Full text of New England Economic Review : January/February 1969
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January/February
1969
FEDERAL RESERVE BANK OF BOSTON
NEW
ENGLAND
ECONOMIC
REVIEW
Bank Holding Companies and Public Policy
Bank holding companies are playing an increasingly important role in
American banking. This article describes their recent growth in the Nation
and New England and analyzes aspects of bank holding company organization, operations, and performance that are relevant to public policy.
Increasing Job Opportunities in Boston's Urban Core
New industrial facilities in Roxbury and public transportation to suburban
plants create more job opportunities. This article examines the problems of
finding new plant sites within the urban core and the impact of the "Employment Express."
SUPPLEMENT:
Pax Americana
alance of Payments
Remarks by Fra ..
January 30, 1969.
-
dent, Federal Reserve Bank of Boston,
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Federal Reserve Bank of St. Louis
Bank Holding Companies
and Public Policy
By
STEVEN
companies have existed in the
B Unitedholding
States for over 50 years. Ever since
ANK
their early days, they have been a subject of continuing controversy among legislators, bankers'
organizations, and bank regulatory agencies. A
spokesman for independent bankers, testifying
before a Congressional committee in 1966,
voiced his objections to bank holding companies
in strong terms:
Bank holding companies are the most insidious
devices for accelerating the trend to concentration
(in banking) and elimination of competition ....
Although the laws require autonomous operation of banks by their respective boards of directors, it is common knowledge that holding companies are operated by a single management. The
central manager operates the subsidiary banks
like puppets on strings held in his hand and can
readily shift deposits, arrange loan and bond participations, and in many other ways use the subsidiary banks as a complex to overwhelm the
competition of independent banks ....
Of course, holding company bankers would respond with equally strong statements in favor of
the holding company form of bank organization.
Public policy must be based on a balanced view,
informed as much as possible by an objective
knowledge of bank holding company operations.
The above quotation is pertinent insofar as it
raises some of the major issues that are relevant
for policy purposes. One important question is
the extent to which concentration of banking
resources is increased through holding compa-
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J.
WEISS
nies and the impact that holding company formation and expansion have on banking competition
in specific areas. On the positive side, it is important to determine whether and how holding
company affiliation yields significant benefits in
terms of the convenience and needs of bank
customers.
This article will examine bank holding companies, emphasizing aspects that are of particular concern for public policy. First, the present
Federal law regarding bank holding companies
will be summarized briefly. Growth of bank
holding companies in the Nation and in New
England in particular will be described, along
with an analysis of the principal reasons for
growth and the arguments in favor of bank
holding company development.
Subsequent
sections will examine the performance of bank
holding companies, their various forms of organization and operation, and the record of
regulatory policy to date. The major issues in
the current debate about one-bank holding companies will be discussed in the last part of the
article.
Definitions. A bank holding company organization is essentially a form of bank ownership.
Any corporation, business trust, association, or
any other similar type of organization which
owns or controls one or more banks may be
classified as a bank holding company. Subsidiary
New England Economic Review
banks (or affiliates) of a bank holding company
are independently chartered banks which possess
varying degrees of autonomy depending upon
the organization and operational policies of the
holding company.1 "One-bank holding companies," i.e. organizations that control only a
single bank, must be distinguished from registered bank holding companies which control
two or more banks and are subject to specific
regulation by the Board of Governors of the
Federal Reserve System. A related form of
multi-bank organization, "chain banking," consists of common ownership of more than one
bank by an individual, partnership, family or any
other group of individuals.
Present Federal Regulation of
Bank Holding Companies
Registered bank holding companies are regulated by the Board of Governors under the Bank
Holding Company Act of 1956, as amended.2
The Act's coverage is limited by its definition of
a bank holding company in terms of ownership
or control of 25 percent or more of the stock of
at least two banks. The Act does not apply to
one-bank holding companies or to banking
chains. It also contains a number of special
exemptions, so that not all types of organizations
which control more than one bank are required
to register. The major purposes of the Bank
Holding Company Act were summarized in a
Senate Committee Report:
The Bank Holding Company Act has two chief
objectives. First, it seeks to prevent excessive
concentration of banks under the control of any
holding company. Second, it seeks to prevent
holding companies from combining banking and
I Bank holding companies are usually separately chartered
corporations, but a bank which owns stock in one or more
other banks (either directly or through a subsidiary) may
itself be a bank holding company.
2The appendix to this article contains a review of the
historical development of Federal bank holding company
legislation and a detailed discussion of the 1956 Act.
4
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Federal Reserve Bank of St. Louis
nonbanking businesses. The first objective reflects a desire to guard against undue concentration of control of banking activities because of the
importance of the banking system to the national
economy. The second objective reflects concern
over conflicts of interest that might result in a
subsidiary bank extending credit to an affiliated
business under circumstances that could endanger
the bank or give the borrower an unfair advantage
over competitors.
In order to accomplish the first objective, the
Act requires prior approval of the Board before
any action may be taken which would result in
(a) formation of a new bank holding company;
(b) acquisitions which give an existing holding
company ownership or control of over 5 percent
of the voting stock or substantially all the assets
of a bank not already a majority-controlled subsidiary; or (c) merger or consolidation of two
bank holding companies. The Board, in considering applications for prior approval, is directed to evaluate factors relating to the present
and prospective solvency of the institutions involved (the "banking factors"), benefits which
might accrue to affected communities ("convenience and needs" factors), and the impact of
the proposed transaction on com petition in
relevant banking market areas (the competitive
factor). Amendments enacted in 1966 give particular emphasis to the importance of the competitive factor in the Board's decisions. 3
Since one-bank holding companies are not
covered by the Bank Holding Company Act, the
second objective - separation of banking and
non-banking businesses - was only partially
achieved. Although there are some limited exceptions to this rule, the Act prohibits a registered bank holding company from holding or
acquiring stock in companies other than banks
8The Board may receive opinions from other supervisory
agencies in connection with applica tions for holding company
acquisitions, and in some cases it may be required to conduct
hearings. If the Department of Justice disapproves on
antitrust grounds of an acquisition which the Board approves, it has the power to file suit within 30 days to stop
the transaction.
January/ February /969
or companies engaged solely in activities closely
related to banking. 4
Other provisions of the Act effectively limit
holding company acquisitions across state lines,
specify administrative procedures, and outline
the Board's regulatory authority.
The Bank Holding Company Act represents
the first effective Federal legislation designed to
control the growth of bank holding companies
and supervise their operations. Enactment of
the law followed many years of controversy.
Although earlier legislative proposals sought to
limit severely the growth of bank holding companies or abolish them altogether, the intent of
the present law is essentially precautionary. The
present legislation implies Congressional acceptance of the bank holding company as a legitimate form of banking organization.
Growth of Registered Bank
Holding Companies
While the Bank Holding Company Act of 1956
was being considered by Congress, there was a
flurry of holding company acquisitions, as existing companies apparently feared that the legislation would restrict future expansion. In the 6
months immediately preceding passage of the
Act, holding companies acquired 19 subsidiary
banks with over $450 million in deposits.
At the end of 1956, 49 separate bank groups
were covered by the new legislation ;5 by June 30,
1968, the number had grown to 69. During this
period, however, the pattern of growth in the
4Provisions were included in the Act to assure that existing
bank holding companies could divest their nonbanking
interests on an equitable basis.
5 A larger number of "bank holding companies" were
required to register under the terms of the 1956 law, but in
some cases a two-tiered organizational structure means
that a single banking organization would have to register
twice - e.g. if one bank holding company controls another
bank holding company. The figures given here have been
adjusted to eliminate such double counting. They also
include two companies which did not register until 1959.
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Federal Reserve Bank of St. Louis
number of registered bank holding companies
was quite uneven. The years immediately after
enactment brought a net decline in the number of
registered companies. Twelve companies reduced their stock holdings to less than 25 percent
in two or more banks and were therefore no
longer subject to Board regulation. Others got
rid of their holdings or reorganized in some
manner, with the result that 19 companies were
no longer on the registered list 2 years after the
1956 Act took effect. 6
Growth in the number of registered bank
holding companies proceeded at a moderate pace
for about 10 years, and not until 1966 did the
number exceed the original level of 1956. It is
possible that uncertainty about the policy that
the Board would adopt in ruling on applications
to form new holding companies may have dampened the enthusiasm of prospective holding company organizers. In any case, the situation
changed dramatically in 1966 and 1967, when
there was an upsurge in the number of registered
bank holding company formations and expansions. Nineteen organizations were newly added
to the Board's list of registered bank holding
companies during those years,7 and the pace of
holding company acquisitions increased significantly. All signs point to a continuation of
this accelerated trend.
Data on the growth of registered bank holding
companies in the United States are presented in
Table I, which includes figures on the number of
holding company affiliates, banking offices in
holding company systems, and the dollar volume
of deposits controlled. Average annual percentage increases have been calculated for two subperiods - 1957-65 and 1965-67 - in order to
6 See Gerald C. Fischer, Bank Holding Companies (New
York: Columbia University Press, 1961), pp. 44-45.
7 Seven separate groups had existed previously but were
required to register for the first time in 1966 as a result of
amendments which removed several statutory exemptions
that had been written into the 1956 Act.
5
New England Economic Review
Table I
GROWTH OF REGISTERED BANK HOLDING COMPANIES,
1957-1967*, U. S. AND NEW ENGLAND
UNITED STATES
1957
1965
1967
Avg. Annual % Increase
1957-1965
1965-1967
1957-1967
MAINE
1957
1965
1967
Avg. Annual % Increase
1957-1965
1965-1967
1957-1967
MASSACHUSETTS
1957
1965
1967
Avg. Annual % Increase
1957-1965
1965-1967
1957-1967
NEW HAMPSHIRE
1957
1965
1967
Avg. Annual % Increase
1957-1965
1965-1967
1957-1967
*Data are for December of each year.
SOURCE:
Federal Reserve Bulletins.
6
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Federal Reserve Bank of St. Louis
No. of Banks
Affiliated With
Holding Companies
Offices of
Affiliated Banks
Deposits of
Holding Company
Banks ($ Mill.)
