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Some 19th Century Controversies Revisited

Standing on opposite sides of the current debate
over monetary theory and policy, and delineating
the major issues, are a monetarist group and a non­
monetarist or credit school contingent. Generally,
the monetarists: (1 ) make a sharp distinction be­
tween money and other liquid assets;
(2 ) argue
that the money stock determines total spending, the
price level, and the nominal level of national incom e;
(3 ) believe that the central bank can control the
money supply by controlling a narrowly defined
m onetary base (cu rren cy plus bank reserves) ;
(4 ) are critical of the central bank’s past performance
in controlling the money supply and argue that in­
appropriate policies may have been the source of
economic disturbances; and (5 ) wish to replace the
central bank’s discretionary powers with rules.
The nonmonetarists, on the other hand, generally:
(1 ) view money merely as a component of a broad
spectrum of liquid assets that have an important
bearing on total spending; (2 ) argue that the money
supply is largely an endogenous variable, i.e., de­
termined primarily by (instead of itself determining)
the level of economic activity and by the public’s
preferences for money and other types of liquid as­
sets; (3 ) hold that, in the short run at least, the
slippage between the monetary base and the money
supply renders the central bank’s control over the
latter weak and uncertain ; (4 ) believe that economic
disturbances stem chiefly from nonmonetary factors
instead of from inappropriate central bank policies;
and (5 ) defend the central bank’s discretionary
powers by alleging that rules are too simple and too
narrowly circumscribed to handle all contingencies.
The intensity of the current monetarist-nonmonetarist debate tends to obscure its origins and
its lineage. The current controversy is the latest re­
currence of a debate that has been going on for a
long time. The essentials of the debate can be
traced back to the Bullionist-Antibullionist and Cur­
rency-Banking School controversies that took place
in Britain in the 19th century. This article traces
the development of the controversy and shows how
similar in essentials are the prevalent monetary
doctrines of today and their counterparts in the


T h e B u llio n is t - A n t ib u llio n is t C on troversy In
1797, under the stress of the Napoleonic Wars,
Britain departed the gold standard for an incon­
vertible paper standard. A series of poor harvests,
necessitating extraordinary wheat im ports, had
weakened England’s trade balance.
The tradebalance deterioration combined with heavy military
expenditures abroad had depleted the Bank of E ng­
land’s gold holdings and had forced suspension of
specie payments, i.e., bank notes and deposits were
no longer automatically convertible into gold. The
suspension of specie payments and the corresponding
increase in the stock of paper money was followed
by a rise in the paper pound price of bullion, foreign
exchange and commodities. A debate arose between
the Bullionists and the Antibullionists centering on
two questions: W as there inflation in Britain? If
so, what was its source?
The Bullionists argued that inflation did exist,
that overissue of banknotes by the Bank of England
was its cause, and that the premium quoted on bul­
lion (the difference between the market and the mint
price of gold in terms of paper money) was the
proof. Price indexes were not in use then. The
Bullionists used the gold premium as we use price
indexes today to measure the extent of inflation.
The Antibullionists denied the existence of infla­
tion. The premium on gold, they said, was not due
to note overissue and rising domestic prices, but
to the unfavorable balance of payments that had
lowered the exchange rate of the British pound
relative to gold and foreign currencies. The Bul­
lionists replied that the cause of the persistent un­
favorable trade balance had to be currency inflation
rather than the commodity-sector disturbances cited
by the Antibullionists. This was an early example
of monetarist-nonmonetarist disagreement over the
source of economic disequilibrium, the monetarists
(Bullionists) finding it in the inappropriate actions
of the central bank and nonmonetarist (Antibul­
lionists) in monmonetary factors, notably crop
failures and heavy military outlays abroad.
Indicting the Bank of England for its tendency
to overissue notes, the Bullionists stressed several
points that thereafter became key components of

