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Branch, Chain, and Group Banking
HEARINGS
B EFOR E T H E
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
SEVENTY-FIRST CONGRESS
SECOND SESSION
UNDER
H. Res. 141
AUTHORIZING THE B A N K IN G AND CURRENCY COM M ITTEE
TO STUDY AND INVESTIGATE GROUP, CHAIN
AND BRANCH BANK ING
APRIL 8 AND 11, 1930
VOLUME 1
Part 7
UNITED STATES
GOVERNMENT PRINTING OFFICE
100136
W A S H IN G T O N : 1930
CO M M ITTE E ON BANKING AND CURRENCY
LOUIS T . M cF A D D E N , Pennsylvania,
JAM ES G. STRO N G , Kansas.
R O B E R T LU CE , Massachusetts.
E. H A R T F E N N , Connecticut.
G U Y E. C A M P B E L L , Pennsylvania.
C A R R O L L L. B E E D Y , Maine.
JOSEPH L. HOO PER , Michigan.
G O D F R E Y G. G O O D W IN , Minnesota.
F. D IC K IN SO N L E T T S , Iowa.
F R A N K L IN W . FO RT, New Jersey.
B E N J A M IN M . G O LD E R , Pennsylvania.
F R A N C IS S E IB E R L IN G , Ohio.
M R S. R U T H P R A T T , New York.
J A M E S W . D U N B A R , Indiana.
P h il ip
n
Chairman
OTIS W IN G O , Arkansas.
H E N R Y B. S T E A G A L L , Alabama.
C H A R LE S H. B R A N D , Georgia.
W . F. S TE V E N S O N , South Carolina.
T. A L A N GO LD SB O RO U G H , Maryland.
A N N IN G S. P R A LL , New York.
JEFF B U S B Y, Mississippi.
CONTENTS
Pas?e
1 ouiiE, Hon Hoy A , Governor Federal Reserve Board, questioning of. 707, 753
in
BKANCH, CHAIN, AND GROUP BANKING
TUESDAY, APRIL 8, 1930
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
C
,
urrency,
Washington D. C.
and
The committee met in the committee room, Capitol, at 11 o ’clock,
a. m., Hon. Louis T. M cFadden (chairman) presiding.
The C h a ir m a n . The committee will come to order.
STATEMENT
OF GOV. ROY A. YOUNG— K esum ed
The C h a ir m a n . M r. Luce, would you like to question the witness
this morning?
M r. L u c e . For a fe w m in u te s.
Governor Young, some days ago M r. W ingo made an observation
that interested me much and will furnish a peg on which I may ask
some questions of a general nature. He said that he was obliged to
pay 10 per cent if he chose to borrow from his local bank. Of course I
am referring to it as a typical instance, if I am right in m y under
standing that interest rates in the W est average higher than those in
the East.
One of the criticisms made against branch banking is to the effect
that it will tend to draw money away from, the smaller communities
and center it in the metropolis where it will be used for purposes of
the stock exchange. This puzzles me. I had understood that the
purpose of decentralizing the Federal reserve system or one purpose
was *to equalize the supply of money throughout the country and to
equalize rates on commercial paper.
Will you explain to me how it happens that the cotton factor in
Arkansas must pay a higher rate of interest than, say, a potato mer
chant in northern Maine?
Governor Y o u n g . M r. Congressman, X do not know what the legal
rate is in Arkansas, but I assume it is 10 per cent. If that cotton
factor is a small operator and depends upon one or two local banks,
he might have to pay a 10 per cent rate, although I doubt it. If he
was a larger cotton factor, so that he had connections in various parts
of the country, he would be in a position to bargain for his money the
same as the jobber or wholesaler and he would know where he could
get it cheapest, even though he had to go to New Y ork City.
The smaller man would have to pay a higher rate and, to answer
your specific inquiry, I think that the State usury laws have more to
do with that than any one thing I know of.
I have a list here showing the legal rate of interest and rate by
contract in all o f the States o f the Union. It ranges all the way from
707
708
BRANCH, CH AIN , AND GROUP BANKING
a minimum of 6 per cent to a maximum o f 12 per cent, and in a few
States, any rate.
M r. L u c e . M y difficulty goes beyond that. Tw enty years ago it
was known that loans on real estate commanded a higher interest in
the W est than in the East. We had, in the East, formed numerous
investment companies for the purpose of taking advantage o f that.
Then we created the Federal farm system which seems to have
equalized the opportunities for all parts of the country. A t any rate
in the insurance company in which I happen, by chance, to be a
director and when I am able to attend a directors’ meeting, when the
list of loans in the preceding m onth is read off I notice loans in the
M ississippi Valley, Ohio, Missouri, and so forth, at the same rate that
is paid for loans in the immediate neighborhood of Boston. That
leads me to conclude that the farm loan system has given all
parts of the country equal opportunity in a general way.
B ut am I wrong m m y understanding that still the rate for loans on
commercial paper in the territory beyond the Mississippi is distinctly
higher than it is on the Atlantic seaboard?
Governor Y o u n g . From what I have been able to observe, M r.
Congressman, I should say yes.
M r. L u c e . I am including the South also in m y question.
G overnor Y o u n g . I would say yes, with the exceptions of Virginia,
where I think they have a maximum rate of 6 per cent, also North
Carolina, Tennessee, and W est Virginia.
M r. L u c e . In those States where the usury law permits high rates,
w hy does not the law of supply and demand operate to bring those
rates down? There are large numbers of citizens in the East at the
present m om ent who are seeking opportunity for investing their money
at what they have, since the war, commenced to look upon as a fair
rate and they can not get it. The m oney market is so flooded with
m oney for investment that a prudent man will look askance at any
offering on which he can earn more than 6 per cent. W hen money
can be loaned in Arkansas and Georgia or anywhere west or south at
10 per cent, why does not capital flow from the East to those places?
G overnor Y o u n g . It does to a certain extent, M r. Congressman.
W e had a very specific illustration of that in Decem ber, January, and
February of 1929 and 1930. Conditions eased in the New Y ork
market first. The surplus funds gradually drifted to the interior.
T hey drifted in this way— and I am going to take a territory I am
familiar with no illustrate what I have in m in d : M inneapolis has
several large grain concerns that are nationally known. T hey have
banking connections in many sections of the country. A t times they
are very heavy borrowers. They have a very large credit standing
so that if they, in a tight money period, should be asked to pay 6 per
cent in the Minneapolis district and the New York correspondents
offered them 5% or even 5%, they would immediately borrow in New
Y ork to save that one-quarter per cent over the rate they would have
to pay in Minneapolis. That shifts the funds from the larger centers
to the smaller centers.
N ow , on the other hand, when we have a condition such as we had
in January, 1927, and January, 1928, clear through until O ctober of
1929, when the call rate was so high that it attracted funds from the
interior to New York, credit has the tendency to a degree to flow
where it brings the better rate.
BRANCH, CH AIN, AND GROUP BANKING
709
M r. L u c e . That is what I wanted to bring out, because it seems
to me inconsistent with the allegations that the W est has to pay more
for money than the East. I want to find out whether M aine, New
Hampshire, and Vermont are any worse or any better off in that par
ticular than Arkansas, Oklahoma, and Texas?
Governor Y o u n g . I think, generally speaking, that the customers
through that territory— that is, Maine, Vermont and through there—
pay a lower rate------M r. L u c e . W hy?
Governor Y o u n g . Than they do in Minnesota, M ontana, and the
Dakotas, because th e small borrowers—-and I refer to the small
borrower when I make that statement— has not the opportunity to
deal in several sections o f the c o u n tr y the same as the large operator
has.
M r. L u c e . Y o u m e a n th a t the cen ters o f c o m m e rc e are far a p a rt?
Governor Y o u n g . He is so small that he is not known. For
instance, let us take a small com m unity in South D akota: A farmer
who has to borrow $1,000 or $2,000 is known to the local banker
and not known to any one else. He can not go to New Y ork, Ver
mont, or Maine and present his note. N o one knows him. There
fore he lias to pay the legal rate or contract rate, generally speaking.
I have forgotten about South D akota, blit it seems to me the m axi
mum rate is 10 per cent. That is the rate he would probably have
to pay to the local bank unless he was well enough known so he
could go to a near-by town with a very desirable piece fo paper and
drive a bargain, say, for 8 per cent.
Mr. L u c e . His local banker can take his note and send it to
Minneapolis, through his correspondent, can he not, and then the
correspondent there can rediscount, if he sees fit, with the Federal
reserve bank?
Governor Y o u n g . If he was dealing with a nonm ember bank, the
correspondent bank could not discount that with the Federal reserve
bank at Minneapolis at the present time, although during the war
period and for some time after the war period we did accept notes
originating in nonmember banks.
M r. L u c e . W ould that give the note a different standing when it
reached M inneapolis from the paper of a member bank? In other
words would there be a discrimination in the rate that the M inne
apolis bank would impose upon that piece of paper?
Governor Y o u n g . Well, if that was a member bank, M r. Congress
man, in all probabilities they would go to the Federal reserve bank
rather than their correspondent, because the Federal reserve bank
always has a lower rate than the correspondent bank.
Mr. L u c e . T h e n , it is e a sy for the p ap e r, u ltim a te ly , to reach
so m e p la ce w here it g e ts the sta n d a rd ra te for tim e lo a n s fixed th r o u g h
o u t the c o u n tr y ?
Governor Y o u n g . For instance, the Minneapolis bank— if the
farmer’s note bore 8 per cent and it was sent to the Minneapolis
Reserve Bank, it would be discounted at 4)4 per cent, and if it was
6 per cent it would be discounted at 4% per cent. We pay no atten
tion to the rate the paper bears.
M r. L u c e . Then the spread b e tw e e n th e final discount rate an d
the initial rate furnishes the western b a n k e r a larger profit than it
furnishes the New Hampshire b a n k e r, for instance?
710
BRANCH, CH AIN , AND GROUP BANKING
Governor Y o u n g . Generally speaking, I would say yes.
M r. L u c e . N o w we come to what I mean. Under a branch bank
ing system, would that still prevail? Assume that a bank in Chicago
owned branches out in the district of which we are speaking: W ould it
impose a different rate on a customer in Fargo than it would on a
customer in Springfield, 111.?
Governor Y o u n g . I am inclined to think, M r. Congressman, that
it would have a tendency to bring rates down to the borrower and
I base that statement on the experience we have had in California
where there is a very extensive development of branch banking.
M r. L u c e . Then the branch-banking system would, if this line of
reasoning is correct, directly aid the borrower in the small western
tow n rather than hurt him?
G overnor Y o u n g . That would be m y opinion.
M r. L u c e . W ould you say that the argument is fallacious under
those circumstances, which is to the effect that a branch-banking
system would tend to drain the aggricultural districts to the benefit
o f the industrial centers?
G overnor Y o u n g . I do not believe that it would.
M r. L u c e . Y o u have brought in usury as an im portant factor
here. I do not quite reconcile that with m y general understanding
of the flow of capital. If North Carolina has a usury law o f 6 per
cent and South Carolina has 10 per cent, why does not all the money
flow in to South Carolina instead of North Carolina?
G overnor Y o u n g . Well, I am not familiar— —
M r. L u c e . Oh, well, I a m just assuming these quite arbitrary
figures.
There are throughout the country apparent^ different
usury rates. W hy does not the money go where it would get the
m ost profit, to the d e trim e n t of places where it is prevented from get
ting the bigger profits?
Governor Y o u n g . Generally speaking, in the larger communities,
it does do that, M r. Congressman.
M r. L u c e . If it does that, when it gets into that State, does not
the law of suppty and demand operate? Is there not competition
between financial institutions? D o not they level again? I am
puzzled b y these discriminations between different parts of the country
and do not understand why all the water in the reservoir does not
seek the same level?
G overnor Y o u n g . W ith the larger units and with the people that
have national connections, it does. W ith the smaller communities
and the smaller borrowers, it does not to the same degree.
N ow , perhaps we can take the intermediate credit bank and illus
trate that the smaller borrower does get pretty close to a uniform
rate throughout the United States. Y et the intermediate credit
bank has not developed to a very large organization. I think the
total outstanding amount is $60,000,000. In so far as the inter
mediate credit banks are concerned, they have leveled those rates to
borrowers in various sections of the country.
M r. L u c e . Can anything b e done in the matter of the national
banking system to carry still further the purpose of the G overn
m ent in equalizing opportunities throughout the land?
G overnor Y o u n g . Well, M r. Luce, I am not an attorney and I
assume that States’ rights come into that, but I suspect, that the
legal rate and contract rate is too high in any State, it would have to
be corrected by the State.
BRANCH, CH AIN, AND GROUP BANKING
711
M r. L u c e . Y o u doubt if any Federal usury law would stand?
Governor Y o u n g . I have no right to say that. I am not a lawyer.
I do not know.
M r. L u c e . Y et we do control the national banks?
Governor Y o u n g . W e do.
M r. L u c e . And the regulations imposed upon them, without a
Federal usury law might stand where the Federal usury law might
not stand?
Governor Y o u n g . If you did that, M r. Congressman, would you
not put the national banks at such a disadvantage with their com
petitors, with the State nonmember banks, that they would be
prom pted to leave the Federal reserve system?
M r. L u c e . It would seem to me to work the other way. If you
say that the national banker shall not charge more than 8 per cent
and other banks charge 10 per cent, why does not all the trade go to
the national banks?
Governor Y o u n g . If they reduced the rate of charge, obviously
they would have to reduce the rate they pay depositors to operate as
a profitable institution.
M r. L u c e . They pay next to nothing to their depositors. I get
the gorgeous sum of 2 per cent per year and it has to be pretty big
to amount to anything and they chop off a lot of that.
Governor Y o u n g . In western banks they pay on savings accounts
ail the way from 3 to 4 per cent.
M r. L u c e . I am speaking of checking balances. In New Y ork
C ity they look askance at a man who asks interest on a balance of
less than $20,000, and when it gets below $15,000 the operators of
the bank begin to prod the depositor. I doubt if that end of it
would, in that city, be a great factor.
Governor Y o u n g . Well, if New Y ork pays 2 per cent and Chicago
decides to pay 2% per cent, obviously the deposits of the people that
do business in both places will drift to Chicago.
M r. L u c e . Well, that is tru e; but it is hardly------Governor Y o u n g . I have seen instances of that.
M r. L u c e . It would be the case in big business, but it would hardly
be the case in a small community where the bank balance of most of
the depositors is not large anyhow.
G overnor Y o u n g . It applies to the larger communities in the
country. That is true.
M r. L u c e . W e are most naturally greatly concerned with the
little man. He is the chap who is most unhappy in the present
situation, and what we would like to do is to give the little man in
Fargo, N. Dak., the same chance as the man in Bangor, M e.
Governor Y o u n g . If the com petition was keen in Fargo, a good
outstanding man would probably get six per cent there.
M r. L u c e . W ould that be true of a man of the same financial
status who chances to be a rancher with his nearest banking point a
much smaller place than Fargo?
Governor Y o u n g . W hat I have been able to observe of the notes
that come to the Federal Reserve Bank of Minneapolis, the farmers,
ranchmen, sheepmen, and other are generally above 6 per cent.
M r. L u c e . N o w , th a t is ju s t w h a t w e are aim in g a t. W hy is
th a t so , an d can w e correct it?
712
BRANCH, CH AIN , AND GROUP BANKING
Governor Y o u n g . Well, it
6 per cent contract rate.
M r. L
la w s?
uce.
has
been corrected in Virginia
b y the
I s there a n y a g ita tio n in the w e st fo r s im ila r u su r y
Governor Y o u n g . I never heard o f it. When I first w e n t to
M innesota, the contract rate was 10 per cent. I think about 8 years
ago it was reduced to 8 per cent. I think that M ontana had a 12 per
cent contract rate and that since has been reduced to 10 per cent.
In M ichigan, in m y own State, the contract rate 30 years ago was
8 per cent and was changed to 7 per cent 30 years ago. There is a
general tendency in all States of the Union to reduce the maximum
rate.
M r. L u c e . W ould it be a fair conclusion, then, to say to our western
friends, rather than lay the blame at Wall Street, they should seek
the remedy in their own State legislatures?
G o v e r n o r Y o u n g . I f th a t c o m p la in t w as b e in g m a d e , I w o u ld s a y
yes.
T h a t is the q u ic k e st w a y to correct it.
M r. L u c e . That is all.
The C h a ir m a n . I should like to ask you this question, Governor,
in connection with the questions that M r. Luce has asked:
Referring to the rates of interest paid in these agricultural sections
of the country that M r. Luce referred to in the Northwest, the M iddle
West, and the South— agricultural sections particularly— the rate o f
interest paid on deposits in those banks is usually higher than in the
eastern cities and States of the east, is it not? M y thought goes to
some specific cases where the general rate is from 4 to 6 per cent on
deposits, whereas in the east we have rates that start with no interest
and run up to 4 per cent, as the prevailing rate. In the east, o f
course, rates to borrowers are lower, whereas in those localities where
the banks pay higher rates of interest, the laws of those States also
permit higher rates of interest to be charged. I should like to get
your general reaction as to what the situation is there, and I would
also like to have you express the attitude of the Federal Reserve in
regard to the discount of paper by those banks that charge 8 and 10
per cent interest and rediscount with the Federal reserve bank at a
lower rate of interest. Is it the policy of the Federal reserve to
admonish those people to make a lower rate to borrowers, or what
do they do about that?
That is a composite question and you may answer any one or all o f
the parts in your own way.
Governor Y o u n g . Y o u asked three questions. In reply to the
first one, I would say that previous to 1922 rates paid by banks in
the W estern States— and I am thinking of the Ninth Federal Reserve
District with which I am familiar— were higher than the rates paid
b y the banks in the New England and Eastern States. After 1922,
however, m any of the banks in the W est, if not all of them, found that
they were paying an interest rate to depositors that was too high to
permit them to make a profit on the rates that they were receiving,
with the result that there was a general m ovem ent in the N orthwest
from 1922 clear through to 1927, to reduce the interest rate paid to
depositors, so that, generally speaking, throughout the Northwest
the rate was 3, 3K, &nd, in no cases that I recall, in excess of 4 per
cent, and, while I may be mistaken, I should be inclined to say that
the rates paid in the W est now are just about the same as those paid
BRANCH, CH AIN, AND GROUP BANKING
713
in the East, although I have been informed that some mutual savings
banks in the East pay as high as 4% per cent. They, of course, do
not deal with commercial borrowers. Their money is invested almost
entirely in bonds and mortgages.
The C h a i r m a n . Is that true in respect to the past two years?
D o not the savings banks go in for investments and brokers’ loans
and various other investments that exist?
G overnor Y oijng. I am not familiar with the law, but I am of the
opinion that the law prohibits savings banks from taking collateral
loans.
M r. L u c e . That is true, but they do it indirectly through theii
connections with national banks and, in my own State, I think the
banks are paving 5 per cent.
Governor Y o u n g . I think I am safe in saying that there is not a
bank in the ninth Federal reserve district that pays f> per cent on
savings accounts.
M r. L u c e . I may be inaccurate about that.
Governor Y o u n g . I d o u b t if a n y b an k p a y s in excess of 4 per c e n t.
Mr. L u c e . I m a y be m ista k e n , b u t I am sure th a t u n til n short
tim e ago 5 per cent w as p aid .
The C h a ir m a n . Has the Federal Reserve Board an opinion in
regard to rediscounting paper that draws 6 per cent or above in rates
of interest?
Governor Y o u n g . None whatever.
The C h a ir m a n . Y ou do not admonish those banks that are charg
in g excessive rates to borrowers?
Governor Y oung . W e never have.
The C h a ir m a n . Y o u feel th a t is n o t part o f your fu n c tio n , in a s
m u c h as the S ta te la w s p e rm it it?
Governor Y o u n g . That is correct.
The C h a ir m a n . W hat is y o u r opinion o f these State laws permit
ting higher rates o f interest in those localities? D o you think it is
ju s tifie d ?
Governor Y o u n g . Well, if they were not
t 1 M Chairman,
it seems to me the people of the States would n pe the laws. The
conditions and circumstances as to hazard, and
foith ne all factors
that must be taken into consideration in establishing a maximum
contract rate. As I explained before, over the past 30 years there
has been a tendency downward, and in no case that I know of has
the rate ever been raised.
The C h a ir m a n . Of course the continuance of those laws permitting
higher rates of interest, tends to sustain that policy?
Governor Y o u n g . That is true.
Now, in so far as the reserve bank is conec m 1 hen a bank bor
rows from a Federal reserve bank, we usualh
ti^fv ourselves that
the request is justifiable and, while the banks w i 1 1 our debt heavily
in 1920, in 1921, and 1922, since 1923 the lequn nents have been
seasonal, rather than continuous borrowing, lasting for a period of
from three to six months, and, by tradition, the banks object to bor
rowing continuously. I do not know of any evidences at all of where
banks have deliberately borrowed, for profit, in the last seven or eight
years.
The C h a ir m a n . Has it been your observation in those sections
that the change in the Federal Reserve discount rate affects th e rate of
interest charged their borrowers?
714
BRANCH, CH AIN, AND GROUP BANKING
G overnor Y o u n g . W e are told by member banks that it does; in
other words, when we reduce our discount rate they say they have
demand from their customers for a lower rate because of the lower
Federal discount rate. We are told also by the borrowers that when
we raise the rate, that gives the member banks a stronger argument
for charging the customers more.
The C h a i r m a n . Whether borrowing from the Federal Reserve
bank or rediscounting?
Governor Y o u n g . It works both ways. The discount rate of the
Federal reserve bank is used by the lender and also by the borrower
as an argument.
The C h a i r m a n . M r. Beedy.
M r. B e e d y . Governor Young, other things being equal, m oney
does generally flow into that market where the greatest return m ay
be im mediately realized, does it not?
G overnor Y o u n g . Generally speaking, yes.
M r. B e e d y . A s suggested by M r. L u ce’s questions— I think he
asked you why, we will say, in the State of Arkansas, with the State
law permitting a charge of 10 per cent interest and the State law of
M aine permitting 6 per cent— why does not the m oney flow into
Arkansas? Of course the rate of interest alone would not influence
the flow of money, would it? There must be coupled with it such a
measure of industrial activity, with an incidental demand for the use
of m oney which, coupled with the rate, would influence the flow?
G overnor Y o u n g . M any factors would influence it.
M r. B e e d y . And is it not probably true in these States where
people do not revolt against the higher legalized rate of interest that
fundamental conditions justify it? For example, in the Western
States where they have not reached the high state of developm ent
which we have attained here in the East, loans to the small borrower
are more hazardous, in the main, are they not?
G overnor Y o u n g . Well, I am not going to put it quite that way,
M r. Congressman. I think that the smaller loan requires more atten
tion and more inspection and, obviously, if you lend $500 to a farmer
on a chattel mortgage, the inspection requires as much labor as a
$2,000 loan. Generally speaking, the expense of the inspection of
chattel loans runs about 1% per cent.
M r. B e e d y . A banker, when applied to for a loan b y an established
business concern, with large assets, in a highty developed com m unity,
would naturally be influenced by the attraction of such a loan as against
a loan sought by a small concern just getting under way in a new
territory where the development and growth were problem atical?
G overnor Y o u n g . Obviously so. W e have very specific evidence
of that in commercial paper, bankers’ bills, and so forth.
M r. B e e d y . Is that not one of the reasons why there is a difference
in the legalized rate in the different States and sections of the country
in the rate customarily charged b y banks?
Governor Y o u n g . That is one of the reasons; yes, sir.
M r. W i n g o . I think both of you gentlemen are speaking w ithout
experience in that 10 per cent territory. That rate applies to a loan
to a Congressman putting up Government bonds as security, so that
there is not any risk.
M r. B e e d y . I could make the retort courteous, but I do not care
to enter into any discussion about that. Personally what I am trying
a
BRANCH, CH AIN, AND GROUP BANKING
715
to bring out are the fundamental underlying conditions which justify
the institution of different interest rates and justify their main
tenance. They are such as the governor has said obtain and he is
not without experience, as I understand it, in the western country.
M r. W i n g o . He is from the Northwest. I do not think they have
a 10 per cent rate there.
Governor Y o u n g . South. Dakota permits 10 per cent and M ontana
10 per cent; M innesota 8 per cent and North Dakota 9 per cent.
Those notes that I have seen out there would average, I would say,
between 7 and 8 per cent.
M r. W i n g o . W hat I want to suggest to the gentleman from Maine
is that the reason for this has been studied by practical bankers in
that territory and it is unanimously agreed that the two m ajor reasons
for the higher rates are the law of supply and demand and the other
is the expense of doing business and the necessity of making expenses
and a profit for the stockholders. Those are the two major factors.
I think the governor will agree with that.
That enters into the contention with respect to branch banks, that
because of the expense of doing business------M r. B e e d y . And I suppose the element of risk and hazard is e q u a lly
im portant in connection with the maintenance of laws authorizing
different rates.
M r. W i n g o . Of course the element of hazard has something to do
with that in that territory, but m y general contention has been that
the rate is the same. I mean if you walk up to a bank that is main
taining a 10 per cent rate and put up $10,000 worth of Government
bonds to cover a $500 loan, you would still be charged 10 per cent.
There is no risk involved there.
G overnor Y o u n g . Where would they charge that?
M r. W i n g o . In any of the Southwestern States.
Governor Y o u n g . I do not see why a borrower would pay 10 per
cent on a note secured by Government bonds.
M r. B e e d y . Governor Young, you have testified that the funda
mental and underlying differences in conditions justify, for the most
p a r t, the variation in rates of interest which are charged, and prob
ably justify the continuance of State laws permitting those differences
in rates.
Governor Y o u n g . In a general way; yes.
M r. B e e d y . Exactly. In other words, the banker in Maine is no
more humanitarian than the banker in Arkansas; the banker in
Arkansas is just as decent a fellow as the banker in M aine; he does
not arbitrarily rob his borrowers of that difference between 8 and 10
per cent as against the rate of the humanitarian banker in Maine
who will take 6 per cent?
Governor Y o u n g . I do not think so.
Mr. B e e d y . One other thing has been gone into here. It is the
fixing of the call loan rate in New Y ork and the effect that call loan
rates has on the credit situation in general. If no one objects to it,
I should like to have five minutes on it.
^ We got to the point, in questions by M r. Seiberling, Governor
Young, where you said, in order for the price of securities to keep on
ascending, there must be a continuous supply of money to make it
possible, and the higher the call loan rate goes the more attractive
becomes the money market in New Y ork and the more money from
the more distant places bgeins to flow in.