417
468
603
1,268
1,954
2,688
$15,139
27,560
49,827
1.4%
13.7
3.9
5.6%
17.4
7.9
3
4
6
11
12
48
16.5%
25.0
8.3
1.4%
150.0
31.1
22
23
24
140
194
218
0.6%
2.2
0.9
5
7.8%
35.2
13.3
$
4.3%
181.2
39.7
$
5
9
10
2.8%
8.4
3.9
7.9%
5.6
7.5
1,002
1,378
1,946
4.9%
15.6
7.0
4.3%
5.4
4.6
6
7
29
40
199
$
34
91
121
15.8%
13.4
13.9
January/February 1969
illustrate the break in the trend that occurred
around 1966. Growth in deposits and the number of banking offices in holding company
systems reflects not only the acquisition of new
subsidiary banks but also internal growth of
existing subsidiaries (including de novo branching) and their external growth (by merger). As
of December 31, 1967, 65 separate registered
bank holding company organizations controlled
603 banks with 2,085 branches and $49.8 billion
total deposits in 34 states and the District of
Columbia.
Growth in New England. Registered bank
holding companies exist in only three of the six
New England States - Maine, Massachusetts,
and New Hampshire. Vermont is the only New
England state that prohibits bank holding companies by statute. Neither Connecticut nor
Rhode Island has any law specifically relating to
bank holding companies; both states have large
branch banks, but no holding companies. 8
The accompanying maps show the present
geographical configuration of registered bank
holding company offices in Maine, Massachusetts, and New Hampshire, and Figure I shows
the relative importance (in terms of total commercial banking offices and deposits) of holding
company systems in these states and in all states
where holding company banks exist. By the end
of 1967, the bank holding company share of commercial bank deposits was larger in Maine,
Massachusetts, and New Hampshire than the
average for all holding company states, but there
are many individual states where bank holding
8 Massachusetts, one of the few states that has a detailed
bank holding company statute, regulates bank holding
companies under a law patterned closely after the Bank
Holding Company Act. Any bank holding company formation or expansion is illegal without the prior approval of the
state's Board of Bank Incorporation. Maine law places no
specific restrictions on bank holding companies. In New
Hampshire, state law specifically limits holding company
growth in two ways: (1) no bank holding company may have
more than 12 affiliates; and (2) no bank holding company
may hold, through its affiliates, over 20 percent of the total
deposits of all banks in the state.
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Federal Reserve Bank of St. Louis
companies are more important (by this measure)
in the overall banking structure. In Maine and
Massachusetts bank holding companies also
have an above average share of total commercial
banking offices. Together, the two Massachusetts holding companies control an unusually
large share of commercial banking offices in the
state, but that share has declined since 1957,
indicating that the number of independent bank
offices has grown faster (through de novo branching and organization of new banks) than the
number of offices operated by bank holding
company affiliates.9
The growth of bank holding companies in
New England has followed a pattern somewhat
different from that of the Nation as a whole, as
the state figures in Table I indicate. Except for
Maine, where a new holding company was organized in 1966, the state figures in the Table do
not reveal the sort of dramatic increase in growth
after 1965 which characterizes the national pattern. However, the situation appears to be
changing, therefore warranting a review of the
different factors underlying past growth and
prospects for further holding company development in the three holding company states of
the region.
(1) MAINE. The first bank holding company
in Maine came into existence in the late l 920's.
Between 1957 and 1967 the company held a
small and relatively stable share of total commercial bank deposits in the state. It acquired
only a single additional subsidiary bank over
that period. The importance of holding companies in the banking structure of Maine was
dramatically increased in 1967, when the largest
commercial bank began operations under a new
9Note again that the number of offices in holding company
systems increases as new subsidiary banks are acquired, or
as existing subsidiaries add branches de nova or by merger.
Declines in the national holding company share may reflect
de-registration of previously registered holding companies
as well as possible slower growth relative to all commercial
banks in any given period .
7
New England Economic Review
Map I-MA INE BANK HOLDING COMP ANIE S
*
• *
..
•
•
• •
•
Lewiston
•••
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LB RA RV
Federal Reserve Bank of St. Louis
*'.
*,.
ID:
DEPOSITORS CORPORATION , AUGUSTA
MERRILL BANKSHARES , BANGO R
EASTERN TRUST FINANC IAL ASSOCIATES , BANGO
R
Stars ind icate home off ices of subs id iary banks1
dots ind icate branch off ices.
January/February /969
holding company with another affiliate. The
large increases shown for Maine in Table I and
Figure I provide a quantitative measure of the
impact of this new holding company formation,
but the implications for future holding company
development are much greater than the numbers
alone indicate. The new company received permission in 1968 to acquire an additional subsidiary and is taking action to acquire several
more banks in the near future.
The aggressive activity and plans of this one
company have undoubtedly been an important
factor contributing to an upsurge of interest in
holding companies on the part of Maine bankers.
A third bank holding company was organized
in 1968, and plans for two more have been announced. If all these plans become effective in
the coming year, five registered bank holding
companies would control approximately half
of the commercial bank deposits in Maine by
the end of 1969.
Maine law permits statewide branching by
merger. Therefore, the present Maine holding
company systems could legally have taken the
form of branch banks rather than holding companies. Two reasons may explain the choice of
the holding company route over branch banking.
First, holding company development offers
greater flexibility with respect to future branching. Banks in Maine may branch de nova only in
their home office county and contiguous counties. When a holding company acquires a subsidiary, the subsidiary retains its power to expand geographically by de nova branching in its
local area. On the other hand, if the same bank
were merged into a bank in a distant county it
would become a branch office and the acquiring
bank would not be able to establish additional
de nova branches in the area. Even if this limitation did not exist, holding company organization
might be preferred over extensive branch
banking for a second reason, namely an expecta-
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Federal Reserve Bank of St. Louis
tion that the banking public would rather deal
with an institution that has local directors and
officers plus a long-standing local reputation and
identification. This consideration is particularly
important for a state which is as large as Maine
and contains many small towns and rural areas. 10
(2) MASSACHUSETTS. The two large registered
bank holding companies in Massachusetts began
as trust associations in the late l 920's, affiliated
or closely connected with large Boston banks.11
Both had quite extensive systems in 1956 when
the Bank Holding Company Act was passed.
Total deposits in each of the companies approximately doubled between 1956 and 1967, slightly
surpassing the overall deposit growth rate in the
state. Their roughly similar deposit growth records were achieved, however, in rather different
ways. Growth of one company (in terms of
offices as well as deposits) was entirely internal,
while the other acquired five new affiliates during the period and two of its banks merged with
banks outside the system. Since both companies
have consolidated their organizations to some
extent by merging subsidiary banks, 12 the net increase in the number of separate holding company affiliates in the state since 1956 has been
minimal. One of the present holding companies
has recently announced plans for a new acquisition, and the role of bank holding companies in
Massachusetts banking may also increase in the
near future as a result of new holding company
formations.
As multi-office banking organizations, Massachusetts bank holding companies enjoy a distinct
advantage over branch banks in their ability to
10 1t would not be such an important factor in Connecticut
or Rhode Island, for example, two states that are much
smaller and more integrated, economically, than Maine.
These states both have extensive branch banking systems
under more liberal branching laws than Maine's.
11 Bay state Corporation's Boston bank connection was
terminated in 1962.
12 Just like mergers involving any insured bank, mergers
of holding company subsidiaries are subject to the Bank
Merger Act of 1960, as amended.
9
Map II - MASSACHUSETTS BANK HOLDING COMPANIES _
0
Map]l
.:... ..
I
I
•
I
...
....
.,• .
I
l\y
I
I
. .•••:.•
I
L
•!'A,·•
__ _
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Federal Reserve Bank of St. Louis
•
•
•*
~•••• Springfield
- - -------w---0~ - - - - - - - - - ~ - - - KEY
SHAWMUT ASSOCIATION, BOSTON
29 BOSTON BANKS
BAYSTATE CORPORATION, BOSTON
Stars indicate home offices of subsidiary banks ,
dots indicate branch offices .
•
January/February 1969
achieve direct representation in economic areas
throughout the state. Individual banks are not
permitted to establish branches outside of their
home office county; this means that non-holding
company Boston banks are unable to compete
directly with offices in the rapidly growing suburbs. Map II shows that one holding company,
the Baystate Corporation, has utilized this advantage more fully by acquiring subsidiaries over
a broader area of the state. In contrast, the subsidiaries of Shawmut Association, Inc., are concentrated more heavily around Boston where
the largest bank in the system is located. In the
event that Massachusetts branching law is
liberalized, either of these companies would be in
a potentially very advantageous position. They
could readily convert to regional or statewide
branch banking systems by merging some or all
of their affiliates.
(3) NEW HAMPSHIRE. Until October 1963
branch banking was prohibited in New Hampshire. Organization of New Hampshire Bankshares, Inc., presently the only registered bank
holding company in the state, may have been
motivated by the desire to establish multi-office
banking. Before the law was changed the only
way to accomplish this goal was via the holding
company route. Even though branch banking
is now permitted, it is very narrowly restricted,
so that holding companies still offer significant
advantages for geographical expansion. If current reports are accurate, two new bank holding
companies may soon be organized in New
Hampshire, with the result that roughly 25 percent of commercial bank deposits in the state
would be controlled by holding companies.
The Impact of State Branching Laws. Some
of the New England holding company developments discussed above exemplify how restrictive
state branching laws may stimulate the formation
and expansion of bank holding companies. In
states where branching is entirely prohibited,
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Federal Reserve Bank of St. Louis
Map III-NEW HAMPSHIRE BANK
HOLDING COMPANIES
*••
KEY :
NEW HAMPSHIRE BANKSHARES
INC ., NASHUA
Stare Indicate home office• of
aubaldlary banka ; dote
Indicate
branch offlcea .
multi-office banking is possible only through
holding companies, and where branching is permitted but subject to specific restrictions, 13 holding companies often provide a more flexible
means (or the only means) of establishing a statewide, regional, or even metropolitan area banking system. The holding company route has
proven particularly attractive to center city banks
13 1n "limited branching" states, branching may be restricted to one county, contiguous counties, a single city,
some radial distance from the home office, etc. Even in some
statewide branching states (such as Connecticut) branching
may be limited by "home office protection" laws.