monetarist doctrine. First, they stated that the
money supply is the major determinant of the price
level and that changes in the money stock cause
price level changes. The Bullionists may have had
a fairly refined and subtle theory of money, but,
when discussing policy matters or interpreting events,
they resorted to the simplistic notion that prices
always vary directly and proportionally with changes
in the money supply.
Second, the Bullionists implied that the Bank of
England had the power to control the money supply
within close limits via control of a narrowly defined
monetary base. This point was brought out in their
treatment of the relation between the volume of Bank
of England notes and the volume of notes issued by
country banks. The money supply at that time in­
cluded gold and banknotes both of the Bank of Eng­
land and country banks. The link between the entire
money supply and the Bank of England note com ­
ponent might have appeared tenuous because of the
possibility of the country bank note component ex ­
panding and contracting independently of the be­
havior of Bank of England notes.
But the Bul­
lionists denied this possibility on two grounds.
First, the country banks tended to keep as a reserve
Bank of England notes equal to a relatively constant
percent of their own note liabilities. Second, any
overissue of country bank notes (and consequent
rise in local prices relative to London prices) would
drain Bank note reserves from the countryside to
London via a regional balance of payments mecha­
nism, thereby forcing the country banks to contract
their note issue. Because of the foregoing reasons,
asserted the Bullionists, country bank notes would
be passively tied to Bank of England notes by a
virtually rigid link and could expand or contract only
if the Bank’s issues did.
Third, the Bullionists felt that the Bank of E ng­
land’s discretionary policy should be limited and the
conduct of monetary policy prescribed by a rigid
rule. In this case, the rule prescribed was that the
Bank should limit its issues of inconvertible paper
to the volume that would exist if the notes were con ­
vertible into gold, i.e., that the bank limit its note
issue to the amount consistent with equality between
the mint and market price of bullion.
Defending the Bank of England against the Bullionist charge of note overissue, the Antibullionists
employed the real-bills doctrine which, thereafter, oc­
cupied a vital position in nonmonetarist thought.
Overissue of inconvertible paper currency would be
impossible, argued the Antibullionists, as long as new
notes were issued only on the discount of sound com ­
mercial paper. The rationale of the real-bills doctrine

was that the creation of money would be tied to the
production of additional output and that the money
would be extinguished as the paper was redeemed
with the sales proceeds. Since money creation would
be limited to the expansion of goods, no inflation
would occur.
T he C urrency-B anking School C ontroversy The
m onetarist-nonm onetarist con troversy flared up
again in the discussion surrounding the Bank
Charter A ct of 1844. The protagonists at this time
were known as the Currency School and the Banking
School, but they were the intellectual heirs of the
Bullionists and Antibullionists.
The Bullionists, in their search for a rule limiting
the discretionary powers of the Bank of England,
had established a precept which was adopted by the
Currency School. A ccording to this precept, a mixed
gold-paper currency should be made to behave e x ­
actly as would a purely metallic currency. The
Bullionists had thought that convertibility as such
would be sufficient to insure that the paper currency
would respond automatically to gold flows consistent
with this precept. Convertibility alone, they thought,
would be sufficient to prevent currency overissue, to
keep the foreign exchanges at par, and to maintain
equality between mint and market price of gold.
Thus, the Bullionists were satisfied when England
resumed specie payments, i.e., went back on the
gold standard in 1821.
T o members of the Currency School, however, the
requirement of convertibility was not sufficient, by
itself, to prevent overissue. They feared that even
a legally convertible currency could be issued to
excess with the fo llo w in g co n se q u e n ce s: rising
British prices relative to foreign prices, unfavorable
balance of payments, gold outflow, depletion of gold
reserves, and, ultimately, suspension of converti­
bility. The rate of reserve depletion would be ac­
celerated, they noted, if the external gold drain
coincided with an internal drain as domestic resi­
dents, pessimistic about the maintenance of con­
vertibility in the future, sought to convert paper cur­
rency into gold.
The apprehensions of the Currency School were
well founded. Experience following the 1821 re­
sumption of specie payments had demonstrated to
the Currency School that mere convertibility was not
enough to preserve the gold standard (the primary
policy objective in those days). In the three decades
following resumption, British financial history was
punctuated by frequent external gold drains— some
so severe as to endanger convertibility— and by
periodic overexpansion of credit followed by panics

and liquidity crises. Moreover, to many members
of the Currency School, it appeared that the actions
of the Bank of England had been sluggish, perverse,
and destabilizing during these periods. It seemed
that the Bank’s reactions to external drains were
often too late to protect the gold reserve and served
instead to weaken public confidence in the Bank’s
ability to maintain convertibility. Furtherm ore,
when the Bank finally did apply restrictive policies
to stem the gold losses, these policy actions tended
to coincide with and to exacerbate the domestic
liquidity crises. W hat was needed to prevent the
recurrence of gold drains, exchange depreciation, and
dom estic liquidity crises, the C urrency School
thought, was convertibility plus strict regulation of
the volume of Bank notes.
The Currency School was successful in enacting
its ideas into legislation. The Bank Charter A ct of
1844 embodied its prescription that, except for a
fixed amount of notes which the Bank could issue
against government securities, new notes could only
be emitted if an equivalent amount of gold or silver
was brought to the Bank. In modern parlance, the
Charter A ct established a marginal gold reserve re­
quirement of 100% behind note issues. W ith notes
tied to gold in this fashion, external gold drains
would be accompanied by reduction of a like amount
of notes domestically.

