the shifting conditions, it
becomes a constant problem that has to be met. I assume that they
are handling it in some way in connection with the Bank of Italy,
and that as they extend branch banking they will work out a way,
and the courts can be determined upon to protect the interests of
both the States and the banks; but I do not want it to appear to the
attorneys and directors of banks who may read this record that the
comptroller who is making this recommendation to us that we have
to pass on treats the taxation problem as a light one.
Mr. P o l e . I intended to convey to you, Mr. Wingo, that I realized
that the taxation problem was a most intricate one, and I reiterate
that.
Mr. S t r o n g . N o w , Mr. Fort.
Mr. F o r t . Mr. Pole, on this tax problem, we now have a statute,
$s you pointed out awhile ago, by which the Federal Government
restricts and limits the powers of the State to tax national banks so
that the capital invested in national banks shall be treated the same
as other capital in the State similarly employed.
280
BRANCH, CH AIN ,
\ND GROUP BANKING
Mr. P o l e . That is correct.
Mr. F o r t . I assume that that act has been sustained in the courts?
Mr. P o l e . I a m sure it has.
Mr. F o r t . If we have, then, the power to put on that type of
limitation, we would also have the power, if we saw fit, would we not, to
draw a statute providing— and I am just suggesting this, not having
thought through this particular matter— that each national bank
which had branches shall pay in each city or in each town where it
had branches a tax proportionate to the volume that the deposits from
that branch bear to its entire resources, or something of that sort?
M r P o l e . That would se e m to be entirely reasonable.
Mr. F o r t . In other words, we have the power, if we choose to use
it, to establish a rule of taxation for national banks which will compel
them to pay taxes?
Mr. P o l e . I feel sure that the States tax the national banks by
permission of Congress. That is my understanding.
Mr. F o r t . And we could compel it as well as permit it? That is,
we could compel the bank to pay?
Mr. P o l e . That would be m y idea.
Mr. F o r t . We have had a lot of discussion here about the Bank of
Italy. I do not hold any brief for their system of banking or of hold
ing companies, but, as a matter of fair consideration of this whole
question, substantially the same thing that is happening in the Bank of
Italy group is happening in other banking groups in this country, is
it not?
Mr. P o l e . The same methods of transacting business and the same
developments along the line of branches is going on with respect to
other banks.
Mr. F o r t . And the same development in the line of affiliated
organizations of one type or another?
Mr. P o l e . In a greater or less degree.
Mr. F o r t . F o r example, the Chase National Bank in New York
today has the American Express Co. as a part of itself, has it not?
Mr. P o l e . I believe that is true through the Chase Securities
Co.
Mr. F o r t . A s a result, today, in effect, the Chase National Bank is
operating branch banking of a type throughout all of the cities of any
importance in the United States and Europe, is it not?
Mr. P o l e . It is operating a branch system directly in the city of
New York and, through its Securities Co., I think over the country
in the manner suggested by you.
Mr. F o r t . All of the business of the American Express Co. is
banking business of a type, is it not? I do not mean that they are
necessarily depositary banks, but they do a banking business, do they
not, in exchange, in the issuance of letters of credit, and in the issuance
of traveler’s checks?
Mr. P o l l . That is m y understanding.
Mr. F o u t . So that we already have at least one affiliated organiza
tion in the United States which is engaged in certain forms of branch
banking, not only nation wide, but world wide?
Mr. P o l e . Yes.
Mr. F o r t . And somewhat the same thing is true— and, of course,
it is a part of the Bankitaly group— of the Banc am eric a since its
BRANCH, CH AIN, AND GROUP BANKING
281
affiliation with the Blair Corporation, is it not? They are issuing
letters of credit and doing a banking business throughout the world
and in the larger cities of the United States9
Mr. P o l e . That is true.
Mr. F o r t . And the same thing is true with the National City and
Guaranty Cos., or their affiliates, and the Chicago Continental &
Commercial Bank?
Mr. P o l e . In many re sp e c ts.
Mr. F o r t . So that we already are faced, as a practical existing
question and not a mere future possibility, with the expansion of some
form of branch banking activities, both nation wide and world wide,
by some of our large banks?
Mr. P o l e . Other than b y the Transarnerica Corporation?
Mr. F o r t . Ye*, other than by the Transarnerica Corporation
Mr. P o l e . Yes.
Mr. F o r t . And in some cases those function', are really carried on
by the bank as a bank, are they not? For instance, the Bankers
Trust Co., of New York, as I understand, has no security affiliate,
but has securities offices and letters of credit offices, and so forth,
throughout this country and Europe—is not that so?
Mr. P o l e . I think you are correct. Of cou rse, the Bankers Trust
Co is not a national bank and I have no official information with
regard to its operations.
Mr. F o r t . Now, in that connection, you have spoken, under the
questioning of Mr. Luce---- Mr. B u s b y . Will the gentleman yield at this point, before he leaves
that matter? I want to call attention to the fact that I w a s not
pointing out these things that you have asked about-----Mr. F o r t . 1 w as referring to Judge Luce’s questions.
Mr. B u s b y . But to the fact that the Transarnerica Corporation
had been formed to take care of all the interests of the Bank of Italy,
which has not happened in any other system.
Mr. F o r t . It has happened in the Chase National Bank taking
o\er the American Express Co
Mr. B u s b i . N o ; not by a holding corpoiation formed indeendently of all these units, to take over all the units under a new name.
Mr. F o r t . Mr. Pole, in regard to the question of the shift which
Mr. Luce, I think, very aptly described as from the finer to the baser
system of banking, the shift from the national to the State system,
what has been the shift in terms of resources between the two systems
since the passage of the McFadden bill?
Mr. P o l e . There have been four and a half billion dollars of re
sources that have been converted from the national to the State
system within the past 10 years.
Mr. F o r t . Is that a net figure, or have there been corresponding
shifts of State to the national that would reduce that?
Mr. P o l e . N o , that is the total resources of all national banks of
five millions of resources and over which have left the national system
within the past 10 years, as set out in my report to Congress.
Since the passage of the McFadden Act (Feb. 25, 1927) to March
14, 1930, the total resources of the 377 national banks which have
gone into the State systems is approximately $3,400,000,000, while
282
BRANCH, CHAIN. AND GROUP BANKING
the total resources of the 181 State banks which have come into the
national system during the same period is about $2,700,000,000,
Mr. F o r t . Have you the figures in number of banks?
M r . P o l e . I shall be glad to supply that.
Mr. F o r t . I should like to see it.
Mr. W i n g o . Right in that same place, will you insert the resources
of State banks and the resources of national banks on the date the
McFadden Act passed, and the same figures of resources of State
banks and resources of national banks on the last available date, or
at the present time?
Mr. P o l e . I w ill b e g la d to.
Mr. W i n g o . Pardon the interruption, but I wanted to get the whole
picture there.
(The information called for is reproduced below.)