11
New England Economic Review
Figure I
RELATIVE IMPORTANCE OF REGISTERED BANK HOLDING COMPANIES
IN NEW ENGLAND AND THE U.S.~1957-1967
COMMERCIAL BANK OFFICES - PERCENTAGE
UNDER HOLDING COMPANY CONTROL
COMMERCIAL BANK DEPOSITSPERCENTAGE IN HOLDING COMPANY BANKS
Percent
35
30
25
25
Mass.
I
20
I
I
15
/-,-
/
- - - - - - - - -N.H
-. ---
10
5
------M-:;"in-:-- -
0
1957
1959
1961
1963
I
20
15
I
I
I
5
- - --'
1965
I
All Holding Co.
States
0
1967 1957
I
--------:-------J
Moine
1959
1961
1963
1965
1967
NOTES : Based on figures for Dec. 31 of each year, published in the Federal Reserve Bulletin .
* Percentages for the U .S . I nc lu de only those
states where registered bank holding compan ies
operate affiliates .
that lack the legal power to branch into growing
suburban areas. Critics, usually irtdependent
bankers, have argued that holding companies
are primarily a device for circumventing legal
restrictions on branching.
The proposition that bank holding companies
are most common and rapidly growing in states
that prohibit or restrict branching is often
stated, and is quite plausible. It has been noted,
however, that holding company banking has
developed to an important extent in several
statewide branching states, suggesting that
factors other than state law are influential e.g. size of the state, historical considerations,
12
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Federal Reserve Bank of St. Louis
and even such subjective factors as might apply,
for example, to the current situation in Maine.
It is not uncommon for holding companies to
exist and have large branch bank subsidiaries in
states where branching is unrestricted. In these
cases, holding companies appear to serve as
complements to branch banking rather than
substitutes.
The figures in Table II are designed to shed
some light on the relation between state branching laws and the importance of bank holding
companies in terms of their share of total commercial bank deposits. Figures are presented for
1960 and 1967; and the change in the holding
January/ February /969
company share over that period is also shown.
A year earlier than 1960 was not selected for
comparison because adjustments to the 1956 law,
mostly de-registrations of existing companies,
were not entirely completed. The 1967 figures
were adjusted to eliminate the effects of new
registrations that resulted directly from the 1966
amendments changing the definition of holding
companies in the Bank Holding Company Act;
without this adjustment, the figures would be
distorted since the affected companies had
existed earlier, and an inflated 1967 figure would
reflect legal rather than real changes. States
where bank holding companies are illegal were
eliminated from the sample.1 4
The figures show some interesting results.
First, in statewide branching states, where the
14 In some of these states holding company subsidiaries do
exist; they are either part of in-state companies protected by
a grandfather clause or banks acquired by out-of-state hold'ing companies before 1956. In either case, any change in the
holding company share of deposits would represent growth
of existing affiliates rather than new holding company acquisitions or formations.
average holding company share of deposits was
highest in 1960, the share declined between then
and 1967. This decline reflects the fact that four
important holding company states in this category have no in-state holding companies. Since
there were no formations or new acquisitions
during the period, holding company growth in
these states represents only expansion of banks
affiliated before 1956 with out-of-state companies. Bank holding companies have increased in
importance in unit banking states, but by far
their most impressive growth has occurred in
limited branching states, where their average
share of total commercial bank deposits increased by half (from 12. l percent to 18.1 percent) between 1960 and 1967. If these results,
based on recent bank holding company development, have any predictive value, they would
support the expected trends previously described
for the New England states: further growth of
holding companies is expected in Maine, Massachusetts, and New Hampshire, but their development in Connecticut and Rhode Island seems
unlikely.
Table II
STATE BRANCHING LAWS AND CHANGES IN THE IMPORTANCE OF
REGISTERED BANK HOLDING COMPANIES, 1960-1967
Type of State
Branching Law
Statewide Branching
(14 States)
Limited Branching
(12 States)
Unit Banking*
(13 States)
Holding Company Share of Total
Commercial Bank Deposits
1960
1967
Change in Holding
Company Share,
1960-/967
Percent
Percent
Percent
18.2
16.8
-.1.4
12.1
18.1
+6.0
16.2
19.0
+2.7
SOURCES: Federal Reserve Bulletins and data from the Board of Governors of the Federal Reserve System.
*Branching prohibited.
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Federal Reserve Bank of St. Louis
13
New England Economic Review
Bank Holding Companies Pro & Con
Restrictive state branching laws have undoubtedly fostered the growth of bank holding
companies in some areas. Extension of holding
company banking over integrated economic
regions that cannot be covered by branch banking systems may yield desirable results. Proponents argue that bank holding companies
offer significant benefits to the affiliated banks,
to the communities served by them, and to bank
stockholders. Their arguments, the case for
bank holding companies, will be reviewed in
this section.
Commenting on the passage of the Bank
Holding Company Act of 1956, M.A. Schapiro
& Co. noted that
It is ironic that the Bank Holding Company
Act of 1956 stemmed originally from efforts by
independent bankers to remove the holding
company from the banking scene; what has
actually happened is that the holding company
has received legislative approval. What some had
hoped would be a death sentence turned out to be
a passport to the future.1 5
In passing the 1956 Act, Congress recognized
potential dangers of bank holding companies;
bunhe "passport" would not have been issued
if Congress had not also perceived that benefits
to the public could be realized through holding
company banking. Of course, holding company
growth has been motivated by many considerations other than altruism; not all the advantages
claimed by holding company advocates are relevant to public policy.
Advantages to the Public. A bank holding
company may be able to assist an acquired bank
in becoming a stronger competitor in its local
area.. Financial support and advice from the
A. Schapiro & Co., Inc., The Triple Banking System
(New York, 1956), p. 18.
15M.
14
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Federal Reserve Bank of St. Louis
parent company may enable a small subsidiary
to offer banking services which were previously
unavailable to its customers, or to provide existing services at lower prices. For example,
whereas a small subsidiary may not have the
resources to operate a trust department on its
own, it can offer trust services directly or indirectly through the holding company. Similarly, a subsidiary's ability to service large local
customers can be facilitated by intra-system participation loans. The banking public gains
directly if affiliation enables a bank to offer new
or cheaper services or, in general, to become a
stronger competitor in its area.
Holding companies often argue that affiliation
can enhance a small bank's ability to supply
needed loans to its community. The holding
company can offer sound portfolio counseling,
advice and assistance on special credit problems,
and an opportunity to sell participations in
larger loans to other banks in the system. As a
result, the bank should be able to lend out a
higher proportion of its deposits and therefore
better serve the borrowing needs of its customers.
Overall allocation of credit is enhanced to the
extent that participation loan transactions are
utilized within a holding company system to
channel excess funds to subsidiaries in areas
where loan demand is high but the supply of
funds is relatively low.16
Comparable allocative effects may arise in
connection with bank capital. A holding company can generally raise capital more readily
than a small independent bank; thus, it can obtain bank capital in a capital-surplus area and
apply the funds to strengthen one of its banks in
an area of capital shortage. A subsidiary's improved access to capital can benefit its customers
by assuring the necessary expanding capital base
16Critics have argued that bank holding companies may
consequently discriminate in favor of city affiliates and drain
money out of rural or suburban areas.
January/February 1969
to support increasing loan and service needs of
a growing community.
Advantages to the Banks Involved. Most bank
holding companies include a dominant or "lead
bank," usually a bank in a metropolitan center.
As suggested above, the lead bank often organizes a holding company as a means of expanding
into areas where it is not allowed to branch
directly.
Holding company organization may be motivated, in part, simply by a desire to increase the
size of a single banking organization. In some
regions banks have banded together into holding
companies in order to enhance their bargaining
power in dealing with banks in major financial
centers.
The opportunity to achieve gains in operational efficiency provides another impetus to
bank holding company organization. Through
the facilities of the lead bank, or through a separate non-banking subsidiary, a holding company
can perform services for affiliated banks. Therefore banks joined in a holding company group
can reap many of the benefits of branch banking
while at the same time retaining some degree of
local autonomy. Economies may be realized by
centralizing or coordinating such operations as
data processing, advertising, purchasing, portfolio management, auditing and preparation of
tax returns. The holding company can pool
specialized management talent and provide expert advice to individual banks on such matters
as branch location decisions and special loan
problems. As a result of these and other advantages, proponents claim that bank holding
company subsidiaries can offer more services and
operate more profitably than independent banks
of a comparable size.17
17 lt should be noted that many of the advantages of holding
company affiliation can be obtained through a correspondent.
However, given the ownership link in a holding company
organization, an affiliate might expect more dependable
service, on a basis of greater certainty at all times, or more
cheaply, than it could get from a correspondent.
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Federal Reserve Bank of St. Louis
Although holding company expansion is
usually the result of a parent company actively
seeking new affiliates, sometimes an independent
bank will take the initiative and ask to be acquired. The bank may regard holding company
affiliation as a convenient solution to problems
such as providing new services in response to
competitive pressures from larger banks, raising
capital, or hiring specialized personnel, including
successors for top management positions. It is
often argued that one of a bank holding company's most important contributions is in easing
bank personnel problems. The advice of holding
company experts may be made available to subsidiary banks, as noted above, and the holding
company can establish system programs for
recruiting, training and shifting of management
personnel among subsidiaries. Holding companies often offer more generous employee benefits than an individual subsidiary could afford
or manage, and prospective employees may also
be attracted by the greater opportunities for
mobility and more rapid advancement in an
organization that includes a number of banks.