change and demand deposits (now , but not then, de­
fined as part of the money supply)— from their
policy analysis. They thought that the entire credit
superstructure could be controlled by control of the
note base. In particular, they thought that the note
issue set a limit on the creation of deposits so that
control of the former implied control of the latter.
This argument bears some resemblance to the modern
monetarist doctrine that control of a narrowly-defined stock of “ high powered money” implies virtual
control of the money supply. In justification of the
sharp distinction they made between money and
near money, they pointed out that in crises near
moneys were poor substitutes for money strictly
speaking (gold and notes), because only the latter
would be accepted in final payment.
Third, the Currency School wanted the Bank’s
discretionary powers in policy making severely con­
strained. The Charter A ct’s provision for tying
note issues to gold instead of to the discretion
of the Bank’s officers was intended to serve this

Monetarist Doctrines of the Currency School It
is easy to detect the monetarist doctrines in the Cur­
rency School’s arguments. First, of course, was the
Currency School’s prescription for stabilizing prices,
securing convertibility, and preserving the gold
standard by tying the note issue to gold. This pre­
scription was based on the monetarist notion that
money stock changes cause price level changes. The
Currency School held that the channel of influence
ran from domestic note overissue to rising prices to
a weakened trade balance and deterioration of the
foreign exchanges and ultimately to gold outflows.
Similarly, domestic price rises would be reversed and
the foreign exchanges strengthened by reducing the
note issue. By tying notes to gold with a 100% re­
serve requirement, stability of the foreign exchanges
would be achieved automatically.
Second, the Currency School displayed monetarist
traits in focusing on a narrow concept of money.

Real Bills and the Commercial Loan Theory In
contrast to the Currency School, members of the
Banking School thought that convertibility was suf­
ficient to assure monetary stability. They thought
that no further regulation of note issue was needed.
Their arguments relied on the real bills doctrine and
the law of reflux. A s noted earlier, the real bills
doctrine asserts the impossibility of note overissue as
long as banks restrict their loans to self-liquidating
commercial or agricultural paper.
The Banking
School advocated discretionary control of bank notes
by banks themselves. Banks, they thought, could
judge the volume of notes required to meet the
legitimate needs of trade. But Banking School ad­
vocates went further, noting that, even if the real
bills criterion was violated, the law of reflux would
operate to prevent overissue. If notes were emitted
in excess of legitimate working capital needs, the
public would not wish to hold the excess notes, and
the notes would flow back to the banks. Because of
this reflux mechanism, convertibility alone was suf­
ficient insurance against overissue. Accordingly, the
central bank did not need to be constrained by a
rigid rule because the supply of money and credit
would regulate itself automatically through the force

The strict separation of money from “ near money”

of people’s self-interest.

is a monetarist characteristic.

fluenced later antimonetarist opposition to monetary

A t a time when bills

of exchange and demand deposits were being em­
ployed increasingly as exchange media, the Currency

This notion probably in­

“ rules.”
The Banking School never explained adequately

School advocates concentrated on notes only. They

the rationale of the law of reflux.

felt justified in excluding near money— bills of ex ­

consisted of little more than the notions that (1 ) the


Apparently, it

public determines the amount of currency it needs
to make purchases at current prices, and (2 ) if the
currency in existence exceeds the desired amount,
the public would return the excess to the banking
system. The banks were viewed as being entirely
passive. They could not force an excess issue on
the public. The current price level and the volume
of transactions were treated as given data (instead
o f as variables determ ined within the econom ic
system) by the Banking School in its discussion of
the reflux.

tivity precede money supply changes, (2 ) the supply
of circulating media is not independent of the de­
mand, and (3 ) the central bank is often not an
active controller of the money supply but, instead, is
an agency responding to prior changes in the demand
for money.

Nonmonetarist Doctrines of the Banking School
Like present-day nonm onetarists, the Banking
School emphasized the overall structure of credit
rather than a narrowly defined money supply. It
criticized attempts to make a watertight distinction
between money and near money.
The Banking
School argued that the use of bank deposits, bills
of exchange, and other forms of credit (i.e., money
substitutes) would defeat the Currency School’s ef­
forts to control the credit superstructure via control
of the banknote base. The Banking School thought
that the volume of credit that could be erected on a
given monetary base was extremely variable and un­
predictable. Here is the nonmonetarist notion that
the volume of credit is independent of, as well as
quantitatively more significant than, the money stock.
It should be noted that in the Banking School’s
terminology the word credit was largely synonomous
with the term means of payment. Today a distinction
is drawn between the two concepts: bank credit
refers to the earning assets of banks whereas deposit
and note liabilities of banks serve as means of pay­
ment. However, the tendency to meld or fuse the
two concepts persists in banking circles and may ac­
count for the central bank’s emphasis on qualitative
control of loans in the 1920’s and for its primary
policy focus, until quite recently, on credit and creditmarket conditions instead of on the money supply.
Contrary to the Currency School’s contention that
the channel of influence runs from money to prices,
the Banking School argued that the channel of
causation runs in the opposite direction. That is,
when prices, total money income, and aggregate de­
mand are increasing, the demand for loans would in­
crease and the banking system would respond to the
increased loan demand by supplying additional credit

