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FEDERAL RESERVE BANK OF RICH M ON D

MONTHLY
REVIEW
Antitrust and the New Bank
Holding Company Act
The Fifth District
Agricultural Outlook for 1971







Antitrust and the New Bank Holding
Company Act: Part III
A s discussed last month, new antitrust rules
governing bank holding company acquisitions of
banks became effective in 1966. A t that time, there
were but 65 regulated companies controlling two
or more banks, and their deposits accounted for only
11.6 percent of total bank deposits in the United
States.
By m id-1970, however, regulated companies ac­
counted for 16 percent of total deposits, largely be­
cause 44 new companies were formed in the inter­
vening period and the number of banks in regulated
groups increased from 561 to 884. Although prior
approval under the new antitrust rules was required
for both holding company formations and for bank
acquisitions throughout this period, only two ap­
provals by the Board were challenged in court by
the Department of Justice under the antitrust laws.1
Meanwhile, controversy erupted over the growth
of unregulated one-bank holding companies and
their expansion into a variety of nonbanking busi­
nesses. Under the 1956 Bank Holding Company
Act, as we have seen, companies controlling two
or more banks were required to divest most of their
nonbanking activities of they chose to retain con­
trol over their banks. However, no restrictions were
placed upon nonbanking activities of companies con­
trolling only a single bank.
The One-Bank Holding Company Exemption
From the legislative reports, it appears that Con­
gress excluded one-bank holding companies from
regulation for three principal reasons. First, since
only one bank was involved, the holding company
could not be used to evade Federal and State branch
banking legislation.
Second, most of the banks
owned by one-bank holding companies were small.
And third, the nonbanking activities of these com ­
panies were for the most part quite limited involv­
ing, primarily, local real estate and insurance agency
operations. The only legislative comment shedding
light on the 1956 exemption for one-bank holding
companies was the following paragraph of the
Senate Report:
Your committee did not deem it necessary to in­
clude within the scope of this bill any company
which manages or controls no more than a single
bank.
It is possible to conjure up visions of
monopolistic control of banking in a given area
1 U. S. v. F irst at Orlando Corporation et al., filed December 23,
1969; U. S. v. United Virginia Bankshares, filed January 30, 1970.




through ownership of a single bank with many
and widespread branches. However, in the opinion
of your committee, no present danger of such con­
trol through the bank holding company device
threatens to a degree sufficient to warrant in­
clusion of such a company within the scope of this
bill. Should legislation of that nature prove de­
sirable in the future, the Congress is free to act
upon a showing of need for such a law.2

Nevertheless, the Board consistently urged Con­
gress to include one-bank holding companies, both
before and after adoption of the 1956 legislation.
In 1953, Governor Robertson asserted to the Senate
Committee on Banking and Currency that
If there is merit in the proposal that you should
separate banking from nonbanking businesses, it
is just as important that you do it in a 1-bank
case as in a 2- or more-bank case.3

In 1955, testifying before the House Banking and
Currency Committee, Chairman Martin stated:
. . . it seems clear that the potential abuses re­
sulting from combination under single control of
both banking and nonbanking interests could
easily exist in a case in which only one bank is
involved. In fact, if the one controlled bank were
a larger bank, the holding company’s interests in
extensive nonbanking businesses might well lead
to abuses even more serious than if the company
controlled two or more very small banks. For
these reasons, the Board would continue to urge
that, whatever the percentage test may be, the
definition should be related to control of a single
bank.4

When the 1956 A ct became effective, there were
about 117 unregulated one-bank holding companies
with total deposits of $11.6 billion,5 compared with
42 regulated companies having aggregate deposits of
$15 billion.0 Over the next decade the number of
one-bank holding companies increased to about 550,
but their combined deposits rose only $3.5 billion,
to $15.1 billion. The relatively small deposit in­
crease reflects the fact that most of the new com ­
panies were small, local enterprises.
In contrast,
over the same period deposits of regulated holding
company banks almost doubled, from $15 billion in
1956 to $27.6 billion at the end of 1965. When
2 “ Control of Bank Holding Com panies,” Committee on Banking and
Currency, United States Senate, 84th Cong., 1st Sess. (1 9 5 5 ), p. 7.
3 “ Bank Holding Company Legislation,” Hearings Before the Com­
mittee on Banking and Currency, United States Senate, 83rd
Cong., 1st Sess., on S. 76 and S. 1118 (1 9 5 3 ), p. 14.
4 “ Control and Regulation o f Bank Holding Com panies,” H earings
Before the Committee on Banking and Currency, House o f Rep­
resentatives, 84th Cong., 1st Sess., on H .R . 2674 ( 1 9 5 5 ), p. 15.
5 "T h e Growth o f Unregistered Bank Holding Companies— Problems
and Prospects,” S ta ff Report for the Committee on Banking and
Currency, House o f Representatives, 91st Cong., 1st Sess. (Febru­
ary 11, 1969 ), p. 5.
8 Hall, “ Bank Holding Company R egulation,” Southern E conom ic
Journal, v. 31, (1 9 6 5 ), p. 34.

3

Congress in 1966 again faced the issue of regulating
one-bank holding companies, it again declined to do
so because
. . there was no substantial evidence
of abuses occurring. . .
One-Bank Holding Company Growth, 1966-1970
A radical change in the nature of one-bank holding
company growth and activities occurred after 1965,
as indicated by Table I.

pay for time deposits, the lower the costs of such
funds.
Between 1947 and 1967, changes in the ratio of
demand and time deposits and in the maximum rate
structure for time deposits combined to increase
substantially the cost of bank funds. The shift from
demand to time deposits is shown in the following
table:
T a b le

T a b le

GROW TH OF O N E -B A N K HO LDING C O M P A N IE S
1955-1970

Year

Num ber of
O n e -B a n k
H o ld in g
C o m p a n ie s

1955
1965
1968
1970

* A ctu al a n d
* * E stim a te d

C o m m e r c ia l
Bank
D e p o s its
(B illio n s)

117
550
783*
1 1 0 0 **

$ 11.6
15.1
108.2*
1 4 0 .0 * *

P ro p o s e d O n e - B a n k
by

Bo ard

GROW TH OF D E M A N D A N D TIME DEPOSITS
IN CO M M ERCIAL BANKS, 1947-1967
(in b illio n s)

Dem and

Percent o f
T o ta l U.S.
D e p o s its
6.0
4.5
24.9
33.8

H o ld in g C o m p a n ie s .

o f G o ve rn o rs.