716
BRANCH, CH AIN, AND GROUP BANKING
N ow , do you think it is a good tiling for call loan ra te s to go o n
pyramiding until there comes such a strain on the credit situation
that ordinary borrowers engaged in legitimate business can not get
money?
Governor Y o u n g . I do not.
M r. B e e d y . I did not understand why you do not think it is wise
to limit the call money market rate, we will say, at 6 per cent?
Governor Y o u n g . I am not hesitating to be evasive; I am trying
to follow this along. I have referred to D octor Goldenweiser a little,
all of which I assume is agreeable to you.
M r. B e e d y . Certainly.
Governor Y o u n g . If there is anything in the theory at all that a
higher rate has a restraint on a condition of that kind, obviously the
6 per cent rate from the experience I have had, would not be a re
straint. It appeared for a long while that the higher rates o f 10, 12,
and 14 per cent did not have a restraint because the market kept
continuing even under those conditions, but------M r. B e e d y . M a y I interrupt 37ou? Y ou and I are thinking at
cross purposes. Far from being a restraint, it is an encouragement.
It is an inducement to a further continuation of the bad condition— a
concededly bad situation. The higher you raise your rates, the more
you induce the flow of m oney to that particular center and the more
you accentuate the movement which multiplies the possibilities for
evil consequences.
Governor Y o u n g . On the other hand, the more the speculator is
penalized and obviously no man could continue indefinitely with
such rates as 14 per cent and 15 per cent and expect to get a profit out
o f his speculative transactions. Eventually the interest that he pays
w ould eliminate any appreciation in the value of his securities.
Now, under a 6 per cent rate, that restraint would not have been
there and while I will have to admit that, for a long period it seemed
as if the higher rates did not have an effect on speculation, obviously,
in the last analysis, they did have some effect and were a contributing
factor in controlling that situation.
M r. B e e d y . During that time, when the rates were mounting
in the call money market, the Federal Reserve Board in O ctober—
was it O ctober when you sent your letter of warning?
Governor Y o u n g . February.
M r. B e e d y . February of this year?
G overnor Y o u n g . February of 1929.
M r. B e e d y . February 1929?
G overnor Y o x jn g . Yes. It was February 6 or 7. I have forgotten
which.
M r. B e e d y . Y ou sent out your first letter of warning and from then
on it was the policy of the board to do what it could to curb further
extension of credit, was it not?
Governor Y o u n g . Correct.
M r. B e e d y . N ow, the late Governor Strong, governor of the
New Y ork bank, testified a year or two ago that from the time the
Federal Reserve Board began to increase its rediscount rate or de
crease it, according to the results it hoped thereby to assist at least in
attaining, a period of about six months elapsed before the first con
sequences of that step begin to be observed. W ould you agree
with that statement?
BRANCH, CH AIN , AND GROUP BANKING
717
Governor Y o u n g . Well, the period w ou ld be different— and I
am just trying to think of the last period. The Federal reserve
system started a firming- up policy about in November, 1927. That
w o u ld bring it up to April.
I should say that it was just about six
months before any effects were seen.
Mr. B e e d y . H is testimony w as that as he looked back over the
operations of the Federal reserve sy s te m , it had taken about six
m o n th s for the machinery to turn out results.
Y our letter of warning started in February. That would bring
us up, if that six m onths7 period obtained, into August. The call
money rate, in the meantime, was firming up. D o you recall what the
call money rate of August, 1929, was?
Governor Y o u n g . I think the call money rate had dropped a bit
by August. It had dropped somewhat. It was 8% at that time— the
average rate.
M r. B e e d y . That is a fa ir ly high call money rate, is it not? It is
m o re than tw ice the present call money rate.
Governor Y o u n g . It is very high.
M r . B e e d y . From th a t tim e on h o w d id the call money ra te s ta n d ?
Governor Y o u n g . The call money rate, on an average------Mr, B e e d y . From then on up to October, when the crash or break
came?
Governor Y o u n g . I find I was mistaken in my statement. The
call rate was—-it dropped down to as low as 7% per cent— but at the
beginning of August it was pretty close to 10 per cent on an average.
Toward the end of the month it dropped to 8 per cent and at the time
of the crash in the stock market the call rate was about 0 per cent.
M r. B e e d y . In other words, in August a 10 per cent rate prevailed
in the call money market?
Governor Y o u n g . In the early part of August.
Mr. B e e d y . In other words, in about six months from the February
warning, your call money market rate had gone up to a point higher
than that which obtained when the crash itself came?
Governor Y o u n g . That is correct.
Mr. B e e d y . Of course that rate fluctuated during the months of
June, July, and August to the extent of 1 or 2 per cent according as
money flowed in from, we will say, places where it had been theretofore
unattracted by the call money rate or for some other reason which,
for the moment, increased the supply of available funds in New Y ork
City?
Governor Y o u n g . Correct. The highest average was in April or
M ay of that year.
Mr. B e e d y . Between February and August, 1929, the Federal
Reserve Board was finding that legitimate borrowers were not able
to be accommodated to meet demands of industry, were they not?
Governor Y o u n g . We had complaints in reference to that. W e
investigated through many sources and felt that in the great? majority
of cases business was being taken care of.
Mr. B e e d y . I am surprised at that because I understood the posi
tion of the board to be that the fundamental justification for their
February warning was the failure of the legitimate borrower, the
man engaged in industry, to be accommodated.
Governor Y o u n g . I think the warning specifically stated that
they anticipated that it might develop to a point where it would be a
718
BRANCH, CH AIN, AND GROUP BANKING
deterrent to business. I do not think they took the position that it
had been a deterrent up to February.
M r. B e e d y . Probably I am wrong but you say you investigated
the rumor. H ow did you investigate that rumor? I am now referr
ing to the rumor that legitimate borrowers were not being accom m o
dated between February and August of 1929?
G overnor Y o u n g . I dispatched a telegram— I do not know whether
it was just at that time or some time before that— to all the Federal
reserve banks to make a careful inquiry in their own territory as to
whether business was being denied credit and whether high rates were
a real deterrent to business at that time, and if I remember correctly,
the replies we got back were that up to that time it had not operated
as a deterrent to business, although rates were higher.
M r. B e e d y . If the call m oney rate had not mounted to 2 0 per cent,
do you believe there would have been anywhere near the amount of
m oney available in New Y ork City for the purchase of securities that
was available?
Governor Y o u n g . I think so. That was a world market and I
believe that they could have gone across the water and borrowed
the m oney in a circuitous way and then transferred the funds here
and handled the situation in that way. International finance natur
ally enters into the call loan rate.
M r. B e e d y . Exactly. They could have gone abroad and borrowed
it, if what?
Governor Y o u n g . If the lenders across the water were willing to
lend, as they apparently were.
M r . B e e d y . I a m ask in g y o u to keep in m in d th e call m o n e y ra te
as a fa c to r in th e situ a tio n ?
Governor Y o u n g . Suppose
they could not make a loan of that kind
in New Y ork City. There would be nothing to prohibit their making
the loan in London or Paris or elsewhere. They could go all over the
world to get that money and would have gone.
M r. B e e d y . Suppose some one had the power to pass a law or had
passed a law which held the call-loan rate at 6 per cent in New Y ork
C ity and m oney would not as easily have flown into New Y ork City,
yet you say that, granted a sufficiently strong com bination of capital,
so minded, they might have gone across the water and made a deal to
get capital further to boost prices in this country?
Governor Y o u n g . T hey might have.
M r. B e e d y . That, of course, would depend o n whether there was
surplus funds available in foreign countries?
G overnor Y o u n g . Or even in this country. Our own funds could
be sent to those countries and loaned there and transferred back here.
M r. B e e d y . It would be possible only when business itself in the
various sections of the country was not developing to such an extent
that the demands for further credit absorbed the available funds in
the various localities?
Governor Y o u n g . That was a tremendous volume, M r. Congress
man, as shown by the brokers’ loans for others which aggregated in
the neighborhood of four or five billions of dollars, I think— four
billion at the maximum.
M r. B e e d y . Assuming that the call rate could never go above
6 per cent and assuming there are no available funds abroad. Before
a bull market can be continued with profit to the operators in that
BRANCH, CH AIN, AND GROUP BANKING
719
market, there must be a decline in business throughout the country
generally and a let-up in the demands for credit generally by legitimate
borrowers before they can go out with a rate of 6 per cent and induce
further capital to come to New Y ork?
Governor Y o u n g . There is an old saying that if the rate is high
enough, it will draw gold out of the ground, and it will.
M r. B e e d y . That is why I asked you if you do not think it would
be highly desirable for some legislative body, having the powTer, to
limit the call loan rate?
Governor Y o u n g . N o ; I do not think so. I think that if there is
another bull movement started in the country and the speculators
are so ambitious for funds that they are willing to pay the rates
they paid before, that that credit wrould be produced in some way—
some circuitous way.
M r. B e e d y . But I say if industry absorbed all available funds in
the various localities of the country and the world, where would you
get money unless you had some higher rate as an inducement?
Governor Y o u n g . Well, I suspect som ebody would manufacture
some credit.
M r. B e e d y . Governor, as a matter of logic, if business is demanding
credit— if business is on the upswing and is demanding credit wiiich
takes up the available funds of banks throughout the country and
the bankers are loaning their money and getting their 6 per cent
return, and they can not get 7 per cent in New" Y ork C ity under the
call loan rate, they are going to loan their m oney at home, are they
not?
Governor Y o u n g . The first procedure they follow is to buy
bankers7 bills and Government bonds and anything that offers the
best yield and the best possibility of profit.
M r. B e e d y . But they will not go away from home when they
can use their money there and get 6 per cent wdien, to go awray, it
will not yield them any more than 6 per cent, no matter what
they buy?
Governor Y o u n g . Business would not get the 6 per cent rate
locally. They would get wiiat the local bankers wrould pay, which
would be probably 2 or 3 per cent.
M r. B e e d y . W hy, business men can not borrow money at 2 or
3 per cent.
G overn or. Y
oung.
Y o u are sp e a k in g a b o u t th e b orrow e r?
M r. B e e d y . Yes.
Governor Y o u n g . 1 thought you wrere speaking about the lender.
M r. B e e d y . A s long as borrowers can take money from their local
banks in order to satisfy the needs of their business at 6 per cent,
those banks would rather lend it at home?
Governor Y o u n g . That has been m y observation. They take care
of the local industries first.
M r. B e e d y . If they can get 8 per cent in New York, it is human
nature they would divide up— fairly equitable perhaps— some of the
money at home to meet the local needs and skimp out a little to
send to New Y ork to make more profit out of the call money rate?
Governor. Y o u n g . The bankers deny that.
Mr. B e e d y . Oh, well------Governor Y o u n g . I think it was done to a certain extent, but
not in large volume.
100136— 30—
vol
1 p t 7------ -2
720
BRANCH, CH AIN, AND GROUP BANKING
M r. B e e d y . From your experience, clo you think there is a banker
in the country that would not try to take a little o f his money and
send it to New Y ork where he can get, on perfectly good security, 8
per cent, rather than lend it all out at home at 6 per cent?
G overnor Y o u n g . N o; m y observation among the bankers in the
interior of the country was that they continued to lend at home m oney
on which thev could get much more interest by sending: it to N ew
York.
M r . B e e d y . W hat a b o u t the small b a n k s?
Governor Y o u n g . Some of the small banks lent their surplus
funds, as well as the large banks.
Mr. B e e d y . W ould they lend as m u c h of their surplus funds when
the rate is 20 per cent as they would if it stays at 6 per cent?
Governor Y o u n g . No ; not as much.
M r . B e e d y . I t w ou ld b e a p r e tty g o o d id e a , th e n , to h a v e s o m e
b o d y lim it the call m o n e y ra te on the g ro u n d th a t th e h u m a n te n
d e n c y w o u ld be n o t to m a k e it as e asy to b u ll th e prices o f secu rities
as w o u ld o th erw ise o b ta in , w ou ld it n o t?
Governor Y o u n g . There are so many other factors you have to
take into consideration, M r. Congressman, that I believe that the
factor that you stress so much is insignificant in comparison with the
others.
Mr. B e e d y . W e can not take them all into consideration. We
have to deal with them one at a time, but this factor has some
influence.
Governor Y o u n g . It has some.
M r. B e e d y . And I say, would it not be a wise thing to start in
with this one factor which has a tendency to induce a flow of m oney
in great quantities to a single center, when we are on the upward
swing, b y limiting the returns which can be realized b y sending funds
to such center?
G overnor Y o u n g . I do not see how you can do that, M r. Congress
man.
M r. B e e d y . Possibly w e can not, but waiving that for the
mom ent, I am trying to get an answer as to whether or not it would
be a wise thing to take that one factor and deal with it in such a way
as would have a tendency to be helpful and prevent these wide
swings in prices.
G overnor Y o u n g . M i*. Congressman, I could not answer yes to
an inquiry that I do n ot see a solution of.
The C h a i r m a n . M ay I make an observation here, M r. Beedy?
M r. B e e d y . I do n o t w a n t to b e sw u n g off th is lin e o f th o u g h t.
The C h a i r m a n . Y o u will n o t be swung away from your line of
thought. I simply w a n t to observe, because of this situation in
regard to high rates in New York C ity during the period you referred
to here, that it w as n e c e ssa ry fo r Pennsylvania to change its usury
laws in order to hold fu n d s in Pennsylvania that were flowing into
N ew Y ork ; in other w o rd s, the banks of Philadelphia felt they should
have the same right to lend m oney at the rates New Y ork had to
protect their own fu n d s in Philadelphia; otherwise they were being
sucked into New Y ork o n account o f the high rates there.
Governor Y o u n g . That was true also of Illinois. But meanwhile
those banks maintained a 6 per cent rate to business.
The C h a i r m a n . I do not know as to that.
BRANCH, CH AIN, AND GROUP B A N K I N G
721
Governor Y o u n g . But I do.
The C h a i r m a n . They are not in the habit, I know, of sending
money into New York, when they can hold it and get the same rates
at home, but the situation did arise where they changed the usury
laws in Pennsylvania so as to conform to the laws in New York
whereas, if New Y ork had a law such as Pennsylvania, the rate would
have been held down to 6 per cent.
Mr. B e e d y . Y o u h a v e answ ered m y q u e stio n p a r tly w hen y o u
sa y , of cou rse, if w e m a k e the ra te o f return on m o n e y high enough it
w ill drag gold d ollars lig h t o u t o f the earth.
F o llo w in g th a t th o u g h t, b ro k e rs’ lo a n s a d v a n c e d fro m , w e w ill
s a y , the sp rin g o f 1929 from b e tw e e n foiir and rive billion d ollars to
rig h t arou n d — w h a t did th e y go u p to in A u g u st, 1929?
Mr. G oldenw eisek . The peak was ^j.9u0.000,000.
M r. B i- edy . What month was that?
Mr. G old i' n w eiser . October.
M r. B e Lin What were they in the spring of 1929?
Governor Y o u n g . $5,400,000,000, approximately.
M r. B e e d y . So, in six months, th e y went over a billion and a h a lf
dollars. W ould that be an accurate statement?
Governor Y o u n g . About a billion and a half.
M r. B e e d y . Where did that money come from?
Governor Y o u n g . From all over the world, in my opinion.
Mr. B e e d y . You th in k the call m o n e y rate had a n y th in g to d o
w ith it at all?
Governor Y o u n g . The call loan rate had a great deal to do with
it— the high rates-—up to, say, September, when the rates were
frequently above 10 per cent, but there was a tremendous increase
in those brokers’ loans even after the rate went down.
M r. B e e d y . Exactly, because by the mere change in the. rates,
you can not cause the business world to readjust itself in a moment.
It takes approximately six months for the tangible results to be
evident to the ordinary person and even to the banker himself.
That continued increase in brokers’ loans and the attendant increase
in price of securities was not a good thing, was it?
Governor Y oung . Not in m y opinion.
Mr. B e e d y . Y o u h a v e ju s t said th a t one o f the v e ry con sid erab le
factors in the situ a tio n w as the h igh ra te o f in te re st on call lo an s.
T h e ir fore, does it n o t fo llo w , as a lo gical c o n c lu sio n , th a t if the call
loan ' ate h a d been fixed, it w ou ld h a v e at le a st had a te n d e n c y to p re \ont th a t a d d itio n a l in crease o f a billion and a h a lf in b ro k e r s’ lo an s
ip a ^ . m o n t h s ’ period in 1 9 2 9 ?
Governor Y o u n g . Not in m y opinion. They would have gotten
that money from other sources in a circuitous way.
M i B e e d y . It would have made it more difficult for them, at least,
would it not? Here was the money available in New Y ork City. It
wa>
to step out of one door and into another and get the money.
Governor Y o u n g . I do not think so. I think that is what put the
rate up. because money was not available. Certainly the New York
banks attempted to check this and if you will take their brokers’
loans figures from 1927 clear through to October, 1929, there is very
little difference in the amount they lent. It is the fact that they did
not lend that forced the borrower to put his bid up so that it invited
the entire world to come there with their funds. Generally speaking,
722
BRANCH, CH AIN, AND GROUP BANKING
M r. Congressman, there was a tendency upon the part of all banks o f
the United States to control the situation.
The thing that seriously interferes with any control of it— and I
do not know that they could have controlled it— was the so-called
bootleg loan of funds coming from some source. If they had not
come from one source, they would have come from another and if
they had not come directly they would come indirectly. It was
the lack of funds that put the rate up.
M r. B e e d y . If you put the rate high enough— or, if you can not
put the rates high enough, those funds will not come.
Governor Y o u n g . They will come in a circuitous way just as sure
as I am sitting here.
M r. B e e d y . They have to be used by som ebody, do they n ot?
M oney is to be used by some one.
Governor Y o u n g . Yes, it has got to be used.
M r. B e e d y . Now,' you are going to let the fellow use the money
that pays you the most, other things being equal?
Governor Y o u n g . Yes.
M r. B e e d y . If you get the call money rate high enough in New
Y ork, you will let that fellow in New Y ork use it?
Governor Y o u n g . N ot all of it.
M r. B e e d y . Well, as much as he can get hold of with safety, and
retaining enough to satisfy the local interests at the same time?
Governor Y o u n g . Yes, sir, and credit is pyramided. Y ou know
that?
M r. B e e d y . That is true.
Governor Y o u n g . Those high rates tended to pyramid credit and
expand credit. That is the one position the Federal Reserve took.
It did not take any position with reference to the prices of securities.
It took the position that this considerable expansion of credit for
this particular purpose eventually would work to the harm of the
business interests of the country, and all their efforts were used to
curb that tremendous expansion.
M r. B e e d y . N o w , following up this testimony of G overnor
Strong’s, that it takes about six months for the machinery of the
Federal Reserve Board to work out results, you began to cut down
your rediscount rates in 1929 when?
Governor Y o u n g . The first rate reduction was in N ovem ber, I
think. N ovem ber 1, the New Y ork rate was reduced from 6 to 5
per cent.
M r. B e e d y . And the next reduction was?
Governor Y o u n g . Novem ber 15, to 4 }{ per cent.
M r. B e e d y . And the next reduction?
Governor Y o u n g . February 7, 4 per cent. The last reduction
was M arch 15, Vk per cent.
M r. B e e d y . N o w , then, along in the middle of this summer,
unless the Federal Reserve Board— the latter part of the summer—
unless the Federal Reserve Board changes its policy of doing what it
can to ease the credit situation, let us see what will happen in the
prices of securities.
G overnor Y o u n g . Y o u are not making an inquiry of me?
M r. B e e d y . N o ; I say let us see.
The C h a i r m a n . Governor, supposing a banker in Fargo, N. D ak.
wants to lend some m oney in the call market in New Y ork. I merely
BRANCH, CH AIN, AND GROUP BANKING
723
m ention Fargo by way of illustration. It might be M emphis or any
other part of the United States. W hat method do they pursue in
lending that m oney?
G overnor Y o u n g . They wire the New Y ork correspondent to
charge their account a certain amount and invest it in call loans.
The C h a i r m a n . There is a limitation to lending money to brokers;
that is, an individual or an individual banker, unless they go through
a New Y ork bank, can not lend money on the call market?
Governor Y o u n g . W hat is that, M r. Chairman?
The C h a i r m a n . A bank in Fargo, N. Dak., can not lend money
on the call market without going through a New Y ork bank?
Governor Y o u n g . It is a matter of procedure and not law.
The C h a i r m a n . All these brokers’ loans have to be made through
a New Y ork bank?
Governor Y o u n g . That is correct.
The C h a i r m a n . A Chicago banker can not lend money in New
Y ork— I am speaking of brokers’ loans— without going through a
New Y ork bank?
Governor Y o u n g . That is the procedure, if I am correctly informed.
The C h a i r m a n . D o I understand this to be a practice which has
grown up in recent years— the question of banks throughout the
country lending their surplus funds in the New Y ork call loan market?
M y understanding is that that has developed somewhat in this man
ner, and I should like to have you check me up on it if I am wrong,
that the large New Y ork banks are largely responsible for this develop
ment of country bank loans in the call money market and loans for
the account of others, through their practice of getting business
throughout the country; in other words I have been told that a busi
ness concern or a bank that kept, say, $3,000,000 on deposit in New
York, would be approached by a New Y ork bank and asked to trans
fer their account to that bank, and as an inducement to do that, they
will say, “ W e will lend $2,000,000 of that on the call market if you
will keep the other million on deposit with us.”
Through the operation of that plan they have built up a large
clientele and have induced country banks to lend their surplus funds
in the call-loan market and have also induced industrial concerns with
surplus funds, concerns with attractive and profitable accounts for
banks, to do the same thing. This development is due apparently
to the large banks going to the small banks and offering the oppor
tunity of lending their money at twice the usual rates in the callloan market. D o you know anything about that?
Governor Y o u n g . I have never had any actual experience with it
myself, M r. Chairman, but I am told that has been the procedure.
M r. B e e d y . Y o u stated that the call-m oney rate got to a point
where it was no longer profitable or would reach a point where it was
no longer profitable to carry the stocks and make m oney and that, as I
understood you to say, contributed to the collapse of the market
last fall.
Governor Y o u n g . In m y opinion it had an effect; yes.
Mr. B e e d y . Was it not rather the fact that, even though a 2 0 per
cent call-m oney rate obtained, they were not able to get any more
money, and so had to stop?
G overnor Y o u n g . N o ; the m oney was always forthcom ing from
some source.
724
BRANCH, CHAIN, AND GROUP BANKING
M r. B e e d y . W a s it still c o n tin u in g to c o m e w h e n th e m a r k e t
broke?
Governor Y o u n g . Oh, ves; there wras a tremendous increase in
broker’s loans from July 29 to October 16; they raised almost
$800,000,000 in that short period, on rates averaging about 8 per
cent, I should say.
M r. B e e d y . As you say, there are always so many factors in these
situations that it is impossible to single out any one and attribute to
it a m ajor influence.
G overnor Y o u n g . That is true.
M r. B e e d y . But it seems to me, as we look back over the history
of the country and see what has happened to the market, that it was
not because it was unprofitable to pay 20 per cent and to realize
five, six, and eight points in three or four days on a stock that it
collapsed, but it was because they could not get an}^ more money.
G overnor Y o u n g . N o; the m oney was forthcoming.
M r. S t r o n g . From where?
Governor Y o u n g . I suspect, M r. Congressman, that when we refer
to m oney we mean credit. M uch of it was manufactured.
M r. W i n g o . I either misunderstand M r. Beedy or the governor
on some o f the figures that you have been talking about. I have before
me your table that you referred to, “ Loans to brokers and dealers in
securities made by reporting member banks in New York C ity ,” and,
on October 2— and these figures refer to mil]ions of dollars-— there
were 6,804; on O ctober 9, (>,71 o ; on October 16, 6,801; on O ctober 23,
6,634; on O ctober 30, 5,538: on O ctober 6, 4,882; on Novem ber 13,
4,172 ; on N ovem ber 20, 3,587. and so on; and now, commencing with
the 1st of October, instead of declining, the peak on O ctober 2 o c
curred; it was $3,000,000 more on October 2 than on October 16, the
other peak, and then it dropped $200,000,000 from the 16th to the
23d, and dropped over a million between the 23d and the 30th.
Governor Y o u n g . M y statement, Mr. Congressman, is that be
tween June and O ctober there was a tremendous increase in brokers’
loans; almost $800,000,000.
Mr. B e e d y . But the collapse did not come between June and O cto
ber; it came in October, and at that time there was evidently a failure
of funds in New York City banks to sustain the market.
Governor Y o u n g . That is the p o in t; the funds did come when the
crash cam e; the New York banks stepped right into that situation
and took over those brokers’ loans as rapidly as they were called.
That was the only thing they could do to prevent a widespread panic
throughout the world.
M r. B e e d y . That was not an increase in the supply of money ; it
was a matter of bookkeeping. In other words, it was changing from
brokers’ loans to bank loans.
G overnor Y o u n g . That is correct.
M r. B e e d y . But they did not have any more money to do it than in
the first place; there was not any more money in New York City
when they began to cut down brokers’ loans and increase their own
borrowings.
The C h a i r m a n . And increase their borrowings at the Federal
reserve banks.
M r. B e e d y . And increase their borrowings at the Federal reserve
banks. There was not any more money coming in from world
BRANCH, CH AIN , AND GROUP BANKING
725
sources or from a mysterious source. Either one of two things hap
pened— either som ebody somewhere stopped manufacturing credit,
or else, as the figures would seem to indicate in the New Y ork bank
ing situation, the available funds either for brokers’ loans or for
borrowings by banks began to fall off.
Governor Y o u n g . The demand began to fall off. The funds were
always available there, and that is what that call loan committee
does; they fix the rate that will bring those funds, so that there will
be no shortage.
Mr. W in g o . Right in that connection, before you get away from
that, M r. Reedy, attention should be directed to those figures that
I gave a while ago so as to have the full picture, those figures show
ing a drop of about a billion dollars; and you should also consider
the fact that there was an enormous drop in the value of the stocks
and that there was a greater volume of stocks carried, even though
it took a billion less, because the general average of stocks dropped
very greatly. And I suspect the actual facts were that there was
a larger volume of stocks carried. In other words, they took care
of them, as the governor states, when the crash came, but it took less
dollars in loans to take care of a larger volume of stock.