This office had no call showing the resources of national banks as of February
25, 1927, but did through process of calculation estimate the total amount of
resources of national banks on that date as being $25,136,426,000. No figures
were available, ho\se\cr, for Svate and private banks. The nearest available
figures on call rep* its for ► ate ai d private banks and national banks was June
M
30, 1927, four months Mib^'iuent to the passage of the McFadden bill, on which
date the total resource1 c. 7,796 national banks was $26,581,943,000
Total
resources for 19,265 {Vati and private banks way $41,550,615,000. The total
resources for 7,536 H-pw.’tiiig national banks as of June 29, 1929, was $ 27,440,228,000, and the total ro^nurces for 17,791 State and private banks as of June
29, 1929, was $44,732,277,000
?So later figures are available for State and pri
vate banks but the total resources of 7,408 national banks as of December 31,
1929, was $28,882,483,000.
Mr. F o r t . N o w , we have also had some discussion as to the
political power resulting from these various systems. Is it not a
fact also, Mr. Pole, that these changes m the banking systems, of
branch banking and group banking and other affiliations of banking
power, are resulting in an enormous concentration of economic power,
apart from political power?
Mr. P o l e It would seem that that would be natural.
Mr. F o r t . And that that is running along correlatively and simul
taneously with an aggregation of economic power in our industry and
in our merchandising?
Mr. P o l e . Undoubtedly
Mr. F o r t . The tendency everywhere seems to be toward the
establishment of greater units under single control?
Mr. P o l e . Yes
Mr. F o r t . It has seemed to me, parenthetically, that we are
somewhat getting to the point where we have got to consider the
aggregation of economic power, through control of personal property^
as England was forced three or four hundred years ago to consider
it when all property was real property. If this aggregation of
economic power through consolidation of banking resources is moving
as fast as it is, do you still feel, as you said awhile ago, that allowing
these great banks of deposit to go into the investment field and the
origination of securities is wise, or should they be restricted and held
out of the investment and origination of securities altogether and
forced back into what used to be called banking?
Mr. P o l e . A very important factor in the banking business is
dealing in securities, and it is becoming more and more important as
BRANCH, CHAIN, AND GROUP BANKING
283
the commercial business of the bank appears to be coming less and
less profitable.
Mr. F o r t . Let us get a clear view of what we mean by dealing in
securities, Mr. Pole. Dealing with securities and dealing in securi
ties are two different things, of course?
Mr. P o l e . Yes.
Mr. F o r t . Can you see no possible basis for a differentiation
between the function of loaning on securities held by somebody else
and the function of originating securities and selling them to some
body else?
Mr. P o l e . A very wide difference.
Mr. F o r t . Granting that there is a difference there, are they, in
your judgment, as a supervising bank official, the type of functions
that should be in the same hands?
Mr. P o l e . I know of no dangerous developments to date, Mr. Fort.
Mr. F o r t . N o ; but that does not go to the theory
M r. P o l e . N o .
Mr. F o r t . Banking, as it has been regarded traditionally, is the
receipt of deposits and the loaning of money, is it not?
Mr. P o l e . Y e s .
Mr. F o r t . Now, the loaning of money to-day, by virtue of the
transformation in our business and economic structure, has become
increasingly a loaning on securities rather than a loaning on names
or on individually-owned business. Do you feel that it is sound
banking— and I am not precommitted one way or the other— or
sound banking theory that the same man should sell me a security
and then determine how much he should lend me to buy it?
Mr. P o l e . I can not see any objection to banks going into the
underwriting and the distribution of securities on a large scale.
Mr. F o r t . In the one case the psychology of the banker is that of a
lender whose sole consideration is the safety of the loan and the making
of a loan that is wise for the borrower to have; do you see no difference
between that psychological viewpoint and the viewpoint of the sales
man who is making money or profit out of selling the security on which
the loan is sought?
Mr. P o l e . Yes, I see a very great difference.
Mr. F o r t . In that psychology?
Mr. P o l e . A very great difference in that psychology.
Mr. F o r t . N o w , the trust powers of banks have been exercised to
a very great extent, have they not?
M r. P o l e . T o an increasing extent.
Mr. F o r t . And are continuing. The percentage of increase is
really tremendous, is it not?
Mr. P o l e . Remarkably large.
Mr. F o r t . That results in the control of very large resources going
into the hands of the management of banks, that management having
no financial interest whatever in the funds in its control, does it not?
Mr. P o l e . It certainly does.
Mr. F o r t . In other words, it is another step by which we are pass
ing from the owner controlling his property to somebody else control
ling it for him?
Mr. P o l e . I think you are correct.
Mr. F o r t . N o w , if an individual is trustee under a will or a volun
tary trust, he may make no profit whatever, directly or indirectly,
284
BRANCH, CH AIN , AND GROUP BANKING
out of the funds in his hands as trustee, other than his legal com
mission, may he?
Mr. P o l e . That is correct.
Mr. F o r t . And if he does, he is liable to removal, and also to
deprivation of his profit, and, simultaneously, to make up any loss
which may have occurred on one transaction, wdrile being denied a
profit on the other transaction. Is there any sound reason why the
same rule should not apply to corporate trustees?
Mr. P o l e . I think not.
Mr. F o r t . Then should banks which are corporate trustees be
permitted to deposit the funds of the trust with themselves, except
that they pay as interest the same earnings that they make?
Mr. P o l e . I should say that under regulation there would be no
objection to it.
Mr. F o r t . Why not? If it were a private individual, he would not
be allowed to do it, would he?
Mr. P o l e . I think that the trust department might properly
deposit its uninvested trust funds in the commercial department of
a bank, which it does to-day, such deposit being covered by securities
under governmental regulation.
Mr. F o r t . And then, when deposited in the commercial depart
ment, they become subject to the ordinary hazards and investments
of the bank, do they not?
Mr. P o l e . They are protected by a deposit of securities with the
trust department, covering the full amount of deposit.
Mr. F o r t . The individual trustee under a will is covered by a
surety bond, is he not?
Mr. P o l e . Yes.
Mr. F o r t . So that there is no difference between the one case and
the other?
Mr. P o l e . As far as the security is concerned; no.
Mr. F o r t . But the individual trustee would not be permitted,
even though under bond, to utilize the funds in his custody as trustee
in his own business and make a profit?
Mr. P o l e . That is correct.
Mr. F o r t . Nor would he be permitted to buy securities from him
self or from a corporation which he owned?
Mr. P o l e . That is true.
Mr. F o r t . N o w , all that I am asking is this, that as a matter of
sound theory, is there any reason why a corporate trustee should
have broader powers in this respect than individual trustees?
Mr. P o l e . I p r o b a b ly see n o re a so n w h y th ere s h o u ld b e a n y
d ifferen ce th ere.
Mr. F o r t . Is
it not possible, under the present situation of security
affiliates, as was brought out by somebody else the other day, for
the little actual stock ownership of a bank to be in its own security
affiliate?
Mr. P o l e There is no law prohibiting that at present. I have
suggested that where the stock is held by these securities companies,
or where there is a securities company that is closely affiliated with
the bank, that the supervisory authority should be extended to such
corporations.
Mr. F o r t . The fact is that the stock of security affiliates and the
stock of the banks themselves are traded in as a unit, is it not?
BRANCH, CH AIN, AND GROUP BANKING
285
Mr. P o l e . That is quite often the case.