But even these figures do not fully indicate the
sharp, sudden surge of growth in 1968. Within the
first eight months of 1968, over 30 of the nation’s
100 largest commercial banks announced plans to
transform themselves into subsidiaries of one-bank
holding companies. By the end of that year un­
regulated companies, including companies in process
of formation, accounted for more than double the
volume of bank deposits of regulated companies—
$108 billion compared to $49 billion. And by the
close of 1970, at least 1,100 commercial banks with
total deposits of about $140 billion were believed to
be affiliated with one-bank holding companies, com ­
pared with 119 regulated groups with 890 banks
and deposits of approximately $70 billion. Together,
the two classes of holding companies accounted for
almost half of all commercial bank deposits in the
United States, with unregulated companies account­
ing for two thirds of the total. This remarkable
change in banking structure occurred in less than
three years.
Reasons for O ne-B ank Holding Company
Growth
Increasing costs were an im portant
factor motivating banks to adopt the one-bank hold­
ing company form of organization.
Commercial
banks must necessarily rely on the deposits of the
public for their principal source of funds to use in
acquiring earning assets. T o the extent that demand
deposits are available, operating costs are lower than
is the case if interest must be paid to attract time
deposits. Similarly, the lower the interest rate banks

4



II

I

1947
1967

So u rc e :

Tim e

T o ta l

Percent
Dem and
o f A ll
D e p o s its

108
211

34
24 4

144
455

75
46

F e d e ra l R e se rv e Bu lle tin .

Over the 20-year period, while total deposits were
more than tripling, the share represented by demand
deposits fell from 75 percent to 46 percent. In the
same period, the pressure of competition for funds
among banks and other financial intermediaries,
especially savings and loan associations, forced in­
terest rates on time deposits ever higher.
In 1968 and 1969, as interest rates continued to
escalate, commercial banks found themselves at an
increasing disadvantage in the competition for funds
due to the ceilings imposed by Regulation Q. A
bank holding company could avoid restrictions, how ­
ever, by issuing commercial paper, just as any other
corporate borrower. The funds so acquired could
then be made available to a bank affilate for use in
its banking business, and more and more banks
began to resort to this method of acquiring funds.
A second factor stimulating the creation of onebank holding companies was the growing investment
by banks in expensive data processing equipment
and personnel. This development in the 1960’s gen­
erally paralleled the change in deposit composition
and the higher cost of funds. M ore important, how­
ever, the rapid evolution in data processing tech­
nology and automation, and their interconnection
with communications networks, opened up new op­
portunities for the larger commercial banks in par­
ticular to serve business and consumer accounts by
handling their varied record-keeping and other
needs in more effective ways. Typically, these banks
possessed substantial excess machine capacity. New
uses of equipment held the promise of both lowering
unit costs and expanding the range of services
available to bank customers.

i

A prominent banker and early advocate of the
one-bank holding company movement summed up
the cumulative effect of these changes in 1969:
Several events have been working to wrench bank­
ing about in the last decades. Probably the most
fundamental has been the shift in the deposit mix
that has made banks more dependent on time de­
posits and other high-cost funds.
But perhaps the most pressing event has been the
surge of competition, particularly since 1963.
Banking law and regulations have always paid
service to the idea that there should be sub­
stantial competition among financial institutions
and within the banking industry. Yet the weight
of legislation enacted during the 1930’s and long
prevailing was toward restraint—the protection
of solvency and the containing of harmful com­
petitive practices that might again lead to wide­
spread bank failures.
H
e

*

❖

At the same time, new consumer demands have
surfaced.
Individuals and businesses, to say
nothing of local governments and tax-exempt in­
stitutions, have sought from banks new and more
sophisticated services— such things as account
reconciliation, automatic payments or, more inci­
dentally, travel service and credit insurance.
Meanwhile, strides in bank technology— notably
computerization— have opened the way to sub­
stantial efficiencies through the expansion of
services, geographically as well as in kind.

*

*

*

These events, blurring the lines that once com­
partmentalized credit markets and creating various
new cost pressures, have put banks under heavy
onus to diversify, to find new areas where their
resources and experience could be profitably put
to work. And many have moved into fields which
even if not unrelated to banking have not tradi­
tionally been part of it— such things as factoring
insurance, equipment-leasing, mortgage-servicing,
data processing, travel services, and credit cards.7

National banks led the movement into new
market areas in the 1960’s, with support from the
Office of the Comptroller of the Currency. Under
the aggressive leadership of James J. Saxon and
his successor, William B. Camp, the Comptroller’s
office issued a number of interpretations opening
the way for national banks to enter these new areas.
Nevertheless, banks faced formidable legal ob­
stacles in attempting entry into new markets. Statechartered banks operating under more restrictive
laws and regulations, and many existing nonbank
companies already furnishing these services, did not
welcome the innovations. A number of bank and
nonbank competitors throughout the country re­
taliated with litigation challenging the power of na­
tional banks under existing law and their charters
to compete in the new ways. The Supreme Court
upheld the right of competitors furnishing data pro­
cessing and travel agency services to challenge na7 C. C. Cameron, “ A Breakthrough in
Holding Com pany (1 9 6 9 ), pp. 57-59.




Banking,”

The

One-Bank

tional bank entry into their market areas.8 W hile
the Court’s decisions did not reach the merits of the
question whether national banks may in fact, under
their charters and existing Federal law, engage in
new activities not traditionally regarded as “ the
business of banking,” they cleared the way for such
tests. Thus, a long shadow of doubt spread over the
legal status of banks entering new market areas,
and this at the same time that Federal antitrust en­
forcement was increasingly thwarting bank growth
by acquisitions of other banks. A n editorial in The
American Banker gave the following appraisal of
these decisions:
It was stunning for bankers who had believed
themselves to be well sheltered when the Supreme
Court affirmed lower court decisions granting
competitors standing to sue national banks. That
standing had not been granted before, and to
make sure it was not, the American Bankers A s­
sociation for the first time had entered a court
case of this type as amicus curiae on behalf of
a sued bank, to support the contention that com­
petitors lacked standing; but even so, the courts
found that they have a right to sue, and now it
is a whole new legal ball game.