Y ou catch the point I am making?
M r. B e e d y . That is a fact.
Mr. Seiberling wanted me to yield to him.
M r. S e i b e r l i n g . Governor, if your theory is correct that there
was always sufficient money in New York, then why did the call
money rate go up?
Governor Y o u n g . During that period?
M r. S e i b e r l i n g . Yes.
Governor Y o u n g . It went down.
Mr. S e i b e r l i n g . I am talking about prior to that time. W hy did
the rate on call monev go up if thev always had sufficient money in
New Y ork?
Governor Y o u n g . It was the rate that brought it there. For
instance, you may have a, shortage of $30,000,000 in the call loan
situation to-day, and this committee that we were speaking about
the other day sizes that situation up. W e will say that there is a rate
of 4 per cent at the moment, and they figure that a 4 J
A per cent rate
will bring that m oney in, and they may change it at 11 o ’clock, and
they are still short and they will raise it to 5 per cent, and that may
not bring the money in, and they will raise it to 5U, and, if that does
not bring the m oney in, they will raise it to 6 per cent, and before the
close of business that night they will have a rate that will bring that
m oney from some place in the United States by telegraph.
Mr. S e i b e r l i n g . But the call money rate went up because they
did not have sufficient call m oney in New Y ork?
Governor Y o u n g . At the time, but the rate always brought the
money and credit.
M r. S e i b e r l i n g . But when they got the rate away up and it still
did not bring the money, something had to happen, did it not?
Governor Y o u n g . It did bring the money, M r. Congressman.
Mr. S e i b e r l i n g . But there is a limit to the amount of money
you can get even in New Y ork at any call money rate, is there not?
Governor Y o u n g . A theoretical limit, yes.
726
BRANCH, CH AIN , AND GROUP BANKING
M r. S e i b e r l i n g . Well, the estimate is that it was $58,000,000,000
that was lost in the stock market crash in paper values. Is that
correct?
G overnor Y o u n g . I have heard estimates much higher than that.
M r. S e i b e r l i n g . That is as much as all the deposits of all the
banks in the country, is it not?
Governor Y o u n g . Yes.
M r. S e i b e r l i n g . S o that putting this money in New Y ork is a
very serious thing for the country. The banker might continue to
carry his old loans, but he would not encourage any new business
or enterprises or anything of that kind in dealing with a customer
from whom he could not get more than the usury rate in his State
when he could lend the money at 15 to 20 per cent in New York,
would he?
Governor Y o u n g . I think he would.
M r. S e i b e r l i n g . It is contrary to human nature.
Governor Y o u n g . No, I do not think so. If I am running a
commercial bank, I am interested in m y community and in the
industries in m y community, and if I can make a good loan to a
permanent customer at 6 per cent, I would hesitate before I would
lend to a temporary borrower at 18 or 10 or 12 or 14 per cent, because
the local customer is going to be with me forever.
M r. S e i b e r l i n g . Y ou would just put him off for a few months?
Governor Y o u n g . I would not do that.
M r. S e i b e r l i n g . Y ou would not do it, but, as a matter of fact I
know it was done.
Governor Y o u n g . I do not think it was done in the m ajority of
cases, M r. Congressman, and I say that with all sincerity. I believe
that the bankers of the country------M r. B e e d y . Of course, we do not know about that. N ob od y
knows about it, but it is clear from your testimony that the call rate
does now suffice to bring money into New Y ork when they want it,
and if the then existing rate does not bring it in, they put it up until
they get it in New York, and in getting it into New Y ork they brought
about a bad situation in the market, and we are feeling the conse
quences of it at the present time.
Governor Y o u n g . That is correct.
The C h a i r m a n . Following up m y questions of a few moments ago
one of the problems which confronted you as the head of the Federal
reserve system, I inferred from your testimony, was the lack of con
trol over the money that came into this market for the account of
others and country banks. Am I correct in that? Y ou referred to
them as bootleg loans.
G overnor Y o u n g . Lack of complete control. W e did have some
surveillance over it— for instance, we watched the situation very
carefully and would not permit a member bank to borrow from us and
then turn around and lend on call solely for profit.
The C h a i r m a n . But that was one of your problems, the fact that
there was money coming in over which the Federal Reserve Board
did not have jurisdiction?
Governor Y o u n g . I will go a little bit further than that and say
that the member banks did not have jurisdiction.
The C h a i r m a n . The point I am getting at is that this New Y ork
call loan money market is limited by the rules in New Y ork. New
BRANCH, CH AIN, AND GROUP BANKING
727
Y ork banks introduced bootleg loans into the call-loan market, they
introduced the country banks into that market, and they introduced
the business concerns of the country into that market, because those
loans had to be made through the New York banks. Therefore I
am assuming that the New Y ork banks were largely responsible for
bringing that m oney into New York.
Now, I would like to ask whether or not that situation could n ot be
remedied either by rules and regulations of the stock exchange per
taining to those brokers loans, or through putting limitations on the
New Y ork banks as to the amount of money they can loan for account
o f others, and, if such loans are made, whether they could not be
regulated to a great extent by requiring reserves against those loans
in the same manner as the banks are required to keep reserves against
deposits, because it has been clearly proven in this particular situa
tion that there is no difference between the total aggregate of those
brokers’ loans in New Y ork City and deposits in those banks in New
Y ork City— in other words, when those loans were called, the New
Y ork banks had to meet them just as they would demands from their
customers for the withdrawal of their own funds.
G overnor Y o u n g . M r. Congressman, experience is a great teacher,
and I suspect that the New Y ork banks worried enough about that
situation during 1928 and 1929, so that they are giving a great deal
of thought to it. I have been informed that some studies are being
made of it to see what can be done. I hope something can be de
veloped.
M r. B e e d y . I am through but would tie all my questions up to the
issue by asking you one question.
In your opinion, is it going to be easier through call-money rates or
other banking devices in New Y ork City to get funds into that center
under a group-banking or chain-banking or branch-banking system
than it would be under a unit banking system? Is not one of the
arguments for this branch banking m ovement the mobility of funds
and the advantages of the system?
Governor Y o u n g . That is an extremely hard question to answer,
M r. Congressman. The answer, I suppose, would be determined
entirely by the attitude of the unit banker or the attitude of the group
banker or the attitude of the branch banker.
M r. S t r o n g . H ow are you going to control the attitude?
M r. B e e d y . W e can not go into that. Here is an opportunity, a
possibility under a call-loan rate of 20 per cent, to get returns far in
excess of any to be realized in any other interest market, and here is a
big bank in New Y ork City, in a group or a chain, extending clear
across the country. All it has to do is to wire these banks and say,
“ Ship us so many thousand dollars.” Is not that a fact?
W e will not go into the attitude or the psychology of it, but it is
going to much easier, as a matter of practical banking operation, to
have that mone 3r there in New Y ork and more quickly under a group,
chain, or branch banking system than it would have been if consolida
tions had never been permitted or branch banks were never authorized
throughout the country?
Governor Y o u n g . Under a branch banking system, of course, they
would have those funds in New York, theoretically; that is where
the books would be kept. In the case of a group bank where they
attempt to maintain local autonomy, the possibilities are that the
728
BRANCH, CH AIN , AND GROUP BANKING
local bank had lent the money long before the central bank would
have wired them.
M r. B e e d y . Of course.
Governor Y o u n g . The b a n k w o u ld n o t leave $200,000 lying a rou n d
idle with a high cell rate in New Y o r k .
M r. B e e d y . Of course, they could not do anything unless the banks
in the group had available funds for loaning purposes, but, if they had,
it would be easier to get them in New Y ork where they control the
system or part of it than where they have to deal with independent
banks.
Governor Y o u n g . 1 do not think so.
M r. B e e d y . W hy n o t?
Governor Y o u n g . If I am an independent banker in Minneapolis,
M inn., I can get money on call inside of an hour’s time and get it
out just as quickty.
M r . B e e d y . B u t y o u h a v e to ask s o m e b o d y else ab ou t i t ; y o u c a n
n o t issu e an order m ere ly .
G overnor Y o u n g . I just have to wire my correspondent in New
Y ork to charge m y account and put so much on call, and, if I want
it back, I wire, “ Call the loan and credit m y account.”
M r . B e e d y . S o th a t this a rg u m e n t w h ich has been a d v a n c e d here
th a t there is an a d v a n ta g e un d er the b r a n c h -b a n k in g s y s te m in th a t
it p ro v id e s easier m o b ility of fu n d s is n o t te n a b le , in y o u r o p in io n ?
G overnor Y o u n g . M obility of funds to lend on the New Y o r k Stock
Exchange?
M r. B e e d y . For any purpose— getting funds and credits from one
section of the country to the other in the group or chain or in the
line of branches?
Governor Y o u n g . Y e s : I th in k there is s o m e th in g to the a r g u m e n t ;
b u t do n o t m isu n d e r sta n d m e -------M r. B e e d y . H o w can you answer
that question “ Y e s ” and the
other question “ N o ” ?
Governor Y o u n g . Because the argument for those funds was to
get them into the interior and not in New York City.
M r. B e e d y . D o you mean to say, then, that it would be easier to
get funds out of New Y ork City into the interior under a branchbanking system than it would be to get funds from the interior into
New Y ork City?
Governor Y o u n g . That is the argument of the Com ptroller of the
Currency, and an argument that I am inclined to agree with.
Mr. B e e d y . Now, I th in k it w ou ld be in te re stin g to h a v e us under
s ta n d w h y th a t is so.
Mr. W i n g o . M ay I
I h a v e n e v e r grasp ed it.
make a suggestion there? I f I were to attempt
to set forth the advantages of branch banking, I would say that there
would be greater efficiency of control in a large bank with branches,
with a quicker perception of the danger of keeping the money in the
call-loan market, and a quicker tendency to pull it back to meet the
needs of the interior.
M r. B e e d y . It works both ways.
M r. W i n g o . I was m oved to say that because you were about to
infringe on my right; you have gotten over on m y side, and, so, to
keep the balance, I have gotten over on your side.
M r. B e e d y . I do not know what you are talking about.
BRANCH, CH AIN, AND GROUP BANKING
729
M r. W i n g o . D id you never play the old game of “ shinny” ?
Mr. B e e d y . Yes.
M r. W i n g o . Y o u were “ shinnying” on my side.
M r. B e e d y . W hat is your position?
M r. W i n g o . M y side is against branch banking, and, if you get
over on this side, against branch b a n k in g , I just thought I would
gravitate to the other side.
M r. B e e d y . I want to get all the facts. M y thought was that it
is easier under a branch banking system to get funds out of New
Y ork City if the attitude of the banker in charge of the branch system
is such as to take that step, and that it is likewise easier to get money
o u t of the small localities into New Y ork it is believed th a t greater
returns for the moment under a branch banking system or group
banking system m a y thus be realized than would otherwise be th e
case.
Governor Y o u n g . I probably did not catch y o u r former query.
Obviously it would work both ways.
The C h a i r m a n . Mr. Strong, it is your turn to question the
Governor.
M r. S t r o n g . M r. Chairman, I want to examine th e Governor on
brunch, group, and chain banking, but this subject th a t has come up
this morning is producing such a fund of information in favor of a
policy of the Federal Reserve Board stabilizing the price of money
th a t I want it continued, and I yield to M r. Fort.
The C h a i r m a n . I understand Mr. Fort is, then, to proceed.
M r. F o r t . I want to ask one or two questions in reference fb
matters that have not been touched upon.
Customarily, Governor Young, call loans are not accompanied by
any deposit from the borrower with the bank from which he secures
the loan, are they?
G overnor Y o u n g . S o far as the bank that lends the money in the
interior is concerned, I do not think so. W hat arrangements a broker
may have with the New York correspondents about compensating
balances, I do not know.
M r. F o r t . As I get the practice, and certainly this is true as it
relates to my own bank, if we lend money on the New York call
market through our New Y ork correspondent, we compensate that
correspondent by a commission on the interest, but we get no deposits
in Newark from anybody to compensate for the amount we loaned on
call in New York.
Governor Y o u n g . That is correct, unless you would make a. time
loan direct to that brokei
Mr. F o r t . I am speaking o f call loan s on!\. Now, that differs
from the usual rule ol American banking, of requiring the borrower
to maintain a deposit
ount with the bank that loans him the money,
does it not?
Governor Y o u n g . That is true, with the exception of commercial
paper and bankers' bills.
M r. F o r t . Consequently, the b ank lias not the same opportunity
to profit out of a call loan at 6 per cent when commercial loans in his
vicinity are at 6 per cent, because it has no compensating deposit
from the borrower on which it pays but 2 per cent or nothing.
Governor Y o u n g . That is correct.
730
BRANCH,
c h a in
,
and
group
b a n k in g
Mr. F o r t . In other words, it is not lending him back part of his
own money?
Governor Y o u n g . N o .
Mr. F o r t . S o that if you were to have a fixed call-loan rate, and
desired to preserve the call-loan market, you would have to allow a
higher charge for interest on call loans than on other loans, would you
not?
Governor Y o u n g . That is correct.
Mr. F o r t . N o w , the method of making call loans is that certain
money brokers on the N e w York Stock Exchange handle those loans
for all accounts, do they not, banks and nonbankers?
^Governor Y o u n g . In 90 per cent of the cases; yes.
M r. F o r t . And those money brokers make loans sometimes, we
will say, of $5,000,000 in a single loan, which represents the money of
40 or 50 different lenders?
Governor Y o u n g . It may be.
Mr. F o r t . In one single loan?
Governor Y o u n g . It may be.
Mr. F o r t . That money broker gets a compensation for his services
as the intermediary, based on the amount he places, does he not?
Governor Y o u n g . I do not know, Mr. Congressman, whether that
is so or not.
M r. F o r t . I think that is the fact.
G overnor Y o u n g . W ell------M r. F o r t . Now, in the peak of the money trouble last fall, the
major part of the money loaned in New York on call was for the
account of others and not for the account of member banks— is not
that true?
Governor Y o u n g . That is correct.
M r. F o r t . And that meant not merely loans for other banks, non
member banks, but also very substantial loans for the account of
business corporations and other types of financial institutions, did
it not?
Governor Y o i j n g . That is correct.
M r. F o r t . There was nothing to prevent— and, indeed, it. was
done, was it not— the m oney brokers from handling the m oney for
the account of nonmember banks directly without the intervention
of any bank? For example, let us take the United States Steel Cor
poration; when it placed a call loan in the New Y ork market of
$30,000,000 or $40,000,000, it was placed through its own broker and
not through its bank, was it not?
Governor Y o u n g . I do not think so; it was placed through its
bank.
M r. F o r t . But not invariably.
D octor G o l d e n w e i s e r . N ot invariably.
M r. F o r t . M any of the large industrial corporations maintain
their own lending offices, do they not?
Governor Y o u n g . N ot that I know of.
M r. F o r t . I thought they did. M any of the insurance companies
and other institutions of that sort make the loans at their head
offices and not through their banks.
Governor Y o u n g . That is all news to me.
Mr. F o r t . And there are many private bankers who loan direct,
are there not?
BRANCH, CH AIN, AND GROUP BANKING
731
Governor Y o u n g . Yes; private bankers.
M r. F o r t . And when those men lend on call, they withdraw a
deposit from a bank, do they not, in order to make a loan?
Governor Y o u n g . In the great m ajority of cases.
M r. F o r t . The tendency of the high loan rate on call last year was
toward a reduction in deposits in the New Y ork banks, was it not?
Governor Y o u n g . I will have to check those figures.
M r. W i n g o . Reduction of local deposits?
M r. F o r t . N o; total deposits.
Governor Y o u n g . Net demand deposits of reporting member
banks of New Y ork City between January and October 2 ranged
from a low of $5,106,000,000 on August 2 to a high on January 2 of
$5,682,000,000, and that $5,682,000,000 really should not be taken,
because that is after the period that I have------M r. F o r t . N o w , the 1st of February.
Governor Y o u n g . $5,354,000,000.
M r. F o r t . S o that there was a decrease o f $ 2 0 0 ,0 0 0 ,0 0 0 between
the 1st o f February and August?
G overnor Y o u n g . Approximately.
M r. F o r t . And that is the period when the highest call money
rates prevailed, is it not?
Governor Y o u n g . Correct.
M r. F o r t . N o w , deposits increased after the collapse in the callmoney rate which accompanied the collapse in the stock market,
did they not?
Governor Y o u n g . They increased very rapidly in New Y ork City.
M r. F o r t . They went up from what?
Governor Y o u n g . The peak of demand deposits, according to m y
figures here, occurred on October 30, when they mounted to $6,851,000,000.
M r. F o r t . And that was just at the time o f the b ig crash?
Governor Y o u n g . That was right at the end of it.
M r. F o r t . The crash went on into November.
Governor Y o u n g . I mean that there was a very severe period
from October 23 to Novem ber 1.
M r. F o r t . Was not this in very large part due to the return to the
banks of money which had been previously loaned for the account
of others?
Governor Y o u n g . That is correct. W hat happened in October—
that is from October 23 to Novem ber 1— is that the New Y ork banks
to save that situation (as the loans were called by country banks and
by others, apparently through fear, because they had no use for the
m oney), took the loans over, thereby increasing their loans, and the
country banks and others left the money on deposit with the New
York banks so that there was a very rapid increase in loans and a
very rapid increase in deposits in the New Y ork reporting member
banks during that week.
Now, all that the New Y ork banks needed to handle that situation
was the additional reserve that they were required to carry with the
Federal Reserve bank on the increase in deposits, and that is what
the New Y ork banks did during that period.
M r. F o r t . W hat happened to time deposits in that same period,
between the 1st of February and the high point? W hat were the low
and high dates?
732
BRANCH, CH AIN , AND GROUP BANKING
Governor Y o u n g . W e will take February 1. Time deposits, N ew
Y ork reporting member banks, $1,200,000,000. On August 28 there
were $1,189,000,000, practically no change.
M r. F o r t . W hat were they on the 30th of October?
Governor Y o u n g . $1,257,000,000.
M r. F o r t . That is an increase of nearly $100,000,000.
G overnor Y o u n g . From February, an increase of $57,000,000.
M r. F o r t . B ut from August------Governor Y o u n g . From August, $100,000,000.
M r. F o r t . S o that apparently between the low date of deposits in
August, which was also at the time when the money rate was running
very high and the time of the low money rate that follow ed the
crash, there was a substantial increase in deposits with the member
banks in New Y ork City, both time and demand?
G overnor Y o u n g . There was an increase of $300,000,000.
M r. F o r t . N ow, in that same period after the crash, would not
the more significant figure be the total loans on collateral?
Governor Y o u n g . I am inclined to think so.
M r. F o r t . W hat was the figure covering total loans on collateral
in August?
Governor Y o u n g . In New York, or throughout the United States?
M r. F o r t . In New York.
Governor Y o u n g . M y previous reply to you applied to the entire
United States.
M r. F o r t . I appreciate that. I want to get New Y ork first.
Governor Y o u n g . I am giving you New Y ork. Reporting member
banks on January 30, loans on securities, which included brokers’
loans, were $2,795,000,000.
M r. F o r t . W hat about the latter date?
G overnor Y o u n g . On October 30 they were $4,205,000,000.
M r. F o r t . W hat were they on that August date in between?
G overnor Y o u n g . On August 28 they were $2,819,000,000.
M r. F o r t . S o that between February and August the figure is
about the same, but by O ctober 30 the loans on collateral had risen
$1,300,000,000 by the New Y ork banks?
G overnor Y o u n g . Correct. That practically all came in the week
of October 23 to Novem ber 1st.
M r. F o r t . And that raise represented the transfer of securities by
individuals from their broker’s account to their bank, did it not?
D octor G o l d e n w e i s e r . Where customers borrowed directly from
the banks instead of through brokers.
Governor Y o u n g . That is correct; that represented a large part
of the increase.
M r. F o r t . And it also represented a reduction in the amount of
loans for the account of others which the banks had to step in and
cover?
Governor Y o u n g . Correct.
M r. F o r t . In this same period, when we have been observing that
the change in the deposit figure was only a few per cent, the total
brokers’ loans had gone up from what figure on February 1 to the
August 28 figure in New Y ork City?
Governor Y o u n g . On January 30 there were $5,559,000,000;
on August 28, $6,217,000,000.
M r. F o r t . W hat was the peak?
BRANCH, CH AIN, AND GROUP BANKING
733
Governor Y o u n g . October 2 , 1 think.
M r. F o r t . W hat was that?
Governor Y o u n g . $ 6 ,8 0 4 ,0 0 0 ,0 0 0 .
Mr. F o r t . And that is an increase of $1,300,000,000 between
February and October?
Governor Y o u n g . That is approximately correct, sir.
M r. F o r t . But in that same period the deposits with all New Y ork
banks had remained practically stationary, had they not?
Governor Y o u n g . Well, between February and August they had
gone off------M r. F o r t . N o; February to October.
Governor Y o u n g . Very little change.
M r. F o r t . So that the entire increase of $1,300,000,000 in the loan
account between February and October 2 was provided other than
through an increase of deposits with the New York banks which
they loaned out?
Governor Y o u n g . That is correct.
M r. F o r t . Now, that money came from abroad, as well as from this
country, did it not?
Governor Y o u n g . It did.
M r. F o r t . And as to the major portion of it, the bank must have
acted simply as an agent and not as a lender for its own account?
G overnor Y o u n g . That is correct.
M r. F o r t . Otherwise it would be reflected by an increase in the
deposit account?
Governor Y o u n g . That is right.
M r. F o r t . N ow, that would perhaps to some extent bear out your
theory, Governor Young, that they could get the money somewhere
if they could not get it from the banks, would it not?
Governor Y o u n g . Yes.
M r. F o r t . Y ou said in answer to a question— I think by M r.
Beedy—-that the rapid decline in the call rate in O ctober was due
primarily to a drop in the demand rather than to an increase in the
supply, in the total call loans.
G overnor Y o u n g . If I did I should have added some other factors
to it.
M r. F o r t . I do not mean that you used those specific words, but
that was the impression I got.
G overnor Y o u n g . I would like to add a little something to that.
Starting with August, with the seasonal requirements of the country,
the Federal reserve was buying bills and buying a limited amount of
G overnm ent bonds, which had a tendency to put more credit into the
market. In addition to that, in the latter part of October, when this
crash did come, there was a willingness upon the part of New Y ork
banks to lend, when up to that time there had not been a willingness
on their part.
Mr. F o r t . 1 think you and 1 are not talking directly to the same
point. As I recall it, the question of M r. Beedy and your answer
were something like this— or it may have been M r. Seiberling’s
question: The question was asked you, in effect, whether the crash
in the market was not due to a lessening of the supply of funds that
even the high call rate failed to bring in, and your answer was that
this decrease in loans was due rather to a decrease in demand for
loans than to a lack of available funds. Is that correct, or is it not—
to a decrease of brokers’ loans?
734
BRANCH, CH AIN, AND GROUP BANKING
Governor Y o u n g . I want to answer that accurately, M r. C on
gressman. That would cover the period from February until------M r. F o r t . N o . Perhaps I have not gotten it clear yet.
As I understood it, you were being questioned about the effect of
high rates on drawing money in, and the question was asked you as
to whether or not the high rate did not ultimately fail to draw enough
m oney in to support the high stock market, and therefore it had to
crash for want of money. W hat I am trying to get at is whether the
crash came from the want of money to carry on, or whether it came
from some other cuase, plenty of money being available?
Governor Y o u n g . I think I did reply to that at the time, M r.
Congressman, that there was less demand, but in reviewing these
figures I think perhaps it would be better for me to correct that and
say that that there was an increase in the supply rather than a lack of
demand.
M r. F o r t . It is now after 1, and there is a special matter coming
up on the floor to-day.
The C h a i r m a n . I was simply letting you finish.
M r. F o r t . I know you were, and I would like, if I could, to finish
because I had some conclusions I wanted to draw from these figures,
and I would like to go on on Friday morning, as the governor says he
can not be here to-morrow.
M r. D u n b a r . Can we not have a session at 2.30 o ’clock?
5fs
*
*
*
*
*
H
?
The C h a i r m a n . In accordance with the instructions o f the com
mittee, the chairman has sent invitations as follows:
T o the Northwest Bank Corporation, Minneapolis, M inn., M r.
E. W . Decker, to appear before the committee April 15.
T o the First Bank Stock Corporation, Minneapolis, M inn., M r.
L. E. Wakefield, to appear before the committee April 16.
T o the Guardian D etroit Union Corporation, Detroit, M ich., M r.
R obert O. Lord, to appear before the committee April 23.
T o the Marine M idland Corporation, Buffalo, N. Y ., M r. George
F. Rand, to appear before the committee April 24.
T o the First National Associates, Atlanta, Ga., M r. John K . Ottley,
to appear before the committee April 29.
T o M r. A. P. Giannini, Transamerica Corporation, San Francisco,
and M r. James A. Bacigalupi, Transamerica Corporation, San
Francisco, to appear before the committee M ay 6.
These invitations have been accepted b y all except Messrs. Ottley,
Giannini, and Bacigalupi, and I have understood indirectly that it
was agreeable to M r. Giannini and M r. Bacigalupi to appear on M ay
6 and I suppose I will receive later advice.
(Thereupon, at 1.05 o ’clock p. m., a recess was taken until 2.30
o ’ clock p. m .)
after
recess
U pon the expiration of a recess, the hearing was resumed.
The C h a i r m a n . The committee will come to order.
M r. Fort, will you proceed?
M r. F o r t . G overnor, I wish you would put into the record that
memorandum you were referring to this morning of the usury rates
in the different States.
735
BRANCH, CH AIN, AND GROUP BANKING
G overnor Y o u n g . It covers the legal rates of interest and con
tract rates of interest of all the States in the Union, as taken from
the Rand M cN a lly Bankers’ D irectory as of date of June 30,1929.
The C h a i r m a n . W ithout objection, that will be placed in the
record at this point.
(The statement referred to is as follow s:)
Interest rates
S ta te s a n d T e rrito rie s
L e g al
rate of
interest
i
L egal
rate of
interest
S ta te s a n d T errito ries
P e r cen t
8
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!
1 A n y rate agreed u p o n is legal on loan s cv
) b u t C o lo ra d o cou rts decline to ind orse g ro ssly u n r ea so n a b le rates.
2 A n y rate.
3 A n y rate agreed u p o n in w r itin g is legal o
teral d e m a n d loan s o f $5,000 a n d o ver.