M r . F o r t . I s th e re a n y th in g in th e n a tio n a l b a n k a c t th a t p e rm its
th a t?
Mr. P o l e . There is nothing prohibiting it.
Mr. F o r t . The tieing of the two stocks together so that neither
could be sold separately from the other.
Is there anything in the national bank act that permits voting
trusts on national bank stock?
Mr. P o l e . There is no mention of voting trusts as far as I know.
Mr. F o r t . Are there any court decisions on that subject in regard
to national banks?
Mr. P o l e . I am sure there are.
Mr. F o r t . Which way? Do you know? Are they legal or illegal?
Mr. P o l e . I have not the information on that.
Mr. F o r t . If Mr. Await knows the decisions, I wish he would put
them in the record.
Mr. A w a l t . I can not offhand tell you the exact decisions, but
there was a decision in New York State on a voting trust, holding it
illegal, and there was a decision in one of the southern States holding
a voting trust illegal.
Mr. W i n g o . That w
^as not with reference to national banks,
was it?
Mr. A w a l t . I do not believe either one had reference to national
banks.
Mr. W i n g o . I do not think they were. I remember that I had
occasion to ask about that.
Mr. A w a l t . I might say that we have consistently opposed voting
trusts in our office.
Mr. F o r t . That is what I was coming to. I think generally that
there is a feeling that, a voting trust of bank stock at least is against
the public interest.
Mr. P o l e . There is.
Mr. F o r t . Is th e re a n y lo g ic a l difference b e tw e e n a v o tin g tru s t
on th e b a n k sto c k an d th e ow n e rsh ip o f th e m a j o r ity o f th e s to c k o f
t h a t b a n k b y a c o rp o ra tio n ?
Mr. P o l e . A s a matter of practice, there would be great similarity
in the operation of the two ideas.
Mr. F o r t . In the one case the man would have his voting trust
certificates for his holding, and in the other he would have a certificate
of stock in the Transamerica Corporation, or whatever it might be
that owmed the stock of the bank, but in either case the control is
locked, is it not?
Mr. P o l e . Yes.
Mr. F o r t . Do you feel that the locking of control of banks through
any form of device is a desirable thing?
Mr. P o l e . I think it is undesirable.
Mr. F o r t . In the examinations of banks having trust departments,
are the securities held by the banks for their own account cross
checked by number and in other ways against the securities held by
the bank for trust accounts?
Mr. P o l e . Those are kept entirely separate.
Mr. F o r t . Y o u seal the one box so that they can not be transferred
back from box to box until you make your examination?
286
BRANCH, CH AIN, AND GROUP BANKING
Mr. P o l e . We do. We take care of that situation.
Mr. F o r t . Has the question come to you in any way that will give
you grounds for an opinion as to whether we should, now that bank
ing has become so largely a matter of loans on collateral, in addition
to our 10 per cent limit, or some other limit, of resources that may be
loaned to any borrower, make a lending limit as to the amount that
can be loaned on the securities of any corporation?
Mr. P o l e . I have not given that any consideration.
Mr. F o r t . N o w that collateral loans have replaced personal loans
to such a large extent, do you not think it is something that we should
think of?
Mr. P o l e . I think it might be given consideration.
Mr. F o r t . Is it not essential if you are going to get real diversifi
cation of investment?
Mr. P o l e . I do not know that I would say that it would be essen
tial. I think it might be desirable.
Mr. F o r t . In regard to branch banking again, has the branch
banking system in California, in your judgment and from your
vision of it, produced really strong banks in the small towns? That
is, have the branch banking systems penetrated into the very small
towns as well, or have they only gone into the larger towns?
Mr. P o l e . They are in \ery many small tow ns as well as the larger
ones.
Mr. F o r t . Y o u have said that branch banking will intensify com
petition. Has not its tendency so far been, as applied to city-wide
banking, to reduce the competition in the sense of the number of
competitors, while at the same time it has furnished stronger inde
pendent banks, larger individual banks?
Mr. P o l e . I think that might be true as to the cities.
Mr. F o r t . Would not the same thing be true in the country?
Mr P o l e . The small unit banks in the cities have very frequently
been replaced by branches, and there are branches on almost every
block of one bank or another, thus increasing competition with, it is
true, a less number of competing systems. I think that the large
cities would reach out into the rural sections and the competition
would be just as keen there
Mr. F o r t . Y o u have spoken of the fact that the branch banks
would be stronger by virtue of a greater diversification of loans, which
I think is a very sound observation.
Mr. P o l e . Yes.
Mr. F o r t . That has not necessarily been true, however, of our
great city systems has it?
Mr. P o l e . I should say so, in their diversification of loans with
respect more, of course, to industries than to rural credits. There
are greater opportunities for diversification in the cities by reason of
the great diversification of industries there.
Mr. F o r t . I think the panic of 1920 is far enough back so that we
can perhaps talk about it a little. Is it not true that in 1920 and 1921,
some of the very largest banks in America were in pretty tight straits?
Mr. P o l e . I have heard that some of them w^ere.
Mr. F o r t . But were not permitted to fail because of the danger
to the whole banking structure of the Nation if they did fail?
Mr. P o l e . I think that is correct, Mr. Fort.
BRANCH, CH AIN, AND GROUP BANKING
Mr.
287
F o r t . Is not th e explanation in part of the absence of failures
Canadian system the fact that they have not been allowed to
fail? Was not that the case just two or to re e years ago, where one
bank was on the verge of failure and was taken over by two or three
of the other major systems of Canada?
M r . P o l e . I think that may account in some measure for the few
failures which do occur in the metropolitan centers. That is also true
in this country.
Mr. F o r t . In Canada, too. It is true in a group system. In other
words, if a bank gets so big that its failure would be a shock to the
whole banking structure, somebody is going to step in and take it over
and not let it fail, whereas that does not happen with these little
country banks.
Mr. P o l e . That is undoubtedly true
Mr. F o r t . S o th a t in part the safeguard to the small country town
is not altogether from the diversification?
Mr. P o l e . Not altogether.
Mr. F o r t . Or from the greater capital, in the sense that it enables
it to stand the shock, but from the fact that the size will make it inad
visable for other banks to let it fail.
Mr. P o l e . That is an important fa c to r
Mr. F o r t . N o w , we have developed in these questions of you, Mr.
Pole, a very great deal of interesting thought from which it might
appear to some of us at least that perhaps our loss of banks from the
national system to the baser system, as Mr. Luce very well called it,
could be in either of two ways. One is by extending the powers of
national banks and the other by e n d e a v o r in g to force improvement
in banking methods among State hanks
One would be as effective
as the other, would it not?
Mr. P o l e . I do n o t kn ow how w e could force improvement in th e
m a n a g e m e n t of State b a n k s.
Mr. F o r t . Not in the management, but in the code.
Mr. P o l e The code?
Mr F o r t The code under which they operate
You said, m
answer to a question the other d a y , that we h a d the power, if we
chose to exercise it through the Federal reserve system, to lay down
rules which every State bank would have to live up to
M r . P o l e . A s a c o n d itio n o f membership.