#

*

*

It is possible, of course, that the banks will win
the trials, and be adjudged as acting within their
rights by these extensions of competition; but the
point now established is that they do have to
undergo this adversary process, and are no longer
free to expand unencumbered by such challenges.
And no matter what the results in specific cases,
the establishment of this new principle is bound
to embolden those who find banks tough com­
petitors to seek legal relief.9

Organization of a holding company is one, and
perhaps the only, method owners of banks may use
to insulate themselves against litigation attacking
their right to enter new areas not specifically au­
thorized by statute. H olding companies are usually
corporations organized under the general business
laws of a state and can, therefore, lawfully engage in
a wide variety of business activities. If a holding
company is in fact competing in a number of market
areas other than banking, there is less risk that courts
will “ pierce the corporate veil” and impute to the
holding company the same legal restrictions ap­
plicable to a bank owned by such a company.10
A number of powerful economic and legal con­
siderations thus converged in 1968 to cause large
and small banks alike to transform themselves into
8 Association o f Data Processing Service Organizations, Inc. v.
Camp, 397 U. S. 150 ( 1 9 6 9 ); A rnold Tours, Inc. v. Cam p, 400 U. S.
45 (1 9 7 0 ).
9 The Am erican Banker, M arch 3, 1970.
10 A real risk nevertheless exists. This was clearly established early
in March, 1971, when the Supreme Court refused to review a lower
court ruling which held that operation o f an armored car deposit
pick-up service violated the branch banking law o f the State of
Georgia, even though the service was operated by a subsidiary of
a bank holding com pany.
The A m erican Banker, M arch 2, 1971.
Y et to be determined is the possible effect o f the 1970 amendments
on rulings based on the law in e ffect prior to December 31, 1970.

5

subsidiaries of one-bank holding companies.
The
mood was aggressively expansionistic, as reflected
in these words from Fortune:
In 1967, Harry Volk had only ten years in bank­
ing, yet that had been enough to know that the
future of the banking business lay with the “ fi­
nance industry.” Accordingly, he turned his Union
Bank of Los Angeles into a de novo commercial
corporation called Union Bancorp., which became
the owners of the bank.
After a year or so of hesitating— and duly
noticing Union Bancorp.’s impressive earnings—
other banks soon followed, first stepping, then
pushing, finally stampeding into line.
The ac­
celerating rush was more than an example of
“ an idea whose time had come.” Bankers sensed
that Congress might impose new restrictions but
might also provide some sort of “ grandfather
protection” for those who got there first.11

Congressional Debate and Differences, 1969-1970
Large banks were not the only leaders in the rush
to form one-bank holding companies. Conglomerate
enterprises such as Signal Oil & Gas, Gulf & W est­
ern Industries, and Sperry and Hutchinson also
began acquiring commercial banks of substantial size
to complement their operations.
The dread of
abuses, including raids on bank resources for the
benefit of nonbank affiliates, favoritism by the hold­
ing company bank in lending to customers of its
nonbank sister organizations, and even the growth
of giant banking-industry combinations in the pat­
tern of the saibatsu which dominate the Japanese
economy, generated irresistible pressures to amend
the Bank Holding Company A ct to insure that these
potential evils would not occur.
N o less than five different bills to control onebank holding companies were introduced in the
House and Senate in 1969. All agreed upon cov­
erage of one-bank holding companies, but they dif­
fered widely in their approach to other major issues.
These were primarily the identity of the agency to
administer the new legislation, the date of a “ grand­
father clause” or other exemptive provisions, and the
all-important question of the permissible nonbanking
activities for bank holding companies.12 These dif­
ferences generated two full years of debate, the
equal of the memorable 1966 battle to bring bank
mergers and bank acquisitions by regulated holding
companies under antitrust control. A typical head­
line early in this debate announced “ Administration.
Congress Near Blowup Over Controlling One-Bank
Holding Firms.” 13
1 Sanford Rose, “ The Case for the One-Bank Holding Com pany,”
1
F ortune, M ay 15, 1969, p. 310.
12 H . R. 6778, sponsored by Rep. W rig h t Patm an; H . R . 9385, in­
troduced by Rep. W idnall on behalf o f the Adm inistration; S. 1052,
sponsored by Sen. Proxmire; S. 1211, sponsored by Sen. Sparkm an;
S. 1644, the Senate counterpart o f H . R. 9385 o f the Adm inistration
introduced by Sen. Sparkm an; and S. 2382, sponsored by Sen.
Brooke.
13 The Wail Street Journal, February 13, 1969.

6



First blood was drawn by advocates of a highly
restrictive bill. Late in November 1969, the House
passed a measure with a “ laundry list” of business
activities specifically designated as “ not in the public
interest to be carried on by bank holding companies
of subsidiaries thereof.” It included insurance, data
processing, accounting, travel agency, securities and
leasing services. The proposed bill limited other
business activities of bank holding companies to
those “ financial or fiduciary in nature . . . so closely
related to the business of banking as to be a proper
incident thereto.”
The House-passed bill (H .R . 6778) would thus
have specifically foreclosed bank holding companies
from insurance activities even though the original
1956 A ct had authorized them under certain con­
ditions, and might well have blocked any future ex­
pansion of approved financial or fiduciary activities.
T w o tests had been developed by the Board in 15
years of acting upon proposed applications to
perform “ financial, fiduciary or insurance” ac­
tivities authorized under the original 1956 A c t :
(1 ) whether such activities were “ so functionally
integrated with or required for banking operations as
to make them in effect part of the parcel of such
operations” ;14 and (2 ) whether their performance by
commercial banks was in accordance with common
regional practice among banks in the areas con­
cerned.15 In practice, these tests had proved so
rigorous that only a handful of applications were
filed during the entire 15 years that the 1956 pro­
visions were in effect, and most of the approvals
w e r e for insurance agencies which would have been
banned under the House legislation. The restrictive
nature of the House bill was underscored by its
designation of May 9, 1956, the date the original
Act became effective, as the “ grandfather” date
establishing retroactive coverage of the law.
W ith passage of H .R. 6778, proponents of more
liberal legislation concentrated their efforts in the
Senate. The Senate approved a bill without the
“ laundry list” of prohibited activities, and its bill
also contained a provision designed to give the Board
greater discretion in approving bank holding com ­
pany applications to engage in nonbanking ac­
tivities.
Specifically, it stated that such activities
should be
. . . functionally related to banking in such a way
that their performance by an affiliate of a bank
holding company can reasonably be expected to
produce benefits to the public, such as greater
1 "A p p lica tion o f Transam erica Corporation Relating to Occidental
4
Life Insurance Company o f C alifornia,” Federal R eserve Bulletin,
September, 1957, pp. 1017-1018, 1029-1930.
15 See, e. g., “ First Bank Stock Corporation,” Federal R eserve Bul­
letin, August, 1959, pp. 917-954.