Outcome of the Currency-Banking Debate W h at
was the outcome of these 19th century debates? It
was largely a standoff.
Although the Currency
School’s prescription of fixed exchanges, maintenance
of the gold standard, currency convertibility, and
strict control of notes (but not of deposits) became
part of British monetary orthodoxy in the second
half of the 19th century, the Currency School’s once
dominant position had eroded significantly by the
turn of the century. It was clear by then that the
Currency School had grossly underestimated the
significance of deposits.
The Currency School
wanted monetary control to be automatic, but the
failure of the 1844 Bank Charter A ct to regulate
deposits permitted the Bank of England to exercise
discretionary control over this part of the money
supply. Growing recognition of the Bank’s responsi­
bility as a lender of last resort, together with the
Bank’s successful use of its discount rate in pro­
tecting its gold reserve, further strengthened the case
for discretionary control. In addition, attention was
swinging away from the Currency School’s concern
with maintaining stability in the external exchanges
to the problem of domestic price level stability.
It is also true that the Bullionists’ and Currency
School’s quantity theory of money had gained wide­
spread acceptance among academic economists by the
end of the century. But this advantage was offset
by the survival in banking circles of the Anti­
bullionists’ and Banking School’s real bills doctrine.
The real bills doctrine had been subjected to sus­
tained criticism throughout the 19th century. The
monetarists had demonstrated that as long as the
loan rate of interest is below the expected yield on
new capital projects, the demand for loans would
be insatiable. In such a case the real bills criterion
would not effectively limit the quantity of money in
existence. Despite this and other criticisms, the real
bills doctrine survived in banking tradition and was
incorporated as a key concept into the Federal R e­
serve A ct of 1913. The A ct provided for the ex­

and circulating media.

In the determination of the

tension of reserve bank credit (chiefly loans to mem­

volume of currency in existence, the public (b or­

ber banks) via the Federal Reserve’s rediscounting

rowers) played an active role and banks (issuers)

of eligible (short-term, self-liquidating) commercial

a passive role. The volume of currency was demand

paper presented to it by member banks.


Here is the origin of three more non­

monetarist doctrines:

(1 ) changes in economic ac­

In summary, the dominant position that mone­
tarists had gained by their initial victories had de­

teriorated by the turn of the century. A s evidence
that the monetarists did not gain the upper hand,
we may cite the Stabilization Hearings before the
U. S. Congress in the 1920’s. American monetarists,
wishing to limit the discretion of the central bank,
proposed the adoption of a legislative mandate re­
quiring the Federal Reserve to stabilize the price
level as measured by a price index. Federal Reserve
officials employed Banking School arguments in their
opposition to the proposal. The proposal was not
enacted into law.
T h e Current D ebate T h e main lines of the 19th
century debates remain essentially unchanged up
to the present time, and the debate today is a
standoff just as it was at the turn of the century.
Today’s monetarists are no less critical of the central
bank than their Bullionist forebears were of the 19th
century Bank of England.
Some modern mone­
tarists attribute both the Great Depression of the
1930’s and the inflation of the late 1960’s to inap­
propriate central bank policies. Monetarists still ad­
vocate that the central bank’s discretionary mone­
tary management be replaced by a rule— in this case
a rule fixing the annual growth rate of the money
stock at a steady figure roughly corresponding to
the long-term trend growth rate of output. M one­
tarists still argue that money-stock changes precede
and cause changes in national income. They still
argue that the central bank has full control over a
well defined monetary base which is sufficient to
enable it to control the money supply.
On the other side of the debate nonmonetarist
doctrines are still very much in force. A large body
of literature questions the distinction between money
and other liquid assets and belittles the efficacy of
actions to control the stock of money in a financial
system that can produce an endless variety of money
substitutes. Similar issues were, of course, raised
by the Banking School. Moreover, the monetarist
conception of the money supply as an exogenous
variable under the control of an independent central
bank is being questioned. Countering the monetarist
conception is the Banking School notion of the
money supply as an endogenous variable, determined