Mr. F o r t . As a condition of membership, or, I assume, as a condi
tion of having their checks cleared
Mr. P o l e I think th a t Congress might pass legislation to th a t
effect,
Mr. F o r t . S o that we have the power if it is wise to use it?
Mr P o l e . As fa r as I know, M r Fort.
Mr. F o r t . But, in any event, so far as moderate regulation of the
State banks goes, we have unquestionably the power through the
Federal reserve system9
Mr. P o l e I should say so.
Mr. F o r t . So that we can approach the question of the strength
ening of the national system from either angle w choose, either by
re
making the membership in the Federal reserve system mean a better
bank or by extending to the national banks more of the privileges that
the State banks now enjoy, or other privileges that the State banks
can not enjoy, as in your suggestion?
in th e
288
BRANCH, CHAIN, AND GROUP BANKING
Mr. P o l e . I think that might be said to be correct.
Mr. F o r t . Somewhere in between there probably is a balance that
represents wrhat we ought to do?
Mr. P o l e . Yes.
Mr. F o r t . The shift from the national to the State system really
will not be stopped if we permit either chain or group banking while
the States still give greater advantages to the State banks?
Mr. P o l e . I do not think I understand the question.
Mr. F o r t . I will ask my question differently. All of us are
vitally concerned with this shift of resources out of the national
system into the State system.
Mr. P o l e . Y e s .
Mr. F o r t . If the State laws continue to permit greater flexibility
in banking practice to banks incorportaed under State charter than
we do under the national charter, and w e continue to permit group
T
and chain banking, will not the tendency be for the groups and
chains to transform their national banks that they own into State
banks?
Mr. P o l e . I think that tendency w^ould be so if they did not
attach too much value to their membership in the Federal Reserve
System. I think, however, if privileges were given to national
banks which would permit them to cross State lines wdth branches it
w^ould attract a great many State banks into the national system.
Mr. F o r t . That I see.
Mr. P o l e . If they wr permitted to cross State lines, which is the
ere
important factor there
Mr. F o r t . But we have not found, practically, that the extension
of branch banking facilities to national banks in cities has not retained
their resources in the system, has it?
Mr. P o l e . Not at all, because that extension was to meet State
bank competitors and gave the national bank no superior advantage.
Mr F o r t . On the contrary we have lost four and one-half billions
in three years, in spite of extending that privilege.
Mr. P o l e . From the national system, *but not from the Federal
Reserve System.
Mr. F o r t . We have lost that because of the greater flexibility
permitted banks under the State laws, have we not?
Mr. P o l e . That is correct.
Mr. F o r t . I think that is all.
Mr. W i n g o . May I ask a fewr questions along the line of the
questions Mr. Fort has been asking?
A moment ago, on the voting trust proposition—
Mr. B e e d y . Will you permit me, before we leave this particular
subject to ask one question?
Mr. W i n g o . Yes.
Mr. B e e d y . It has been developed here in answer to a question
that the one thing that might tend to check this shift from the national
to the state system would possibly be the attraction of membership
in the Federal Reserve System, which membership would be doubly
attractive if the national banks were permitted to establish branches
beyond State lines. I do not want to say to the committee that I
have given extensive consideration to that very problem, but I have
in my possession a consideration of the cases bearing upon the right
of Congress to pass a law authorizing national banks to establish
289
BRANCH, CH AIN, AND GROUP BANKING
branches in States, even where the State law does not permit it. You
recently answered a question which was asked you as to the power of
national banks under Federal law to establish branches in more than
one State irrespective of State lines. You said you though there was
such power, or you had been so advised. Have you any legal opinion
in writing which you could put in the record at this point as bearing
upon this subject?
Mr. P o l e . I h a v e , an d shall b e g la d to do so.
(The opinion referred to is as follows):
N o v e m b e r 16, 1929.
Memorandum for the comptroller.
You have requested my opinion as to the constitutional power of Congress to
authorize the establishment of branches by national banks irrespective of State
laws.
In order to fully cover the question involved, it is necessary to go back to the
establishment of the first bank of the United States in 1791
The legal theory upon which Congress enacted the national bank act and the
Federal reserve act is the same as that upon which Congress authorized the
establishment of the first bank of the United States in 1791 and the second bank
of the United States in 1816
When the first bank was proposed in Congress,
the constitutionality of the bill was seriously debated but a majority of both
Houses supported it, The act as passed provided in part*
“ It shall be lawful for the directors of aforesaid to establish offices wheresoever
they shall think fit in the I nited States, for the purposes of discount and deposit
only, and upon the same terms, and in the same mariner, as shall be practiced
at the bank, and to commit the management of such offices, and the making of
the said discounts, to such persons, under such agreements, and subject to such
regulations as they shall deem proper, not being contrary to law, or to the con
stitution of the bank ”
President Washington signed the Mil after considering the official opinions
both for and against its constitutionality. The first bank of the United States
was opened December 12, 1791, and established eight branches in several States,
namely, in Boston, New York, Baltimore, Washington, Norfolk, Charleston,
Savannah, and New Orleans, This is the first precedent of the establishment of
branches by national banks. Upon the occasion of the failure of Congress to
renew the charter of the bank, which expired in 1811, the constitutional question
was again raised and some of the opposition against the renewal was upon the
ground that Congress was without power to establish and maintain a national
bank.
T h e S econ d
N a tio n a l B a n k o f th e
U n ite d
S ta te s ,
1816-1836
The attempt to finance the war of 1812-1814 without any banking instru
mentality under the control of the Federal Government proved so disastrous that
Congress in 1816 passed a new bill to charter a bank of the United States simi
lar to the first bank, President Madison approving the act, having the year before
vetoed a similar measure which did not meet his views. As compared with the
first bank of the United States there was little difference between their organi
zation and purpose.
The second Bank of the United States likewise established branches in various
States in the Union In 1818 the legislature of the State of Maryland passed an
act the effect of which was to place a special tax upon the branch of the Bank
of the United States in operation in Baltimore. The Baltimore branch refused
to pay this tax; its cashier, McCulloch, was sued m the State court and a judg
ment sustained against him by the court of final jurisdiction. He thereupon
sued out a writ of error under which the case was brought before the Supreme
Court of the United States. Here for the first time the constitutional power of
Congress to establish the bank, and of the bank to establish branches, was con
sidered by that tribunal
(McCulloch v. Maryland, 4 Wheat. 424.)
In the following year, 1819, the State of Ohio imposed a tax of $50,000 on
each of the two branches of the Bank of the United States, established at Cin
cinnati and Chillicothe. Upon the refusal of these branches to pay the tax the
sheriff on behalf of the States seized $98,000 in money. The State officials con
cerned were arrested by the Federal authorities and tried in the Federal Circuit
Court where judgment was rendered against them to restore to the bank with
290
BRANCH, CI I MX.
\XI> GKOUP BANKING
interest the funds seized
An appeal was taken to the Supreme Court of the
United States (Osborn v. Bank of the United States, 9 Wheat 738), where again
the constitutional power of Congress was brought into question and formed the
basis of the opinion.
The opinions in both of these cases were written by Chief Justice Marshall,
and for practical purposes can be considered as one case, the second being an
elaboration and a review of the first.