Advantages to Bank Stockholders. Holding
companies usually acquire control of a bank
through an exchange of stock. When a bank is
acquired by a bank holding company, its owners
generally stand to gain on several counts. In
addition to a capital gain on the exchange, 18
they receive holding company stock that is
virtually always more readily marketable and
often pays a higher yield than the individual bank
stock that they give up, and they often enjoy a
tax advantage as well. Moreover, since holding
companies usually attain some degree of geographical diversification, their stock may represent a less risky, more stable asset than the stock
of a single bank. It is not surprising, then, that
some leading authorities have concluded that
181n some cases the capital gain may be quite substantial,
even exceeding a 100 percent premium on market value.
15
New England Economic Review
expected gains to stockholders have been the
primary reason for independent bankers' decisions to join bank holding companies. Top
managers of many banks are also significant
stockholders; if they are considering the possibility of holding company affiliation, their management and ownership interests are generally
complementary.
Arguments Against Bank Holding Companies.
The Bank Holding Company Act contains provisions designed to prevent developments that
gravely concerned opponents of bank holding
companies, namely that they would lead to
undue concentration of economic power and
reduction of competition in banking. Much opposition to bank holding companies is apparently linked to a broader objection to any form
of multi-office banking, and branch banking in
particular. Although the Board of Governors
has declared its opinion that holding company
acquisitions are not subject to state restrictions
on branching, critics sometimes maintain that
holding companies are at least contrary to the
spirit of branch banking laws.
The 1956 legislation is also intended to prevent certain kinds of abuses which drew notoriety to some holding companies in the past e.g. using holding company control to dictate
excessive dividend pay-outs by a subsidiary,
manipulating accounts to reap promotional
profits, and exploiting subsidiary banks in selfserving management deals. Given the Federal
Reserve's present regulatory powers, objections
along these lines are not important today with
respect to registered bank holding companies.
A more relevant argument against bank holding companies is that "absentee control" over
local banks may result in a diminished responsiveness to local credit needs. Holding companies usually can exercise effective control over
the operations of their subsidiaries, whether or
16
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Federal Reserve Bank of St. Louis
not they choose to do so. Despite the appearance of local autonomy, holding company control may in some cases lead to a loss of local
initiative.
Organization and Operational Policies
of Bank Holding Companies
The extent to which the potential advantages
of bank holding companies are realized depends
upon the organizational structure of a particular
company and the manner in which the holding
company renders services to its affiliates.
The autonomy of affiliates varies widely
among holding companies. In some cases the
parent company acquires and holds bank stock
merely for investment purposes, while at the
other extreme the holding company exerts substantial control over subsidiary banks' activities
so that the system closely resembles a branch
banking organization. The "typical" holding
company lies between these two extremes.
Generally, the holding company influences directly some broad policies of its bank subsidiaries, but lacks detailed control over daily activities.
An important question for policy purposes is
whether bank holding companies should be regarded as a decentralized form of branch banking
or as a cooperative association of essentially
autonomous banks. Resolution of this question
is important for bank regulators who must judge
the competitive effects (e.g. in terms of concentration of banking resources or number of
independent banking alternatives) in a given
market area of proposed holding company acquisitions and formations or mergers involving
existing holding company subsidiaries. The
problem has been debated in the literature but
never satisfactorily resolved. In fact, the only
realistic answer is that no generalizations are
possible.
January/February 1969
The actual degree of autonomy of a subsidiary bank depends upon the attitude of the
parent holding company. To determine the extent to which an affiliate acts as an independent
unit, it is necessary to examine the organizational
structure of the particular holding company,
including the various means of communication
between the holding company and the affiliate
and the types and extent of control exercised by
the parent organization.
A study of the registered bank holding companies in the First District provides examples of
the substantial differences that exist among
holding companies in terms of their basic
organization and operations. The following discussion illustrates how holding company control
may be exercised through different organizational structures and operational policies with
regard to certain bank and holding company
functions.1 9 Bank holding companies in New
England run the gamut from a very loose organization, where the avowed purpose of the
parent company is merely to advise and not to
control, to a system where the holding company
closely controls most important internal operations of subsidiary banks through frequent intrasystem meetings, required reports and close
supervision of policy. One First District system
is unusual in that it contains no dominant "lead
bank;" services to its subsidiaries are provided
through a wholly owned subsidiary service
corporation. More typically, in other companies
expert advice is made available and services are
rendered primarily through personnel and
facilities of a lead bank.
Organizational Structure. A bank holding
company may influence the activities of affiliates
by having representatives on the affiliate's board
of directors or in key management positions, or
19This section is based substantially on research carried out
by Thomas H. Hodges, a former employee of this Bank's
Research Department.
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Federal Reserve Bank of St. Louis
by effectively controlling the selection of these
individuals. Control may also be accomplished
through various formal and informal lines of
communication between the subsidiary and the
parent company or by requiring that the subsidiary consult the holding company on certain
matters.
All New England bank holding companies
emphasize the local character of their affiliates'
boards of directors. 20 In one case, the only instance of common directors or officers is between
the parent organization and the lead bank.2 1 At
the opposite extreme is a situation where the
president of the lead bank is also president of
all the other affiliates, and within the system
there are additional cases of overlapping of key
policy making personnel. It is common practice
for the local bank to recommend candidates for
directorships or top management positions and
to at least clear its suggestions with the holding
company. The company may insist on veto
power over specific choices.
Even in cases where the holding company is
not directly represented on a local board it may
send representatives to attend the board meetings. This is one of several possible lines of
communication that can be utilized in order to
expose the subsidiary to ideas of the holding
company or to improve the company's understanding of an affiliate's operations. Some companies have established formal committees to
deal with specific operations or to serve as a
forum for discussion among affiliate and holding
company representatives of general "problems of
mutual interest." Holding company spokesmen
20Local board members are valued for special expertise
and for the value of business they can bring to the bank. If a
holding company wishes to influence a local board it will
ordinarily retain these men but expand the size of the board
by adding its own representatives.
2 1Two New England companies are unusual in that they
provide for affiliate representation on the holding .company's
board.
17
New England Economic Review
may participate simply in an advisory capacity,
offering suggestions which the affiliate is free to
accept or reject, or the meetings may be supplemented by audits or required reports that furnish
the basis for specific recommendations from the
company to the affiliate. There is obviously little
need for formal communications in the one
situation where the lead bank and affiliates have
a common president.
Expert advice from
specialists at the holding company or lead bank
is usually available through informal channels.
Holding companies generally expect to be
consulted by their affiliates on such matters as
changes in dividend policy, establishment of
branches, or other factors that affect earnings.
Two New England companies extend their influence over affiliates by requiring consultation
on a much broader set of questions; in one instance, such restrictions apparently confine the
autonomy of affiliates' operating officers to
rather minor and routine matters.
Provision for Management. One potential
advantage of bank holding companies is their
ability to supply skilled management to subsidiary banks through recruiting and training
programs and intra-system shifting of personnel.
However, this potential has rarely been realized
fully. Only one company in New England presently has a formal management training program, but its operation has not been successful;
in practice, the company's policy has been to
assist an affiliate directly, and therefore, to relieve the bank's need for management rather
than supplying it. Although another company
has a personnel committee, the committee has
not been very active. 22 To the extent that most
companies offer any sort of personnel assistance,
it is ordinarily only on an informal basis, such
22 On several occasions a subsidiary bank has hired a
management trainee from the lead bank, and management
needs of affiliates have sometimes been met by movement
of personnel within the group.
18
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Federal Reserve Bank of St. Louis
as offering the facilities of the lead bank's personnel department for recruiting, or "lending"
the services of a lead bank officer to an affiliate
to solve a particular problem.
Investment Services. All but one of the bank
holding companies in the First District offer
investment counseling or complete portfolio
management to their subsidiary banks. Nationally, this has proven to be one area of service
which holding company organizations have
utilized most successfully to the advantage and
satisfaction of their affiliates. One company
provides continuous supervision of each bank's
portfolio and offers in addition a variety of investment services. In another case the lead
bank's investment department periodically reviews the affiliates' portfolios and offers recommendations. The same service is offered on an
identical basis to non-affiliated banks that havea correspondent relationship with the lead bank.
Management of subsidiary bank portfolios is
handled completely by the lead bank in two
New England holding companies.23
Loan Policy. Bank holding companies generally seek to influence at least the general lending
policies of their subsidiaries. They almost always review loan portfolios through special reports or audits, and some companies maintain
complete central credit files. Subsidiary bank
officers usually retain the authority to grant or
refuse loans without interference from the parent
organization, although the company may expect
to be consulted before an unusually large or
complicated loan is made. Many companies
encourage affiliates to initiate or extend consumer instalment Joan programs.
Among the First District bank holding companies, loan policy varies from nearly complete
231n these cases this service is provided exclusively for
affiliates, i.e., it is not available to correspondents of the
lead bank.
January/February 1969
autonomy for affiliates to fairly effective control
by one company which maintains a central credit
file and has organized special committees to coordinate instalment and participation loan programs. At least two companies set specific
loan/deposit ratio targets for their subsidiaries;
one aims for a minimum level of 65 percent and
another sets a 75 percent maximum.
Bank holding companies generally have not
exploited intra-system participation loans to
their full potential. However, an exceptional
case is one New England company which actively promotes and thoroughly supervises participation loans as a means of serving large
customers of affiliated banks. The loans are
usually arranged and originated by the lead
bank, and participations with non-affiliated
institutions are discouraged. No other New
England holding company has developed participation loans to a very significant extent, although they may be "encouraged."
Correspondent Relationships. In order to minimize the non-earning assets of their subsidiaries,
most bank holding companies discourage correspondent relationships with banks outside the
system, unless, of course, such relationships are
necessary to obtain services which the company
cannot provide directly or through the lead bank.
Two companies in the First District exercise
complete control over the correspondent activities of their affiliates, and only one apparently
leaves the matter entirely up to the individual
banks.
Computer Services. Three New England holding companies offer their subsidiary banks convenient access to computer services, either
through the facilities of the lead bank or, as in
one case, through a computer center that is
wholly owned by the participating banks. This
service is made available to affiliates on a direct
charge basis, and utilization is generally optional.