by the level of economic activity and by the public’s
preferences for money as against other financial as­
sets. Even the old law of reflux has reappeared in
a new version which holds that the public will adjust
its volume of deposits so as to eliminate any excess.
In addition, while the central bank no longer adheres
to the real bills principle, until fairly recently it still
defined its actions and formulated its policies largely
in terms of Banking School concepts (e.g., credit
market conditions) instead of in terms of the money
supply. In the past year, the central bank has given
greater consideration to the money supply as a policy
target. But it still uses credit-market conditions as
supplementary policy guides, and some monetarists
charge that it continues to give too much weight to
the objective of credit-market stabilization. Finally,
nonmonetarist interpretations of economic distur­
bance are frequently heard. Inflation is said to result
from cost-push forces, administered prices, sectional
demand shifts, and bottlenecks in the econom y’s
structure rather than from an oversupply of money.
Nonmonetarist explanations of the cause of the Great
Depression, e.g., vanishing investment opportunities,
collapse of confidence, and the stock-market crash,
compete with monetarist explanations.
C onclusion T h e lon gevity of the m onetaristnonmonetarist controversy is remarkable. Despite
two centuries of innovations in monetary thought,
policy, and institutions, the two sides still argue over
basically the same issues. One can only speculate as
to why the debate has not long since been laid to
rest. Maybe it is because some of the commentators
have not been sufficiently aware of the work of their
predecessors. Or perhaps it is because until very
recently statistical analysis was not sufficiently ad­
vanced to permit rigorous testing of the opposing
theories. M ore likely it is because neither side has
a monopoly on the truth. If this is the case, it is
unlikely that the controversy will be resolved in the
near future.
Even with sophisticated empirical
techniques, it will probably take a long time to
identify conclusively the valid elements of each
Thomas M . Humphrey

A major determinant of the structure of the bank­
ing industry is the set of regulations governing bank
formation, branching, mergers, and bank holding
companies. In the Fifth Federal Reserve District,
as elsewhere in the United States, this regulatory
environment is complex. Federal regulations differ
among the several classes of banks. Three federal
agencies (the Comptroller of the Currency, the Fed­
eral Deposit Insurance Corporation, and the Federal
Reserve System) share supervisory responsibility
among themselves and with state regulatory au­
thorities. State laws vary widely from one state to
The purpose of this article is to summarize and
compare regulations affecting the banking structure
in the states of the Fifth District. The Fifth Dis­
trict presents a particularly interesting sample for
such a comparison, since each of the principal types
of bank law environment found in the United States
is represented by at least one state in the District.
The accompanying table outlines current federal and
state restrictions having the greatest impact on the
banking structure.
The remainder of this article
discusses each section of the table in turn.

statutory minima probably give some indication of
the relative stringency of actual requirements in par­
ticular states. W ith the exception of Virginia, mini­
mum capital set by Fifth District state laws varies
depending on the population of the city or town in
which the new bank intends to establish its home
office.1 The considerable variety of requirements
which arises under this scheme makes generalization
difficult; however, as the first row of the table indi­
cates, North Carolina minima appear to be relatively
high and South Carolina requirements comparatively
low for most population categories.
The relative
position of the other states varies from one popula­
tion range to another.
(Rows 2 and 3 of Table)

The regulation of bank branching and bank mer­
gers significantly influences the banking structure in
any state, since these activities directly affect both the
number and size distribution of banks. In general,
a bank can, where permitted, establish a branch by
either of two procedures: (1 ) creation of a new fa­
cility ( de novo branching), or (2 ) conversion of an

(Row 1 of Table)

Requirements for the establishment of new banks
are given by federal law for national banks and by
state law for state chartered banks.
capital requirements are of special significance for
the banking structure. These requirements can af­
fect the number of banks operating in a given state,
since they are an important determinant of the ease
with which a new bank can be formed. Moreover,
since bank size, as measured by total assets or total
deposits, is related to capital, these requirements can
also affect the size distribution of banks in a given
Federal and state statutes establish minimum
standards respecting bank capital. Actual capital re­
quirements, however, are determined for each po­
tential entrant by the relevant chartering authority
and often exceed statutory minima.

existing facility acquired by merger.

In the vast

majority of cases, the object of a merger is the es­
tablishment of a branch by the acquiring bank. Con­
sequently, laws regulating branching and mergers
are intimately related and are discussed together in
this section.
The intermingling of federal and state jurisdic­
tions is particularly complex in the area of branch­
ing and mergers.

In general, however, state laws

provide the ultimate constraint in that individual
states can prohibit or restrict branching by both
national and state banks within

their respective

boundaries even though branching is permitted state­
wide by federal statutes.

The simplest procedure in

approaching this subject is to consider the situation
prevailing in each District state in turn.
1 In states where branching is permitted, m inim um additional capital
required to establish a branch in a given location is identical to or
close to the requirement for a new bank in the same location.