The principles decided in these cases may be briefly stated as follows:
(1) Congress has the constitutional power to incorporate a national bank.
(2) The existence of State banks can have no influence upon the question of
this paramount power of Congress.
(3> “ After the most deliberate consideration, it is the unanimous and decided
opinion of this court that the act to incorporate the bank of the United States
is a law made in pursuance of the Constitution, and is a part of the supreme law
of the land. The branches proceeding from the same stock, and being conducive
to the complete accomplishment of the object, are equally constitutional.” '
(McCulloch Case 4 Wheat 424.)
(4)
Congress, having the constitutional power to create a national bank, has
also the constitutional power to determine, authorize, or create the faculties
necessary to enable it to perform the services for which it was created and Con
gress alone is the judge of the means to be employed in the exercise of these
faculties.
The Supreme Court of the United States in these two cases upheld the power
of a national bank, to establish branches in the various States without permission
or authority from the State governments.
The
N a tio n a l
Bank
A ct
O f 1863
W ith the failure of Congress to renew the charter of the second bank of the
United States the Federal Government operated without a banking instrumen
tality under its control until the enactment of the national bank act in 1863.
That act set up a system of independent national banks rather than one central
national bank with branches. The question of the power of national banks to
establish branches did not again come before the Supreme Court of the United
States until 1924, more than a century after the decision of McCulloch v. M ary
land and Osborn v. Bank of the United States when it was presented in the case
of the First National Bank in St. Louis v Missouri. (263 U. S. 640.)
In the meantime, however, many cases had come before the Supreme Court of
the United States in which it became necessary to interpret and construe the
national bank act with reference to the charter powers of national banks in their
relationship to the State legislatures, in all of which the fundamental principles
enunciated in the McCulloch and the Osborn cases were sustained and followed.
It seems appropriate to consider some of these cases before proceeding to the
First National Bank in St. Louis v Missouri.
P r ig g
v. P e n n s y l v a n i a
(16 P e t e r s , 539, 617-19)
The Supreme Court of the United States in discussing the respective domains
of Federal and State legislation, said:
“ If this be so, then it would seem upon just principles of construction, that the
legislation of Congress, if constitutional, must supersede all State legislation upon
the same subject; and by necessary implication prohibit it. For, if Congress
have a constitutional power to regulate a particular subject, and they do actually
regulate it in a given manner, and in a certain form, it can not be, that the State
legislatures have a right to interfere, and as it were, by way of compliment to the
legislation of Congress, to prescribe additional regulations, and what they deem
auxiliary’' provisions for the same purpose. In such a case, the legislation of
Congress, in what it does prescribe, manifestly indicates, that it does not intend
that there shall be any further legislation to act upon the subject matter. Its
silence as to what it does not do, is an expressive of that its intention is, as the
direct provisions made by it
This doctrine was fully recognized by this court,
in the case of Houston v Moore (5 Wheat, 1, 2 1 -2 ), where it was expressly held,
that where Congress have exercised a power over a particular subject given them
by the Constitution, it is not competent for State legislation to add to the pro
visions of Congress upon that subject; for that the will of Congress upon the
whole subject is as clearly established by what it has not declared, as by’ what it
has expressed.’ ’
BRANCH, CHAIN, AND GROUP BANKING
F arm ers’
and
M e c h a n ic s ’
N a tio n a l
B a n k v. D e a r in g
291
(91 U. S. 29, 1875)
This was a cage before the Supreme Court which construed the national bank
act with reference to the authority of the State governments and involved the
application of the usury law of the State of New York. The court said:
“ The constitutionality of the act of 1864 is not questioned. It rests on the
same principle as the act creating; the second bank of the United States. The
reasoning of Secretary Hamilton and of this court in McCulloch v. Maryland
(4 Wheat. 316), and in Osborn v. Bk. (9 Wheat. 738), therefore applies. The
national banks organized under the act are instruments designed to be used to aid
the Government in the administration of an important branch of the public
service. They are means appropriate to that end. Of the degree of the necessity
which existed for creating them. Congress is the sole judge.
“ Being such means, brought into existence for this purpose, and intended to
be so employed, the States can exercise no control over them nor in anywise affect
their operation, except in so far as Congress may see proper to permit.
Anything
beyond this is ‘ an abuse’, because it is the usurpation of power which a single
State can not give
Against the national will ‘ the States have no power, bytaxation or otherwise, to retard, impede, burthen or in any manner control the
operation of the constitutional laws enacted by Congress to carry into execution
the powers vested in th^ General Government ’ (Osborn v Bk , supra; Weston
v. Charleston, 2 Pet. 466; Brown v Maryland, 12 Wheat 419; Dobbins v Erie Co ,
16 Pet. 435.
“ The power to create carries with it the power to preserve
The latter is a
corollary from the former
“ The principle, announced m the authorities cited, is indispensable to the
efficiency, the independence, and, indeed, to the beneficial existence of the General
Government; otherwise it would be liable, in the discharge of its most important
trusts, to be annoyed and thwarted by the will or caprice of every State in the
Union
Infinite confusion would follow. The Government would be reduced
to a pitiable condition of weakness
The form might remain, but the vital essence
would have departed
In the complex system of polity which obtains in this
country, the powers of government may be divided into four classes.
“ Those which belong exclusively to the States;
“ Those which belong exclusively to the National Government;
“ Those which may be exercised concurrently and independently by both;
“ And those which may be exercised by the States, but only with the consent,
express or implied, of Congress
“ Whenever the will of the Nation intervenes exclusively in this class of eases,
the authority of the State retires and lies in abeyance until a proper occasion for
its exercise shall recur
(Gilman v. Philadelphia, 3 Wall. 713, 18 L. ed 96;
Ex parte McNiel, 13 W all. 240, 20 L ed 625 )
“ The power of the States to tax the existing national banks lies within the
category last mentioned
“ It must always be borne in mind that the Constitution of the United States,
‘ and the laws which shall be made m pursuance thereof,’ are ‘ the supreme law of
the land’ (Const , art. 6), and that this law is as much a part of the law of each
State, and as binding upon its authorities and people, as its o\\ n local constitution
and laws ”
Casey v G a l li (94 V S 673, 1877)
This case held that Congress had the power to authorize a State chartered bank
to convert into a national bank without any assent or permission in the State
upon the ground that no authority from the State was necessary
D a v is
v
E lm ir e
S a v in us B a n k
(161 t
S
275. 1896)
The court in deny ing the \ alidity of a statute of the State of Ncsv \ ork tixing
preferences in eas£s of insolvency, in so far as it applied to national banks, through
Mr. Justice White, said
“ National banks are instrumentalities of the Federal Go\eminent, treated
for a public purpose, and as such necessarily subject to the paramount authority
of the United States
It follows that an attempt In a State to define their
duties or control the conduct of their affairs is ubsoirteh void, wherever such
attempted exercise of authority expressly conflict < v,n.i iho h * of tiic I':,'ted
iv\
States, and. either frustrates the purpose of the national 'egi.-lation, o’ impairs
the efficiency of these agencies of the Federal Government to di^char^e the da ties
for the performance of which they were created The*e principles t*re axiomatic,
and are sanctioned bv the repeated adjudications of thi** court ’
292
BRANCH, CHAIN, AND GROUP BANKING
E a ston
v.