convenience, increased competition or gains in ef­
ficiency, that outweigh possible adverse effects,
such as undue concentration of resources, de­
creased competition, conflicts of interest or un­
sound banking practices.16

The Senate bill would also have allowed one-bank
holding companies to continue to engage in non­
banking activities in which they were engaged on
March 24, 1969, regardless of whether they met the
foregoing test.
One major new feature appeared in the Senate
version of H .R. 6778. This was a provision that
in some respects imposed more stringent antitrust
restrictions upon commercial banks in their basic
operations than those applicable to business and in­
dustry generally under the Sherman and Clayton
Acts. The new provision, subsequently enacted into
law, subjects all commercial banks, regardless of
whether they are in a holding company group, to
the following absolute stricture:
A bank shall not in any manner extend credit,
lease or sell property of any kind, or furnish any
service, or fix or vary the consideration for any
of the foregoing, on the condition, agreement or
understanding
(1) that the customer shall obtain some other
credit, property or service from such bank, a bank
holding company of such bank, or from any sub­
sidiary of such bank holding company;
(2) that the customer provide some other credit,
property, or service to such bank, the bank hold­
ing company of such bank, or to any subsidiary
of such bank holding company; or
(3) that the customer shall not obtain some other
credit, property, or service from a competitor of
such bank, bank holding company of such bank, or
any subsidiary of such bank holding company.17

T w o classes of exceptions were written into this
absolute prohibition against tie-ins. One provides
that banks may continue to require loan customers
to maintain compensation balances as compensation
for loans, and ask correspondent banks to maintain
balances as compensation for services. The second
authorizes the Board by regulation or order to per­
mit such exceptions as it considers will not be con­
trary to the purposes of the prohibition.18
But even these exceptions do not apply in the
event of antitrust charges under Section 3 of the
Clayton Act and under the Sherman Act. A s pointed
out by the Department of Justice in a letter to the
Chairman of the House Committee on Banking and
Currency, “ It is important to remember that any
tie-ins in the area of traditional banking practice
will remain fully subject to normal sanctions under
the antitrust laws.” 19
>« H . R. 6778, as amended and adopted by the Senate, S. Rep. No.
91-1084, 91st Cong., 2d Sess. (1 9 7 0 ), Section 4 ( c ) ( 8 ) .
1 84 Stat. 1766-1767 (1 9 7 0 ).
7
i»84 Stat. 1767 (1 9 7 0 ).
1 W ashington Financial R eports, N o. 47, November 23, 1970, p.
9
T .6 ; Compare F ortn er Enterprises, Inc. v. United States Steel Corp.,
394 U. S. 495 (1 9 6 9 ).




The 1970 Amendments A com prom ise between
the House and Senate bills was reached in the
course of a marathon three week conference in De­
cember, 1970, described by one newspaper as “ one
of the most contentious sessions ever held on bank­
ing legislation.” 20 Negotiating teams representing
the two legislative bodies were headed by Senator
Sparkman, Chairman of the Senate Banking and
Currency Committee, and Representative Patman,
Chairman of the corresponding House Committee.
There was dissension within each team, and sharp
disagreement later as to the meaning of the com ­
promise measure agreed to.
Debate centered around the new provisions au­
thorizing bank holding companies to engage in non­
banking activities. There is little doubt about the
meaning of most of the other 1970 amendments.
The amended statute covers one-bank holding com ­
panies on the same basis as multi-bank companies
and now includes partnerships as well as corpora­
tions, trusts, associations and similar organizations.
Sole administrative jurisdiction is vested in the
Board, which is authorized to determine that such
an organization exercises controlling influence over
a bank or bank holding company even if it does not
own or control 25 percent or more of the shares, or
the election of a majority of the board of directors,
of a bank.
All companies subject to the 1970 amendments
are required to register with the Board on forms to
be prescribed prior to June 30, 1971. A “ grand­
father clause” date of June 30, 1968, is established,
which permits companies to continue activities en­
gaged in continuously since then, regardless of
whether they are authorized under the new amend­
ments.21 However, this is subject to the following
qualification: The Board may at any time, after
opportunity for hearing, terminate the authority con­
ferred on any company by the “ grandfather clause”
if it determines that such action is necessary to pre­
vent undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound
banking practices. In addition, the Board must,
within two years, review the nonbanking activities
of all companies controlling banks with assets of over
20 The Am erican Banker, December 24, 1970.
2 Three other classes of exemptions are provided: Section 4 ( c ) (11)
1
exempts from the statute any company
more than 85 per centum o f the voting stock o f which was
collectively owned on June 30, 1968, and continuously there­
after, directly or indirectly, by or for members o f the same
fam ily, or their spouses, who are lineal descendants o f com­
mon ancestors.
Section 4 ( c ) (1 2 ) exempts companies which agree to divest them ­
selves of their banks on or before December 31, 1980; and Section
4 ( d ) grants to the Board discretionary authority to exem pt onebank holding companies existing prior to July 1, 1968, from the
divestiture requirements o f Section 4 provided certain conditions
exist, and subject to such conditions as the Board deems necessary
to protect the public interest.