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Federal Reserve Bank of St. Louis
Trust Services. Affiliation with a bank holding
company can enable even a small bank to offer
trust services to its customers. The holding
company may channel all trust business to the
lead bank, or administration may be centralized
while the affiliates nominally retain their own
accounts. Alternatively, the holding company
may offer assistance in trust administration,
generally on a direct charge basis. Bank holding
companies in this district provide examples of
all of these arrangements.
Other Services. The variety of services that a
holding company can provide to subsidiary
banks is exemplified by the programs of one
New England company. The company offers
(on a voluntary basis) several employee benefit
programs, a profit-sharing plan, a group purchasing program for supplies, equipment and
insurance, preparation of tax returns by holding
company specialists, compilation of statistical
data for use in evaluating performance, and
other services. Only one of the companies in
this area has pursued an extensive program of
coordinated advertising.
Holding company affiliates generally pay an
annual management fee to cover the expenses of
the parent organization. When services are
rendered on an optional basis, the holding company is paid either directly or through compensating balances at the lead bank.
Regardless of significant differences in the
organization and operations of bank holding
companies, two common characteristics affect
the relationship between the affiliates and the
parent organization. First, a feeling of group
identity, which more or less pervades any holding
company organization, is conducive to close
cooperation and common operational policies
among subsidiaries even in systems where there
is no structural compulsion to follow the leadership of the holding company. Secondly, no
19
New England Economic Review
matter how much autonomy a holding company
chooses to allow its subsidiary banks at a given
time, its fundamental relationship to the subsidiaries remains that of principal stockholder.
A holding company may limit an affiliate's
autonomy at any time if it feels compelled to do
so in order to assure continued profitability.
Performance of Bank Holding
Company Affiliates
The various advantages and potential benefits
of holding company banking have been described
in the preceding sections of this article. The
extent to which holding company affiliation
actually benefits acquired banks or bank customers is of course an empirical question, and
one which is of considerable interest to bank
regulators. Previous studies have concluded
that subsidiaries of bank holding companies are
not fundamentally di.fferent from independent
banks of a com parable size in the same area,
either at the time of acquisition or after they have
been affiliated for some time. As noted above,
many of the advantages of holding company
banking are available to independent banks
through correspondents.
Thus, despite the
many claims of bank holding company advocates, "many of the virtues of this form of organization are far more imagined than real."2 4
In a recent study for the Board of Governors,
Robert J. Lawrence analyzed the performance
of bank holding company affiliates relative to
comparable independent banks. 25 Examining a
sample of banks acquired by holding companies
between 1954 and 1963, Dr. Lawrence employed
a statistical procedure which was carefully designed to isolate the impact of holding company
fischer, op. cit., p. 86.
J. Lawrence, The Performance of Bank Holding
Companies (Washington, D .C.: Board of Governors of the
Federal Reserve System, June 1967).
24
25 Robert
20
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Federal Reserve Bank of St. Louis
affiliation on a series of variables selected to
measure bank performance. The results of these
tests show only a limited number of statistically
significant changes in acquired banks' performance.
The most significant changes occurred in
measures of acquired banks' asset structures.
Lawrence found that, after acquisition, holding
company banks achieve an increased ratio of
total loans, and especially instalment loans, to
total assets. Two other changes suggest that
changes in investment behavior after affiliation
may often increase the amount of bank credit
available to the local community. Relative to
independent banks, the acquired banks show
increased holdings of state and local government
securities and declines (as a proportion of total
assets) in U.S. Government securities and currency plus balances due from domestic banks.
The ability of holding companies to ease an
affiliate's management requirements by handling
some operating functions on a centralized basis
is indicated by the finding that after affiliation
subsidiary banks show a lower ratio of officers
to total employees. Somewhat surprising, however, is the absence of significant improvement
in certain operating results. No significant
changes were observed in the performance of
affiliated banks relative to independent banks in
terms of loan losses, capitalization, or average
yield on the U. S. Government securities portfolio.
Probably reflecting the fact that affiliates'
rates and charges are almost always determined
locally, Lawrence found no significant differences in loan charges or interest rates paid to
depositors; but he did discover an average
increase in service charges on demand deposits.
If affiliation enables a bank to offer more or
better services, this advantage should show up
in a growth rate exceeding that of independent
January/February -1969
competitors. This was not true in the cases that
Lawrence analyzed.26
An important conclusion of Lawrence's study
is that holding company affiliation generally did
not lead to increased efficiency or improved
earnings performance by acquired banks relative
to their independent bank competitors.21 Operating revenues and expenses both increased
significantly. Higher revenues apparently result
from higher service charges as well as some
substitution of loans for lower-yielding U.S.
Government securities or for cash and other
non-earning assets. Higher operating expenses
apparently stem largely from the fees and
charges levied by the parent company for
services rendered.
Acquisitions in New England. 28 Ten bank
holding company acquisitions took place in this
district between 1956 and the end of 1967. In
eight of these cases statistical data are available
for a sufficient time before and after acquisition
so that it is possible to analyze how the banks
were affected by holding company affiliation.
The applications were examined in each case in
26Two other studies arrived at different results.
First, in a cross-section study of paired holding company
and independent banks in the Sixth District, Joe H. McLeary
found that holding company affiliates generally charged
lower rates on Joans ("Bank Holding Companies: Their
Growth and Performance," Federal Reserve Bank of
Atlanta, Monthly Review, October 1968). Second, in his
earlier study, Fischer (op. cit., Ch. IX) found that rural subsidiaries· of bank holding companies achieved more rapid
growth of deposits and loans than their independent bank
competitors. Neither of these authors employed the before/
after technique of comparison utilized by Lawrence. (This
methodological difference is recognized explicitly by
McLeary).
21111 his earlier study, Fischer found that banks acquired
by holding companies typically did not gain in profitability
relative to their competitors, except in cases where they had
held excessive amounts of cash or government securities prior
to acquisition. In fact, he found that profitability often declined in the short run.
28This section is based on a report prepared by Dorothy
Bradley of this Bank's staff. Six of the eight banks studied had
total assets under $10 million at the time of acquisition .
Benefits of holding company affiliation are allegedly most
likely to accrue to small banks such as these.
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Federal Reserve Bank of St. Louis
order to determine the major reasons for each
acquisition. This review therefore provides an
ex post check on a case-by-case basis on holding
company claims of benefits versus actual results.
(1) MANAGEMENT. The need of a small bank
to locate or train a successor for its chief executive officer was an important factor in 5 of the
10 holding company acquisitions, and the holding companies were evidently successful in each
of these instances. In another case the holding
company sought to recruit or train junior
officers in order to provide greater management
depth for an acquired bank.29
(2) LOAN AND INVESTMENT POLICY. It has been
argued that holding company advice and assistance can improve an affiliate's lending service
to its community by encouraging it to loan out
a higher proportion of deposits and to emphasize
certain kinds of loans, especially consumer instalment loans and unsecured business loans.
These changes in loan policy are consistent with
the desire of bank holding companies to improve
the earnings performance of their affiliates.
In all but two of the cases studied the acquired
banks' loan-to-deposit ratio increased in the
post-acquisition period. The percentage increases were generally not very large, however the ratio increased by over 10 percent in only two
instances.3° The holding companies argued
specifically in three applications that the banks
they sought to acquire could expand consumer
lending services as affiliates. For the group of
acquired banks as a whole, the ratio of consumer
instalment loans to total loans decreased after
29 Two of the acquired banks were subsequently merged
with existing subsidiaries, partly to solve management
problems, and another bank had already been under control
of holding company personnel, so that in only 1 of the 10
cases was the management factor entirely absent.
30The most dramatic change was an increase in the ratio
from .45 to .54, or by 21 percent. For one bank the ratio
fell by 12 percent from .80 to . 71.
21
New England Economic Review
acquisition in all but two instances. Consumer
instalment loans did not increase in proportion
to total loans in any of the three cases where
expanding consumer credit was emphasized in
the holding company application. Business loans
grew significantly as a proportion of total loans
in one bank after acquisition and declined substantially in another. Otherwise, the study did
not reveal any significant impact of holding
company affiliation on the business loan policies
of acquired banks.
The New England cases confirm that holding
company affiliation often has an important effect
on the structure of acquired banks' non-loan
assets. In all but one of the cases, currency plus
deposits due from other banks declined relative
to total assets in the post-acquisition period,
reflecting a switch to loans and other more
profitable earning assets. The acquired banks
also reduced their holdings relative to total
assets of U. S. Government securities in most
cases, and sometimes very significantly. They
also typically increased their holdings of securities issued by state and local governments. In
several cases, state and local government obligations were apparently substituted for U. S.
Government securities; they are, after all, close
substitutes as low-risk investments. Such substitution may result from portfolio counseling
furnished by the holding company, and it may
reflect an effort by the companies to encourage
acquired banks to hold state and local issues as a
public service to the areas they serve.
(3) CAPITAL AND EARNINGS. Although holding companies often argue that they can provide
subsidiaries with improved access to capita],
holding company acquisition does not seem to
have affected the average rate of growth of total
capital accounts of the banks involved in the
cases studied. Moreover, the bank regulatory
agencies have not given very high ratings to the
capital positions of the banks acquired by New
England holding companies. Of the 10 banks
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Federal Reserve Bank of St. Louis
acquired from 1956 through 1967, five are presently rated as "marginal," four "adequate," and
only one "good" in terms of "capital adequacy."
Evidently, the bank holding companies generally
have not felt that more capital is needed for these
subsidiaries; at least their capacity to raise more
capital for the acquired banks has not been
exercised effectively in these cases.
Comparative figures also fail to indicate any
significant overall impact of affiliation on the
earnings performance of acquired banks. One
quite impressive gain was noted, but otherwise
the rate of return on capital was hardly different
at all in the post-acquisition period. It should
be noted, however, that these comparisons cover
3 years or less, and the effects of holding company affiliation on both earnings and capital
positions may show up only after a longer period
of time.