(188 U. S. 220, 1903)
Iow a
In this case the president of a national bank was sentenced under a criminal
statute of the State penalizing the receipt of deposits with knowledge of the
insolvency of the bank.
In taking issue with the Supreme Court of the State, Mr. Justice Shiras, in
delivering the opinion of the court, said:
“ W e think that this view of the subject is not based on a correct conception
of the Federal legislation creating and regulating national banks. That legis
lation has in view the erection of a system extending throughout the country,
and independent, so far as powers conferred are concerned, of State legislation
which, if permitted to be applicable, might impose limitations and restrictions
as various and as numerous as the States. Having due regard to the national
character and purposes of that system, we can not concur in the suggestions
that national banks, in respect to the powers conferred upon them, are to be
viewed as solely organized and operated for private gain. The principles enun
ciated in McCullough v. Maryland (4 Wheat. 425, 4 L. ed. 606) and in Osborn v.
Bank of United States (9 Wheat 738, 6 L. ed. 204), though expressed in respect
to banks incorporated directly by acts of Congress, are yet applicable to the
later and present system of national banks.”
“ Such being the nature of these national institutions, it must be obvious that
their operations can not be limited or controlled by State legislation, and the
Supreme Court of Iowa was in error when it held that national banks are organized
and their business prosecuted for private gain, and that there is no reason why
the officers of such banks should be exempt from the penalties prescribed for fraudu
lent banking,”
F ir s t N
a t io n a l
B
ank
v
. F
ellow s
(244 U . S . 416, 1917)
In this case the State of Michigan contested the powder of Congress to enact
the provisions of the Federal reserve act conferring trust powers upon national
banks. The Supreme Court of the United States (opinion delivered by Mr.
Chief Justice V^hite) reversed the Supreme Court of Michigan and upheld the
powers of Congress citing with approval the principles enunciated in McCullough
v. Maryland and Osborn v. Bank of the United States. Referring to the basic
principles of constitutional law laid down in the above two cases, the court
further said: “ The doctrines thus announced have been reiterated in a multitude
of judicial decisions, and have been undeviatingly applied in legislative and
enforced in administrative action. ’ ’
F ir s t N
a t io n a l
B ank
of
S a n J ose
v
. State
of
C a l if o r n ia
et
al
. (26 2 U .
S.
366, 370)
In this case the Supreme Court declared invalid, so far as national banks were
r
concerned, a State lav/ providing for the escheat to the State of California of
bank deposits remaining unclaimed for more than 20 years, and in commenting
upon attempted interference with national banks by State legislation, said:
“ This court has often pointed out the necessity for protecting Federal agencies
against interference by State legislation The approved principle of obsta principiis should be adhered to. (McCulloch v. Maryland, 4 Wheat, 316; Osborn v.
United States Bank, 9 Wheat. 738; Farmers’ and Mechanics’ National Bank v.
Dearing, supra; California v. Central Pacific R. R. Co., 127 U. S. 1; Davis v.
Elmire Savings Bank, supra; Easton v. Iowa, supra; Covington v. First National
Bank, 198 U. S. 100; Farmers and Mechanics Savings Bank v. Minnesota, 232
U. S. 516; Choctaw, Oklahoma and Gulf R. R. Co. v. Harrison, 235 U. S. 292;
Bank of California v. Richardson, 248 U. S. 476.”
B
arnes
N
a t io n a l
B
ank
v. D
uncan
(2 6 5
U. S . 1 7 / 1 9 2 4 )
In this case the State of Missouri attempted to enforce against a national bank,
the State law regulating the exercise of trust powers. The Supreme Court of the
United States reversed the State Supreme Court upon the authority of the Fellows
case and others above cited. Mr. Justice Holmes in delivering the opinion of the
court reiterated the principle that the constitutional power of Congress was to
be tested by the right to create the bank and the authority to attach to it that
which was relevant in the judgment of Congress to make the business of the bank
successful and that this excluded the power of the State in such cases.
BRANCH, CH AIN , AND GBOUP BANKING
F ir s t N
a t io n a l
B
a n k in
S t. L o u i s
v
. M
isso u r i
(2 6 3
293
U. S. 6 4 0 , 1 9 2 4 )
This case involved primarily the question of the power of national banks to
establish branches under the authority of the national bank act and rests upon a
state of facts different from that of Mc-Culloch v. Maryland in which the question
of branches for national banks was first considered by the Supreme Court.
The First National Bank, upon the advice of its own counsel, proceeded to
establish and conduct a branch bank in the city of St. Louis upon the theory that
whereas the Federal statutes did not expressly authorize national banks to es
tablish branches, such banks nevertheless possessed the incidental charter power
so to do. No permission from the comptroller was obtained for the establishment
of the branch, There was upon the statute books of the State a law prohibiting
the establishment of branch banks in that State. The Attorney General of
Missouri on behalf of the State took the position, first that the national bank
exceeded its charter powers under the national bank act when it established the
branch and second that there being no permissive Federal statute, the State was
competent to enforce against the national bank its own law against branches.
The following propositions are quoted from the brief of the Attorney General of
the State which he filed before the Supreme Court of the United States:
(1) “ Branch banking by a national bank in a State is conduct in excess of any
authority from the Nation.”
(2) “ Acts of a national bank in a State which are in excess of any authority
from the Nation, and in contravention of State law, can be stopped by the State.”
(3 ) “ An unauthorized, unlawful act of a national bank in a State should stand
upon the same footing as the unauthorized, unlawful act of any other corporation.’ *
(4) “ A national agency is no more free from responsibility to the state for un
lawful acts done in the State beyond the scope of its powers and authority than
is a State agent.”
(5) “ The same conduct may be an offense against both State and national
sovereignty, and may be restrained by both Nation and State.”
It was upon these grounds that the action was brought by the State in the
supreme court of the State in the nature of quo warranto. The formal allegation
of the State was to the effect, first that the bank was not authorized by Congress
to establish a branch and second, that in establishing the branch it violated a
statute of the State expressly prohibiting the establishment of branch banks.
At the request of the Comptroller of the Currency the Attorney General of the
United States intervened in this case, not however for the purpose of upholding
the right of the national bank to establish the branch but to contest the jurisdic
tion of the State to inquire into the question whether Congress had authorized
a national bank to establish a branch
It was shown before the court that the office of the Comptroller of the Currency
had for years construed the national bank act as denying the right of national
banks to establish branches. This opinion was supported by an opinion of the
Attorney General, M ay 11, 1911, which was cited with approval in the opinion
of the court in this case. The principal argument of counsel on both sidek before
the court, and the bulk of the opinion of the court, is devoted to the question of
whether Congress had authorized national banks to establish branches. The
court reached the conclusion that there was no doubt, especially in view of the
long-continued construction of the national bank act by the Comptroller of the
Currency, that Congress had not conferred upon national banks the charter powder
to establish branches.