* O n a m o u n ts exceedin g $50, 80 per cen t, in c lu d in g service an d expen ses; on a m o u n ts n o t exceed in g $ 50.
5 per cen t per m o n th for th e first six m o n th s , 2 ) 4 per ce n t th ereafter.
M r. F o r t . Governor, we were talking this morning about the
effect of the brokers’ loan situation on deposits. W ill you give me
again for the record the total of brokers’ loans on February 2, August
28, and O ctober 30, was it not, that we were using this morning?
Governor Y o u n g . Well, using January 30, 1929, August 28, 1929,
October 2, 1929, and O ctober 30, 1929— I think those are the dates
we used------M r. F o r t . Y e s .
Governor Y o u n g . Total loans and investments of all reporting
New Y ork City member banks, January 30------M r. F o r t . N o , brokers’ loans.
Governor Y o u n g . Loans on securities?
M r. F o r t . N o , brokers’ loans first, please. Then I will come to
securities.
Governor Y o u n g . The total of all brokers’ loans on January 30,
1929, was $5,559,000,000; on August 28 they were $6,217,000,000;
on October 2, $6,894,000,000; and on October 30, $5,538,000,000.
M r. F ort . N ow , will you give me the secured loans of the New
Y ork banks for the same dates?
100136— 30—VOL 1 PT 7-- 3
736
BRANCH, CH AIN, AND GROUP BANKING
Governor Y o u n g . January 30, $2,795,000,000; August 28,
$2,819,000,000; October 2, $2,947,000,000; and October 30,
$4,205,000,000.
M r. F o r t . And the demand deposits as of those same dates, of the
New Y ork banks?
The C h a i r m a n . M ay I ask, does that include time as well as call
loans?
Governor Y o u n g . T hat includes time and call loans, both.
January 30, $5,334,000,000 net demand deposits; August 28,
$5,106,000,000; October 2, $5,279,000,000; October 30, $6,851,000,000.
Tim e deposits, January 30, $1,200,000,000; August 28, $1,189,000,000; O ctober 2, $1,256,000,000; and O ctober 30, $1,257,000,000.
M r. F o r t . N o w , will you give me the brokers loans for others?
Governor Y o u n g . Will that include out o f town banks?
M r. F o r t . Yes.
G overnor Y o u n g . I will have to add those figures.
M r. F o r t . Well, then, give them to me separately, loans for others
and loans for out-of-tow n banks.
Governor Y o u n g . For out-of-tow n banks, January 30, $1,853,000,000; August 28, $1,756,000,000; October 2, $1,826,000,000; and
O ctober 30, $1,005,000,000.
For others, January 30, $2,615,000,000; August 28, $3,468,000,000;
O ctober 2, $3,907,000,000; and October 30, $2,464,000,000.
M r. F o r t . N o w , one other set of figures, for all reporting m em ber
banks, demand deposits and secured loans. Let me have secured
loans first on those same four dates.
G overnor Y o u n g . Loans on securities?
M r. F o r t . Yes.
Governor Y o u n g . January 30, $7,440,000,000; August 28, $7,515,000,000; O ctober 2, $7,828,000,000; and O ctober 30, $9,179,000,000.
M r. F o r t . A nd the deposits?
G overnor Y o u n g . Demand deposits, January 30, $13,395,000,000;
August 28, $12,985,000,000; O ctober 2, $13,295,000,000; and O ctober
30, $15,110,000,000.
Now, time deposits. January 30, $6,893,000,000; August 28,
$6,786,000,000; O ctober 2, $6,825,000,000; and O ctober 30,
$6,868,000,000.
T h at covers about 700 banks, that represent 101 cities, about 40
per cent of all total loans and investments.
M r. F o r t . From these figures, Governor, it appears that brokers’
loans between January 30 and O ctober 2 of the New Y ork C ity banks
increased from $5,500,000,000 to $6,800,000,000, or $1,300,000,000?
Governor Y o u n g . That is correct.
M r. F o r t . And in that same period the secured loans o f the N ew
Y ork banks for their ow n account only increased $150,000,000?
Governor Y o u n g . F or O ctober 2?
M r. F o r t . Yes, sir.
G overnor Y o u n g . $150,000,000.
M r. F o r t . A nd that the loans for out-of-tow n banks, brokers
loans, decreased $27,000,000?
G overnor Y o u n g . $27,000,000; that is correct.
M r. F o r t . But that in the same period the loans for the account
o f others, which means non-banks, I take it, increased from
$2,615,000,000 to $3,907,000,000, or $1,300,000,000?
BRANCH, CH AIN, AND GROUP BANKING
737
Governor Y o u n g . That is correct.
M r. F o r t . In that period it also appears that the deposits, demand
deposits, in New Y ork City banks actually decreased $55,000,000?
Governor Y o u n g . That is correct.
M r. F o r t . And the deposits of all banks decreased $100,000,000?
Governor Y o u n g . Demand deposits?
Mr. F o r t . D em and deposits.
Governor Y o u n g . That is correct.
Mr. F o r t . And the deposits on time of all banks decreased
$68,000,000?
Governor Y o u n g . $68,000,000.
M r. F o r t . In other words, at the peak of brokers’ loans on O cto
ber 2, banks for their own account were lending less money, or only
slightly more money, both out-of-tow n and New Y ork banks, than
they were lending at the end of January?
Governor Y o u n g . That is, October 2 ?
M r. F o r t . Y e s .
Governor Y o u n g . $47,000,000 less.
Mr. F o r t . The money that made the trouble, then, in New Y ork
was not bank money, was it; that is, the money that met the high
interest rate?
Governor Y o u n g . N ot in m y opinion; practically no increase in
the amount the New York banks had loaned to brokers from 1927.
M r. F o r t . It is not only the New Y ork banks, but the loans of
all banks, secured loans, have gone up in that period, between Jan
uary 30 and October 2, for their own account, $382,000,000, while
the brokers7 loans have risen $1,300,000,000?
Governor Y o u n g . That is correct.
Mr. F o r t . And the banks have lost $ 1 0 0 ,0 0 0 ,0 0 0 deposits in that
interim?
Governor Y o u n g . Demand deposits?
M r. F o r t . Y e s .
The C h a i r m a n . M ay I suggest that it would be helpful if Governor
Young would describe the sources from which this m oney came?
M r. F o r t . I was coming to that.
There are only two places from which a bank can get the resources
with which to loan funds for its own account, are there not, and
those are its own capital and surplus funds and its deposit account?
Governor Y o u n g . And what it might borrow from the Federal
reserve banks.
M r. F o r t . Yes. The outsiders, however, nonbankers, have avail
able all of their funds in any form to loan if they want to loan
them— I mean, they can withdraw their moneys from the bank to
make loans with, if they want to?
Governor Y o u n g . That is correct.
M r. F o r t . D o you know or do you know whether there were
substantial withdrawals from the banks for the purpose of direct
loan by corporations on the stock market?
Governor Y o u n g . There were.
M r. F o r t . N o w , one other figure. W e have confined ourselves
here to the period between January and O ctober 2. I now’ want to
use the October 30 figures which I have taken off as you read them..
If I am wrong, will you correct me as I read them into the record?
Brokers’ loans between O ctober 2 and O ctober 30 had gone down
from $6,804,000,000 to $5,538,000,000?
738
BRANCH, CH AIN, AND GROUP BANKING
Governor Y o u n g . That is correct.
M r. F o r t . The secured loans of New Y ork banks had in the
same period gone up from $2,947,000,000 to $4,205,000,000?
Governor Y o u n g . That is correct.
M r. F o r t . That difference is practically $1,300,000,000 in each
case, is it not? Brokers’ loans are down $1,300,000,000, and loans
on security b y New Y ork banks are up $1,300,000,000?
G overnor Y o u n g . That is correct.
M r. F o r t . As to loans for the account o f others in that period,
brokers7loans had gone down from $3,907,000,000 to $2,464,000,000,
or about $1,450,000,000?
G overnor Y o u n g . That is correct.
M r. F o r t . In that same period also New Y ork demand deposits
had increased from $5,279,000,000 to $6,851,000,000, had they not?
G overnor Y o u n g . Yes, sir.
M r. F o r t . Or about the same amount that their loans had in
creased?
G overnor Y o u n g . $1,550,000,000, approximately.
M r. F o r t . Their time deposits were stationary. Their loans for
out-of-tow n banks in that period had gone down from $1,826,000,000
to $1,005,000,000; is that correct?
G overnor Y o u n g . $1,826,000,000 to $1,005,000,000.
M r. F o r t . Now, turning to all bank loans for their own account
between O ctober 2 and October 30 on secured loans, that figure had
gone up from $7,828,000,000 to $9,179,000,000; is that n ot correct?
Governor Y o u n g . Yes, sir.
M r. F o r t . W hich, again, is that figure o f $1,300,000,000 that we
seem to get?
G overnor Y o u n g . Practically all in New York.
M r. F o r t . And their deposits had gone up from $13,295,000,000
to $15,110,000,000?
Governor Y o u n g . That is correct.
M r. F o r t . So that we find, when we come to a n a ly z e that loan
picture, that the banks gained in deposits as they increased their
loan account?
G overnor Y o u n g . That is always true.
M r. F o r t . And that the market was not financed between January
and October by way of increase in loans out of bank funds, but out
of funds for others?
G overnor Y o u n g . That is correct.
M r. F o r t . And the deflation between October 2 and O ctober 30
resulted only in a decrease in the loan account for the account of
others and an increase in the loan account for the account of the
banks themselves?
G overnor Y o u n g . N ot dollar for dollar.
M r. F o r t . N ot exactly?
G overnor Y o u n g . No.
M r. F o r t . But a correlative one, in part.
Governor Y o u n g . I think, if you figured that out, that there was
a real liquidation, exchange of securities.
D octor G o l d e n w e i s e r . That was after October 30.
M r. F o r t . There was some before, obviously.
Governor Y o u ng . Yes.
BRANCH, CHAIN, AND GROUP BANKING
739
Mr. F o r t . Y ou have a decrease in loans to brokers between O cto
ber 2 and October 30 for all accounts, a net decrease of about
$900,000,000 in brokers’ loans?
Governor Y o u n g . For what dates?
M r. F o r t . October 2 to October 30.
Governor Y o u n g . $1,262,000,000, I would say. That is, all brok
ers’ loans went from $6,800,000,000 down to $5,538,000,000.
Mr. F o r t . And that includes time loans?
Governor Y o u n g . Y es; that is a $1,262,000,000 reduction.
M r. F o r t . But you had in that same period a deduction of $1,400,000,000 in loans for others, and a deduction of $800,000,000 in loans
for out-of-town banks?
Governor Y o u n g . That is correct.
M r. F o r t . N o w , are y o u able to h a za rd w h a t w e m ig h t call an
e d u c a te d gu ess as to h o w m u c h o f th a t m o n e y w as fore ign m o n e y
th a t w as in th o se lo an s for th e a c c o u n t of o th e rs?
Governor Y o u n g . That is a very difficult figure for us to furnish,
M r. Congressman. The nearest that we can come to it is the amount
of money that might have been loaned on call by New Y ork banks or
private banks for foreign banks, and that would exclude individuals
and corporations and others, and that figure is only $150,000,000.
Generally speaking, foreign banks of issue and other foreign banks
either leave their money on deposit here or they invest it in United
States Government bonds, so that that figure would be of little benefit.
M r. F o r t . Or handle it through banking houses, which you get
no record of.
Governor Y o u n g . I think this does cover a record of some of the
private banking houses.
The C h a i r m a n . M ay I ask, in connection with that, whether or
not the Federal reserve keeps a record of the amount of foreign money
on deposit in this country?
Governor Y o u n g . We attempt to keep a record, and the Depart
ment of Commerce is attempting to do the same thing, but they are
very unsatisfactory figures.
The C h a i r m a n . I should think they would be very essential figures
in the exercise of the functions of the Federal reserve.
G overnor Y o u n g . We realize that, but they are extremely hard to
get. A t one time those figures were as high as $370,000,000, M r.
Congressman, just before this break, and the procedure, I think, that
was followed generally by the foreign correspondents was to leave
the money on deposit with the New’ Y ork banks or the interior banks,
and they paid them a rate of interest that bore relationship to the
call-loan rate or the average rate they received.
I would rather not furnish that figure, because it does not sound
right; it sounds much too small.
M r. F o r t . Very much too small. W hat I am after, however, is to
see how much m oney there is available for what you call bootleg loans
in this country. It seems to me quite obvious from these figures that
there is a substantial volume of it.
Governor Y o u n g . Well, there was approximately $ 4 ,0 0 0 ,0 0 0 ,0 0 0
on October 2.
Mr. F o r t . Out of total loans of $6,800,000,000, brokers’ loans.
Governor Y o u n g . That is correct.
740
BRANCH, CH AIN, AND GROUP BANKING
M r. F o r t . N o w , th a t m o n e y w as a ttr a c te d here u n d o u b te d ly , or
a ttr a c te d in to th e lo a n m a r k e t, b y th e ra te , w a s it n o t — n o t n e c e s
sa r ily b y th e in d iv id u a lly h igh ra te fo r a g iv e n d a te , b u t b y th e c o n
tin u a n c e o f high rates o v e r a lo n g p e rio d ?
G overnor Y o u n g . I would say that those funds were attracted in
that market ever since the rate got to 3 per cent.
M r. F o r t . And kept increasing in volume as the rate went up?
Governor Y o u n g . Y e s .
M r. F o r t . The bulk of that money which was American in its
origin as distinguished from foreign, must have come out of the
deposits of some bank, must it not?
Governor Y o u n g . Well, there are m a n y fa c to rs to take into con
sideration th ere. If you w o u ld ta k e the figures th a t we have been
using, it would look as if the deposits had not gone down in any such
proportion as the loans for others had gone up, so we have to go back
a little bit an d remember that there was a great gold movement into
this country from 1921 clear through to 1924, that permitted a tre
mendous pyramiding of credit in this country. The momentum that
that received up to 1924 continued clear through until 1928. In 1927
gold proceeded to leave this country, and as it left the country the
only way that the banks of the United States— I mean collectively—
could make up that shortage, was to borrow from the Federal reserve
banks, with the result that their rediscounts did increase very rapidly
during that period. Now, as those deposits were withdrawn from
banks to lend on call, obviously som ebody purchased the stock on
credit and paid the owner, and the owner in turn had to redeposit in
some bank somewhere.
M r. F o r t . But the original effect of the creation of the credit that
was continually marking up the prices of securities and marking up
the amount of chips that were exchanged for them should have been
to swell the deposits, should it not?
Governor Y o u n g . It did decrease the deposits throughout the
United States?
D octor G o l d e n w e i s e r . Somewhat, but I think the point is cor
rect. The loans for account of others did not create new deposits.
Governor Y o u n g . It did not increase the deposits; it had a tend
ency to decrease them.
D octor G o l d e n w e i s e r . Just transferred them from one bank to
another without increasing them.
Governor Y o u n g . And if there was any tendency at all, it was
downward.
M r. F o r t . Let us get at this other factor that affects the capital
that was used there. W^hat was the rediscount position of the New
Y ork banks? W hat were their total rediscounts on these same dates
that we are talking about?
Governor Y o u n g . On January 30 they were $215,000,000; August
28, $241,000,000; October 2, $152,000,000; and on O ctober 30,
$246,000,000.
M r. F o r t . And for all banks?
G overnor Y o u n g . For all banks, on January 30------The C h a i r m a n . Do you mean for all banks in the United States
or all banks in this------M r. F o r t . All reporting banks.
BRANCH, CH AIN , AND GROUP BANKING
741
Governor Y o u n g . This
would
cover
all
member
banks:
$821,000,000 on January 30; $974,000,000 on August 28; $931,000,000
on O ctober 2; and $991,000,000 on October 30.
M r. F o r t . Y ou say that no great part of that volume of additional
capital came by way of rediscounts?
G overnor Y o u n g . N ot during that period.
M r. F o r t . Only an increase of $110,000,000 in all banks between
January 30 and O ctober 2, and an actual decrease of $61,000,000 in
New Y ork between those same dates?
Governor Y o u n g . That is correct.
M r. F o r t . W hat were the gold imports in. that same period?
Governor Y o u n g . They would have a bearing on the amount of
rediscounts. There was a large increase of $200,000,000 or more in
gold supply.
M r. F o r t . W hat are the figures?
Governor Y o u n g . On January 26, this figure was $4,117,000,000;
on October 26, the average for that week wras $4,386,000,000, an
increase of $269,000,000 during that period.
M r. F o r t . H o w m u c h cu rren cy w as b a se d o n th a t in creased g o ld ?
M r. B e e d y . W ill you pardon me? Y our record here tends to
show that this was all imports, but you are now quoting figures on the
stock of gold in the country, not just imports.
Governor Y o u n g . I don 't know just what the imports were during
that period, but it was released from earmarks or imports or produc
tion; it came from those three sources.
Also, during that period money in circulation increased about
$ 121,000,000.
M r. F o r t . From what to what?
Governor Y o u n g . From January 26, when it was $4,677,000,000,
to October 26, when it was $4,791,000,000, and an increase in cur
rency requirements would have a tendency to increase the discounts,
while the imports of gold would have a tendency to decrease the
discounts of the banks.
M r. F o r t . Altogether, however, there is not enough in that to
account for the inflation in the loans, is there? There is not enough
in those gold figures or those rediscount figures?
Governor Y o u n g . Well, that would make a difference to the extent
of $100,000,000 only.
M r. F o r t . Have you the figures there, Governor, that will show
wiiat the commercial-loan picture was as of these dates?
Governor Y o u n g . I am furnishing that figure with reservations.
M r. F o r t . This is for all banks?
Governor Y o u n g . This is for reporting member banks.
M r. F o r t . This is the comparative figure to what you are using?
Governor Y o u n g . Yes; and I do not knowT as I should give these
figures as commercial loans. They are classified as all other loans.
M r. F o r t . Other than secured?
Governor Y o u n g . Other than secured loans, presumably commer
cial loans, but, of course, you know and I know that many of them
are not.
On January 30, $8,675,000,000; August 28, $9,434,000,000; October
2, $9,600,000,000; October 30, $9,755,000,000.
M r. F o r t . S o that running hand in hand with the increase in
brokers7 loans of $1,300,000,000 between January and October 2,
there was^an increase of $925,000,000 in unsecured loans?
742
BRANCH, CH AIN , AND GROUP BANKING
Governor Y o u n g . Correct.
M r. F o r t . So that apparently if those unsecured loans were not
for stock-m arket use, the business of the country got a substantial
increase in funds at the same time the stock market was continuing
to substantially increase?
Governor Y o u n g . That is correct.
M r. F o r t . Somewhere, then, between January and October we
found $925,000,000 of additional loans for general business purposes,
along with $1,300,000,000 of additional loans for brokers?
Governor Y o u n g . That is correct.
M r. F o r t . N o w -------The C h a i r m a n . M ay I ask a question there, M r. Fort?
M r. F o r t . Y e s .
The C h a i r m a n . Are we to infer that that money was used in
industry, or did it go into the stock market?
M r. F o r t . I said I had some reservations on that subject in some
of m y questions. These were nonsecured loans.
Governor Y o u n g . I presumed that they were used for business.
The C h a i r m a n . There is no way of telling, however, what it was
used for?
Governor Y o u n g . N o . For instance, M r. Chairman, a good cus
tomer of a bank comes in and asks for a loan of $10,000. They lend
it to him. T hey do not ask any questions what he is going to do
with it. It might go one way and it may go another way.
The C h a i r m a n . In that connection, a case was cited to me in New
Y ork where a man went in with United States Steel stock and asked
his bank for a loan of $100,000. The bank said that they could not
loan it to him if he wTas going to buy stocks, and he said that that was
what he was going to use it for; but they did make the loan to him
on his own personal note for $100,000 and he put his collateral in his
pocket and walked out.
Governor Y o u n g . There may he some of those cases, M r. Congress
man, but in the aggregate they would not amount to much.
I want to remind the committee that between February and July
there was very active business in this country.
M r. F o r t . W hich is reflected in the increase in loans; there is no
question about that.
The conclusion that I personally reached on these figures, and I
would like to have you check up with me, Governor, is this, that the
banks as such were neither responsible for nor did they gain in any
material way by the exaggerated brokers’ loan position in New York
City.
G overnor Y o u n g . I think, generally speaking, M r. Congressman,
with very few exceptions throughout the United States— and my
contact was m ostly with the larger banks— that they did everything
within reason, everything within their power, to restrain this from
expanding any further.
D oes that answer your question?
M r. F o r t . It does, in part.
Governor Y o u n g . There were some exceptions.
M r. F o r t . The further question in m y mind is whether, with the
net loss in deposits which accompanied this performance in spite of
an increase in commercial loans of $925,000,000 between January 30
and O ctober 2, the fact that there was a decrease of $100,000,000 in
BRANCH, CH AIN, AND GROUP BANKING
743
deposits in that same period in the same banks indicates, as it seems
to me it does, that they lost substantial deposits that they should
have had?
Governor Y o u n g . I think that is true.
M r. F o r t . And that therefore from the banks’ own position, this
m oney flurry in New Y ork was harmful?
Governor Y o u n g . I think it was harmful to everyone, M r. C on
gressman. Perhaps I can illustrate that by following along just what
did happen. For instance, when the broker got up to a point where
he was charging the customer, say, 8 per cent, that prompted
that customer to go to his local bank and request accommodation at
6 per cent or 5 per cent or whatever rate he could command, and he
could command a pretty good rate because he had been a customer of
the bank for many years, carried a very handsome deposit there and
had not asked for any accommodation for years. So that, taking the
city of Chicago, while they called these New Y ork loans at the higher
rates of 8, 9, or 12 per cent, they simply took that customer to
another window where they lent him the money at 6 or 7 per cent. Of
course, 6 or 7 per cent is a good profitable transaction for a bank,
but not as profitable as the 14 or 15 per cent that they could have
gotten by continuing to lend on call.
M r. F ort . But the thing I am trying to get to is this, that if, as
these figures seem to bear out, the banks, looking at them from their
primary function, as banks of deposit, are not gainers by this enormous
volume of loans induced by high call rates, and are losers from the
subsequent disturbance of business, would they be better off if in any
of these laws we make here we considered this question of call loans?
G overnor Y o u n g . Obviously that is a thing that should be con
sidered. W hat the solution of it is, I do not know.
M r. F o r t . I do not, either.
Governor Y o u n g . Y ou have to bear in mind that the New Y ork
banks did increase their profit to a certain extent when they put a
charge of one-half of 1 per cent on all of these loans they made for
the account of others.
M r. F o r t . I am taking the banks of the Nation as a group. W e
can not consider legislation solely for the benefit or harm of a given
group of banks.
The C h a i r m a n . That commission only went to the New Y ork
banks, though.
M r. F o r t . Yes.
The C h a i r m a n . That is right, is it not?
G overnor Y o u n g . Generally speaking, yes. Whether some of the
interior banks charged a commission on top of what New Y ork
charged, I do not know. Some of them may have.
M r. F o r t . But it is also a fact, is it not, Governor, that if we
attempted to regulate this situation by drastic regulation, we would
simply increase what you called bootleg loans at the expense of
loans that are placed through the banks and which we at least have a
record of?
Governor Y o u n g . I am afraid so, and I think that the only possi
bility of controlling that is in the way of something that the New Y ork
banks and the stock exchange may be able to work out themselves,
but I do not know that there is a possibility of that.
744
BRANCH, CH AIN, AND GROUP BANKING
M r. F o r t . It is also a fact that the inception of every speculative
market is in low m oney and not in high money, is it not?
Governor Y o u n g . As to every one that I can remember, that is
true.
M r. F o r t . The accumulation of holdings b y pools and large bor
rowers is always or almost always at a time of cheap money, is it not?
Governor Y o u n g . The inception of it; yes.
M r. F o r t . And the high m oney period follows, when they have got
ten the public interested and the public is beginning to clamor and
not care what they pay for money, as long as they think they are going
to make 10 per cent overnight in the stock?
G overnor Y o u n g . I think that in the last experience, m aybe some
of the originators stayed a little too long.
M r. F o r t . They originated too high. So that a mere curb on the
high rate would not necessarily reach the whole evil?
Governor Y o u n g . I do not think so.
M r. F o r t . And there would be some excuse for a higher call rate
than for an ordinary loan rate because of the absence of a covering
deposit, would there not?
Governor Y o u n g . In the period such as we had from 1927 on, that
is what happened, but ordinarily the call loan rate, which is supposed
to be for an overnight loan, commands a much lower rate.
M r. F o r t . I know it does ordinarily, but there would be some ex
cuse for the usury laws to be fixed, for example, so as to permit the
call rate at times to rise above the commercial loan rate, because there
is no covering deposit?
Governor Y o u n g . Yes; that would be one factor.
M r. F o r t . On the other hand, the call loan is regarded generally
as the safest and most liquid loan possible, is it not?
G overnor Y o u n g . I would prefer to put the bankers7 bills and
trade bills ahead of them.
M r. F o r t . But, with a trade bill, you have to wait until its due date.
Governor Y o u n g . Yes.
M r. F o r t . And call money is the most liquid, because you can get
it the next day.
G overnor Y
oung.
Y o u m e a n , an o v e rn ig h t tr a n s a c tio n ?
M r. F o r t . Yes.
Governor Y o u n g . I think Federal funds would be a little more
liquid.
M r. F o r t . But even Federal funds would have to be sold at a dis
count the following day— a discount below the price at which they
were purchased.
G overnor Y o u n g . Oh, no; you get 100 cents on the dollar the next
day. Y ou discount it to-day and it calls for 100 cents on the dollar
to-m orrow.
M r. F o r t . I thought you meant Government bonds?
Governor Y o u n g . If you are operating a bank and you have some
surplus reserve with the Federal reserve bank and I am short, I will
say, “ I will buy your surplus from y ou .” If the discount rate is 3)i
per cent, you have to make me a rate to induce me to buy it. But
you sell it at a rate probably under 3K per cent and you get your
m oney the next morning at 100 cents on the dollar.
M r. F o r t . But the volume of that is not like the demand for call
m oney?
BRANCH, CH AIN, AND GROUP BANKING
745
Governor Y o u n g . N o; but at times it runs to one hundred to one
hundred and fifty million.
Mr. F o r t . But in comparison with any other form than what you
call Federal funds, call loans are the most liquid, in that they are
callable, practically speaking, without notice and payable at par?