7

$60 million to determine whether such activities
should be terminated.
A s to permissible nonbanking activities, the com ­
promise standard finally agreed upon provides that
new activities may be approved only if they are
determined by the Board to be
. . so closely related
to banking or managing or controlling banks as to
as to be a proper incident thereto. . .
In making
determinations, the Board must consider whether
the activities
. . . can reasonably be expected to produce benefits
to the public, such as greater convenience, in­
creased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound
banking practices.22

The Board is also authorized to differentiate be­
tween proposed acquisitions of going concerns by
holding companies proposing to enter new areas,
and their entry de novo.
Recent Actions by the Board Soon after the
new law became effective, the Board on January 25,
1971, published for comment a proposal to authorize
bank holding companies to engage in ten different
nonbanking activities, subject to approval by the
Board in individual cases.23 Unlike acquisitions of
banks, no geographic limitations are imposed as to
nonbanking activities either by the law or by the
Board’s proposed authorization. Since the proposed
activities— including, particularly, mortgage loan
and finance offices— involve some functions similar
to those performed by banks, strong opposition to
permission to expand across state lines has already
been registered, most notably by the Independent
Bankers Association.24

The nature and extent of

comments received have caused the Board to schedule
hearings in April and May on the proposed ac­
tivities, with particular attention to be given to
22 Bank Holding Company A ct, Section 4 ( c ) (8 ) as amended by the
Bank Holding Company A c t Amendm ents o f 1970.
23 These w ere: (1 ) operating as a m ortgage, finance or factoring
com pany; (2 ) operating as an industrial bank; (3 ) servicing loans;
(4 ) acting as fiduciary: (5 ) acting as investment or financial ad­
viser; (6 ) leasing personal property subject to specified restric­
tions; (7 ) acting as insurance agent or broker, principally in con­
nection with extensions o f credit by the holding company or its
subsidiaries; (8 ) acting as insurer for the holding com pany and
its subsidiaries or with respect to insurance sold by the holding
company or any o f its subsidiaries as agent or broker; (9 ) pro­
viding bookkeeping or data processing services for (a ) the holding
company and its subsidiaries, (b ) other financial institutions, or
(c ) others, provided that the value o f services performed by the
company for such persons is not a principal portion o f the total
value of all such services perform ed; and (10) m aking equity in­
vestments in community rehabilitation and development corporations
engaged in providing housing and employment opportunities for
low and moderate income persons.
24 P ratt’s L etter, March 5, 1971.




permissible insurance agency and brokerage serv­
ices, and to the furnishing of data processing and
bookkeeping services. Only after the testimony at
these hearings will the Board’s initial regulations be
made outlining the scope of permissible activities.
Concluding Comments A s discussed in Part I,
the desire to supplement Federal and State branch
banking legislation to prevent creation of regional or
nationwide banking organizations by means of hold­
ing companies was a prime factor leading to enact­
ment of bank holding company regulation in 1956.
At that time, bank holding companies were re­
stricted to banking and managing or controlling
banks, were effectually prevented from further ex­
pansion across state lines, and were barred from
substantially all types of nonbanking activities.
In 1956, when the Bank Holding Company Act
became effective, enforcement of the antitrust laws
against commercial banking had been attempted in
only one case, and that attempt had failed. By 1970,
all types of bank mergers and consolidations, and
all bank holding company acquisitions of banks, were
subject to prior antitrust review both adminis­
tratively by the Federal banking agencies and by the
Department of Justice and the Federal courts.
During the 1960’s major changes occurred in the
economic environment of the commercial banking in­
dustry.
The cumulative effect of these changes
caused many leading banks, accounting in the ag­
gregate for a substantial percent of total commercial
bank deposits in the United States, to expand or
plan to expand into many new service and geo­
graphic areas by means of the one-bank holding com ­
pany.
Congress reacted with legislation bringing
one-bank holding companies under regulation and
conferring upon the Board of Governors’ broad dis­
cretion to authorize such expansion within the frame­
work of guidelines embodying the substance of the
traditional antitrust “ rule of reason,” tailored to the
particular conditions of the commercial banking in­
dustry. Strict new provisions limiting the use of
tying devices were made applicable to all commercial
banks. For the future, enhancement of competition
and the preservation of the traditional separation of
banking and commerce will very likely be the princi­
pal guideposts for regulating expansion of com ­
mercial banking in the United States.25
William F. Upshaw
^ See, e.g., W illiam W . Sherrill, “ Some Reflections on the New
Bank Holding Company Legislation,” Speech, W ashington, D. C.,
March 16, 1971.

Economic Review of 1970

THE FIFTH DISTRICT

Efforts to overcome inflation continued to be a
prime economic concern in 1970 as in 1969, and
prevailing conditions gave evidence of the deep
entrenchment of inflation in the nation’s economy.
A s anti-inflationary policies were pursued, unem­
ployment began a steady climb, and the problem
became one of preventing the slowdown from slip­
ping into a deep recession.
The Fifth District
shared with the nation the problems of rising wages,
prices, and unemployment, as well as a contraction
in the construction industry.
Economic data on states and regions are seldom
available immediately following the end of the year.
Even now, some of the final statistical series neces­
sary for a complete evaluation of economic conditions
within the District are not available. Thus, in addi­
tion to the published statistical sources, this article
depends heavily upon responses to the Fifth Dis­
trict Opinion Survey of Business Conditions con­

the index may reflect convergence of opinion about
the direction of change without indicating a change
in the economic series itself.
Manufacturing

W eakness in sales accom panied

by large wage settlements produced a serious profit
squeeze in manufacturing industries throughout the
nation last year.

District survey respondents also

reported weakness in shipments, volume of new
orders, and backlogs of orders in both durable and
nondurable goods manufacturing.

This sluggishness

characterized some of the District’s most important
industries, including textiles, chemicals, nonferrous
metals, and furniture.

Inventory levels, which re­

mained fairly stable on the high side, were a con­
tinuing concern for manufacturers throughout the
year, as most respondents felt that inventories were
too high relative to desired levels.

ducted by the Federal Reserve Bank of Richmond.
Questionnaires are mailed at four-week intervals,

Retail Sales

so that replies are received and compiled during the

particularly appliances and furniture, suffering more

week preceding each meeting of the Federal Open
Market Committee. The survey sample currently
contains between 80 and 90 respondents representing
manufacturing, banking, and trade and services

than nondurable goods.

throughout the Fifth District.

The level of consumer purchases during the Christ­
mas season was greater than expected, lending sup­
port to the belief that the downward trend in retail

The sample is strati­

fied so as to represent all important industries and
all regions of the District. In order to obtain more
accurate data and thus a better picture of general
economic conditions, the survey questionnaire was
revised in May 1970.

Accordingly, the charts and

R etail sales fell o ff during 1970 in

the nation at large, with durable goods purchases,
The

situation was ag­

gravated in the final quarter of the year by the Gen­
eral Motors strike.
The ensuing decline in auto
sales was the largest quarterly drop in 20 years.

sales was reversing. The first two months of 1971
have tended to confirm that conclusion.
The situation in the Fifth District, as indicated

comments that follow pertain to the period from

by the survey, was much the same. Retail sales, ex­

May 1970 through February 1971.

cluding autos, were consistently down until fall,

The graphs show diffusion indexes computed from
responses to the questionnaires.
interpreted as follows:

These indexes are

a + 1 indicates that all re­

when an upturn became evident, partly in accord
with seasonal expectations.