In view therefore of this condition precedent the court held that the State was
competent to enforce its own law against the national bank. The question
therefore of the constitutional power of Congress to permit national banks to
establish branches was not involved in this case. The ease is in harmony with
the previous decisions of the court hereinabove considered
Had there been upon
the Federal statute books an amendment to the national bank act permitting
national ban^s to establish branches the Supreme Court of the United States
would have undoubtedly held the State law invalid as applied to national banks.
The question asked b^ the court of the State law, “ Does it conflict with the laws
of the United States9 ” would have been necessarily answered in the affirmative.
In the absence of such an amendment the question was answered in the negative.
Congress inserted in the so-called McFadden-Pepper Act of February 2 5 , 1 9 2 7 ,
a clause in its branch banking section, that branches of national banks would be
permitted only in those States which permitted the State banks to establish
1 0 0 1 3 6 — 3 0 — v o l 1 p t 3 -------- 5
294
BRANCH, CH AIN, AND GROUP BANKING
branches
This clause was a concession to the States not as a matter of constitu
tional necessity but rather as a matter of legislative policy
In view of the above consideration there appears to be no doubt of the consti
tutional power of Congress to permit the national banks to establish branches m
any State of the Union, irrespective of the laws of the State
If Congress deter
mines that the national banks could better serve as instrumentalities of the Fed
eral Government through the establishment of branches it would not be within
the jurisdiction of a State to prohibit or restrict the purpose of the National Legis
lature to this effect.
F G A w alt,
Deputy Comptroller and Counsel.
Mr. W i n g o Y o u said you knew of no power by which we could
prevent and control the State standards of banking. Is that true, do
you think, in its entirety?
Mr. P o l e . I said I did not know of anything that Congress could
do to control a State bank, except-----Mr. W i n g o I am talking about a charter to the State bank, not
talking about controlling the actual operation of the bank after it
gets the charter, but about the powers of the bank secured from a
charter given by the State— in other words, under the State banking
laws. You say you do not know of any power we have to affect that?
Mr. P o l e I know of none. Of course, I am not a law3^er
Mr. W i n g o . Let us speculate just a little bit and draw on experi
ence, too, Let me cite to you the fact that we drove out of existence
the State bank issues by the exercise of a Federal power, the taxing
power.
Before I go into these illustrations I want it distinctly understood
that bv enumerating the possibilities I do not by my questions indi
cate my personal opinion on or approval of the use of any of these
methods, but, in talking about possibilities, we will take the question
of the commerce clause of the Constitution
Mr. P o l e . I thought you were talking about existing law
Mr. W i n g o . N o; I am talking about the power to enact a law and
that the effect of it would be to drive out of existence every State
bank that did not come up to a standard that Congress fixed.
Mr. P o l e . I w ou ld n o t q u e stio n th a t in a n y w a y .
Mr W i n g o . As an illustration, we could use the taxing power to
stop chain banking or group banking, we could use the interstate
commerce clause; we could use the barring of the mails; we could pro
vide that no national bank or Federal reserve bank should clear or
have any relations with a bank that did not come up to a specific
standard, and if we did those things would we not ultimately force
the different State banks up to a standard that was comparable to
the ideal standard that we have fixed in the national bank act?
M r P o l e There is no question in my mind that Congress could
eliminate the State banks
Mr. W i n g o Is it not a question of the power of Congress by se\ era!
means to check what we all recognize and what you denominate as
the evils of chain and group banking? But your idea is that the
ideal way to check these evils is to adopt what some other people
regard as another evil, branch banking?
Mr P o l e Yes
Mr W i n g o If you are a chain banker or group banker, and you
were given the alternative what reason or what motive or what
philosophy w ould there appear to you that would lead you to *a\ ,
BRANCH, CH AIN , AND GROUP BANKING
295
“ I had better change my chain and my group into a branch banking
system?”
Mr. P o l e Greater mobility of resources and ease and economy of
operation.
Mr. W i n g o What do you mean by “ greater mobility of resources?”
Mr. P o l e . That the transfer of funds from one section of the area
in which I was operating my branch system to another would be
far easier under the branch banking system than it would under the
other systems which you speak of
Mr. W i n g o I can not comprehend that statement, because I
have an idea that the transfer of funds would either come by telegraph
or by mail.
Mr. P o l e Under the group plan, each bank is an independent
unit, and it has its own investments, so that if it wished to transfer
funds from one point to another, it would be under the necessity of
selling some of its assets or transferring them through a holding com
pany to some other bank which had funds
Mr W i n g o N o t n e c e ssa rily , it cou ld tra n sfer a d e p o sit, cou ld it
n o t, w ith o u t d o in g th a t?
Mr. P o l e It could not transfer its deposits
Mr. W i n g o What is to prevent a chain
bank from making a
transfer of its deposits in the same identical instance that a branch
bank could? Suppose that here is a chain bank that has a deposit
in New York City with a correspondent, and it is changed over night
into a branch banking system Is there any difference in the mechan
ics of transferring those funds m one case than m the other?
Mr. P o l e . We must be talking about different things
Mr. W i n g o That is the reason I am asking you to elucidate
Mr. P o l e . If you were to deposit your funds m a bank which was
a member of a group, it would not be within the province of the hold
ing company which held the stock of that member of the group to
transfer your deposit to another member of its group where funds
might be needed for loaning purposes
Mr. W i n g o . Well, they are doing it everyday Even if the laws
of Arkansas prohibit branch banking, they do permit chains, and
funds are being transfeired from Arkansas to Nashville, Tenn ,
under chain banking and under group banking just tht - ame as they
would have the power to do if you had branch banking
Mr. P o l e Funds may be transferred, funds which arc involved m
the operation of a single unit
Mr. W i n g o That is what we are talking about
Mr P o l e But there would be no possibility of transferring the
deposits of one independent bank which might be a member of the
group to another independent bank which might be a member of the
group.
Mr W i n g o You mean the book record, not the deposit
Mr P o l e . The deposit
Mr W i n g o . Are you talking about the a ctu a l m o n e y 01 the actual
credit or the record on the books?
Mr. P o l e I am talking about the actual credit
If a bank itself
wished to transfer its funds, that still might be a very difficult matter
Mr. W i n g o . We will say that there is a holding corporation in
Xashville, Tenn.; can it not direct one of its chain banks in Arkansas
to transfer my funds that are there to my credit— and there is no
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BRANCH, CH AIN, AND G R O U P BANKING
occasion to specify “ Wingo deposit” ; they say, “ from your deposits,
you transfer $10,000 or $20,000” —whatever they wanted— “ over to
the depositary in Nashville, Tenn.”
Can they not do that now, and do they not do it?
Mr. P o l e . Such funds as that may be moved, but they would b e
limited to the amount which the bank might deposit or the amount
which the bank might borrow.
Mr. W i n g o . That would be true in both instances.
Mr. P o l e . W ith small banks it would be a very small amount,
T
whereas in the branch banking system funds could be transferred very
freely to any branch of the system.
Mr. W i n g o . What limitation is there in the national bank act with
reference to such transfers? The limitation you are talking about is
the 10 per cent limitation, and that applies to loans.
Mr. P o l e . No; I was not referring to that.
Mr. W i n g o . What statute did you have in mind?