Governor Y o u n g . N o; I would put bills before call loans. I would
put bills ahead of call loans on collateral because, in a real emergency,
if you have a call loan on bills you can always go to a Federal reserve
bank and sell at a price.
Mr. F o r t . If your call loan on collateral has been intelligently
made and watched, you can also.
Governor Y o u n g . As long as you can borrow from Peter to pay
Paul; yes. Y ou can not take call money to the Federal reserve bank,
but you can take bills.
M r. F o r t . I was not thinking in terms of liquidity in Federal
reserve terms but liquidity in the sense of instant realization.
Governor Y o u n g . I hesitate in putting collateral loans above the
commerce and business of the country.
M r. F o r t . I do not blame you for that.
The C h a i r m a n . M ay I ask a question there, M r. Fort?
M r. F o r t . Certainly.
The C h a i r m a n . The suggestion has been frequently made that
brokers’ loans be made eligible for rediscount in the Federal reserve.
W hat is your opinion about that?
Governor Y o u n g . I am o p p o se d to it.
M r. F o r t . There is just one other question along a different line,
but it was brought out by what M r. Luce and M r. Beedy were
questioning you about.
Generally speaking, the higher rates of legal interest are to be
found in those sections where there is less capital invested in bank
ing— is not that true?
Governor Y o u n g . I should like to check that, M r. Congressman,
but I think you are right in that statement.
M r. F o r t . Generally the lower rates prevail in those States that
are known as possessing more capital, like the eastern States and the
more powerful mid-western States—is not that true?
Governor Y o u n g . That is true, but I took the position this morning
that the rates were generally lower in the East than in the West,
but I did not take into consideration the compensating balances
which might make quite a difference. Generally speaking, I think,
in reply to your inquiry, rates are higher where there is less banking
capital.
M r. F o r t . That is true internationally as wTell as within this Nation
and has always been true, has it not, that in the nations or sections
where there is the greatest amount of capital for investment, the
supply side produces lower rates?
Governor Y o u n g . Generally speaking; yes.
Mr. F o r t . And we, as a nation, used to pay England very much
higher rates for the capital that was invested over here by England
than England was able to get on her own loans at home?
Governor Y o u n g . That is correct.
M r. F o r t . Until we became a nation of large capital?
G overnor Y o u n g . That is correct.
746
BRANCH, CH AIN, AND GROUP BANKING
M r. F o r t . And if that be true— and I interject here that I am
somewhat like M r. W ingo; I am not yet a convert to branch banking—
if it be true, will it perhaps not have a tendency to influence country
loan rates downward if banking institutions with substantial capital
extend out into those sections?
Governor Y o u n g . In m y opinion it will.
M r. F o r t . Governor, will you put into the record at this point,
the call-loan rates on the four days that we have been using?
Governor Y o u n g . I shall be glad to do that.
M r. F o r t . And the Federal rediscount rates on the same day— call
and time on collateral?
Governor Y o u n g . We shall be glad to do that.
(The figures referred to are printed in full as follows:)
,
D iscount rate at the Federal Reserve Bank o f N ew Y ork compared vrith open-m arket
rates on stock exchange collateral loans: 1929
The C h a i r m a n . There has been so much said about brokers’ loans,
I suggest, Governor, that you define a brokers’ loan and tell us how
it is handled.
Governor Y o u n g . W hy, a buyer of securities goes to his broker
and orders certain stocks. He may put up a cash deposit with the
broker or he may put up some listed securities. He ends up, if he
can not pay for them in full, with a debit balance. In so far as he
is concerned, it is an open account with the broker. No note is
given.
A broker has many customers. During the course of a day he
buys a certain number of shares of stock for various customers and,
to settle for those the next morning at 10 o ’clock, he has to borrow
some mone}^. So, he telephones to jthe exchange that he wants to
borrow^ a certain amount of money. Simultaneously, some one who
has some money to lend, phones to the exchange at the loan desk
and offers to lend a certain amount of money. The rate, as I explained
the other day, is fixed by the stock clearing committee. That means
that the broker has an obligation to furnish certain collateral covering
a certain loan at a certain rate prom ptly the next morning. The
lender has an obligation to lend money, if the note is presented and
satisfactory collateral is delivered.
Now, what more would you want to know about it, M r. Congress
man?
The C h a i r m a n . In that connection, the loan is made necessary
because of a larger volume than the capital the broker has on hand
to carry on the transaction?
Governor Y o u n g . Quite right.
BRANCH, CHAIN, AND GROUP BANKING
747
The C h a i r m a n . And a margin is exacted, of course, a minimum
of 20 per cent and, in many instances, like last year, the margins
run up even as high as 60 per cent on those loans?
G overnor Y o u n g . That is correct.
The C h a i r m a n . I s it not a fact that a broker’s loan, when it gets
into the portfolio of a bank is no different than any other collateral
loan except it would be regarded as the highest type of collateral
loan because of the fact that there are certain restrictions as regards
the kind of collateral and the margin back of the loan?
Governor Y o u n g . That is a correct statement.
The C h a i r m a n . In other words, these brokers’ loans, when they
are finally lodged in the portfolios of any bank, are similar to any
other collateral loan?
Governor Y o u n g . That is correct.
The C h a i r m a n . The stock exchange clearing house has an organi
zation for the purpose of handling the loans of all their member
brokers, have the}" not?
Governor Y o u n g . Arranging for the loans.
T h e C h a ir m a n . S o th a t a n y b ro k e r w h o lin d s h im s e lf in n e e d
a d d itio n a l fu n d s, to m a k e se ttle m e n ts for th e sto c k s an d securities
w h ic h h e h a s h a n d le d d u rin g th e d a y , eith er in b u y in g or se llin g , is
p r o m p tly fu rn ish e d th r o u g h th a t o rg a n iza tio n each d a y w ith w h a t
e v e r his re q u ire m e n ts m a y b e ?
G overnor Y o u n g . A t the rate.
The C h a i r m a n . And I understand each morning, at a quarter
of
to ten, the committee in the clearing house of the stock exchange,
meets and decides what the renewal rate shall be?
Governor Y o u n g . I do not know what the exact time is, but it
is flashed on the ticker at 10.40.
The C h a i r m a n . That is a very complete organization and it serves
that purpose perfectly, so far as the brokers’ requirements are con
cerned?
Governor Y o u n g . Both borrowers and the lenders seem to be
satisfied with the m ethod of handling it.
The C h a i r m a n . It is m y observation that when the brokers have
had a large volume of business during the day and there has not been
sufficient funds offered at the loan post to make complete settlements,
it is the practice of the committee in charge to call up the banks and
tell them how much money they need, either 1 million or 5 or 10
millions, in order to make these settlements.
D o you know about that? I do not mean to exact that from you,
Governor. I will state that as a fact. That is the method pursued.
This loan group in the stock exchange clearing house is governed
in the fixing o f rates by taking into consideration the amount of
demands for loans, the amount of money that is freely offered by
banks and I suppose undoubtedly they keep in touch with the Federal
reserve bank as to conditions there; in other words, they take into
consideration all the elements that enter into the m oney situation
in arriving at a proper renewal rate for the day. Whether they con
sult with the Federal reserve bank or not, I do not know.
Governor Y o u n g . They do not.
The C h a i r m a n . B ut they do take into consideration the pub
lished reports of the Federal reserve banks?
G overnor Y
M r.
oung.
S e ib e r l in g .
Y e s , sir.
D id the stenographer get that answer?
748
BRANCH, CH AIN , AND GROUP BANKING
The C h a i r m a n . I mention that to show, in connection with what
you said to-day, that there does exist perfect machinery for handling
these brokers’ loans and that machinery serves to make readily
accessible all the money that is sent there to finance the stock-exchange
operations.
>Now, in that connection, it seems perfectly plain that the coopera✓tion b y the banks in New York, particularly in furnishing these funds
for these stock-exchange operations, adds to that easy accessibility of
these funds for stock-m arket operations.
If that machinery and that cooperation b y the big banks o f New
Y ork — I am n ot saying it is not necessary or nonessential; it is prob
ably necessary in the present method of doing business— but if those
operations were not synchronized into a perfectly working machine,
an d the stock brokers had to secure their m oney in the same method
as commerce has to secure it, by going to individual banks through
ou t the country, it would not be so readily accessible for large stock
operations. So, to that extent, it is perfectly plain to me that the
organization between the stock-exchange brokers and the clearing
house association which negotiates those loans and the cooperation
of the big banks to meet the demands for settlement each day, are
furnishing almost a perfect machine to facilitate the carrying on of
stock-m arket operations.
Uuder the plan which has been operating, the New Y ork banks
solicit funds, not only from the country banks, but from industrial
and commercial institutions throughout the country who have sent
surplus funds into that market; that they are also encouraging the
use of money from the country in that market and greatly facilitating
the opportunity for financing stock-exchange transactions.
I would ask you, Governor, whether I have correctly stated that
possibility.
G overnor Y o u n g . I think that the machinery has been set up to
handle that class of business in the best way that they can devise;
yes. As I have said earlier in the day, I have never had any actual
experience, but I have been informed that New Y ork banks have
solicited accounts and offered that service originally gratuitously and
within the last year making a charge for it.
The C h a i r m a n . Y o u suggested that perhaps some protection might
com e about in a change in the rules that the stock exchange could
adopt. D o you care to make any suggestion as to what that rule
might be?
G overnor Y o u n g . I do not. I have not anything to offer on that,
M r. Chairman.
The C h a i r m a n . Y o u referred in the questioning by M r. Fort
I think it was as of October 2, to $4,000,000,000 of brokers’ loans.
Was that the date?
G overnor Y o u n g . For the account of others?
The C h a i r m a n . Yes.
Governor Y o u n g . $3,907,000,000.
The C h a i r m a n . M r. Fort asked you from what source that m oney
came. W ould you think any of that m oney was made available
through the use of Federal Reserve credit?
G overnor Y o u n g . Indirectly; yes.
The C h a i r m a n . N o w , another question that was raised here------G overnor Y o u n g . I want to amplify that a little further, M r.
Chairman, by saying that it is extremely difficult for the Federal
BRANCH, CH AIN, AND GROUP BANKING
749
reserve system to earmark the credit it releases. The initial transac
tion may be a commercial one that is paid to some one else and paid
again to another party------The C h a i r m a n . But finally gets into the brokers------Governor Y o u n g . What fmallly becomes of it one can not tell.
It can move in almost any direction.
The C h a i r m a n . Y ou were stating that some of this increase was
made possible by the influx into this country of a large volume of
gold. I think you said from 1920 to 1925.
Governor Y o u n g . 1924.
The C h a i r m a n . I have the impression— it is rather hazy in m y
mind— that during this period of time the Federal reserve or some of
the officers of some of the Federal reserve banks made an explanation
as to the use to which that gold was being put and I gained the
impression that the country was told that that gold was being im
pounded and was not being used or permitted to be used in increasing
credit facilities here, but that it was looked upon rather as a trust
fund and was held intact and, therefore, could not tend to create an
excess amount of credit in this country.
I also gained the impression two years ago when I was in London
that that had been the policy of the Federal reserve, but apparently
it had not worked out that way.
D o you recall whether the Federal reserve did explain, or some of
the officers of the banks explained, that that m oney was being steril
ized or not used?
G overnor Y o u n g . I have no knowledge of that, M r. Chairman. I
have no recollection of any statement. W hat happened between
1920 and 1922 was that the gold that came to this country was used
largely by member banks to enable them to retire their rediscounts
with the Federal reserve system.
I shall have to carry that up to 1924, M r. Chairman. All that gold
that came in between 1920 and 1924, generally speaking, was used to
retired rediscounts of the Federal reserve banks, the rediscounts
going down to about $400,000,000 in 1922 and later, in 1924, going
down to about $225,000,000.
The C h a i r m a n . W hat was the effect of that? D id that have the
effect of increasing credit?
Governor Y o u n g . Y es; to a certain extent. We have observed
in the Federal reserve system (not only in the New Y ork district,
but in the entire system) that when rediscounts of member banks get
above $500,000,000 there is a tendency to tighten credit through the
country; conversely when rediscounts get below $500,000,000 it has
a tendency to ease credits and when it gets down to $200,000,000,
where it is to-day, you get real easy credit in short-time credits.
Now, that comes about because, traditionally, our banks do not
like to show obligations for borrowed money. W hen it is under
$500,000,000 it works from bank to bank, so that no particular bank
is in debt any great length of time. When it is above $500,000,000,
it is harder to pass it around the circle and a bank stays in debt longer
and to get out of debt it naturally puts pressure on the borrower
and that has a tendency to tighten credit.
The C h a ir m a n . So that really, as a matter of fact, when that gold
came in, it was put to use; it was not sterilized or stored, but used
by member banks to reduce their borrowings from the Federal
Reserve banks?
750
BRANCH, CH AIN, AND GROUP BANKING
Governor
Young.
That
is
correct.
The C h a i r m a n . N o w , referring to the February 5 , statement of
1929 and the subsequent months in connection with the questions of
M r. Fort, and the borrowings by the New Y ork banks from the
Federal reserve, and the other 700 banks that he was referring to in
his questioning, did the Federal Reserve Board or the Federal reserve
bank of New Y ork admonish member banks to reduce their borrow
ings during the period from February to October 1, 1929?
Governor Y o u n g . The Federal Reserve Board’s public statement
clearly asked for their cooperation to prevent a continuation of rapid
expansion.
The C h a ir m a n . I am led to ask that question because it is a matter
of record that the New York banks, during that period were not
borrowing to any great extent from the Federal reserve bank of New
York, as I recall.
Governor Y o u n g . Well, on February 6 , the date that statement
was issued, the rediscounts in the New Y ork bank were $195,000,000.
The C h a i r m a n . They are reported weekly?
Governor Y o u n g . This report covers weekly.
The C h a i r m a n . I am going to suggest that you place in the record
at this point the borrowings of the New Y ork banks from the Federal
reserve bank from the period February 6, up until N ovem ber 1, 1929.
Governor Y o u n g . That includes the New Y ork City banks or New
Y ork district?
The C h a i r m a n . The New Y ork district, including the New Y ork
C ity banks.
Governor Y o u n g . I have the figures right here, but I can furnish
that to go into the record. Y ou do not want me to read them all
now?
The C h a i r m a n . N o; just put them in.
Governor Y o u n g . I can give the maximum and minimum during
that period.
(The figures referred to are printed in full, as follow s:)
Total discounts o f the Federal Reserve B ank o f N ew York
[In millions of dollars]
Apr. 3_
213
195
253
182
222
271
225
208
299
236
247
280
263
248
277
254
197
194
210
226
252
1929— June 26__________ ________ 318
July 3 ____________ ________ 425
July 10__________ ________ 439
July 17__________ ________ 423
July 24__________ ________ 398
July 31 _
________ 386
Aug. 7 ----------------- ________ 384
________ 284
Aug. 14
Aug. 2 1 _____
________ 233
Aug. 28__________ ________ 241
________ 303
Sept. 4
________ 240
Sept. 11 _
________ 220
Sept. 18 _
Sept. 25__________ _________233
Oct, 2 ____________ ________ 152
Oct. 9 . _
________ 131
Oct. 16__________ ________ 130
Oct. 23__________ ________ 107
Oct, 30___________ _________246
Nov. 6 ___________ ________ 221
BRANCH, CHAIN, AND GROUP BANKING
751
The C h a i r m a n , There is an indication that New Y ork banks
realized the danger of the situation of having an increasing amount
of brokers’ loans outstanding and they realized that if there was a
readjustment they would be called upon to meet that emergency
and there was an indication, from m y own observation, that they
were preparing very carefully to meet any emergency, which emer
gency arose in October. I think the New Y ork banks were particu
larly farsighted and I was trying to ascertain, for the record here,
whether they arrived at that conclusion on their own account, or
whether they were admonished by the Federal Reserve Board or the
Federal reserve bank at New Y ork to get their house in order and
keep the borrowings down and keep in as liquid a condition as pos
sible. If you can give us any information on this subject, it will be
helpful in these studies.
Governor Y o u n g . I think the Federal Reserve Board realized that
situation as evidenced by the February 6 statement. I know that
the officials of the New Y ork banks were thoroughly familiar with the
situation, and while I can not speak for all of the New Y ork banks,
those that I talked with, I think, thoroughly realized the situation,
and I have some publications of New Y ork banks that appeared
during that period clearly indicating that they had concern about the
situation.
Now, the board's contact, of course, is not with the New Y ork
banks. Our contact is with the Federal reserve bank. Its contact,
in turn, is with the New Y ork banks. I could not make it as a posi
tive statement, but I assume all those situations were discussed be
tween the New Y ork banks and the Federal Reserve Bank of New
York.
M r. B e e d y . Since there have been so many references to this
February 6 statement of the Federal Reserve Board, m ay we have it
in the record?
G overnor Y o u n g . It is in the record now, Congressman.
The C h a i r m a n . I think it is fair and should be said in this record,
in connection with this discussion— and I think it will be shown b y the
records probably— that the Federal Reserve Bank of New Y ork,
through the assistance of New Y ork banks, met this crisis in a far
better manner than anyone, even though he had been a close observer,
could have expected.
G overnor Y o u n g . I will be glad to make that statement for the
record, M r. Chairman.
The C h a i r m a n . I think myself the Federal Reserve Bank of New
Y ork functioned 100 per cent during the crisis, and had it not been
for the very active cooperation of the Federal reserve bank in New
York, in aiding the big banks of New Y ork who had the responsibility
on their shoulders of liquidating those brokers’ loans in this stockmarket crash, very serious consequences would have resulted.
Governor Y o u n g . I should be very glad to make that statement for
the record and I take your words in making it, M r. Chairman.
The C h a i r m a n . I do not know that I have any further questions.
M r. S e i b e r l i n g . I was going; to suggest that you cover the point
of who constitutes this committee that "handles that call rate situation.
I should like to know that.
100136— 30—-VOL 1 p t 7---------- 4
752
BRANCH, CHAIN, AND GROUP BANKING
The C h a i r m a n . That is a rather voluntary committee. It is made
up a great deal to do the job that is before them.
M r. S e i b e r l i n g . T o whom are they responsible?
The C h a i r m a n . They are really not responsible to any one. T hey
are a group of men who are chosen to do this job and have done it for
m any years. M y own thought is that those men who are fixing that
rate are doing a good job. I have the highest regard for the integrity
of the men who meet each morning to fix the renewal rate.
Taking into consideration the various elements that enter into the
m oney situation and so far as they are capable of doing the job, I
believe they are doing an honest and consistent job.
M r. S e i b e r l i n g . I am not attacking their integrity. I am only
attacking the results.
The C h a i r m a n . I would not want to express a thought as regards
that, but as to the integrity of the men who comprise that renewal
committee, with the information they have, I think they are honestly
doing their job.
M r. B u s b y . I have come to the place in the record, as I revise this
transcript, where Governor Young told us he would insert the figures
in regard to foreign loans made by the American banks. I understand
that he has that prepared. I wonder if he will file that?
The C h a i r m a n . Are you ready to put that in, Governor Y oung?
Governor Y o u n g . I want to furnish what I have, but this inform a
tion comes from the Departm ent of Commerce and is for the close of
the year 1928. Those are the latest figures we can get.
The C h a i r m a n . The meeting is now adjourned until Friday
morning at 10.30.
(Whereupon, at 4 o ’clock p. m., the committee adjourned to meet
at 10.30 o ’clock, a. in., on Friday, April 11,1930.)
BRANCH, CHAIN, AND GROUP BANKING
F R ID A Y , APRIL 11, 1930
H
C
ouse
o m m it t e e
on
of
R
R
e p r e s e n t a t iv e s ,
a n k in g
C
and
,
urrency,
Washington I). G.
The committee met in the committee room, Capitol, at 10.4.5
o 'clo c k a. m., Hon. Louis T. McFadcIen (chairman) presiding.
The C h a i r m a n . The committee will come to order.
STATEMENT OF GOV. EOY A. YOUNG— R esum ed
The C h a i r m a n . Governor Young, you have something that you
would like to insert in the record.
Governor Y o u n g . This was something that was requested b y the
committee the other d a y , which shows the number and deposits of all
banks in the United States located in places having a population of
less than 25,000. The figures are given b y geographical divisions.
The C h a i r m a n . W ithout objection, that will be placed in the
record at this point.
(There was no objection, and the statement referred to is as fol
lows:)
In accordance with the committee’s request, I have had compiled for insertion
in the record figures showing the number and deposits of all banks in the United
States located in places having a population of less than 25,000. These figures,
by geographical divisions, are as follows:
Num ber
of banks
N e w E n g la n d Sta te s
.
- - - - - - - - M i d d le A t la n t ic S tates
___
______________ ______ - _____
_____ - _______ - E a s t N o r th C e n tr a l Sta te s
_ _
_
W e s t N o r th C e n tr a l Sta te s
_____ ____________
. . ............ ..
_ _____________. .
S ou th A tla n tic S t a t e s ,.
.. .. . .
.......... .......................E a s t S ou th C e n tr al S tates
.
- W e s t S o u th C e n tr a l S t a t e s . - ________
__________________________
________
M o u n ta in S ta tes
_
.
P acific S tates
_
.
..
.
.
2,
4,
5,
2,
1,
2,
T o t a l ___________________________________________________________________________________
D e p o sits
750
375
72f)
955
093
598
513
881
851
21, 742
$1,
3,
2,
2,
1,
787,
700,
971,
268,
308,
777,
1, 142,
618,
(353,
you
favor
000
000
000
000
000
000
000
000
000
15, 228, 837, 000
N o t e . — A b o v e figures w ere co m p ile d from th e J a n u a r y , 1930, R a n d M c N a l l y B a n k e r s D ir e c to r y .
la tio n figures w ere b a se d o n la te st C e n su s B u r e a u e s tim a te s.
The C h a i r m a n . N o w , M r. Strong.
Mr. S t r o n g . Governor Young, would
branch banking?
Governor Y o u n g . N ot at the moment.
Mr. S t r o n g . W hy?
204,
915.
194,
406,
348,
414,
693,
853,
810,
Popu
nation-wide
753
754
BRANCH, CH AIN, AND GROUP BANKING
Governor Y o u n g . I do not think that we are ready for nation-wide
branch banking. I do not think we have the men trained tech
nically at the present time, although, as I stated before the com m ittee
the other day, I believe that eventually there will be a demand for
nation-wide branch banking. It may be 50 years from now.
M r. S t r o n g . Y ou think that when y o u get the men trained to
handle it, it will come?
G overnor Y o u n g . I do. That is an opinion, M r. Congressman.
M r. S t r o n g . D o you think it will be a good thing for the Nation?
G overnor Y o u n g . Well, if I did not, I would not want to see it
come.
M r. S t r o n g . If we have nation-wide branch banking, that will be
practically a m onopoly of the money and credits of the Nation, will
it not?
Governor Y o u n g . I do not believe so.
M r. S t r o n g . W hy n o t?
Governor Y o u n g . Because I believe there will be many nation
wide set-ups, rather than one.
M r. S t r o n g . Y o u m e a n th a t there w ill be c o m p e titio n ?
Governor Y o u n g . Strong competition, keen competition, between
larger groups.
M r. S t r o n g . H o w many g ro u p s do you su p p o se that there will be
at the end o f 50 years if w e have nation-wide branch banking?
G overnor Y o tj n g . Well, that would be making a guess that might
embarrass me 25 years from now.
M r. S t r o n g . I made it 50 so that it would not embarrass either one
of us.
G overnor Y o u n g . I would put 50 as a m in im u m .
M r. S t r o n g . Now, with the whole trend of Governm ent and o f
business operations throughout the country toward centralization
and consolidations, what would tend to hold back a m onopoly o f
m oney and credit through having 25 or 50 separate units? W hat
influence do you think would continue the competition so that we
would have 25 or 50 independent units?
Governor Y o u n g . I explained to the committee the other day that
the deposits are really owned by the public, and if these monopolies
which you anticipate should develop, they would be profitable and
that would induce other people to go into the banking business.
M r. S t r o n g . While I think it is true that a reasonably substantial
independent unit may carry on against a large monopolistic or
ganization, nevertheless a large organization generally controls policies
and prices. Take the Standard Oil C o .; we have a lot of independent
oil companies, perhaps as many as or more than the Standard Oil,
yet the Standard Oil Co. and its kindred organizations set the price.
When they say oil is 17.7 cents, everybody says oil is 17.7 cents.
W ould not the same rule apply to banking? If a great organization
with 1,000 or 2,000 branches should set up certain policies, could any
small organization oppose them? W ould not all organizations fall in
line with their policies?
G overnor Y o u n g . W ould it not be their object to encourage the
smaller organization?
M r. S t r o n g . W hy? They would be their competitors.
G overnor Y o u n g . I do not mean a small banker; I mean a small
industry or any industry that is profitable. Is that not what has
happened in countries that have the branch-banking system?
BRANCH, CH AIN, AND GROUP BANKING
755
Mr. S t r o n g . I do not know. I did not get that kind of information
from Canada when I visited there. I did ge it from a big banker
when I talked to him, but the business men out in the small towns,
not wanting to be quoted, seemed to be very much opposed to it and
they thought that they were in a very serious situation. For instance,
one of them pointed out to me that if his com petitor should become
interested in the parent bank or had associates interested in it, he
might be in a very dangerous position.
Governor Y o u n g . I have been informed, M r. Congressman, that
the Canadian banks lend small amounts to farmers, jobbers, whole
salers, and others in the agricultural territory of Canada. T hey have
no objection to the small loan.
M \ S t r o n g . Let us take a nation-wide organization, with head
quarters in New York. The men who are largely interested in that
organization, the head bank, would also be largely interested in the
railroads of the country. Suppose that their organization of rail
roads wanted to acquire a competing line; do you suppose that they
would permit the extending of credit to that railroad which that
railroad would get if such a combination of wealth did not exist?
1 just mention that as one of many things that might happen.
Governor Y o u n g . That is, a railroad wanted to purchase a com
peting line?
M r. S t r o n g . Suppose that a great group of railroads that was
owned by the same group that owned the parent bank, or controlled
it, wanted to get a certain railroad; could they not withhold credit
and get it practically at their own price?
Governor Y o u n g . Then, could not that other group go to the public
with a bond issue and raise the money?
Mr. S t r o n g . It would be pretty hard to sell bonds against that kind
of an influence, I should think.
G o v e r n o r Y o u n g . It has b e e n d on e fo r 50 y ea rs.