AU GU ST, 1970
N ational Banks

M em ber Banks

N onm em ber Banks

M ary lan d

1. Entry Requirements

0 — 15,000:


a. M inimum
C ap ital (require­
ments for each
population range)

6.000 - 50,000:
50.000 + :

b. Paid-in Surplus


2. Domestic Branches

$25,0 0 0
1 5 .0 0 0 - 5 0 ,0 0 0 :
5 0 . 0 0 0 - 1 5 0,000:
$1 0 0 ,0 0 0
150,000 + :


of capital stock

Permitted. Prior a p ­
proval by Com ptroller

Prior a p ­
proval by Board of
G overnors required

proval by

Prior a p ­
FDIC re­

C aro lin a

C aro lin a

0 - 3,000:
3 , 0 0 0 - 10,000:
10,000 + :
$1 0 0 ,0 0 0

0 - 3,000:
$100,0 0 0
3 ,0 0 0 — 10,000:
$1 5 0 ,0 0 0
10,000 — 2 5 ,000:
$ 2 0 0,000
25,0 0 0 — 50,000:
$250,0 0 0
50 ,0 0 0 + :
$300,0 0 0


of capital stock 50% of cap ital stock

Permitted statew ide. Permitted statew ide.
Prior a p p ro val by .prior a p p ro v al by
Bank Com m issioner Com m isioner of Banks

W est
V irg in ia

V irg in ia

District of
Colum bia

Uniform $ 5 0 ,0 0 0 2

0 - 3,000:
$50,0 0 0
3 .000 - 6,000:
6.000 - 2 5 ,000:
$1 0 0 ,0 0 0
2 5 ,0 0 0 - 5 0 ,0 0 0 :
$ 1 2 5,000
5 0 .0 0 0 + :
$ 1 5 0 ,0 0 0

1) De novo branch­
ing permitted:
a) w ithin the city,
tow n, or county of
parent ban k


Permitted throughout
the District of Colum ­
Prior a p p ro val
by Com ptroller re­

of cap ital stock

Permitted statewide.
Prior ap p ro val by
Board of Bank Con­
trol required

Federal la w does not geo grap hically restrict branching.
Each bank,
including each national bank, is subject to the geographic restrictions
on branching imposed by the state in w hich it operates.

b) w ithin a city con­
tiguous to the city or
county of parent
c) w ithin a county
contiguous to the city
of parent bank up to
5 miles from city
Prior ap p ro val by
State Corporation
Com m ission required
2) De novo branching
permitted statew ide
at certain fed eral and
state installations.
Prior a p p ro v al by
Com m ission required
3) Branching by m er­
ger permitted state­
w ide. Prior ap p ro val
of Com m ission re ­

3. M ergers

Prior a p ­
proval by Com ptroller
required if resulting
bank is a national

Prior a p ­
proval by Board of
G overnors required if
resulting bank is a
state m em ber bank

Prior a p ­
proval by FDIC re­
quired if resulting
bank is an insured
nonm em ber bank

Prior ap- Permittec|.
Prior a p ­
proval by Bank Com- p ro va| by Commism issioner required i f sioner Gf Banks reresulting bank is a quired if resulting
state bank
bank is a state bank

Permitted. State a p ­
proval not required

Prior a p ­
proval by State C o r­
poration Com m ission

No statutory provi­
sions regulating bank
m ergers specifically

No statutory provi­
sions regulating bank
m ergers specifically

No statutory p ro v i-No statutory provisions regulating b a n k sjons regulating bank
holding com pany fo r-fo ld in g com pany for­
m ations, acquisitions% T,a jjonS( acquisitions
or m ergers
or m ergers

Prior ap p ro val by
Board of Bank Con­
trol required for bank
holding com pany
form ations, a cq u isi­
tions and m ergers

No statutory provi­
sions regulating bank
holding com pany for­
m ations, acquisitions
or m ergers


No statutory provi­
sions regulating bank
holding com pany fo r­
m ations, acquisitions
or m ergers

M ergers involving a n y insured bank a re subject to the Bank M erger
Act of 1960 w hich:
1) prohibits m ergers resulting in a monopoly, and
2) prohibits m ergers w hich lessen competition unless the anti­
competitive effects a re clearly outweighed by increased public
4. Bank Holding
Com panies

Bank Holding C om p any Act of 1956 defines a bank holding com pany
as a n y com pany controlling 25% or more of the voting stock of 2 or
more banks or w hich controls the election of a m ajority of the di­
rectors of 2 or more banks. W ithin the limits of this definition, prior
appro val by the Board of Governors is required for:


the form ation of a bank holding com pany,

2) the acquisition by a bank holding com pany of 5% or more of
the voting stock of an y bank, and
3) the m erger of a bank holding com pany w ith another bank
holding com pany.
The Board receives recom m endations of the Com ptroller and state
banking authorities regarding bank holding com pany acquisitions
which affect national and state banks, respectively.
The Board must
not approve:


acquisitions resulting in a monopoly, or

acquisitions w hich lessen competition, unless the anticom ­
petitive effects a re clearly outweighed by increased public con­
Subject to certain detailed provisions, bank holding com panies m ay
not en gag e in business unrelated to banking.