Auto sales were poor

early in the year, and, as the work stoppage stretched

spondents feel that conditions in that particular

from

category are “ up,” a — 1 shows that all replies are

significantly reduced, sales dropped sharply.

September into November and output was
Dis­

“ down,” and 0 indicates that “ up” and “ down” re­

trict surveys show that this trend is continuing

sponses are evenly distributed. Thus, movements in

into 1971.




9

Employment and Unemployment
Patterns of
employment and unemployment within the District
generally paralleled those of the nation throughout
1970. The District’s total civilian employment grew
from 8,216,100 in December 1969 to 8,245,400 in
December 1970, an increase of .4 percent. Over the
same period unemployment in the District increased
by 30 percent from 240,600 to 313,100, but this 3.7
percent rate of unemployment for December 1970

the employment situation as becoming progressively
weaker during most of 1970, as the number of re­

W ages and Prices T he survey accurately re­
flected wage and price movements in the Fifth Dis­
trict, indicating that despite scattered reports of price
declines and price shading, the price trend was up
until late in the year. In the last two months of
1970, and thus far in 1971, surveys have indicated
that among manufacturers, price decreases out­
weighed increases, particularly in the textile and
nonferrous metals industries. Price advances were
generally the rule among businesses in the trade
and services category. Upward pressure on wages
was consistently reported by survey respondents
during 1970, and this pressure is continuing in the
current year. Both 1970 and 1971 are record years

spondents reporting declines in employment out­

in terms of numbers of employees affected by col­

was considerably below the 6.0 percent seasonally
adjusted national rate.
Survey respondents in the District interpreted

numbered those reporting increases throughout the
year. A t the same time, however, numerous re­
spondents indicated that while the supply of avail­
able labor was usually adequate, it was often dif­
ficult to find labor of the desired quality, particularly

lective bargaining agreements in the nation at large,
and the effect of the settlements is clearly felt in the
District. Numerous work stoppages occurred in the
District last year, and survey respondents continue
to express concern about the likelihood of further
work stoppages in the District this year.

skilled labor. The District’s employment situation has
yet to show clear signs of strength in 1971, ac­

Construction

cording to the survey.

a year of marked recession in residential construc­

MANUFACTURERS' ORDERS A N D SHIPMENTS




INVENTORIES

For the U. S. at large, 1970 was

RETAIL SALES

EMPLOYMENT A N D HOURS W ORKED PER WEEK

tion, continuing the trend that prevailed throughout
the previous year and reflecting the effects of rising
costs of materials and labor as well as the scarcity
of funds.
Survey respondents reported a similar weakness
in residential construction in the District, and for
the District as a whole, residential construction de­
clined from the 1969 level. North and South Caro­
lina were exceptions to this general trend; both

crease in both the square feet and valuation of non­
residential construction. The lifting of the freeze on
Federal construction projects was perhaps a sig­
nificant factor in this growth.
Loan Demand Increases in both m ortgage and
business loans at District banks were reported until
July, when a downward trend developed and lasted
throughout the remainder of the year.

A t year end,

states recorded increases in square feet, number of
dwellings units, and value of total residential build­

business and mortgage loan demands in the District

ing in 1970.

In December, bankers throughout the

in the nation at large, and coincided with a sub­

District began to anticipate increased activity in

stantial growth of the liquidity positions of banks.

residential construction in the months ahead, and
early 1971 surveys show an apparent recovery under­

Consequently, several cuts in the prime rate oc­
curred, market interest rates declined significantly,

way in this field.
During most of

re­

around in the demand for business loans has oc­

ported that nonresidential construction activity was

curred, according to respondents, during the first

gradually increasing.

two months of 1971, but so far, it does not represent

were particularly weak.

This condition also existed

and banks actively sought borrowers. A slight turn­
1970,

most

respondents

Actual statistics show, how­

a significant increase.

ever, that the District experienced a slight decline
in the number of projects, square feet, and value of

Mortgage loan demand, on

total nonresidential building, except in the District

the other hand, has made a much more dramatic
recovery since the beginning of the year.

of Columbia area where there wr a substantial in­
as

Demand for consumer loans, while marked by

LOCAL LABOR SUPPLIES RELATIVE
TO CURRENT NEEDS

W AGES

-

+ .6
+ .4
+ .2
U n s k ille d

:

\

x

^

0
_______________
~~

1
—

-.2
-.4

— ^ S lr illn r l

-.6
i

i

i

i

i

i

PRICES RECEIVED




i

i

i

-I

..... 1

1 ......... -1......... 1

-i.

J

CO NSTRUCTION

v#siw3;i

fluctuation, increased moderately on balance during
1970, according to District bankers.
Since 1971
began, consumer loan demand has strengthened
further in the District.
Capital Spending D u rin g the first three quarters
of the year, District manufacturing respondents con­
sistently reported excess plant and equipment ca­
pacity, while businessmen in trade and services gen­
erally considered their facilities inadequate.

Neither

group of respondents indicated any strong tendency
toward reduction of expansion plans in the early
part of the year when the prevailing sentiment among
businessmen was that inflationary conditions would
continue.

In the final quarter, manufacturers began

to report cutbacks in capital spending plans, and at
year end, this tendency was still in evidence.

District manufacturers is not readily affected by
changing economic policies.
Prospects for the Immediate Future From M ay
through the summer months of 1970, the general at­
titude expressed by respondents concerning eco­
nomic conditions in the Fifth District was one of
uncertainty, produced not only by economic develop­
ments but by the discontent and social unrest felt
throughout the nation. Remarks to the effect that
the economic situation was likely to worsen before
any improvement occurred were not uncommon.
By September a definitely optimistic tone was ap­
parent as respondents anticipated an increase in
economic activity. By the end of the year, a sig­
nificant majority still expected an economic upturn,
although cautioning that such a change would be
slow in coming and expressing some discouragement

W hile recently announced accelerated deprecia­

over the obvious sluggishness of the economy. M ore­

tion allowances are expected to exert some influence

over, manufacturers were less optimistic than re­
spondents in trade and services, citing the persisting

on capital spending throughout the nation in 1971,
reports from District manufacturers fail to indicate

problems of excess inventories and plant and equip­

any tendency to step up capital expenditure plans.

ment capacity, rising costs, employment weakness,

The survey results imply that capital spending by

and the effects of strikes.