Mr. S t r o n g . But we have not had a great m onopoly of banking
for 50 years. We have had practically o n ly independent banking.
Y ou know that we changed the form of bond of the farm loan
banks and made it a consolidation bond because we found that here
in the East, north of the Ohio and east of the Alleghenies, they were
discriminating against the Federal land western banks; they would
buy the bonds of the eastern banks, whereas the western banks was
having trouble selling their bonds, and so we consolidated the bonds
to be issued by the 12 Federal land banks to get rid of that danger that
we saw confronting us.
Governor Y o u n g . Well, no m onopoly developed.
Mr. S t r o n g . It was not a m onopoly ; perhaps it had not developed
to that point, but it was getting to the point where we could see that
we were going to have trouble selling our bonds of our western banks.
Governor Y o u n g . It has all been consolidated to a certain extent,
M r. Congressman, in an organization that bears many of the ear
marks of a branch organization; and I'believe, for the benefit of our
western people that you and I are interested in------Mr. S t r o n g . Yes, governmental control: but you are going to
put this m onopoly in private interests, privately controlled.
Governor Y o u n g . I am old-fashioned enough to believe that this
country can not continue indefinitely with only one section of it
prospering. I believe it all has to prosper.
756
BRANCH, CH AIN, AND GROUP BANKING
M r. S t r o n g . I agree with you.
Governor Y o u n g . And I can not believe that any such concen
tration of wealth as you anticipate— even though it should develop
to the point that you are inclined to believe it will develop to, that is,
a m onopoly— will ever be so short-sighted as to neglect the require
ments of the balance of the country that makes that center possible.
M r. S t r o n g . Well, human nature is rather selfish. Through the
generations,— the centuries,— we finally arrived at the conclusion
that we could not put governmental power in the hands of individuals
w ithout having autocratic rule, so we built a republic in this country
so that the government might be in the hands of the people, that the
people might be sovereigns, and in order that they could change the
form of government in any way they wanted to. W e did that be
cause we realized that men were selfish and, when given power, would
take advantage of it.
N ow , you propose to have nation-wide branch banking, and, as 1
get your viewpoint, you hope that men will be unselfish enough so
that they will not combine to control the m oney and credits of the
United States, or that through com petition they will avoid com bina
tions of capital that will practically effect a m onopoly of the money
and credits of the country.
Governor Y o u n g . Let me answer it this way, M r. Congressman:
If those monopolies which you anticipate should develop, to the
detriment of the interior of the country, particularly the agricultural
and livestock sections and the interior manufacturing sections and
mining sections, I agree with you that that would be bad; but I can
not bring myself to believe that that will happen.
M r. S t r o n g . W ell, of course, the great handicap in m y mind to
the agricultural regions of the country has been a lack of capital at
reasonable rates. When I went to Kansas they were loaning m oney
at 12 per cent, and sometimes 18 per cent and 24 per cent. Then
laws were passed against usury and finally got the rate down to 10
per cent, and the ruling rate out there now is 8 per cent, which is a
pretty heavy tax upon capital to be used for agricultural purposes.
Then we created the farm loan banks and the intermediate credit
banks in trying to relieve that situation, and, with the intermediate
credit banks, we tried to set up a plan whereby farmers could go to
their banks and put up their paper to be discounted b y the bank at
the intermediate credit banks, so that they could borrow m oney at 7
per cent, but none of the banks do it; they maintain an 8 per cent
rate and they do not use that system that we set up because it reduces
their rate o f interest. Now, we still have that handicap in the West.
Now, if you give men the right to set up and control a m onopoly of
banking, will they not continue that system?
Governor Y o u n g . M r. Congressman, under a unit system in the
State of Kansas, the unit bankers had quite an influence in the legis
lature in reference to rates; but, even with his influence, as you point
out, the rate has come down from 24 per cent to 8 per cent, the
prevailing rate, and to 10 per cent, the contract rate. The prob
abilities are that in the State of Kansas to-day an agricultural loan
bearing an 8 per cent rate is much more profitable than the 24 per
cent rate that existed 30 years ago.
N ow , obviously, the unit banker has a certain influence in a legis
lative w ay; and, although your 10 per cent rate still prevails in
BRANCH, CH AIN, AND GROUP BANKING
757
Kansas, your unit banker charges 8 per cent on a average. If these
other organizations that you speak about existing outside of the
State of Kansas should become so strong that they could put a 10
per cent rate in, the people of your State would fix a contract rate of
8 per cent, or 7 per cent, or 6 per cent, to outside sources much
quicker than it would to your local people. So I think the possibil
ities of any large corporation charging unreasonable rates are very
far removed.
M r. S t r o n g . But fixing the rate so low might not get the money.
Governor Y o u n g . Then the rate is wrong and you have to put it
up ; that is all.
M r. S t r o n g . That is what happened. W e paid those big rates
when you were paying 6 per cent down here, and now we are paying
8 per cent when you are getting money for 4 per cent and 5 per cent.
Now, here is a combination of banking, through branch banking
or group banking, that gets together only for one purpose, and that
is to increase its income and protect future income and to build up
a business that will be more profitable. D o you suppose that, given
that power, they are going to be so magnanimous as to reduce the
rate in the West?
G overnor Y o u n g . I think their profits will come through simpli
fication of organization and operation rather than an increase in
rates charged to borrowers.
Let me illustrate what I have in mind. Y ou take a small bank in
M ontana, locally owned. It can, and probably does, charge the
legal rate in that State of 10 per cent on a good chattel loan. It
would be extremely difficult for a large set-up in Minneapolis to
charge that same rate in m y opinion. Public sentiment will put
that rate down.
M r. S t r o n g . But when one group of banks controls the credit
and the money, how can public sentiment put the rate down? I f
you want the m oney, you have to pay for it.
Governor Y o u n g . Because they have two groups there at the
moment, and the strongest kind of competition, very keen com peti
tion. When they can only get 3 or 3% or 4 per cent on call m oney
in New Y ork and they have surplus funds, they will go into the
interior and make some of these chattel loans at less than 10 per
cent.
M r. S t r o n g . But if a pinch came and they wanted m oney in
New York, they would put up that rate to 4, 5, or 6 per cent?
Governor Y o u n g . They would.
M r. S t r o n g . And they would bring the money of the country to
New Y ork?
Governor Y o u n g . But still your State law prohibits them from
going above 10 per cent in M ontana.
M r. S t r o n g . Well, as I get your idea, Governor, it is that if we
permit branch banking in restricted trade areas, that eventually
it is going to be nation wide?
Governor Y o u n g . In m y opinion, M r. Congressman.
M r. S t r o n g . N ow , suppose that we had nation-wide branch bank
ing in 50 groups or trade areas each dominating and controlling
such trade area; do you not think that would be pretty dangerous
to the Federal reserve system?
Governor Y o u n g . No, sir.
758
BRANCH, CH AIN, AND GROUP BANKING
M r. S t r o n g . W ould they have to go to the Federal reserve system?
Could they not go to each other? Could they not have a trade
agreement or a gentlemen’s agreement with each other without going
to the Federal reserve system?
G overnor Y o u n g . They could if they had sufficient funds, and
probably w ould; but there would always be a time in America when
there would not be sufficient credit for those groups to trade between
themselves, and the Federal reserve will have to release credit and
will have to release currency to take care of seasonal requirements
and to take care of seasonal emergencies. I am firmly convinced
that the larger those set-ups are the more necessary will they find
membership in the Federal reserve system.
M r. S t r o n g . I think that is true if they are not large enough to
control the m oney and credits of the United States, but here are 50
groups controlling the banking of the United States. Now, you have
pointed out that little bankers out in the West had influence enough
in the legislature to at least influence the laws of their States, and if
that is true— and I think it is— and you have 50 great groups in the
United States controlling all the banks, would they not have power
enough to influence the Federal reserve system?
G overnor Y o u n g . N ot with 119,000,000 people left that you say
w ould be harmed, or that might be harmed.
M r. S t r o n g . B ut the 119,000,000 are going; to allow the banking
industry of the United States that handles their money and credit to
form consolidations so that they will be reduced to about 50 groups.
If they would work together, I do not see how the influence that they
wrould have could be kept from dominating and controlling the
Governm ent and the Federal reserve system, too.
G overnor Y o u n g . Those 50 banks?
M r. S t r o n g . Y e s .
G overnor Y o u n g . I do not think so.
M r. S t r o n g . I meant, those 50 groups.
G overnor Y o u n g . Y o u have six large banks in England, and I do
not think they control the Bank o f England and dominate its policies
in any particular.
M r. S t r o n g . But the Government has a lot of influence in the Bank
of England, more than we would have in these 50 groups that we have
been talking about.
G overnor Y o u n g . Well, the Government, through the Federal
Reserve Board, has some influence with the Federal reserve banks.
M r. S t r o n g . But here are 50 groups bigger than the Federal
reserve system, controlling more money and credits than the Federal
reserve system.
Governor Y o u n g . Under the present law, they could go as far as
the Federal Reserve Board and they could go no further. Is that not
correct?
M r. S t r o n g . Y es; but my idea is that they would dominate and
control the Federal reserve banks and the Federal Reserve Board.
Y ou will remember that the Second National Bank, with its branches
and the m onopoly given it by its Federal charter, was so strong in this
country that it dominated and controlled Congress, loaning money
to M embers of Congress and the great newspapers of the country
until, although a national election campaign decided to the con
trary, were able to force through Congress a renewal of their charter.
BRANCH, CHAIN, AND GROUP BANKING
759
Nothing but the backbone of Andrew Jackson stopped by a veto the
extension of that charter.
Governor Y o u n g . I should regret it, of course, Mr. Congressman,
if the Federal Reserve Board should ever get to a position of that kind,
or the Congress of the United States. When the Second Bank of the
United States did get to that position, of course, the bank was termi
nated.
M r. S t r o n g . The present Comptroller of the Currency, having
espoused branch banking, advocates as a restriction that it be limited
to trade areas? I am unable to tell just what he thinks their territory
should be, but he uses the term of “ trade areas.” Now, your belief is
that regardless of such limitation, eventually we will have nation
wide branch banking.
Governor Y o u n g . I may be entirely wrong, Mr. Congressman,
and he may be entirely right, and we hope that these investigations
will bring out what is "best. I agree with the comptroller entirely in
so far as the present situation is concerned that if a trade area can be
described, as I think it can be, it would be better to confine branch
banking to that trade area in an attempt to permit branch banking to
build up in a systematic way and not build up in a way that is too
rapid for us to operate at the moment. Now, if he feels that that is
as far as it should ever go, and I feel that eventually it will become
nation wide, that is a difference of opinion; that is all.
M r. S t r o n g . Well, as I understand it, then you both are agreed
on this proposition, that for the present it would be better to limit
it to trade areas?
Governor Y o u n g . I do.
M r . S t r o n g . I s it y o u r id e a , th e n , th a t m e n are g o in g to be less
selfish an d m o re p a tr io tic 50 ye a rs fro m n o w so th a t th e y can be
tru ste d w ith n a tio n -w id e b ra n ch b a n k in g ?
Governor Y o u n g . I do not like to put it that way, M r. Congress
man.
M r. S t r o n g . I know, but there is a difference; you and the com p
troller agree that we ought not to have nation-wide branch banking
now, that first of all we should build up trade area branch banking,
but you believe that eventually they will break down those trade >
areas and we will have nation-wide branch banking?
Governor Y o u n g . I th in k so; yes.
M r. S t r o n g . W hy do you think so?
Governor Y o u n g . M y position to-day, at the moment, M r.
Congressman, is that technically we are not prepared to operate a
system of that kind.
M r. S t r o n g . D o you think that the men are not experienced
enough so that at the present time it would not be safe to trust them
with nation-wide branch banking, so that you propose to build up
with trade area branch banking?
Governor Y o u n g . I would prefer to see it approached through
trade areas.
Mr. S t r o n g . That is what I am afraid of, that it is going to be
approached in that way.
'Governor Y o u n g . I think, M r. Congressman, that it is now being
approached through the group banker.
M r. S t r o n g . Yes; I know there is a very decided effort on the part
of capital— and everybody knows it— to break down the independent
760
BRANCH, CHAIN, AND GROUP BANKING
bank and finally, come to nation-wide branch banking. I can see that
coming and, o f course, this group banking is helping their cause.
Governor Y o u n g . I think it is a little more than that, M r. Congress
man. I do not think this demand comes entirely from the cities.
I think it comes from the country to a certain extent, so much so
that the commissioner of banking of the State of M innesota in a
public statement yesterday advocated branch banking. He stated
that there are 154 communities in the State of M innesota to-day
without banking facilities, many of which do not need banking
facilities and many of them that do. He advocated the extension of
branches into those communities rather than a revival of the $10,000unit banks. I can not help but agree with him, that he is right.
M r. S t r o n g . And I can agree with you that more and more our
officials are seeking banking through a branch-banking class. For
instance, in recent years we had the Comptroller of the Currency com e
before this committee and make a very eloquent and splendid state
m ent against branch banking, but he thought that we could limit it
to the city where the parent bank was located, and w^e passed a law
agreeing with such position. Now comes the present Com ptroller of
the Currency and says it ought to be extended to trade areas, and
following him, you, as the Governor of the Federal reserve system say
that eventually, within 50 years, we will have nation-wide branch
J^a&kiftg. That is what I am worrying about.
Governor Y o u n g . M r. Congressman, the probabilities are that 10
years ago or & years ago I probably would have said the same thing
that the Comptroller of the Currency Dawes said at that time, but
conditions are changed.
M r. S t r o n g . Then the influence in favor of branch banking is
gradually having an effect.
Governor Y o u n g . Conditions are having their influence on their
position, as they are on mine, yes.
M r. S t r o n g . D o you not think that they are controlling the con
ditions?
Governor Y o u n g . The Com ptroller of the Currency?
M r. S t r o n g . Oh, no; the men who control and dominate the
m oney of the country, and that it is their influence that is bringing
about the conditions which are causing the officials to change their
position?
Governor Y o u n g . Well, if they are bringing those about for the
betterment of the country, obviously I can agree with them— I mean,
in m y opinion.
M r. S t r o n g . I will agree with you that if they are doing it for
that purpose and those men should always continue in that mind,
it might be a good thing, just like I think a monarchy would be
more econom ical and a good kind of a government if the monarch
were always just and unselfish and had the interests of the people
at heart, but we found through the generations that that does not
result, and consequently we have come to a people’s governm ent,
which is much more expensive and inefficient, in order to keep selfish
interests from dominating and controlling.
N ow you propose to gradually increase a system that you admit
within 50 years will bring about nation-wide branch banking, con
trolled by perhaps 50 groups. T o say that those 50 groups will be
unselfish and have only the interests of the people at heart seems to
BRANCH, CH AIN, AND GROUP BANKING
761
me to be kind of going against the rules of human nature as we have
known them in the past.
Governor Y o u n g . Well, I just would like to correct that: I said it
would probably take 50 years and that the minimum would be fifty
groups.
Mr. S t r o n g . Well, if within three or four years the officials of our
banking system of the United States have changed from a belief that
branch banking ought to be limited to the city where the parent bank
is located to a position where it is believed that there ought to be
branch banking limited to trade areas, is it not reasonable to suppose
that nation-wide branch banking will come in less than 50 years?
Governor Y o u n g , Y ou have had an expression from two officials,
from the Comptroller of the Currency and myself. W hat m y col
leagues may say to you or what others may say to you in the official
life of the Government or in the State governments I do not know.
I have had a feeling for some time that I have been almost alone in
m y opinion.
M r. S t r o n g . But this committee, and I think the country generally,
has a good deal of confidence in your opinion.
Governor Y o u n g . I hope so.
M r. S t r o n g . I think they do, and your opinion is that within 50
years we will have nation-wide branch banking?
Governor Y o u n g . Probably.
M r. S t r o n g . I am only pointing out that if some influence or some
conditions or whatever you may call it have changed the views of the
officials within three or four years from believing that branch banking
should be confined to the city where the parent bank is located to
believing that it should now be confined to trade areas, it does seem
to me that perhaps nation-wide branch banking will come in much
less than 50 years.
Governor Y o u n g . Well, that is a frank opinion, M r. Congressman,
and I will have to confess that it is not a very popular one.
M r. S t r o n g . Well, it is not popular with me.
Now, I would like to get to this present situation. The Com p
troller of the Currency evidently thinks, and you seem to think,
that branch banking should be restricted now to trade areas.
Governor Y o u n g . That is correct.
M r. S t r o n g . And Congress is to be asked to set up a definition of
those trade areas. W hat is your suggestion to this committee as to
what those trade areas should be?
Governor Y o u n g . I have stated before the committee several
times, M r. Congressman, that I can not at the moment define a
trade area. It would be very easy in certain Federal reserve districts
and hard in others. I think it would be very easy to define a trade
area in the first Federal reserve district, the New England district,
while in your district in Kansas it would be extremely hard to define
it, and there would be much overlapping at Omaha, W ichita, Kansas
City, Tulsa, and Oklahoma City.
M r. S t r o n g . And when we reached Chicago and S t. Louis, espe
cially Chicago------Governor Y o u n g . It would be difficult there.
Mr. S t r o n g . W hat would be the situation in the East? W ould
Boston and Philadelphia have separate trade areas, or would they be
in the trade area of New York?
762
BRANCH, CHAIN, AND GROUP BANKING
Governor Y o u n g . These are impulsive thoughts, M r. Congress
man.
M r. S t r o n g . I appreciate it.
Governor Y o u n g . Y ou would have to sit down at the map and
consult with the local people and attempt to wTork out something,
but I would say that the three of them would be separate trade areas.
M r. S t r o n g . Y ou would not think that New York would finally
dominate and control the three?
G overnor Y o u n g . I do not think so; not at this time.
M r. S t r o n g . H ow many trade areas do you think there would be
in the United States if we would agree with the com ptroller’s idea,
and yours?
G overnor Y o u n g . As near as the Federal reserve system has been
able to define those trade areas through its branch districts, it would
be 25, and then, of course, there is much overlapping in that, and there
is a larger trade area covering those trade areas. That is represented
pretty well by the 12 Federal reserve districts.
M r. S t r o n g . And we would have perhaps Boston, Philadelphiar
and New Y ork, the three of them, out of the 25?
Governor Y o u n g . There would be 37, M r. Congressman, if you
include the territories of the head offices of the Federal reserve banks.
M r. S t r o n g . W ould or would not that necessitate the changing of
the districts of the Federal reserve system?
Governor Y o u n g . It might. W e have changed the district lines
on two or three occasions.
M r. S t r o n g . W ould you increase the number of Federal reserve
banks?
Governor Y o u n g . You can not.
M r. S t r o n g . W ell, Congress can.
Governor Y ou n g . Yes.
M r. S t r o n g . W ould you recommend to the Congress that they
do that, or do you think that would finally follow?
G overnor Y o u n g . M r. Congressman, you are pressing me on a
question that I really have not made up m y mind on yet.
M r. S t r o n g . I do not want to do that.
G overnor Y o u n g . I am afraid that— —
M r. S t r o n g . I do not want to embarrass you at all. I am just
intensely alarmed about the extension that you propose. I just want
to get all the information I can, and I would rather have your opinion
on it than m y own.
G overnor Y o u n g . It is a bit embarrassing to say to you that I can
not give you that information yet. I expect some day to be able to
recommend something.
M r. S t r o n g . Then if we had 35 or 37 trade areas in the United
States, or any set number, the growth and im provement of the
country would finally, in your opinion, demand more trade areas— an
increase in the number of trade areas?
G overnor Y o u n g . It probably would.
M r. S t r o n g . In these trade areas group banking, unless restricted,
would finally dominate and control the banking in those trade areasr
would it not?
G overnor Y o u n g . Group banking has a possibility of proceeding
too rapidly, in m y opinion.
M r. S t r o n g . D o y o u th in k it o u g h t to b e c h e c k e d ?
BRANCH, CH AIN, AND GROUP BANKING
763
G overnor Y o u n g . N ot unless you offer something in substitution.
M r. S t r o n g . Y o u offer branch banking— that is the idea?
Governor Y o u n g . That is m y idea.
M r. S t r o n g . Are yon going to restrict those banks so that there
can be no consolidation of interests by group banking?
Governor Y o u n g . I would; yes.
M r. S t r o n g . Y o u would absolutely fix those branches and those
trade areas so that they could not extend by any combination of
interests, out beyond those trade areas?
Governor Y o u n g . That would be m y solution of the difficulty
at the present time, if such a thing is possible,
M r. S t r o n g . W hy do you think that eventually the adoption of
that system would spread into nation-wide branch banking?
Governor Y o u n g . Because as men became trained in the operation
of these smaller groups, they would be in position to expand further.
M r. S t r o n g . And they would want to do so?
Governor Y o u n g . I believe so.
M r. S t r o n g . Then, whether we will have trade area branch banking
or nation-wide branch banking simply depends on the time when we
will have men trained in nation-wide branch banking?
Governor Y o u n g . I believe so.
M r. S t r o n g . Now, do you think there will ever be men created on
this earth who, after they become efficient in nation-wide branch
banking and achieve it, will not be selfish enough to look after their
interests as against the interests of the country?
Governor Y o u n g . They will have plenty of competition, M r.
Congressman, so I do not believe that is possible.
M r. S t r o n g . Just let me go into this a little. Suppose that we
set up 37 trade areas, that by law we restrict them absolutely. Yet
your opinion is— and I respect it— that eventually out of those 37
trade areas will grow nation-wide branch banking, when the men are
trained and desire nation-wide branch banking?
Governor Y o u n g . I do.
M r. S t r o n g . And the only thing that will cause those men to
break down our law, to change our law of trade area branch banking,
will be the ability to handle nation-wide branch banking and their
influence to change the law, will it not?
Governor Y o u n g . Well, the public influence to change the law.
M r. S t r o n g . Y o u explained that the bankers in the States have
had that influence in their legislatures to change the law. N ow you
are going to have trade area branch banking, and then you are going
to build up men of such experience that they will have nation-wide
branch banking ability and eventually achieve it. It will not be
by the influence of the people; it will be by the same influence of the
National Legislature that has been exercised and used on the State
legislatures. It will not be the demand of the people.
Governor Y o u n g . M r. Congressman, a banker has two classes of
customers, depositors and borrowers, and the number of depositors
always exceeds the number of borrowers. If a branch system is
created in this country, even in a small trade area, and the depositor
gets the protection that he has not been given for the last 10 years,
and that extends to a larger trade area and those depositors get the
protection that they have not been given previously (and that I
764
BRANCH, CHAIN, AND GROUP BANKING
believe they can get it under a branch system), their influence is
going to be very far-reaching as to whether or not that extends to a
nation-wide branch banking system.
M r. S t r o n g . Yes; but you do not think that the depositors are
ever going to control these groups, do you?
Governor Y o u n g . The depositor is the man that makes it possible.
M r. S t r o n g . He is the man that has the m oney to deposit, but
he has to put it in these banks. These banks are already in this
country, although they have not yet achieved their objective, of
trade area branch banking; they already have such an agreement
when you go in and deposit the m oney in the bank whereby they say,
“ If you do not deposit a certain amount, we will have to charge you
a fee, and if you want to borrow money, you must leave a part of it in
the bank.” S o the depositor will have no choice but to put it in one
of those banks. He can not exercise any influence; he does not now.
G overnor Y o u n g . If the depositor is not satisfied with the solidity
or the policy of the bank, obviously he does not deposit there at all.
If he is a depositor and these groups or branch banking organizations
are unreasonable with him, obviously he has an investment market
that extends all over the world, so that he can do what he wants to
do with his money. They are compelled, through the depositor
and his power in the whole situation, to make things attractive to
him. They have got to compete, and if they do not make things
attractive to him, they lose the depositor.
M r. S t r o n g . Yes; the depositor goes to his bank and says, “ I do
not like that new rule you have; I will take m y money to some other
place,” and the banker says, “ All right.” The depositor goes over to
the other bank and he is confronted with the same rule. He can not
dominate and control and dictate to that bank as to what their
rules shall be; they are going to dictate to him.
G overnor Y o u n g . From what we hear from the bankers and from
what we have heard from the bankers in the last 10 years, the
com petition that they had through Government bonds and the com
petition that they had through bond houses, as well as the competition
that they had, if you will, with the call loan money, leads me to believe
that the depositor has become a very important factor in this entire
situation.
M r. S t r o n g . But unless he organizes into groups himself, he will
exert no influence.
-Governor Y o u n g . There has been no organization for the last 10
years; there was no organization in so far as call loans were concerned.
M r. S t r o n g . But when he withdraws his deposit and goes to the
next bank and he meets the same condition, what can he do?
Governor Y o u n g . He withdraws his deposit and he has the entire
investment world to take his money to.
M r. S t r o n g . Yes, but perhaps he is not a judge of what those
investments mean; perhaps he does not want to bury his money in
those investments, but he just wants to leave it in the bank. It
m ay be $5,000, $10,000, $50,000, or $100,000. M aybe he wants to
leave it there against the seasonal requirements of his business, and
if he does not like the terms offered him by the bank and he goes to
the next bank he will probably meet the same terms.
Governor Y o u n g . I will again repeat that if conditions ever get.
so bad as that in this country, I will agree with you on that; but I do
not think they will.
BRANCH, CH AIN , AND GROUP BANKING
765.
M r. S t r o n g . I hope that your thought is right, but m y fear is
that they might, and I think that the Congress of the United States
ought to so regulate the financial policies of the country and make
such laws that the men who handle the money and credit of the
United States will never dominate and control it, because I fear that
they will not be unselfish when they get that power.
Governor Y o u n g . Well, I think, Mr. Congressman, that one of
the great steps in that direction is the Federal reserve system, and
that is still with us.
Mr. S t r o n g . I agree with you, if wTe do not build up organiza
tions of banking that overpower and dominate the Federal reserve
system.
Now, in your opening remarks to the committee, you referred to
our changing bank structure. B y that do you mean the tendency
toward group and chain and branch banking?
Governor Y o u n g . Yes, sir.
Mr. S t r o n g . W ho should control those changing conditions, the
banks or the Congress?
G overnor Y o u n g . I believe the Congress, but it has gone so far,
M r. Congressman, that it is going to develop many complications
in attempting to control it.
M r. S t r o n g . I agree that the banks are bringing about those
changes.
G overnor Y o u n g . They have under State laws; yes.