Relevant Federal and state statutes.
Requirements given here are fo r all banks.


Requirements for banks intending to engage in trust activities are higher.

law s of the District of Columbia do not provide fo r the chartering of commercial banks by the Government of the
District of Columbia. The Government of the District o f Columbia can, however, charter trust companies which may perform
• ■ ■ ■•




___ ? i _ •_ r _ _ iL _ _ _ _ ___ l _
._ _ _ _
_ i
_ _
. • _ _ _

there was chartered by the Comptroller in accordance with an Act of Congress.

_i_ ±_ t r\ n n r\
_ _ r\ r\

U_______ L

Maryland, North Carolina, and South Carolina
all permit statewide branching either de novo or by
merger with prior approval by state banking au­
thorities. A s the first three columns of rows 2 and 3

area of the acquired bank then remains possible.4
W est Virginia law prohibits bank branches al­
together, and W est Virginia remains the only unit
banking state in the District.

of the table indicate, insured banks operating in these

areas must also obtain approval of one of the three


federal agencies regulating banks, the particular
agency depending on the classification of the bank
in question.2 District of Columbia banks can branch
throughout the city with prior approval by the Comp­

Federal and state laws contain general

guidelines (pertaining to com petitive and con ­
venience effects) which are designed to assist in the
disposition of individual applications.

practice, both federal and state regulatory

agencies possess considerable discretionary authority
in specific cases that can, over a period of time,
significantly affect the actual banking structure in
each of these states.

It is with respect to this dis­

cretionary power that the major practical distinction
between de novo and merger branching in these
states arises; namely, branching by merger does, but
de novo branching does not, eliminate existing bank

Therefore, speaking generally, mer­

ger branching is more likely to affect competition
adversely in a given market area than de novo
branching, a fact which may influence agency rulings.
Prior to 1962, Virginia law permitted banks to
branch either de novo or by merger, but only in the
geographic vicinity of the home office.

In 1962, the

law was revised to permit statewide branching by

D e novo branching, however, remains re­

stricted to the local area of the home office.


revised law has stimulated the growth of statewide
banking organizations in V irginia; however, the con ­
tinued ban on nonlocal de novo branching has en­
couraged several large banks to expand via the hold­
ing company route.3

This preference results from

the fact that nonlocal branching by merger eliminates
the home office of an acquired bank and hence pre­
cludes further branching on a de novo basis in the
new location.

In contrast, holding company acquisi­

tion of a bank does not eliminate the existing home

Further branching on a de novo basis in the

2 In general, federal authority over banks is divided among the three
federal agencies as follow s:
the Comptroller regulates national
banks, the Board of Governors of the Federal Reserve System regu­
lates state-chartered banks which are members of the System, and
the Federal Deposit Insurance Corporation regulates insured statechartered banks which are not members of the System. Each agency
must seek the advice of the other two agencies when reaching
merger decisions within their respective jurisdictions.
3 Virginia law does not restrict bank holding company acquisitions.


4 of Table)

Federal and state laws restricting bank holding
company activity stem from two separate areas of
concern: (1 ) fear that the growth of large holding
companies will reduce competition in the banking
industry, and (2 ) fear that the close association of
banks with nonbank holding company affiliates will
lead to unsound banking practices. The first area
of concern, related specifically to the banking struc­
ture, is essentially the same one motivating the regu­
lation of bank branching and focuses attention pri­
marily, but not exclusively, on multiple-bank holding
companies. The latter apprehension, generated by
the experience of the Great Depression, currently
extends to both multiple-bank and one-bank holding
In the Fifth District, W est Virginia prohibits
multiple bank holding companies Elsewhere in the
District, the legal foundation for bank holding com ­
pany regulation is the federal Bank Holding Com­
pany Act of 1956 (row 4, column 1). This statute
applies to “ registered” bank holding companies only,
i.e., to holding companies controlling two or more
banks. Under this law, the Board of Governors of
the Federal Reserve System must approve registered
bank holding company formations, acquisitions, and
mergers. The statute explicitly requires that non­
banking subsidiaries of registered bank holding com ­
panies be “ . . . so closely related to the business of
banking. . . as to be a proper incident thereto . . . .”
District of Columbia, Maryland, North Carolina, and
Virginia laws do not contain provisions for bank
holding company regulation. Therefore, the Board
of Governors exercises exclusive legal authority in
these states, although, under the 1956 statute, state
banking authorities submit recommendations to the
Board regarding holding company acquisitions of
state banks.