D E M A N D FOR LOANS

Ann M . Spivey

CURRENT E X P A N SIO N PLANS RELATE
P
DESIRED EXP,A N SIO N

+ .6
+ .4

+ .2
0
-.2

Consum e r

-.4

-.6

CURRENT PLANT A N D EQUIPMENT CAPACITY
RELATIVE TO DESIRED CAPACITY




PROSPECTS FOR THE IM M EDIATE FUTURE

Uncertainties Cloud the

...

AGRICULTURAL OUTLOOK FOR 1971
Top level economists of the U. S. Department of Agriculture
presented their views of this year s prospects for the nation s agriculture
at the National Agricultural Outlook Conference late in February.
A capsule review of their forecasts follows.

The nation’s farmers can probably look forward
to some strengthening in farm prices and incomes as
the year 1971 progresses. Realized gross farm
income may well achieve a new record. But farm
production expenses will likely rise more than
enough to offset the increase in gross income.
Realized net farm income will thus probably fall
slightly below that in 1970, even though the income
situation will likely brighten later in the year.
This appraisal of the agricultural outlook assumes
that 1971 will be a year of stepped-up activity for
the general economy. Both fiscal and monetary
policies are expected to favor economic growth.
Consumers’ disposable personal incomes, boosted by
increased Federal income tax exemptions and higher
wage rates, are likely to rise further. Such income
gains, although probably not as large as in 1970,
are expected to support a strong domestic demand
for farm products. In addition, foreign demand con­
tinues exceptionally strong, with the value of total
farm exports in the current fiscal year expected to
hit an all-time high.
There are more uncertainties than usual in this
year’s outlook, however, especially for crop farmers.
They are faced with making adjustments to the new
farm program, to the possibility of another outbreak
of Southern corn leaf blight, and to a limited supply
of blight-resistant seed corn. The outlook for live­
stock farmers is also cloudy, with prospects hinging
on feed costs and on producers’ breeding decisions
during the first half of the year.
Expenses and Income Farm production expenses
are expected to advance to another record high.
The gain, however, seems likely to be less than in
1970. The biggest increase is expected to be for
purchased feed. Overhead costs are headed higher.
Sizable increases are also anticipated for wage rates,
farm machinery, insurance, and fertilizer. Moderat­
ing factors in the farm cost picture are the expected




softening in interest rates and lower prices for
feeder livestock.
This year’s outlook for cash receipts from farm
marketings points to a slight gain over last year.
The increase, if realized, would probably reflect a
greater volume of marketings, with little change from
1970 in average prices received by farmers. Crop
receipts may register a sharp increase, while live­
stock receipts will probably hold near last year’s
level. Some decline in Government payments to
farmers is indicated and will offset part of the ex­
pected gain in cash receipts. Even so, gross farm
income is expected to top last year’s record, al­
though heavier outlays for farm production expenses
will more than offset the income gain. Hence, total
realized net farm income is expected to fall short of
the 1970 figure. But with a declining number of
farms, net income realized per farm may show only
a slight drop from last year’s near-record level. A
sizable gain in farmers’ income from nonfarm sources
appears likely and will help compensate for the ex­
pected dip in net income from farming.
Commodity Prospects
H igh ligh ts in the out­
look for major Fifth District commodities as seen by
the Department of Agriculture fo llo w :
Poultry and E ggs: Poultry farmers are still faced
with low prices and high feed costs. Lower broiler,
turkey, and egg prices are likely to prevail through
m id-1971. Broiler and egg prices may strengthen
later and average slightly higher in the second half,
but lower turkey prices may continue. Large pork
supplies will tend to keep poultry prices under pres­
sure through midyear. Substantially higher feed
prices are in prospect for most of the year. Broiler
output is expected to average about the same as in
1970, but production of eggs and turkeys may be
somewhat larger.
Dairy Products: Prospects are good for another
rise in milk production this year. Record-high milk
13

prices, an easier labor situation, and a good supply
of herd replacements point to a slight expansion in
output despite rising dairy ration costs. Milk cow
numbers will likely continue to decline at a slow
rate. Farm prices for milk are expected to show a
modest increase, and gross income from dairying
will probably rise further.
M eat Animals: Large pork supplies and low hog
prices are expected through the first half of 1971.
But prices, although down sharply from a year ago,
have picked up in recent weeks. A cutback in farrowings will probably occur during the spring
months, reducing pressure on prices in the second
half.
Fed cattle marketings may hold near year-earlier
levels through mid-1971 and then show a moderate
increase in the second half. With consumer demand
for meat expected to remain strong, fed cattle prices
are likely to continue firm.
Tobacco: The outlook for tobacco is mixed. D o­
mestic demand for cigarettes and other tobacco
products remains at a high level, but the decline in
tobacco use continues. Competition in world markets
is growing, and United States tobacco exports in
1971 will do well to hold at the reduced 1970 level.
Carry-over stocks will probably change little, despite
smaller beginning supplies.
Smaller marketing
quotas are in effect this year, so growers can be ex­
pected to harvest considerably less tobacco than in
1970.
On the other hand, price supports are up
4.2% and the smaller crop may well result in higher
prices.
Soybeans and, Peanuts: The supply-dem and
situations for soybeans and peanuts offer a study in
contrasts— too many peanuts and not enough soy­
beans. Peanut supplies are at record levels, about
16% above a year earlier. Output this season was
one-third above edible requirements and farm use.
Soybean supplies, however, are tight and 6 % below
a year ago. Usage of soybeans is exceeding produc­
tion by a wide margin for the second consecutive
year and will result in another sharp drop in carry­
over stocks. Price support for 1971-crop peanuts
has been set at $267 per ton, up 4.7% from last
yea r; for soybeans the support level continues at
$2.25 per bushel.
Cotton: Prospects for larger disappearance and
a slightly smaller supply highlight the cotton outlook.
The increase in disappearance reflects better export
prospects resulting from dwindling supplies and ex­
panding use of cotton abroad.