M r. S t r o n g . N o w , if the Congress does not take some drastic
action, under your thought, we are going to proceed with branch
banking and eventually we will have nation-wide branch banking?
G overnor Y o u n g . Well, group banking; nation-wide group bank
ing; yes. Under the present law we now have------M r. S t r o n g . And if we control the group banking, we are going
to have nation-wide branch banking?
Governor Y o u n g . If you control the group banking, I think it has
gone to a point where you must offer something in substitution.
M r. S t r o n g . That is, we have to abandon in the United States
the policy and idea of unit banking?
G overnor Y o u n g . In m y opinion; yes, sir. I do not mean by
that that the unit banker will necessarily be eliminated.
M r. S t r o n g . Well, the former Comptroller of the Currency came
to us and said, “ Unless you have branch banking in cities like New
York, Detroit, New Orleans, and San Francisco, where they are
permitted to have branch banking under State law, you are going
to destroy the unit banker; they are going to put branch State banks
all over the city of New York, and if you are to maintain the Federal
reserve system and the national banking system you have got to
permit the national banks to have branches in the cities where the
parent banks are located,” and we acceded to that.
Governor Y o u n g . Has not that been for the benefit of the depositor
and borrower in those districts?
M r. S t r o n g . I do not know. It has been followed up with com bi
nations of great banks. The combinations are increasing, and the
unit and individual private bankers are being driven out.
Governor Y o u n g . I believe that it has been a benefit.
M r. S t r o n g . T o w h o m ?
Governor Y o u n g . T o the depositor and the borrower.
766
BRANCH, CH AIN, AND GROUP BANKING
M r. S t r o n g . Have interest rates to the depositor been increased
or decreased?
Governor Y o u n g . Well, I do not know. I would say it is about
the same.
M r. S t r o n g . I s it not a fact that generally throughout the country
the man who deposits money in a bank is being asked to take a smaller
rate of interest, and is that not the tendency?
Governor Y o u n g . That happened in the Northwest in 1921
clear through until 1927, under the unit banking system.
M r. S t r o n g . Y es; and that is a gradual tendency, is it not?
Governor Y o u n g . In the East there seems to be a tendency on the
part of the mutual savings banks to pajT a higher rate.
M r. S t r o n g . I do not know about that.
Governor Y o u n g . But the rate 8 or 10 years ago was an average
possibly of 4 per cent.
I will ask Congressman Luce to correct me if this is not true.
The mutual savings banks have had a tendency to increase in the
last 10 years, rather than decrease their rate to depositors.
M r. L u c e . Absolutely.
M r. S t r o n g . But the regular banks that are in these combinations,
group and chain, have not increased the rate to their depositors,
have they?
Governor Y o u n g . Nowhere that I know o f.
M r. S t r o n g . Then it has not been for the benefit of the depositors
to have these groups formed, because they are getting a smaller rate
of interest.
G overnor Y o u n g . I was speaking about his protection, rather than
the interest return he received.
M r. S t r o n g . I know; but you might give him ever so much
protection and no return.
G overnor Y o u n g . M r. Congressman, I can pay 3 per cent and
give a depositor security in an institution. I can pay 4 per cent and
break that institution.
M r. S t r o n g . But suppose that these combinations would tell
the depositor that they could give him security at 2 per cent, but not
at 3 per cent?
Governor Y o u n g . Then the depositor can still go to the postal
savings bank or to the United States Governm ent bonds or to innu
merable well-seasoned bonds throughout the United States and get
a much higher rate than 2 per cent.
M r. S t r o n g . B ut the average depositor, except the big fellow,
throughout the country, does not deal in bonds.
G overnor Y o u n g . I believe that many of them have become security
buyers.
M r . S t r o n g . Y es; many of them have, possibly, but I am talking
about the poor depositor in a small bank. H e puts his m oney in
there against the seasonal requirements, and does not want to put it
in bonds, and he used to get 4 per cent where he is now offered 3.
In some places he is not offered anything; I know of banks that say,
“ W e have too much m oney; we will not pay a cent o n deposits.”
G overnor Y o u n g . M y experience in the commercial banking busi
ness, M r. Congressman, was that a man that deposited seasonally
was not paid any interest. I do not think he is to-day in the unit
bank, and I do not think he is in your chain or group bank.
BRANCH, CH AIN , AND GROUP BANKING
767
M r. S t r o n g . If he is not paid any interest on a deposit, and in
addition to that he is asked to maintain a certain amount of m oney
in the bank, if he is allowed to put his money at all, he does not have
the accommodation he used to have, does he? It is getting worse
all the time.
Governor Y o u n g . That has developed under the unit banking
system, M r. Congressman, and one of the faults of the unit banking
system was that they would take an account of any kind, even though
a man only maintained a balance of $5 or $10. Experience has shown
that, even in those small country banks, if there is a depositor who
maintains a balance of less than $200 on a regular checking account,
that account is handled at a loss. I do not think you can ask any
banker to operate at a loss. The result was that many of the unit,
banks in the ninth Federal reserve district realized that that was a
source of loss to their institutions, and they put on a charge of 50
cents or $1 a m onth; and in m y opinion they were entirely within
their rights when they did put that charge on.
M r. S t r o n g . Then that is under the policy that unless the banker
makes money out of the little depositor, the depositor is entitled to
no service?
Governor Y o tjng . ‘But he gives him a service.
M r. S t r o n g . But not unless he charges him?
Governor Y o u n g . I do not think he should give it at a loss or
gratuitously.
M r. S t r o n g . Then through this development in banking that has
been going on, we have reached the point where the banker is going
to have a profit upon every item of his business?
Governor Y o u n g . W hy shouldn’t he?
M r. S t r o n g . Other businesses do not do that, do they?
Governor Y o u n g . W hy shouldn’ t they? They shoufd.
M r. S t r o n g . Simply because it is rather a hardship upon the little
depositor and the little business man and the little individual. The
railroads claim that they do not make any m oney out of their pas
senger service, but we compel them to run passenger trains because
of the franchise that is given to them to operate railroads. Now, if
we do not have any more control over them than we apparently have
been having over the banks, if they can build up combinations, the
time will come when they will say, “ No, we must have a profit out of
every service we render.”
If that system is continued, it means m onopoly, and combinations
are going always to continue to make a greater hardship upon the
people.
The C h a i r m a n . M ay I ask a question there?
M r. S t r o n g . Y e s .
The C h a i r m a n . Governor, a suggestion was made here, I think by
M r. Seiberling or some one earlier in these hearings, in regard to
introducing facilities for service to these rural communities in the
post offices. N ow the post offices are legalized to receive savings
deposits up to $2,500, and in that connection I understand there is
pending here in one of the committees a proposal to increase the limit
which one can deposit in trie savings end of the post offices up to
$5,000. Inasmuch as the post offices are also authorized to issue
money orders, I am wondering, in connection with your suggestion
here that we are headed for group banking and eventually nation-wide
100136— 30—
vol
1 pt
768
BRANCH, CHAIN, AND GROUP BANKING
branch banking, which would indicate the coming of larger groups
and perhaps of less service in rural communities, whether you would
advocate an enlargement of the facilities of post offices to enable
these people in remote districts of the country to have some facility
whereby they could pay their bills by checks on the post office, after
having first deposited their money there.
Governor Y o u n g . They have that facility now.
The C h a i r m a n . They have the facility of drawing checks against
their accounts?
Governor Y o u n g . N o; but they have the facility of buying postoffice m oney orders.
The C h a i r m a n . Apparently we are getting to the point where these
rural communities are going to be deprived of banking facilities, and
I am wondering whether you would advocate the enlargement of
the facilities of the post-office system so that a farmer could draw
his own check against the post office in his locality and in that way
facilitate the settlement of his necessary transactions? I am prompted
to ask that because of the questions which have been asked you by
M r. Strong as to the attitude of the banks in refusing to take small
accounts w ithout paying a service charge.
Governor Y o u n g . I would not.
The C h a i r m a n . Y ou would be against that?
Governor Y o u n g . It would be a tremendous cost to the United
States Government on which it would get no profit. It costs the
Federal reserve system in the neighborhood of $10,000,000 a year to
handle checks gratuitously.
M r. S t r o n g . And that has been saddled by the banks onto the
Government.
Governor Y o u n g . The banks say it is the other way.
Mr. S t r o n g . But the banks in the cities where the Federal reserve
or its branches are located are escaping their former costs in the way
of collection charges.
Governor Y o u n g . N ot at all.
M r, S t r o n g . W hy, the national banks do not charge for collections
now, do they?
Governor Y o u n g . M any of them do.
M r. S t r o n g . But those exchanges are made by the Federal reserve
system now; those clearing-house exchanges?
G overnor Y o u n g . Yes.
M r. S t r o n g . At the expense of the Treasury?
G overnor Y o u n g . A t the expense of the Federal reserve banks,
M r . S t r o n g . B ut if that money remained in the Federal reserve
system aiul if they collected the charges and were charging the banks
for that service that the banks used to have to pay for, then the excise
tax to the Government would be increased, would it not?
G overnor Y o u n g . That is correct.
M r. S t r o n g . Then the Government is paying it.
Governor Y o u n g . W e maintain that that is one of the services
that we give to the banks.
M r. S t r o n g . Yes; at the cost of the Government.
G overnor Y o u n g . At the cost of the banks. The banks furnish
the reserve balances that permit the handling of these checks.
M r. S t r o n g . But if a profit is made by these Federal reserve banks
after the 6 per cent is paid and if you do not take the cost of making
BRANCH,
c h a in
,
and
group
b a n k in g
769
those collections out of the Federal reserve balances, there is that
much more left that goes to the Government.
Governor Y o u n g . I know, but if one-third of the banks of the
United States join the Federal reserve system in contributing the
capital and the reserve, they are entitled to some service.
M r. S t r o n g . They get it, do they not?
Governor Y o u n g . That is what I say; they get it; they furnish the
funds that make these profits possible. The Government does not
furnish the money.
M r. S t r o n g . Together with the fact that they can offer eligible
paper and get m oney without interest?
Governor Y o u n g . Yes.
Now, there is a strong desire that the
member banks get a larger return of the profits of the Federal reserve
system, and I am in agreement with that.
M r. S t r o n g . I know, but at the present time the banks in the
cities where there are Federal reserve banks or branches get that
service free that used to cost them thousands of dollars.
G overnor Y o u n g . It did not cost them anything in the past; they
passed that cost back to the depositor in a great m ajority of cases.
This has been a relief to the public of America at the expense of the
banks.
M r. S t r o n g . Well, in m y own city com petition brought about no
charge for the collection of checks long before that, so that our
people did not get any relief. The banks used to take our checks
and pay at their own expense the cost of collection, and now the
banks in the cities where there is a Federal reserve bank or branch
save that expense; they have their checks cleared w ithout cost.
Governor Y o u n g . In your home community, M r. Congressman,
you are speaking about the foreign checks that you deposit with your
local bank?
M r. S t r o n g . Y e s .
Governor Y o u n g . H o w about the checks that foreign banks got
on your local bank previous to the passage of the Federal reserve act;
did they charge to collect and remit on those checks?
M r. S t r o n g . It depended on how strong the com petition was.
Sometimes they did and sometimes they did not.
Governor Y o u n g . N o w that it has been eliminated, your little local
banker is the loser. There is no difference as far as the city bank is
concerned, and the public has gained an advantage.
M r. S t r o n g . Y es; he is the loser and he is deprived of a large part
of his earnings.
G overnor Y o u n g . And he is a member bank. So I still maintain
that if $10,000,000 is paid by the banks of the United States, they are
the losers, the public is the gainer, and the Governm ent does not enter
into it at all.
M r. S t r o n g . Well, I have to disagree with you on that, because if
that was paid it would eventually go into the Treasury of the United
States, but if it is not paid it is paid out of the profits of the Federal
reserve system, which simply holds back that much of those profits
that ordinarily would go to the Federal Treasury under the excise tax.
Governor Y o u n g . That is true. The Federal reserve system could
put a charge on every check it handled and charge that back to its
member bank, and if the member bank would not stand it it would
pass the charge back to its depositor.
770
BRANCH, CH AIN, AND GROUP BANKING
M r. S t r o n g . T hey did not in the past do that in a great many^
cases.
M r. W i n g o . M ay I interrupt you gentlemen right now? Investi
gating another question, within the last few weeks, I find another
time they charged their depositors for the deposit of a foreign check.
T hey charged them not only interest on the check for the period
between the time they are credited with it and the time the am ount
actually comes in, but they also charged them a nominal exchange fee.
Governor
Correct.
Young.
M r. W i n g o . In other words, it used to be that the country bank
charged for remitting the exchange on the bank— he is required to
perform that service free now and not even allowed postage; that is,
he is not allowed to make expenses to say nothing of profits— and
whereas he is compelled to lose that, the bankers in the cities where
are located the jobbers and wholesalers, are still collecting exchange
unless the question of com petition forces or compels them to forego
it. I am prepared to introduce docum entary evidence to that effect
if this is doubted.
Governor Y o u n g . I will confirm the statement.
M r. W i n g o . So, instead of the business of America being relieved
of this burden of exchange, it is just shifted and instead of the country
banker getting it, the bankers in the centers wdiere the jobbers and
the shippers are located, are getting it. The country bankers used
not to get it where there was perhaps com petition that compelled
him to forego it, but now he is compelled to render all of that service
free, but, on the other hand, the jobber and the wholesaler and
others, in a great many instances, have to pay their own bank for
collecting the foreign checks.
G overnor Y o u n g . They always did, M r. Congressman. There is
just this difference. Heretofore the country banker charged for
cashing his own checks, and to-day the city banker and the banker
in the larger centers charge for advancing credit on a check that is
drawn on some one else that it may take 5 or 10 days or two weeks
to collect.
Mr. W i n g o . The country banker did not charge for cashing his
own checks. He agreed to do that when presented across the counter,
but he charged for remitting exchange— where he had to send it to
another point. That is what you had in mind?
Governor Y
o u ng .
Yes.
Mr. W i n g o . He charged for the remittances and not for his
check. It was not permitted under the law. If he had undertaken
to discount his own check, under the laws of many States, he would
have been put into the hands of a receiver.
M r. S t e v e n s o n . W ill the gentleman from Kansas permit me to
follow that with one suggestion?
Mr.
S tro n g .
Go
ah ea d .
M r. S t e v e n s o n . That very suggestion appeals to me more strongly
than any other feature of the suggested change by the Com ptroller
of the Currency, and that is the whole trade area of the National
Bank of Philadelphia should have the right to put branches in the
whole trade area. Then a man who has one of these checks and has
his money deposited in a branch of Bank A, and the head of the branch
A or another branch is in a town where he is paying his bills, he
deposits in one bank in one town and sends a check to another town
BRANCH, CH AIN, AND GROUP BANKING
771
to another bank and, being all one system, there is not this charge.
He should be able to deposit his checks in any one of those banks
constituting that system,
Mr. W i n g o . I think there is one concern where the bank has
branches— either a branch or chain, I forget which— and still charges
its customers an arbitrary interest rate on the clearance period and,
in addition to that, it charges 25 cents on up ; 25 cents is the minimum
fee for each check.
M r. S t e v e n s o n . Just to illustrate m y suggestion------M r. W i n g o . I do not object to showing the gentleman my file on
that— on the collection of exchange on remittances on foreign checks.
M r. S t e v e n s o n . If you say the National Bank of Philadelphia—
if there is such an institution— has a branch in Wilkes-Barre, Pa., and
a merchant in Wilkes-Barre has an account in the branch of that
bank there and he wants to pay a bill in Philadelphia, he draws a
check on the First National Bank of Wilkes-Barre, the branch, and
sends it to the merchant in Philadelphia, and he can go to the First
National Bank of Philadelphia and say, “ Here is a check that I
want credit for.”
M r. W i n g o . Pie does not get credit for it now.
M r. S t e v e n s o n . I think if the system is established, he would.
M r. W i n g o . If he draws a check on a certain branch, he does not
get credit if that is presented in the home office in the city. He sends
it to his hat merchant, to use an illustration I have in mind— he
sends it to the hat merchant, the wholesaler, and that hat merchant
takes it to the central bank. That is not cleared immediately and
he pays an estimated interest on that.
M r. S t e v e n s o n . Well, that is not right. It is the same institution
and it has got his money, whether in Wilkes-Barre or in Philadelphia.
M r. W i n g o . Of course they all do not do that, where competition
is fierce; in other words, here is a good strong hat house or wholesaler
or a groceryman and the banks are competing for his business. The
bank will take and carry the float for that wholesale house, but unless
there is very strong com petition— and I have found in one or two
cities where there is apparently com petition— they must have some
gentlemen’s agreement where everybody is carrying that float and
charges something for the remittances.
M r. S t e v e n s o n . The unit bank at Wilkes-Barre is a different
institution from the Philadelphia bank, but if it is the Philadelphia
National Bank, located in Philadelphia with a branch in WilkesBarre, it is not right to charge exchange on the m oney that institution
has in Wilkes-Barre.
G overnor Y o u n g . I should like to correct the record, for a moment.
The discussion has been in Philadelphia. Philadelphia does not
charge that exchange.
M r. W i n g o . W hen did Philadelphia stop charging on foreign
checks? I had that statement made to me by M r. Norris once before
and I took occasion in Philadelphia on one occasion to test that out.
Certainly m y check bore an exchange charge, and they said m y bank
would charge on it. Of course, before I left town, m y 25 cents was
returned to me. They did not know at the time they made the
charge that I was a member of the Com mittee on Banking and
Currency. T hey returned the 25 cents.
772
BRANCH, CHAIN, AND GROUP BANKING
M r. S t r o n g . I should like to put into the record a letter sent to the
Banking and Currency Committee through the chairman, b y H on.
H atton W . Sumners, from Dallas, Tex.
This is dated Dallas, Tex.. April 1, 1930:
Hon. H a t t o n W. S u m n e r s :
I am inclosing a clipping from a local paper. This action in effect denies to the
small depositor banking facilities, as wage earners seldom have that much to
leave in the banks for their use over and above their own needs, Since they oper
ate m ostly under Federal charters I think it about time some regulatory measures
were considered by Congress and Senate. They regulate service of railroads,
post offices, and several other public service institutions, and I think they need
it as much so as any of these other concerns.
M r. W i n g o . Is that the letter that inspired th e chairman to advo
cate these checking accounts in post offices?
M r. S t r o n g . He incloses a newspaper clipping headed, “ Banks to
hike service rates— T o double 50-cents charge and raise $50 to $100.”
He also incloses a slip evidently being sent out to depositors by the
Dallas National Bank, which reads as follows:
M
arch
31, 1930.
N otice to our depositors:
Beginning with the month of April, we will make a service charge of $1 per
month on all checking accounts averaging less than $100. We have been handling
accounts of this size at a loss.
We believe that every citizen is entitled to banking facilities, but feel that
each person should pay the actual cost of handling her or his account.
W e sincerely hope that all of our customers can keep their balances above $100.
This does not apply to savings accounts— no charge will be made on them.
D
allas
N
a t io n a l
Bank.
That is in line with your thought, Governor, that banks should
rightfully make those charges to their depositors, so that they will not
operate at a loss?
Governor Y o u n g . It is. I think that.
M r. S t r o n g . Is not that a very strong reason why the suggestion
of the chairman might be considered, that if the banks are going to
refuse to small depositors and the laboring men whose semimonthly
paym ents probably will not be much over $100— they are going to
charge them $1 a month— might it not be a good thing for the G ov
ernment to liberalize their postal-savings banks so that the small
depositor in rural communitities may be served without that kind of
charge?
Governor Y o u n g . I think I know enough about the commercial
banking business to realize that the Dallas National Bank is not mak
ing a profit on that transaction. T hey may be breaking even.
As a citizen of the United States, I would be bitterly opposed to
the United States Governm ent assuming a cost of $12 per person for
cashing their checks in payment of bills.
M r. S e i b e r l i n g . In th is connection, I should like to ask a question
or tw o.
M r. S t r o n g . G o ahead and ask them, but make it just one or tw o
questions as I should like to go on with m y thought.
M r. S e i b e r l i n g . It is in connection with this particular subject.
Since you have made the statement you have about the charge on
accounts below $100, what balance do you think makes an account
a paying account?
G overnor Y o u n g . It would depend on different sections of the
country.
BRANCH, CH AIN , AND GROUP BANKING
773
M r, S e i b e r l i n g . Just an average, in a general way— $100 or $200?
Governor Y o u n g . As I figured it out at one time in the bank I was
with, I think it was in the neighborhood of $200.
M r. S e i b e r l i n g . If you believe they should charge them when they
have a losing account, do you not think the}7 should pay interest on
daily balances above $200, on checking account? D o you not think
they should pay some interest because that becomes a profitable ac
count?
M r. B r a n d . Governor, you had better be careful about answering
th a t question.
The whole country will read about that when these
hearings are published.
M r. S t r o n g . Are you a banker?
M r. B r a n d . A small one. We do not charge anything for the serv
ice nor do we pay an interest on deposits.
Governor Y o u n g . I think competition, Mr. Congressman, would
force him to pay interest on deposits over and above a certain amount.
I can not fix the amount because it is different all over the country.
But you know and I know that there are national banks that do not
pay interest.
M r. S e i b e r l i n g . I am not asking you what competition would do,
but you have stated that where an account is below $100 or $150, it
becomes a loss to the bank and the depositors should pay for the serv
ice
I un asking you theoretically if you believe that, that the deposit ■>] 1 o il 5 pay because it is a loss to the bank, should nor the bank pay
the
?itors something when the account's average daily balances
in
< m amount where the bank makes a profit on it?
Governor Y o u n g . In actual practice, M r. Congressman, it is done.
Mr. S e i b e r l i n g . W hat do you think about that yourself? Is n o t
that right both ways? If your theory is correct, should not the
other theory also apply?
Governor Y o u n g . W e ll, I have done that very thing in commercial
banking— not with all accounts.
I have to correct that a little bit, because when I was in the com
mercial banking business, they had not gotten up to the point of
anahTzing their accounts sufficiently well to realize they should put
a charge on unprofitable accounts. I never put a charge on an
unprofitable account, but if I was in the commercial banking busi
ness to-day, I would do it.
On certain open checking accounts that I had and I felt they
were profitable and knew they would go elsewhere if I did not meet
competition, I have paid an interest on the average daily balances.
H aving done that and believing it, m y reply to your inquiry, actually
and theoretically, is yes.
M r. S e i b e r l i n g . I think th a t is all. I should like to ask another
question, but I do not want to take up any more time from M r.
Strong.
M r. S t r o n g . Well, go on.
M r. S e i b e r l i n g . There are many banks in the country th a t
charge this $1 a month service that do not pay a cent to any one
on checking accounts, is not that true? That is true, is it not, no
matter what the amount of the balance is?
Governor Y o u n g . N o; I think that practically every banker in
the United States has announced that it will pay interest on some
accounts.
774
BRANCH, CH AIN, AND GROUP BANKING
M r. S e i b e r l i n g - Oh, a $100,000 or $200,000— big commercial
companies— but I am talking about the ordinary commercial accounts.
G overnor Y o u n g . Yes, there would be many of those.
M r. S e i b e r l i n g . And there are banks that will make a m a n ’s
wife pay if the account goes below $100, $1 a month, when the
husband has an account of five or ten thousand dollars balance and
gets nothing on it.
Governor Y o u n g . Well, I do not know about that, M r. Congress
man.
M r. S e i b e r l i n g . That is all, M r, Strong, and I thank you very
much.
Governor Y o u n g . It seems to me that could be avoided by a joint
account.
M r. S e i b e r l i n g . I want to say I am opposed to the $1 a month
charge and I agree with M r. Strong that that is a service the banker
should render just as the grocery man has to deliver a small order of
groceries at a loss or a merchant deliver thread to a house.
As long as the bank makes a large profit for the stockholders, I
think they owe some duty to the public, especially to these young
people who are starting out in life, and ought to be educated in the
banking business and should not be shut out of the banks.
Governor Y o u n g . This has been developed in the ninth Federal
reserve district in the small country banks. Obviously when the
banker saw his bank go down and did not have any profits himself
and he began to analyze his own situation and discovered where he
coidd cut down where business was not profitable, and he felt com
pelled to do so.
He learned that he had a large number of small accounts that were
not profitable and he was distributing calendars and pocketbooks,
and in an effort to put his institution on a paying basis, he put on the
service charge.
M r. S e i b e r l i n g . He finds one part of his business unprofitable and
he charges for the service and finds another part extremely profitable
and pays no reward for those accounts. A t the end of the year the
stockholder has received a fine dividend and the depositors have been
penalized and others not rewarded who held big accounts.
Governor Y o u n g . That is not true in many of the small banks I
am speaking about in Minnesota and the Dakotas.
M r. S t r o n g . It is also true, Governor, is it not, that a few years
ago the little bank was deriving a great deal of income through
charging for the cashing of checks, and largely through the influence
of the Federal Reserve System checks were taken up and collected
at nar and no charge made, and that revenue was taken away from
them ?
G overnor Y o u n g . That is correct.
M r. W i n g o . Is this true or not, may I ask------M r. S t r o n g . Certainly.
M r. W i n g o . It has been contended that a great many of the
small grocery men and small bankers have been forced out of business
because they have rendered so much free service they could not
make a profit and no business, grocery or banking, can exist in a
com m unity and serve a com m unity unless it can make enough
profit to live?
G overnor Y o u n g . Correct.
BRANCH, CH AIN , AND GROUP BANKING
775
M r. W i n g o . I s n o t th a t on e o f th e m a jo r reaso n s w h y the sm a lle r
b a n k s are d r o p p in g o u t, b e ca u se th e y find the b u sin ess u n p r o fita b le
an d th e y h a v e sta r te d to a n a ly z e their lo sses an d fin d in g w h ere th e y
c o u ld ch arge fo r a service an d exist and serve the c o m m u n ity ?
G overnor Y o u n g . That is correct.
M r. S t r o n g . In m y question I wanted simply to draw a com pari
son where formerly the little bank was charging a fee for the collec
tion of checks, which was a considerable part of its income, through
the acti-n of the Federal reserve system and its par collection of
“c hecks. 1 1:a( revenue was taken away from them?
Gove: jior Y o u n g . I would rather say it was the action of the Con
gress of (he United States.
M i*. S^' k o n g . Well, the idea being developed and encouraged b y
th e Kcdei-id reserve system?
Governor Y o u n g . The law is specific, I think, M r. Congressman.