South Carolina law requires prior ap­

proval by the State Board of Bank Control of
registered holding company formations, acquisitions,
and mergers, regardless of whether the banks in­
volved in these transactions are state or national

a comprehensive description of banking developments in V ir ­
ginia during the past decade see Robert G. Murphy, The Virginia
Banking Stru ctu re:
Changes Since 1962. Unpublished thesis, The
Stonier Graduate School of Banking, R utgers:
The State U n i­
versity, N ew Brunswick, N ew Jersey, 1969.

Currently, one-bank holding companies are subject
only to federal and state laws applicable to all (fi­
nancial and nonfinancial) holding companies. Until
recently, the majority of one-bank holding companies
in the United States controlled relatively small
banks. During the past three years, however, the
number of one-bank holding companies has increased

were the lead institutions of one-bank holding com ­
panies. By state, the two largest banks in Maryland,
the three largest banks in North Carolina, two of
the three largest banks in South Carolina, and the
second largest bank in Virginia were one-bank hold­
ing company subsidiaries on the same date.

sharply, and such companies now list several of the
nation’s largest banks as subsidiaries.


Most of these

companies were initiated and are controlled by the

Federal and state laws regulating bank entry,

managements of the participating banks themselves.

branching, mergers, and holding companies signifi­

Congress is currently considering several bills im­

cantly affect the structure of the banking industry

posing varying degrees of restriction on one-bank

in each of the Fifth Federal Reserve District states.

holding company activities.

This article has attempted to summarize the principal

In general, these pro­

posals would give either the Board of Governors or

features of these regulations.

all three federal

greater detail should consult the relevant statutes




The reader who seeks

powers over one-bank holding companies comparable


to the authority presently exercised by the Board of

laws grant considerable discretionary powers to fed­

Further, since both federal and state

Governors over registered bank holding companies.

eral and state banking authorities, the interested

If such legislation is enacted, the effect on the Fifth

reader should familiarize himself with recent de­

District banking industry could be considerable. On

cisions of these agencies in specific cases.

June 30. 1970, the four largest banks in the District

/ . Alfred Broaddus, Jr.


Table of Contents—1 970

Ja n u a ry

Economic Review of 1969—The Fifth District
Federal Housing Agencies and the Residential M ortgage M arket
State and Local Governm ent Debt

W illiam H. W allace
Ja n e F. Nelson
Ja n e F. Nelson

Feb ruary

Forecasts 1970
Construction Costs
Farm Financial and Credit Conditions

W illiam E. Cullison
Ja n e F. Nelson
S a d a L. C la rke


Perspective on M onetary Policy
The Agricultural Outlook for 1970
Bank Credit Proxy

J. Dew ey Dane
S a d a L. C larke
Jim m ie R. Monhollon


Forecasting Accuracy in the Sixties
Survey of Time and Savin g s Deposits

Clyde H. Farnsw orth, Jr.
Jim m ie R. Monhollon and
Ja n e F. Nelson
M. G ra ce Haskins

The Fifth District (Personal Income)
M ay

The Evolving Payments System
The Federal Reserve's Com m unications Center and the
Paym ents System
The W ashington-Baltim ore Regional C heck C learin g Center

A ubrey N. Snellings
W illiam H. W alla ce

M obile and M odular Housing

H. Lee Boatw right, III and
C . P. K ahler

The Flow-of-Funds Accounts

C lyd e H. Farnsw orth, Jr. and
H. Su zan ne Jones
W ynnelle W ilson and
M arjorie Solomon
Sum iye O kubo


Regulation Q : An Instrument of M onetary Policy
The Public Inform ation Function

Jim m ie R. Monhollon
C a rla R. G rego ry


A Seaso n ally Adjusted W orld
Federal O u tlays in the Sixties
C ontainer Shipping

W illiam E. Cullison
W ynnelle W ilson
Robert W . Cham berlin

Septem ber

M easuring Price C hang es
C orpo rate Financing in the Sixties
A N ew Look at Counterfeiting

W illiam H. W allace
Philip H. Davidson
C a rla R. G rego ry

O ctober

M easuring Price C hang es
Parity, Support Prices, Direct Paym ents, and All That

W illiam H. W alla ce
Thom as E. Snider

Novem ber

M easuring Price C hang es
Foreign Autom obile Sa les in the United States
Personal Income in the Fifth District
M obile Home Financing

W illiam H. W allace
Sum iye Okubo
W illiam E. Cullison
C lyd e H. Farnsw orth, Jr.


The M onetarist-N onm onetarist Debate
Regulations Affecting Banking Structure in the Fifth District

Thom as M. Humphrey
J. Alfred Broaddus, Jr.


Fifth District Investors and the Bill M arket