This review suggests that the advantages of
holding company affiliation have only been
partially realized in the First District acquisitions
since 1956. Management problems have provided impetus for acquisitions, and several acquired banks have benefited from holding company assistance in this area. Whether or not the
banks could have solved these problems on their
own has not been demonstrated. To the extent
that acquired banks have increased their ratios
of loans to deposits, the communities they serve
have benefited. Some discernible changes in
asset structure have been observed fairly consistently, mostly to the advantage of the affected
banks, but, in general, affiliation has not produced significant changes in the capital positions
or earnings of the acquired banks.
Federal Reserve Regulatory Policy
Over the years since 1956 the policy of the
Board of Governors toward bank holding company formation and expansion has become
clearer as the body of precedents has grown.
January/February 1969
Of necessity, the Board's policy was first articulated in fairly general terms, emphasizing a relationship between banking market structure
and competitive results. The Board has endeavored to develop consistent standards in
weighing the merits of each case according to
the broad statutory criteria of the Bank Holding
Company Act, namely the traditional "banking
factors," the convenience and needs factor, and
the competitive factor. 31 The Board's treatment
of individual cases has become increasingly
sophisticated over time, reflecting the results of
continuing research and the accumulation of
experience. Policy in the future may be expected
to focus to an increasing extent on past performance of bank holding companies and on the
differences in organization of specific systems.
The table below shows the record of the
Board's actions in cases of registered bank holding company formation and acquisition for the
recent period of January 1967 through early
December 1968. The denial rate may appear
quite low, but it should be noted that in earlier
periods the rate of denial was approximately
four or five times as high. The lower rate in the
recent period undoubtedly reflects the clarification of the Board's policy since 1956; many proposals of the sort that were denied in earlier
years are not even submitted today or are dropped by the applicants as a result of consultation
with the Federal Reserve System before an
application is formally filed.
Formations
No. of Cases
No. of Banks Involved
Acquisitions
No. of Cases
No. of Banks Involved
Approved
Denied
1832
1
42
2
35
39
4
4
3IAs noted in the Appendix, these factors are not enumerated separately in the law as amended, but they are given
individual attention in the Board's decisions, all of which
are published in the Federal Reserve Bulletin.
32This count excludes one new registration which reflected
only a reorganization of an existing holding company rather
than creation of a separate new system.
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Federal Reserve Bank of St. Louis
In New England, two registered bank holding
company formations and acquisitions involving
15 banks have been approved by the Board since
1956, and no cases have been denied. This
enviable record has been achieved by First District holding companies essentially because their
proposals to date have not, in the Board's judgment, involved serious anticompetitive effects.
In one acquisition, the Board recognized probable benefits in solving a serious management
problem (a "banking factor") through holding
company affiliation, and two other cases were
considered to offer possible convenience and
needs gains to the communities served by the
acquired banks. In none of these instances, however, would the application have been approved
if the competitive effects of the acquisition had
been regarded as adverse. Two acquisition cases
were very close ones. In one, the acquired bank
was to become the largest bank in its region
after a merger (with another subsidiary) that
was scheduled to follow the holding company
acqms1t10n. In the other, the acquired bank
was the largest commercial bank in its county.
The acquired banks in virtually all the other
cases were relatively small institutions in their
respective market areas.
This brief review of the Board's actions in
New England holding company cases indicates
the broad outline of its general policy position.
The policy record of the Board has been examined in detail elsewhere, so that only a short
summary is necessary here. The "banking
factors" have affected decisions only in rare instances. Convenience and needs benefits to the
public must be compellingly demonstrated by
the applicant before this factor is accorded any
significant weight in the Board's decisions. The
competitive factor has always received the major
emphasis, and this has been increasingly true
in recent years. The key issue considered by the
Board is the expected impact of a bank holding
company formation or expansion on the banking structure of a state or specific area.
23
New England Economic Review
The "Banking Factors." Considerations relating to the solvency of an acquired bank are
rarely important in the Board's decisions. Benefits from affiliation which would accrue specifically to the banks involved are usually ignored,
despite possible indirect gains to the public.
The occasional exceptions generally occur in
cases involving small rural banks, where, for
example, a holding company may offer a solution to management difficulties that are apparently insoluble by other means. 33
Convenience and Needs. The relatively few
cases in which the Board accords significant
weight to the convenience and needs factor are
usually cases in which the acquired bank is quite
small and offers a limited range of banking
services. Even in these instances, the applicant
must demonstrate that there is an important
unmet need for banking services in the affected
area and that the services cannot otherwise be
supplied by the acquired bank or other banks in
the area. This factor has received greatest
weight in cases involving organization and acquisition by a holding company of a new bank.
The Competitive Factor. In evaluating the
competitive effects of proposed bank holding
company formations and acquisitions, the major
concern of the Board has been with the structure
of local banking markets. No specific rules have
been developed defining "undue" market power
of a holding company or setting limits on expansion in a given area. However, three types
of considerations figure prominently in the
·Board's evaluations of the competitive factor.
(1) Competition, both present and potential,
among proposed subsidiaries is a key issue.
33Some a pplication s have been ap proved despite co mpetitive problems in situation s where the acquired bank is in such
a weak condition tha t it might otherwise be forced to liquida te. Such a situation obviously affects the con venience and
needs and competitive factors in tha t the acquisition effectively preserves a bank ing fa cility in the affected community.
This is only one instance of overla p among the various
"factors" tha t enter the Board's decisions.
24
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Federal Reserve Bank of St. Louis
This is generally measured by proximity of subsidiary banks or estimated overlap in their
geographic market areas. Therefore, an application for acquisition is likely to be rejected if
the holding company already has an affiliate in
the general market area concerned. . (2) The
Board considers the effect of proposals on banks
competing in affected market areas. If a bank
to be acquired is relatively small in its area, the
Board may view the acquisition as pro-competitive if affiliation is expected to help a small bank
become a more effective competitor against
larger rivals. 34 (3) The Board has also demonstrated a concern for preserving a reasonable
number of independent alternative sources of
banking facilities and services in any given
market area.35 Other competitive aspects which
the Board has considered include the impact of
a proposal on concentration in particular banking markets, on present or future trends in
banking structure changes, and on correspondent
banking competition. In some cases the Board
has evinced an apparent concern about the size
per se of proposed or existing holding companies.
Nonbanking Subsidiaries. Since the Board's
policy regarding nonbanking subsidiaries became clear quite soon after passage of the 1956
law, there have been relatively few cases on this
question. The statute specifies that activities of
nonbanking subsidiaries must be restricted to
business that is a "proper incident" to banking
34 The Board has been accused of protecting existing competitors in some past cases when it has denied holding company a pplica tions. Some critics have claimed tha t in pa rticular instances the Board has fa iled to distinguish between
injury to existing banks tha t may result from enhanced
efficiency of a bank (as a result of affiliation) as opposed to
monopoly power exercised by a holding company system.
35This consideration is important to banking agencies in
their rulings on proposed mergers between existing affiliates
of a bank holding company. In the past there has perha ps
been a tendency to a pprove cases involving common ownership in too perfun ctory a manner. Significant differences
may exist between the policies of two affilia tes - e.g. a given
loan request may be rejected by one but acce pted by the
other. In this area, a knowledge of the organization and
opera tion al policies of specific companies is especially
important.
January/February 1969
or banking management, or financial, fiduciary
or insurance in nature. In its early interpretations, the Board further required that banking
and nonbanking activities of a holding company
must be functionally interrelated and that intrasystem dealings must constitute a large part of
the business of nonbanking subsidiaries. Restrictions on the nonbanking activities of banks
and registered bank holding companies have led
to a recent upsurge of interest in one-bank
holding companies.
One-bank Holding Companies The Current Controversy
Federal law and bank regulatory practice have
traditionally sought to draw a line between banking and nonbanking activities. The rationale for
this policy is protection of depositors from nonbanking involvements and possible abuses that
might impair the solvency of banking organizations. The present restrictions on nonbanking
activities of registered bank holding companies
have been noted above, but these limitations do
not apply to one-bank holding company organizations. Of course, the banks involved are
operated subject to the banking laws and regulation by the banking agencies, but the one-bank
holding companies themselves are outside the
control of bank regulatory authorities.
A great number and variety of one-bank holding companies exist in the United States. The
count of these organizations already established
or recently proposed is rapidly approaching the
800 mark. Many "traditional" one-bank holding
companies have operated for a long period of
time and have attracted relatively little attention
or controversy.
Most commonly they are
closely held corporations that have been set up
to provide a convenient means of combining
management and ownership of small banks and
to realize certain tax advantages. In many instances, these organizations control nonbanking
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Federal Reserve Bank of St. Louis
firms such as insurance, finance, real estate or
investment companies in addition to a single
bank. Some nonfinancial corporations have
operated single banks for many years primarily
as a service to their employees. Other examples
of long-standing one-bank holding company
organizations include charitable trusts, labor
unions, and nonprofit foundations that control
banks under a variety of special circumstances.
In combination, the large number of "traditional" one-bank holding companies have considerable political influence.
Although the
Federal Reserve Board and other proponents of
bank holding company regulation have long
sought regulatory control of all bank holding
companies, Congress has adopted and retained
the one-bank exemption in the Bank Holding
Company Act. Recent developments, however,
have renewed Congressional and regulatory
agency concern about one-bank holding companies. Interest in regulating one-bank holding
companies has revived as a result of the acquisition of banks by several nationally prominent
conglomerate corporations and particularly as
a result of the decision by many large independent banks to reorganize as one-bank holding companies. Both of these trends have given
rise to one-bank holding company organizations
that differ markedly from the "traditional"
mold. Many possess vast economic resources
and actually or potentially combine a wide
variety of nonbanking or even nonfinancial activities with the conventional "business of
banking."
Financial Congenerics.
One-bank holding
companies have been prominent in the financial
news lately because of the extraordinary development of "financial congenerics." This term
has commonly been used to describe one-bank
holding companies that are organized by a bank,
with the bank as the principal subsidiary and
with the intention of forming additional sub-
25
New England Economic Review
sidiaries in order to engage in any number of
financially related activities. The first such bankdominated one-bank holding company was
formed less than 2 years ago, and the number of
these companies that have been established or
proposed has increased at a rapidly accelerating
pace. By the end of 1968, over 80 banks, including some of the largest in the United States,
were either operating or planning to reorganize
as one-bank holding companies. 36 Together,
these banks represent over 23 percent of the
Nation's commercial banking resources; their
deposits exceed by a considerable margin the
total deposits of all banks affiliated with registered bank holding companies.