Mr. P o l e . I w as h a v in g in m in d th e s ta tu te w here a b a n k c o u ld not
k e e p o n d e p o sit, fo r in sta n c e -------Mr. W i n g o . I see what you are driving at now.
Mr. S t k o n g . Are you going to finish soon?
Mr. W i n g o . Yes; I have one or two more questions.
Is it not then true, talking about the standards of the State banks,
that we have been engaged for years in this committee and in Con
gress in constantly framing our laws to meet the competition of State
banks, and has not that been the chief cry and reason for our doing
these things?
Mr. P o l e . I think that is a fair statement of the situation.
Mr. W i n g o . Was not that the late argument for the McFadden
Act?
Mr. P o l e . Yes.
Mr. Wti n g o . T o liberalize the national bank standards, and when
ever we pointed out objections to any particular proposal around th is
table, instead of discussing the merits of the objection, we were to ld
that “ W e ll, we have to do that in order to meet the competition o f
State banks.”
Mr. P o l e . That was largely the case in the McFadden bill.
Mr. W i n g o . And the reason for that was that these State banks, as
my friend Mr. Luce would say, had a baser standard, which was lower,
and so we have governed our conduct in meeting this competition by
reasons of expediency and not by measuring the standard or what
should be the ideal, have we not?
Mr. P o l e . In the McFadden bill there was some liberalization,
Mr. W i n g o . I am talking about the major features of it.
Mr. P o l e . Of course, the important thing in the McFadden b ill
was not so much the liberalization of a bank’s privileges as it was w ith
respect to the extension of branches.
Mr. W i n g o . Oh yes; we had the argument made here that w e
ought to permit them to deal in securities because State banks w ere
permitted to do it. I think every major proposal in the McFadden
Act was bottomed not upon the justification that it was sound bank
ing, but we were trying to meet the competition of State banking
systems.
Can you name a major proposal where that argument was not made?
Mr. P o l e . I think that is correct.
BRANCH, CH AIN, AND GROUP BANKING
297
Mr. W i n g o . And the point I want to drive home is this, that if
there are evils in these State banking systems which, by reason of an
enforced competition, are weakening the standard of the National
system, would it not be profitable for us, instead of spending our time
in devising schemes of expediency and lowering the national standard
in order to meet this competition, to spend our time in devising legis
lation embracing methods by which we could enforce a higher standard
in the State banking laws so as to protect both the State bank patrons
as well as the national bank patrons from the evils of the baser
standard as referred to by Mr. Luce?
Mr. P o l e . I think we have to consider it from the economic point
of view. The announced legislative policy of the so-called McFadden
bank act of February 25, 1927, was parity between the National and
State systems. The purpose of the bill was to make the charter
powers of national banks approximately equal in operating advantage
to those of the State banks. Nearly three years of operation under
that act has demonstrated that it has failed of its purpose in this
respect.
The theory of parity between the two systems of banks is, in my
opinion, economically unsound.
Mr. W i n g o . Should we not say that we will spend our time in
bottoming everything we do upon building up the system that from
an economic standard is sounder and better than the baser standard
now permitted by the States?
Mr. P o l e . I think so, and hence my proposal for an increase of
branch banking powers for national banks without reference to State
laws. I think that the economic change is such that the small bank
can not operate successfully any more. I am, therefore, suggesting
a plan which will enable banking service to be carried to every com
munity from a metropolitan center.
Mr. W i n g o . In other words, your theory is that the changed eco
nomic structure is such that in order for banking institutions to render
to the public that service to which it is entitled, necessarily you have
to have larger banking units?
Mr. P o l e . That is correct.
Mr. W i n g o . And you think that necessarily then in order to have
larger banking units, you have to choose between three types— group
banking, chain banking, or branch banking— and in your own mind
branch banking possesses fewer of the evils and more of the benefits
than the other two?
Mr. P o l e . I think decidedly there is no question in my mind as to
which is the best of the three, and I am not advocating either chain
banking or group banking as a remedy.
Mr. W i n g o . That is what I say.
Mr. P o l e . I am advocating branch banking.
Mr. W i n g o . Your ideal, as I understand it, is the independent unit
banking system, but you say that changed economic conditions have
made us face a condition and not a theory?
Mr. P o l e . Yes.
Mr. W i n g o . And your belief is— and your judgment is entitled to
a great deal of weight— that the only choice we have now in order to
do what you think is necessary is between a group banking system or
a chain banking system or a branch banking sustem, and you think
the branch banking system is preferable, both from the standpoint of
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BRANCH, CH AIN , AND GROUP BANKING
the service they may render, the superior service, and from the
standpoint of having fewer evils than either of the other two systems?
Mr. P o l e . And from the standpoint of successful operation.
Mr. W i n g o . That is included.
/
Now, let us go back to the proposition of the trustee. Is it not a
fact that the courts in New York City now sometimes designate banks
as receivers and trustees, and permit those banks to deposit with
themselves the trust funds and to pay the trust estate, of which it is
receiver, or trustee, only 2 per cent, or whatever the current rate is,
upon deposit balances, and the bank gets the benefit of those funds
and in some instances makes 10 or 12 per cent, or whatever its earning
is upon its deposits, and, in addition thereto, draws its fees as trustee
and remuneration as receiver? Is not that an actual practice in New
York City and possibly in other cities and States?
Let us just take one instance, and it is not an isolated one. Do
you not know that the Irving Trust Co. had such an experience?
Was it not appointed receiver, and did not the court permit it to
deposit the trust funds in its own institution and let them use them and
simply account to the trust estate for the current rate of interest on
deposit balances, and, in addition thereto, the same court allowed
them a fee for acting as receiver?
Mr. F o r t . If the gentleman will permit, I understand that in New
York there have been some modifications made of the ordinary rules
applicable to trustees, in favor of corporate trustees under the super
vision of the banking department as organized.
Mr. W i n g o . That is true.
Mr. F o r t . A s against individual trustees.
Mr. W i n g o . What I am talking about is this, that regardless of
the fundamental rules, time and experience as well as statutes have
set up certain safeguards governing the use of trustees’ funds. I am
not discussing whether they are wise or unwise, whether they should
be permitted to be changed or not; I am talking about what is actually
being done. Is not that very thing being done in New York City?
I am not undertaking to criticize it, to say whether it is justified or
not; I am just asking you if it is not a fact that in actual practice,
such as in the illustration I have used, that that has taken place
place in more than one instance in New York City?
Mr. P o l e . I know nothing, of course, of the Irving Trust Co. I
think as a general rule that trust funds do not remain uninvested
for any great length of time.
Mr. W i n g o . That, of course, does not answer my question. You
do not know whether any such practice as I have given obtains or
not?
Mr. P o l e . No, I do not.
Mr.
S tro n g .
I s that all, Mr. Wingo?
Mr. W i n g o . Can you conceive of any reason why a trust estate
should not be protected by the same jealous rules when a corporation
is dealing with it as when an individual is dealing with it?
Mr. P o l e . None at all.
Mr. S t r o n g . Mr. Goodwin has a matter that he wants to bring
before the committee.
(Thereupon, 1.15 o ’clock p. m., the committee went into executive
’ session.)
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