M r. W i n g o . B ut the law specifically says they may charge not to
exceed one-tenth of 1 per cent
T
here was a little joker put in
there. Congress was told thai n \ t ui I not destroy that revenue but
would only prevent excessive d i < but in actual operation, it did,
Governor. That is the troubk \ i ! ihat. The little joker is that
they provided that a charge snail not be made against a Federal
reserve bank and then you compelled them to go through the Federal
reserve banks.
M r. S t r o n g . W e had that in our hearings once.
M r. W i n g o . The effect was the same as repealing that one-tenth of
1 per cent permissible charge.
M r. S t r o n g . N o w , I am not going to yield any more until I develop
m y own line of thought.
M r. W i n g o . Very well; you use the rest of your 10 minutes, and
what you do not use, yield to M r. Luce. (Laughter.)
M r. S t r o n g . I am going to decline to yield any more.
This privilege of charging this fee on checks, having been taken
away from the banks, went largely to the profit of the big banks in
the float, has it not— in carrying that float— and passing it on to the
G overnm ent?
Governor Y o u n g . I do not think so. The larger banks in the
larger centers, if they were to charge their country correspondents
they, in turn, pass the charge back to their depositors. That was the
general practice, with the exception of one or two points in the
United States, where they figured they could absorb that charge and
the business they would get would compensate for the charge.
The C h a i r m a n . M ay I suggest, Governor, that Philadelphia, at
the time of the passage of this particular provision here, was one of
the cities that wTas doing an extensive collection of checks for country
banks and was requiring compensating balances. They took prac
tically all checks that came to them and credited them on sight and
made no charge for collection, but absorbed whatever charges there
might be in the collection of those checks, themselves.
It was made known at the time of the discussion here that the
Philadelphia National Bank, as I recall it now, was one of the largest
institutions in Philadelphia and wTas doing the largest collection busi
ness of probably any of the banks there. B y this change, and not
being forced to pay anything for the collection of those checks which
they took from the country banks, they made a saving of approxi
m ately $500,000 a year.
776
BRANCH, CH AIN, AND GROUP BANKING
Under the working of the plan, those checks were cleared through
the Philadelphia Reserve Bank and that did relieve the big city banks
of that charge which they had heretofore been absorbing.
Governor Y o u n g . In those two or three specific cases where they
were collecting nation-w ide; yes.
M r. S t r o n g . In this case of the Dallas bank don’ t you think it
fair vo assume that this notice by the Dallas National Bank was not
sent out until all the banks of that city had agreed to this proposition?
Governor Y o u n g . I do not think so, but I assume it was a clearing
house agreement.
M r. S t r o n g . Then, the more closely banks in the cities becom e
connected with each other, the more it is going to cost the public to do
business with them.
G overnor Y o u n g . They were just as close 20 years ago as they
are to-day, under a unit system. This is not a group system.
M r. S t r o n g . If they are proceeding to do that now, saying, “ We
are not going to do business with the public unless the workingman
leaves $ 1 0 0 in our bank or pays $ 1 a m on th ” —-if they continue that,
they will deprive the public of a banking privilege they have had?
G overnor Y o u n g . N o; they are going to charge them for it.
M r. S t r o n g . Yes, at a profit. Mow, if the Governm ent can forego
several millions of dollars in its revenue it would get from the Federal
Reserve System because of this system that they have of standing the
expense of the olear^g horse ir. the various cities and the banks are
going to put that obligation upon the people who have small accounts,
do 3^011 not think the Government would be justified in providing a
system of banking through its Post Office Departm ent or otherwise,
whereby the people could enjoy those privileges without paying the
price they are asked to paAr for them?
G overnor Y o u n g . I do not.
M r . S t r o n g . Y o u th in k th e b a n k s sh o u ld b e a llo w e d to in s is t on
a p ro fit in e v e ry line o f th eir b u sin ess?
G overnor Y o u n g . I do, if they elect to take it.
M r. S t r o n g . Following up m y thought that I have in m y mind,
the thought I have is this: When we have trade area branch banking,
which will be dominated and controlled b}r a few groups in the trade
area, the rules and agreements between the banks will very likely
be more stringent and more demanding of a profit than they are now.
Along that line, let me say in m y district I know of a new bank that
started out and had pretty hard sledding. It adopted a policy of
accepting a checking account as low as $ 1 . It admitted it was
unprofitable, but they built up a clientele of a great many thousand
boys and girls who never had had a bank account before.
In the course of six or eight 3rears, those boA7s and girls and 3Toung
men got into business. They still keep their accounts in that bank.
Gradually that bank became the dominant bank of the town through
the fact of doing a little business for less than cost and accom m odating
the small depositor who finally became a business man with a large
account.
There was no agreement among the banks and that w~as possible.
B ut to-day the banks have gotten together and say, “ Let us all
charge the small depositors. They must have $50 or $ 1 0 0 or we
will charge them for carrying those accounts and we will not pay
interest on deposits except over so many dollars and we will agree
to pay only 3 per cent. ”
BRANCH, CH AIN, AND GROUP BANKING
777
That is by reason of agreements, and gradually those have grown
up among the banks. The thought comes to me that when those
banks that have had to spend years reaching these agreements—
when they are all under one or two or three heads in the trade areas—
whether or not it will not be very easy for the officers of those branch
banks existing in those trade areas to get together and do about
anything they want to the public, to say nothing of the fact of dom
inating business through the contraction of credits in the trade area.
I am just trying to develop m y opposition to branch banking.
Governor Y o u n g . They could do those things that were within
reason and permitted them to make a profit, but they could not
charge that man $100 a month for the account or $80------M r. S t r o n g . No.
Governor Y o u n g . Or $50.
M r. S t r o n g . N o; b u t th e y m ig h t ch arge h im $ 5 .
G overnor Y o u n g . They might charge him $ 5 a month for the
account, but he would not have to pay it. He still could go to the
post office and buy postal money orders to pay his bills at a much
more reasonable rate than that.
M r. S t r o n g . But would have to carry his money in his pocket.
He could not deposit the money and check against it. He would
have to carry it in his pocket.
Now, I w^ant to ask you in regard to the matter of examination of
these groups. D o you think where a bank has 100 branches that it
is a safe examination to send examiners out to examine one of those
branches and the next day another and the next day still another?
D o you think that is a safe wTay to guard the public?
G overnor Y o u n g . I do not think that is what is done, M r. Con
gressman. In these large branch set-ups, they usually center on the
parent office and several of the larger branches and, in m y opinion,
that is a fairly safe examination.
Now , there may be some little discrepancy or something wrong out
in a small branch. There might be a defalcation, but it would be so
small in comparison with the total that it would not affect the sol
vency of the bank.
M r. S t r o n g . If the bank was in bad condition, could not they kite
their funds around among the hundred branches unless they were all
investigated, including the parent, on the same day?
Governor Y o u n g . I do not think so. I think that by getting in
the parent office and some of the larger branches, which the C om p
troller now- can do, that he can uncover anything that would be seri
ously wrong.
M r. S t r o n g . Of course the Banking and Currency Com mittee
was told, a few years ago, by the Comptroller of the Currency,
that that was not a safe examination and that a branch or a bank with
100 or 200 branches, could not be examined unless they had a force
to put one at each branch at practically the same time. That is
where I got the idea.
Governor Y o u n g . D id he say it was not safe or not thorough?
M r. S t r o n g . M y recollection is that it was practically impossible
to make a proper examination of the bank.
Governor Y o u n g . M r. Congressman, I am not a bank examiner
and not trained along those lines. Those questions came before the
778
BRANCH, CH AIN, AND GROUP BANKING
Federal Reserve Board some time ago when we had insisted on a
simultaneous entry and we called the Com ptroller of the Currency
at that time and discussed the situation with him and also con
sulted our chief examiner. The conclusions of those men were that,
with a large set-up, where they could get into the key places— the
parent office and at an occasional outlying branch— that they were
fairly safe in so far as the solvency of that institution was concerned.
M r. S t r o n g . If there was danger in the bank and it was unsound,
do you suppose they could tell where the key places were?
Governor Y o u n g . Yes.
M r. S t r o n g . The banker who realizes he is insolvent would not
xe likely to cover up the small places and leave the key places open?
Governor Y o u n g . Well, the examiner would get quickly to the
place where he suspected trouble.
M r. S t r o n g . Only a few years ago this committee was told b y
the Com ptroller of the Currency that that was not a safe and proper
examination. N ow the committee is told that it is. U ndoubtedly
the heads of the department get their information, as you say, from
the examiners, and I am wondering whether or not the influence of
these groups which are headed toward branch banking, has n ot
worked on those examiners, when they come forward and say it is
not a safe examination and then, two or three years afterwards,
they say they think it is.
Governor Y o u n g . W ould the experience of the Federal reserve
system be anything to go by? W e have 12 Federal reserve banks.
W e do not attem pt to examine them simultaneously.
M r. S t r o n g . But they are separate and distinct institutions.
Governor Y o u n g . They are coupled up with one general gold
settlement fund in W ashington. A thorough examination would cover
all those banks simultaneously.
M r. S t r o n g . But the Federal Reserve Board has a very able
governor looking after them.
Governor Y o u n g . Still defalcations could occur and irregularities
could occur, but we feel we are fairly safe in examining the banks
individually.
M r. S t r o n g . But here is a bank dominated and controlled by one
group, with a thousand branches and it is getting in bad shape and
the examiner comes in and he proceeds to go from one bank to another
or to take the key positions. It seems to me the former inform ation
given us by the Comptroller of the Currency that that was a dangerous
kind of examination, may be considered to be better.
G overnor Y o u n g . Well, I would not have that feeling, M r. C on
gressman.
The C h a i r m a n . Governor, the present Com p toller of the Currency
is advocating a change in our system of unit banking to trade area
branch banking. He is emphasizing the fact that our present unit
system can not continue as at present.
Now , he is the chief advocate of branch banking to be confined to
trade areas. W hat is the effect on the unit banking system by having
it supervised b y an announced trade area branch bank examiner?
D o you think under that system unit banking could proceed when
the man who is supervising it is against it and advocating another
system and says it is unsafe to continue in that manner?
BRANCH, CH AIN, AND GROUP BANKING
779
Governor Y o u n g . I do not think the Comptroller of the Currency
takes that position, M r. Chairman.
The C h a i r m a n . W hat do you understand his position to be?
Governor Y o u n g . I think he advocates the extension of the branch
banking area to the so-called trade area. I do not think that he has
ever said or ever recommended or suggested that the unit banker
should be put out of business.
The C h a i r m a n . He has stated in his annual report they were
leaving, even under the M cFadden A ct of 1927; that national banks
were gradually leaving the system and he advocated, as a m ethod of
saving the system, branch banking confined to trade areas.
It naturally occurs to me that when the unit banking system is
supervised by the people who are against unit banking and in favor of
branch banking, it would naturally follow that unit banking would be
rather the sufferer in that respect.
In that connection also I would like to ask you whether or not,
under those circumstances, it would not be natural for the Com p
troller of the Currency to refuse to grant charters to unit banks and
whether or not, under your observation, preference is not being given
to these larger banks in the big cities to open branches, over the establistment of unit national banks?
G overnor Y o u n g . I could not answer for the Comptroller of the
Currency, M r. Chairman.
The C h a i r m a n . I am speaking particularly of the situation in New
Y ork City which, of course, is one of the tense branch banking cities
and where I understand last year there were applications for something
over 100 national banks and approximately 10 charters were granted
and where there were branches authorized for existing institutions in
many of the localities where unit banks were applied for but charters
refused. They m ay have been properly refused, but I was just
wondering how much such a situation would be affected by the super
vision of a man who was a branch-banking advocate as against the
unit banking system.
Of course these applications, I know Governor, are under the
joint supervision of the Federal Reserve Board which power is dele
gated, I understand, to the Federal Reserve banks.
G overnor Y o u n g . That is correct— not as a matter of law, but as a
matter of procedure.
Y ou must bear in mind, M r. Chairman, that there is always a
check on the Com ptroller of the Currency. If there is an application
for a national charter, he must be reasonable as to whether he grants
that charter or does not grant the charter, for the simple fact if he
does not grant the charter, they can always go to the State banking
department and use the same arguments and either get the charter
or do not get the charter; in other words, he always has to take into
consideration this: “ If I refuse this charter will the State grant it
and will I thereby weaken the national system to that extent?”
The C h a i r m a n . In the close working arrangements between the
Federal Reserve and the Com ptroller's office and the Superintendent
of Banks, there is a matter of reference of all these applications
back and forth, is there not?
Governor Y o u n g . There is.
The C h a i r m a n . And they do not go contrary to each other’s
views on that?
780
BRANCH, CH AIN, AND GROUP BANKING
Governor Y o u n g . N ot as a general rule.
The C h a i r m a n . In other words, if the comptroller refuses a charter,
the State superintendent knows that, and he is reluctant to grant
the charter.
I was wondering what effect that had on the decrease in the num ber
of national bank charters issued and if, in the circumstances, it might
not be working to the detriment of the building of the unit system?
Governor Y o u n g . From what I have observed, I do not believe so.
M rs. P r a t t . I happen to know of two instances that might bear
on what you say in regard to the refusal of charters to unit banks and
the granting of permission to establish branches in New' Y ork.
In the instances where people apply for charters, they should have
proper financial backing. There is no question about that, and in the
instances I have in mind where charters were refused for the establish
ment of unit national banks it would seem, and I think we will all
agree, that it was not a matter of prejudice on the part of the com p
troller that resulted in that refusal.
However, the fact that permission to establish a branch bank was
granted in almost the same area to an existing bank with sound
financial backing and which seemed to be in the interest of the public,
might give rise to the suspicion that there was some favoritism
displayed.
I mention this because it is quite conceivable there might be many
instances of that character which might lend color to the suspicion.
The C h a i r m a n . I was not suggesting a situation like that, M rs,
Pratt.
M rs. P r a t t . I think it will be found that in most cases the refusal
is sound.
The C h a i r m a n . W hat I w^as illustrating is this, that the C om p
troller, being a branch banking advocate, his leanings might un
consciously influence him in granting charters to branch banks as
against unit banks.
M rs. P r a t t . M y point is that it might look like favoritism where,
when all the circumstances are known, it would not be. I know of
two instances, wiiich I have mentioned.
The C h a i r m a n . But in some instances, the comptroller being in
favor of branch banking, might not favor the unit system as against
the branch institutions.
M r. W i n g o . I think what the Chairman has in mind is this, that
the comptroller, assuming that he is using or exercising good ju dg
ment in the matter, vet, because he believes in branch banking, might
be swayed to grant or refuse a charter because of his convictions with
respect to branch banking. I do not think you mean to im ply he
would arbitrarily refuse or grant a charter because of his bias for or
against any particular system, as against the interests of the public.
The C h a i r m a n . I am not attempting to criticise the comptroller
in that respect. W e are all human, but if applications come along
for unit banks and branch banks, he will follow the dictates of his
conscience.
M r. W i n g o . W hat you mean is that if there is an application from
a branch bank and an application from a unit bank, your theory is
that the comptroller, being in favor of branch banking, would natu
rally give preference to the branch bank?
BRANCH, CH AIN, AND GROUP BANKING
781
The C h a i r m a n . I think he would be more favorably inclined to the
branch b a n k ; yes.
Mr. W i n g o . I knew you did not intend to charge the comptroller
arbitrarily, without regard to the public welfare, with doing th a t.
The thought you have been trying to get over is that a man in favor
of a particular system will naturally give that system preferred
consideration?
The C h a i r m a n . Yes.
Mr. S t r o n g . W hat the chairman is trying, in his modest and quiet
way, is to point out whether or not it is a fair thing for the government,
in this contest between unit and branch banking, to have a man who
has power to grant charters, that is a branch banker.
Just one more thing and I am through, Governor. This board
that has been discussed in New Y ork that fixes the rate on call
money and the renewal rate on money, has a great deal of effect
and influence— it has a nation-wide effect, has it not?
Governor Y o u n g . At times; yes.
Mr. S t r o n g . That being the case, do you think the Government
ought to exercise any control over that board as to who it shall be
and how it shall be regulated?
Governor Y o u n g . I do not.
M r. S t r o n g . Here is a board that may attract the savings of the
nation to the stock market by a higher rate, and did do it and has
done it in the last few years, which is generally admitted to be a
rather dangerous procedure, and put them into speculative buying of
stocks on the New Y ork Stock Exchange.
Governor Y o u n g . They can not do that, M r. Congressman, even
under very unusual conditions. It is the conditions that bring about
that rate and not any arbitrary action of those three men. Their
rate has to be right. In other words, the rate has to bring the money;
and, if they make it too high, t oo much m oney comes and, if they make
it too low, not enough money comes.
Air. S t r o n g . I appreciate that, but we have got to the point where
the m oney in New' Y ork for stock-market operations, b y increasing
the rate, they draw it from the savings of the Nation, perhaps to the
detriment of other business.
G overnor Y o u n g . They did do th a t.
M r. S t r o n g . I was wondering whether or not the Governm ent
should take some supervision of aboard th a t had th a t power.
Governor Y o u n g . I have answered repeatedly before the com
mittee that question, and given m y reasons.
The" C h a i r m a n . Are there any further questions? I may say at
this point that I am hoping we can finish with the governor to-day,
because, under the program as previously announced, M r. E. W .
Decker, of the Northwest Banking Corporation, of Minneapolis,
M inn., will appear before the committee on April 15, and, on the
following day, M r. L. E. Wakefield, of the First Bank Stock C orpo
ration, of Minneapolis, will appear.
Are there any further questions of Governor Y oung at this time?
M r. W i n g o . Yrou fa v o r th e e x te n sio n of b ra n c h b a n k in g , as I
u n d e r sta n d , p e r so n a lly ?
Governor Y o u n g . I do.
M r. W i n g o . Y o u c o v e r e d , in y o u r s ta te m e n t
which y o u fa v o r its being granted?
here, the extent
to
782
G overnor
BRANCH, CH AIN, AND GROUP BANKING
Y
oung.
I have not.
Mr. W i n g o . D o you mind giving the committee the benefit o f
your judgment as to whether it should be state-wide, district-wide,,
or trade area, or what you have in mind?
Governor Y o u n g . I made the statement in the committee that I
favored the trade area, the same as the Comptroller of the Currency.
I can not define that at this time. I am hoping some day I will be
able to do that.
M r. W i n g o . I do recall you said that. Y ou took the position,
necessarily, there would have to be some flexibility in defining the
trade area.
Speaking a while ago about the question of profit for banking, I
asked you if it was not true, from your observation, that one of the
m ajor reasons why the small bank has fallen and is passing out of the
picture, is the same reason that a lot of small merchants are passing
out of the picture— that they can not make money out of it?
Governor Y o u n g . That is true and they have been trying to con ert
some of their gratuitous services into profitable services.
M r. W i n g o . In the last analysis, Governor, someone has to pay fo r
that service?
Governor Y o u n g . Certainly.
M r. W i n g o . Take the grocerj^man, when he delivers a small
package, or if he gives unlimited free delivery service, he has to cover
that in the profits that he makes out of ail of his customers, and
those who carry their own goods from the store, have to contribute
their part of the expense of carrying the purchases to other customers
in their apartments or their homes. That is true, is it not?
Governor Y o u n g . That is true.
M r. W i n g o . A bank that renders free service, b y keeping an un
profitable checking account for me, unless I pay for that service
charge, you and others who have profitable accounts, must show that
bank enough profits to cover the deficit or the loss in handling m y
account?
Governor Y o u n g . Some where some one has to pay that.
M r. W i n g o . And if that free service and the limitation by reason
of the interest rate and the limitation on the charge for remittances—
all of these different limitations and losses make it impossible to pay
a dividend to the stockholders, it means that sooner or later that
bank will be liquidated?
Governor Y o u n g . That is right.
M r. W i n g o . If it does not fail it will be liquidated, as being an
unprofitable investment for the stockholders?
Governor Y o u n g . Usually local pride carries that bank along.
M r. W i n g o . That local pride has been one of the incentives,
though, that has led them to put their heads together and bring
about a consolidation in these small towms, where they have had
banking facilities. One of those consolidations occurred in one of m y
county seats, in the town of Nashville last week. T w o banks there
have consolidated, and in their advertisement they directed atten
tion to the fact they could operate at less expense and render better
service.
That is taking place in the different smaller communities over the
United States where they have more banking facilities than the
business men in that town feel they can maintain and make pay for
themselves— they are consolidating.
BRANCH, CH AIN, AND GROUP BANKING
783
Governor Y o u n g . Up to 1920 the number of banks was increasing
and since 1920 they have been decreasing through consolidations,
mergers, and failures.
Mr. W i n g o . That decrease in the number does not mean, neces
sarily, that in every instance some community has been robbed of
proper banking service, but it means in a great many instances a
sounder, larger and better banking service is afforded that community
by reason of the consolidation of in some instances two unprofitable
institutions into one that can exist and make a profit and have a
larger opport?unity to serve the community.
Governor Y o u n g . Generally speaking, that would be true, M r.
Congressman; but I referred, in the record this morning, to the state
ment of the superintendent of banks of Minnesota, in which he said
that there are 154 communities in the State of M innesota that had
banking facilities that now have no banking facilities. M any of
them are entitled to banking facilities.
He recommends under their State law that they be permitted to
establish branches in those smaller communities.
M r. W i n g o . In other words, the point you are making is that
notwithstanding the efforts of people in these localities to preserve
their institutions, inability to maintain them at a profit has caused
154 communities to lose the service and the banking superintendent
says that, in order to enable them to have it, the State law should be
changed to enable them to have branches in those communities?
Governor Y o u n g . In a percentage of them.
Mr. W i n g o . In which they could be operated profitably?
Governor Y o u n g . Yes.
M r. W i n g o . N o w , there is another reason for the decline in the
number of banks, which is this, is it not— I think it is true in m y part
of the country but I do not know whether it is true all over— but
with the system of im proved highways that have been established,
im proved transportation and im proved communications, distances
have been shortened so that a man who formerly lived a in small
town that was 15 or 20 miles away from the metropolis of his county,
we will say, that man now can go to the metropolis of his county about
as easily as he used to go to the village, and the fam ily are going to
the metropolis for their purchases and the merchants in the small
locality are passing out of the picture because of their inability to
meet the competition o f the la rger m e r c h a n t or b ank er th a t attracts
the larger business to th e m .
Governor Y o u n g . There is a great deal to that.
M r. S t e v e n s o n . M y conception of the problem that is before us,
Governor, is tw ofold : We want to make the system such that a man
who goes to bed tonight will realize that his money is in a bank that
is of such a type that it will be there the next morning. Then we
have to guarantee to every business com m unity proper credits for
legitimate business in that community.
Now, those are the two main reasons why we need to do something
with this banking system.
As I understand, you believe that the suggestion of the comptroller
would help that situation?
Governor Y o u n g . It would help it.
100136— 30— V O L 1 p t 7-
784 ^
BRANCH, CH AIN, AND GROUP BANKING
M r. S t e v e n s o n . In removing all trouble?
G overnor Y o u n g . N o .
M r. S t e v e n s o n . There is no trouble-proof proposition to be put
over here?
G overnor Y o u n g . N o .
M r. S t e v e n s o n . But we certainly need to do something to insure
the confidence of the depositors and justly insure the commercial
interests proper credits. If we can do that with branch banking,
we have done something.
Governor Y o u n g . The name, branch banking, chain or group
banking, is not a cure-all. Obviously all of those systems will have
to go through a period of experiment.
M r. S t e v e n s o n . I believe the branch banking system is superior
to all of those. Y ou have one big institution responsible for all of
them, and with group banks and chain banks it is not so.
M r. S t r o n g . Governor, this may not be in the record, but as I
am the chairman of another committee, I often have to be absent
from this committee and probably was not present when it was dis
cussed, and that is the matter of the division of profits in the Federal
reserve system. Several propositions have been made and several
bills are pending before this committee regarding that.
Several years ago, when we were, as a committee, going over the
Nation investigating why smaller banks did not join the Federal
reserve system, it was suggested that a proper division would be to
take the profits of the Federal reserve system and divide them pro
portionately between the banks that furnished the reserves, to the
amount of money furnished bv the Government in currency.
Governor Y o u n g . M y reply is all in the record, M r. Congressman,
and it is substantially this: That the Federal Reserve Board, in its
annual report, has recommended that the member banks participate
to a larger extent than they are now participating in the earnings of
the system, if earned. W e have not been able to work out the exact
procedure, but expect to do so and present it to the committee.
M r. Chairman, I have been here for three weeks. I have attempted
to be of some benefit to you. I hope that I have. I have received
very courteous treatment for which I am most grateful.
The C h a i r m a n . W e are deeply appreciative, Governor, of the
frank manner in which you have responded to questions of members
of this committee. You. have been very generous of your time, and I
knowr you have given us information that will assist us very much and
will be of great advantage to us in our survey of this great problem.
The probability is, however, that before w^e complete our study,
we may want you back again.
M r. D u n b a r . Is Governor Young to appear this afternoon?
The C h a i r m a n . No.
M r. D u n b a r . M y thoughts are along the lines discussed the other
day by M r. Beedy and Mr. Fort, and one of the questions you pro
pounded, M r. Chairman, was that if, in the panic which resulted last
fall, a great many banks did not impound their gold and did not use
it for cerdit purposes. As I understand it that was one of your
questions.
BRANCH, CH AIN, AND GROUP BANKING
785
I want to observe and ask Governor Young if it is not true practi
cally every dollar of gold and bullion that is in this country is the basis
for all our credit to-day?
Governor Y o u n g . It is.
M r. D u n b a r . It is the basis o f all our credit?
Governor Y o u n g . Yes, sir.
M r. D u n b a r . W e have gold and bullion to the amount of
$4,300,000,000. We have deposits amounting to $58,000,000,000
in the banks of our country. It seems to me if any of that gold in the
banks had been impounded and had escaped being used as a sort of
credit, it must necessarily be very small.
Governor Y o u n g . You are making the inquiry as to whether any
gold was sterilized, as many of the economists refer to it?
M r. D u n b a r . Y e s .
Governor Y o u n g . I do not think it w as.
The C h a i r m a n . The committee will stand adjourned until Tuesday
next, at 10.30 o ’clock a. m.
(Whereupon, at 1 o ’clock p. m., the committee adjourned to meet
at 10.30 o'clock a. m. on Tuesday, April 15, 1930.)
@FedFRASER