One essential factor underlies the unprecedented flurry of one-bank holding company
formations: banks are seeking greater freedom
of action in serving the changing financial needs
of their customers and in competing with nonbank financial concerns that can offer a full
range of financial services other than depository
facilities. The bank-dominated one-bank holding company organization provides greater
flexibility and new sources of potential earnings
by facilitating expansion into new product lines
and geographical areas. Financial congenerics
will ·be able to enter any number of financially
related fields by establishing or acquiring subsidiary companies. Non banking activities that
have been specifically mentioned include mutual
funds, data processing, messenger services,
leasing, factoring, specialized land development
and mortgage financing and services, travel
agencies, credit cards, investment counseling,
brokerage and underwriting of securities, loanrelated insurance, and many others. Previous
attempts by banks to enter some of these fields
have been frustrated by lawsuits initiated by
nonbank competitors and by conflicting interpretations of courts and regulatory authorities
36PJans for all but eight of these compan ies were first announced during the last half of 1968.
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Federal Reserve Bank of St. Louis
regarding the proper scope of the "business of
banking." Indirect entry via the one-bank
holding company route enables banks to avoid
legal or regulatory challenges entirely. Furthermore, since subsidiary companies are not restricted by state branching laws, these services
can be offered directly anywhere in the Nation.
Public Policy Concern. As more and more
banks have become involved in conglomerate or
congeneric organizations, Congressional and
regulatory concern about maintaining the traditional separation between banking and commerce has increased. Just as Federal law places
no restrictions on acquisition of a single bank
by nonbank companies, there are no legal limits
on the types or number of businesses that a bankdominated one-bank holding company may
acquire. The combination of banking and nonbanking operations under a single management
raises some serious potential dangers to the
public interest, problems which are a matter of
public policy concern whether the organization
is conglomerate or congeneric.
A primary concern, as indicated above, is
that inter-affiliate transactions might endanger
the solvency of the bank, e.g. if preferential and
possibly unwarranted loan terms are extended
to nonbank affiliates or their customers or
suppliers. A variety of possibilities for selfdealing and tie-in arrangements exist, and there
is serious question as to whether present regulatory powers are adequate to detect such abuses.
Fears have also been expressed about possible
excessive concentration of economic power in
one-bank holding companies. Even though only
a single bank is involved, the fact that closely
related companies can be combined in the same
organization means that potentially independent
sources of financial services may be eliminated.
Antitrust and banking laws are designed to
protect against dangers such as these, but with
the growing involvement of banks in conglom-
January/February 1969
erate and congeneric companies, additional
safeguards may be needed. The newly formed
financial congenerics have not given much indication of what their future plans will be, and
little is known about the true motivation underlying the acquisition of banks by large conglomerate concerns. 37
Another concern is that the development of
financial congenerics will vastly increase the
competitive advantage of large banks over
smaller banks that lack the financial or managerial resources to develop a wide range of
services through a one-bank holding company
organization. Smaller banks that jump on the
bandwagon with hastily conceived one-bank
holding company plans might ultimately encounter difficulties if their resources are spread
too thin.
The rise of financial congenerics poses other
questions of competitive inequality. Among
financial institutions, commercial banks alone
37Typical public statements urge that bank acquisitions
have been made by conglomerates "for investment purposes"
or "to strengthen the bank," but one cannot help but wonder
in some cases if there is not more to it than that.
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Federal Reserve Bank of St. Louis
have access to "cheap" money in the form of
demand deposits. This could constitute a significant advantage to banks expanding into a
broad range of financial services via the congeneric route. Registered bank holding companies have urged the Board of Governors to
liberalize the rules regarding their ownership
of bank-related businesses. Under the present
framework, the choice is between multi-bank
holding companies with strictly limited nonbanking activity or organizations with unrestricted diversification potential but only one
bank. Some critics, including many independent
bankers, complain with some justification that
banks should not be permitted to do indirectly
what they are not permitted to do directly.
These inequalities can be resolved only by
broadening the range of activities permitted to
banks and registered bank holding companies
or by somehow restricting the activities of onebank holding companies. In order to put all
banking organizations on a consistent competitive basis, a top priority, in the words of
Chairman Martin, is "to get a legislative definition of what is financial and what is nonfinancial and to get an outline of what comprises
banking."
27
New England Economic Review
APPENDIX:
Development of Federal Bank Holding Company Legislation
Bank holding companies first emerged as an important
phenomenon in American banking during the 1920's. By the
early 1930's, Congress and the Federal banking agencies became increasingly concerned about their complete lack of
control over bank holding company operations. Extensive
Congressional hearings and investigation beginning in 1930
led to the first Federal controls, which were incorporated as
part of the Banking Act of 1933 (Glass-Steagall Act).
Banking Act of 1933
Under this legislation, the Federal Reserve Board was
granted limited powers to regulate certain bank holding
companies. The scope of regulation was severely restricted
in that the Act applied only to companies holding a majority
of the stock of a Federal Reserve member bank or in any way
con trolling the election of a majority of its directors. In those
cases where the Board's jurisdiction was established, it was
authorized to examine the holding company and its subsidiaries, to set certain reserve requirements and to supervise
other financial policies in the interest of protecting depositors.
Bank holding companies covered by the law were required
to obtain permission from the Federal Reserve before voting
their stock in subsidiary banks. Denial of a voting permit
was the only regulatory weapon available to the Board, and
many bank holding companies were able to avoid regulation
entirely by exercising control with less than majority ownership or without voting stock in majority-owned banks, or by
controlling nonmember bank subsidiaries (in some cases
withdrawing banks from membership in the Federal Reserve
System).
Many Congressmen and banking agencies were soon dissatisfied with the limited effectiveness and scope of the
Board's regulatory authority under the 1933 Act. Some
stringent legislative proposals were eventually introduced,
including recommendations to prohibit bank holding company formation or expansion, to curb branching by holding
company affiliates, and even to abolish existing companies.
In its Annual Report for 1943, the Board argued that the 1933
statute failed to achieve two essential purposes. First, the
Board had no authority to control holding company expansion, even across state lines, and the Act gave no attention
to the possible concentration of economic power in large
holding companies or adverse competitive effects in specific
areas. Second, there was no limitation on the combining of
banks and nonbank business activities 1 under holding company management. The Board held that it was "axiomatic
that the lender and borrower or potential borrower should
not be dominated or controlled by the same management."
Over the years 1933-1956, unregulated growth of large
bank holding companies was particularly rapid in some
Western and Midwestern states, notably where branch
banking was prohibited or quite limited. Although some
critics pointed to isolated past abuses in bank holding company organizations, the prevailing Congressional and regulatory agency sentiment was that bank holding company de1The Banking Act of 1933 called for the separation of banking and
only one nonbanking business - dealing in securities.
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Federal Reserve Bank of St. Louis
velopment was potentially dangerous to the public interest
unless more extensive controls were granted to the banking
agencies.
In 1948 the Board initiated proceedings against the Transamerica Corp., claiming violation of the Clayton Act by
virtue of the company's extensive control of commercial
banking in a five-state area of the West. Transamerica owned
and operated a wide variety of non bank businesses in addition to 47 banks at the time the Board took its action. Although the Board ultimately lost the case in the courts (in
1953) 2 the proceedings attracted a lot of public attention.
Fifteen bank holding company bills were introduced in
Congress between 1949 and 1956, and extensive hearings
began in 1952, leading finally to new legislation in 1956.
Bank Holding Company Act of 1956
The principal purposes of the Bank Holding Company Act
of 1956 are to define bank holding companies, control their
formation and expansion and require divestment of their
non banking interests. In this first comprehensive bank
holding company control legislation, Congress clearly
evinced a concern for the competitive consequences of holding
company development and a desire to prevent excessive concentration of economic power in bank holding companies.
By choosing, after years of controversy, to regulate bank
holding companies rather than abolish them, Congress
recognized bank holding companies as a legitimate form of
banking organization whose development, under supervision,
could yield benefits to the banking public. The major provisions of the Act are summarized below.
Definition. A bank holding company is defined in the Act
as any company (corporation, business trust, association, or
similar organization)
(1) which directly or indirectly owns, controls, or holds
with power to vote, 25 % or more of the voting shares of
each of two or more banks, or (2) which controls the election of a majority of the directors of two or more banks, or
(3) for the benefit of whose stockholders, 25 % or more of
the voting shares of each of two or more banks is held by
trustees.
Notable differences from the definition in the Banking Act of
1933 are that the 1956 law covers nonmember banks, it
lowers the index of "holding" from majority to 25 percent
control, and its coverage is specifically limited to companies
controlling at least two banks. The 1956 Act contains exemptions for banking chains and for various types of "companies"; for example, certain non-profit organizations are excluded. Companies falling under the statutory definition are
required to register with the Board of Governors, to disclose
2Even though the Board lost its case against Transamerica, in the
process, the Court of Appeals ruled that Section 7 of the Clayton Act
was broad enough to encompass acquisition of bank stock by a holding
company such as Transamerica. (This decision was later indirectly
affirmed by the Supreme Court when it denied certiorari to the Board's
appeal.)
January/February 1969
prescribed information in reports to the Board, and to submit
to examination by the Federal Reserve System.
Actions Requiring Prior Approval by the Board. Prior
approval by the Board of Governors must be obtained before
any action is taken which would result in the formation of a
bank holding company. The Board's consent is also required
before a bank holding company may acquire over 5 percent
of the voting stock (or substantially all the assets) of any
bank, 3 or before two bank holding companies may merge.