Combined domestic

since 1952.
Cotton prices have generally been
stronger this season, with the shorter staples doing
best. The 1971 loan rate for Middling 1-inch cotton
at average location is 19.50 cents per pound, down
about 2 cents from 1970.
Farm Credit Outlook Farm ers are expected to
use more credit this year than in each of the past
several years. Keys to this outlook are the easing of
the tight money situation and prospects for lower
interest rates and higher production costs.
Funds for farm loans should be more readily
available both to lenders and to farm borrowers.
Life insurance companies, almost out of the farmmortgage lending business in 1970, may be con­
siderably more active this year. But with lenders
increasingly quality conscious, the repayment ca­
pacity of the farming operation and the management
ability of the farmer are likely to figure more im­
portantly in evaluations of loan requests.
Both long- and short-term farm loans will probably
carry lower interest rates. The decline in interest
rates in the money markets late last year and early
this year has already resulted in some lowering of
farm-mortgage interest rates by life insurance com ­
panies and the Federal land banks. Production credit
associations are also expected to cut their rates be­
cause of the sharp drop in the cost of their loan
funds obtained from the central money markets
through the Federal intermediate credit banks. W ith
the recent increases in bank liquidity, commercial
banks can also be expected to make more funds
available for farm lending. Many small banks, how­
ever, rely primarily on local sources o f funds and
as a consequence their loan rates are less sensitive
to changing money market conditions than are those
of P C A ’s or of large, city banks that regularly tap
the central money market. In the recent tight money
period, for example, country banks did not raise
short-term interest rates as promptly or as sharply
as city banks. On the other hand, cuts in their rates
may not be as great or as promptly forthcoming as
those for city banks.
Farmers will likely remain conservative in making
additions to their long-term debt in 1971.

Indica­

tions are, however, that the use of farm real estate
credit will accelerate.

Many farmers need to catch

up on capital improvements, and if interest rates
continue to soften, they may consolidate some of
their unwieldy short-term debts into long-term real
estate debt.

Rising costs of production inputs and a

mill use and exports may exceed 1970 production

new farm program that encourages larger plantings

by over 1 million bales, cutting the cotton carry-over

will

this summer to around \]/2 million bales, smallest

maintain a strong demand for short-term credit.

14




increase day-to-day

operating

expenses

and

Some Implications of New Farm Legislation
The Agricultural A ct of 1970 contains provisions
applicable to the 1971-73 crops of cotton, feed grains,
and wheat that are quite different from the pro­
grams of past years. Participation is voluntary, and
those who choose to participate and receive program
benefits have much more freedom to plant and
manage their cropland. The flexibility provided by
the 1970 legislation makes farmers’ response to it
highly uncertain.
The new farm program is designed to (1 ) help
farmers shift to a market-oriented agriculture and
away from reliance on Government programs; (2 )
give farmers more options on what and how much
to plant; (3 ) protect and improve farmers’ incomes;
and (4 ) keep farm production in line with antici­
pated demand.
W hile the 1970 Act continues to protect farm in­
come through payments and loans, it has shifted loan
levels of the supported crops to specified minimum
levels and away from parity. It thereby eliminates
the loan escalating features which have threatened
to price United States farm products out of world
markets in the past.
A major departure from former farm programs
is the elimination of the old system of crop-by-crop
allotments whereby a farmer’s planting of the af­
fected crops was limited to his acreage allotments or
base less diversion. Now allotments and bases no
longer dictate the number of acres a farmer is per­
mitted to plant. Instead, they are used only to
figure the set-aside acreages and price support pay­
ments.
Another significant feature of the new
legislation is the elimination of the cross compliance
requirement. A farmer who operates several farms
may now participate in the various programs on
one or more farms without doing so on others.
A farmer who has cotton and/or wheat allotments
or a feed grain base may become eligible for program
benefits by signing up for a specific program or pro­
grams during the enrollment period, setting aside the
required number of acres, and maintaining his farm’s
conserving base. Under the set-aside provisions in
effect for 1971, a cotton farmer is required to set
aside to approved conservation uses an amount of
cropland equal to 20% of his farm’s base acreage

tains his conserving base, he is free to plant as much
cotton, feed grains, or wheat as he has remaining
cropland. Or, he is also free to plant his remaining
acres in crops of his choice, except the quota crops
-—tobacco, peanuts, rice, sugarcane, and extra long
staple cotton. This set-aside provision not only
gives the farmer freedom to shift acres to crops he
can best produce, but it also enables him to employ
his land, machinery, and other capital resources
more efficiently.
A farmer is required to plant a specified per­
centage of his farm’s acreage allotment or base
acreage each year to preserve his allotment or base
acreage history. He may plant either the crop for
which he has an allotment or base, or an authorized
substitute. For 1971, the required planting per­
centage for cotton is 90% of the farm’s base acreage
allotment; for feed grains, 45% of the feed grain
base; and for wheat, 90% of the domestic allot­
ment. A producer who plants less than the required
percentage will have his base or allotment reduced
the following year by the amount of the underplant­
ing, up to 20% . If no crop or authorized sub­
stitute crop is planted for three consecutive years,
the entire allotment or farm base for the affected
crop will be removed from the farm. Loss of allot­
ments or base can be avoided, however, if the farmer
makes the required set aside and does not collect
the price support payment or if he was prevented
from planting the required acreage because of some
natural disaster. A farmer may plant wheat or feed
grains in lieu of cotton for history preservation, but
he will not receive cotton price support payments.
Cotton cannot be substituted for wheat allotments
or feed grain bases, however.
The broader substitution privileges provided by
the 1970 Act have special significance this year in
view of the very real threat of Southern corn leaf
blight and the shortage of blight-resistant seed.
Corn producers, for example, may plant wheat and
grain sorghum on their feed grain base without loss
of history or payments.

Farmers in all or parts of

nine Southern states, including the entire states of
North and South Carolina, have also been declared
eligible to apply for permission to substitute soy­

allotment; for the feed grain producer, the set aside

beans or other crops on corn acreage in 1971 if they

amounts to 20% of the farm’s feed grain base; and

can show that they are unable to obtain enough

for the wheat farmer, it equals 75% of his domestic

blight-resistant seed to plant at least 45% of their

allotment.
Once a farmer sets aside the required amount of

corn acreage base. Similar authority for farmers in
several other states is under study.

cropland to approved conservation uses and main­

Sada L. Clarke




15