In deciding whether to grant approval for these actions, the
Board was required to consider five factors:
(1) the financial history and condition of the company or
companies and the banks concerned; (2) their prospects;
(3) the character of their management; (4) the convenience,
needs, and welfare of the communities and areas concerned;
and (5) whether or not the effect of the acquisition or
merger or consolidation would be to expand the size or
extent of the bank holding company system involved beyond limits consistent with adequate and sound banking,
the public interest, and preservation of competition in the
field of banking.
The first three factors essentially represent an evaluation of
solvency, which was the main concern of the relevant provisions of the Banking Act of 1933. The last two factors
represent significant new departures, requiring consideration
of possible benefits to the public and expected effects on
banking competition.
Separation of Nonbanking Activities. Under the 1956 Act
a registered bank holding company is prohibited from engaging in any business other than b/mking, managing banks,
or providing certain services to subsidiary banks. Subject to
a variety of detailed exceptions, a bank holding company
may not acquire or hold shares in any company which is not
a bank. Some important exceptions apply to holding company ownership or · control of companies engaged solely in
activities closely related to banking or to the operations of
the holding company and its subsidiaries, and to situations
in which ownership of nonbanking assets is not regarded
as violating the purposes of the Act.
Expansion Across State Lines. A bank holding company
may not acquire a bank located outside of the state in which
it conducts its principal operations unless such an acquisition
by an out-of-state holding company is specifically permitted
by statute of the state where the acquired bank is located.
Since no state has enacted the stipulated permissive legislation, interstate expansion by bank holding companies is
effectively prohibited, although holding companies operating
across state lines at the time the Act was passed were allowed
to continue their operations.
Restrictions on Lending and Credit Operations. Section 6
of the 1956 Act prohibited a bank holding company from
borrowing funds from a bank subsidiary and severely limited
or prohibited many kinds of loan or credit transactions
among subsidiaries of a given system.
Even before the Bank Holding Company Act of 1956 was
signed into law, the Board of Governors had expressed objections to some of its features, notably the two-bank defini3 Exceptions to the requirement of prior approval for bank stock or
a sset acquisitions are provided, for example, in cases where such
acquisitions occur in a fiduciary capacity or as temporary holdings
received in the regular process of handling a debt previously contracted, or in instances where the compa ny already controls a majority
of a bank's voting shares.
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Federal Reserve Bank of St. Louis
tion and the inter-subsidiary loan restrictions of Section 6
(which effectively made participation loan operations more
difficult for holding company affiliates than for banks dealing
with a correspondent). The President signed the bill reluctantly, noting that "the exemptions and other special
provisions will require the further attention of Congress."
Despite repeated pleas by the Board of Governors in favor
of amendments, no changes in the law were enacted until
1966.
The 1966 Amendments
In ruling on applications for prior approval of bank holding company formation and expansion, the Board of Governors encountered a difficult problem in weighing factors (4)
and (5) of the statutory criteria. These criteria were couched
in such vague language that it was extremely difficult to
interpret Congressional intent in cases where an acquisition
involving some anticompetitive effects was at the same time
expected to benefit the "convenience, needs, and welfare" of
the affected community. The same difficulty arose in the
banking agencies' rulings under the Bank Merger Act of
1960. In 1966 both laws were amended to contain identical
new criteria. The agencies were directed to continue consideration of the traditional "banking factors" (i.e. the first
three factors in the 1956 Act) and the "convenience and
needs" factor, but emphasis was explicitly placed on the prevention of adverse competitive effects. The law now proclaims that in judging proposed holding company formations
and acquisitions the Board "shall not approve -"
(l) Any acquisition ... which would result in a monopoly,
or which would be in furtherance of any combination or
conspiracy to monopolize or attempt to monopolize the
business of banking in any part of the United States, or
(2) Any other proposed acquisition ... whose effect in any
section of the country may be substantially to lessen competition, or tend to create a monopoly, or which in any
manner would be in restraint of trade, unless it finds that
the anti-competitive effects of the proposed transaction are
clearly outweighed in the public interest by the probable
effect of the transaction in meeting the convenience and
needs of the community to be served.
Several other Federal Reserve recommendations we.re
enacted as amendments in 1966. One of the most important
was the elimination of the Section 6 restrictions which
hampered legitimate loan participations among bank holding
company affiliates. Several special exemptions in the law
were eliminated. However, the exemption for banking chains
was retained, and, more importantly despite strong pleas by
the Board of Governors, the Act's definition was not broadened to encompass one-bank holding companies. Retention
of the two-bank definition is logically inconsistent with the
objective of separating completely banking and non banking
interests, but this objective was apparently subordinated to
practical and political considerations. At the time the
amendments were being considered, 586 companies, many
of them quite small, were reportedly engaged primarily in
nonbanking business and at the same time also owned one
bank. Spokesmen for many of these companies claimed that
divestiture of their banking interests would cause considerable practical difficulties and hardship; and no significant
amount of evidence on one-bank holding company abuses
was presented in the hearings. Presently, one-bank holding
companies are effectively unregulated .
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New England Economic Review
Increasing Job Opportunities in
Boston's Urban Core
By
CAROL
s.
GREENW ALO
paying jobs is a major means
Pof raising good
the incomes of the poor. Job opROVIDING
portunities can be expanded by bringing industry
into the urban core and by making transportation available to take the poor out to suburban
industrial plants. This article will examine both
these means of job creation in relation to the
Roxbury area of Boston. The possibility of
increasing industrial jobs in the Boston core by
building new industrial facilities will be examined
by considering the availability of industrial site
locations in Roxbury. The initial results of
Boston's "Employment Express" - an experimental program of busing Roxbury residents to
the industrial parks on Route 128 - provide
insights into the potential of this type of program for expanding job opportunities for the
urban poor.
Roxbury is an area within the City of Boston
located about 3 miles south of the Boston
central business district (see Map l). Originally
a middle class suburb, Roxbury has become a
blighted, low income neighborhood. Physical
deterioration in Roxbury has been accom parried
by a sharp decline in population and a marked
shift in racial composition. Between 1950 and
1964, the population of Roxbury dropped 36
percent, from 109,000 to 70,000 and the nonwhite proportion of the population increased
from 18 percent to 65 percent. Economic decline has been widespread. Vacant commercial
establishments and dwellings, uncared for taxtitle properties and rubble of demolished buildings scar the streets.
Roxbury is presently
designated a Model Cities area and an attempt
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Federal Reserve Bank of St. Louis
and
RICHARD SYRON
is being made to redevelop it under the Demonstration Cities and Metropolitan Development
Act of 1966.
Any effort to improve the living conditions of
the urban poor must consider ways of expanding
job opportunities. Attracting industry to Roxbury would be one means of raising incomes.
An economic development program for Roxbury
that involves building new industrial facilities
must face the problem of finding industrial sites
to build on. The Federal Reserve Bank of
Boston undertook a study to determine whether
a sufficient number of suitable sites are available
in the Roxbury area to make an industrialization
program feasible. The study indicated that
without public aid, site costs and sizes would
pose a significant barrier to industrial location
in Roxbury.
At present only a limited area is zoned for
industrial use, 1 primarily in the northernmost
section of Roxbury. With the help of the Boston
Redevelopment Authority (BRA), the Massachusetts Department of Commerce, the City of
Boston Department of Real Property and commercial realtors, the Bank was able to compile
a listing of all vacant land in industrially zoned
areas of Roxbury and the adjacent South End.
As of July 1968, 29 vacant sites, totalling
about 1.7 million square feet (39.3 acres), were
zoned for industry in this area.2 Most of the
1 In this study, land zoned for industry included land in
both zone classifications M (manufacturing) and I (industrial).
2This figure includes a few parcels of land not presently
vacant, but which the BRA has plans to acquire and are uncommitted to a private developer.
January/February 1969
Map I - ROXBURY AND DOWNTOWN BOSTON
CENTER
FENWAY
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Federal Reserve Bank of St. Louis
ROXBURY
31
New England Economic Review
unoccupied land was located in the South End.
While the total amount of vacant land was
substantial, the individual vacant parcels were
quite small. As Table I indicates, there were
only three sites between 2 and 5 acres and only
one site larger than 5 acres. That one, located
in the South End , includes 11.7 acres. Few
firms will consider a site less than 2 acres, and
if allowance is made for expansion, most will
want more than 5 acres.
Another 750,000 square feet (17.1 acres) of
industrial floor space was also found to be available in the Roxbury-South End area. Some
of this floor space might be adequate for firms
willing to locate in existing structures. Alternatively, if a building is largely vacant, it might
be bought fairly readily and demolished to
provide a site for a new plant.
The scarcity of large sites of vacant land as
well as Roxbury's close proximity to the central
business district and its excellent access to rail
and highway networks makes land suitable for
industry expensive. The price per square foot of
land in Roxbury ranges upward from about
$ 1.00 a square foot, several times the cost of
land in suburban areas. The high cost of land
in this area is partly acco~nted for by the demand
for sites by truckers and warehousers who need
storage and parking facilities close to highways
and downtown Boston. The price of land in
Roxbury, however, also appears to be bid up
by speculators holding on to unoccupied sites
in expectation of redevelopment of this area.
This would seem to be the only plausible
economic explanation of why vacant land selling
at a high price is found adjacent to tax-title
properties.
Land availability and site cost are serious
obstacles to private industrial development in
Roxbury. Without public aid there will be little
economic motivation for more labor intensive
industries to locate in this area.
Table I
AVAILABLE LAND FOR INDUSTRY
Section
Site Size
Less than ½ acre
South End Urban
Renewal Area
Square
feet
93,362
Ii
Roxbury1
Total
Number
of sites
Square
feet
Number
of sites
6
46,227
4
139,589
10
Square
feet
Number
of sites
1,
More than ½ acre
Less than 2 acres
325,752
7
313,957
8
639,709
15
More than 2 acres
Less than 5 acres
160,000
1
261,360
2
421,360
3
511,0002
12
15
0
421,544
0
14
511,000
1,711,658
1
29
More than 5 acres
Total
1 By
1,090,114
Roxbury, we mean all of Roxbury and that part of North Dorchester in the Model Cities area.
site is not entirely vacant at present, but the Boston Redevelopment Authority intends to acquire the area.
2This
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Federal Reserve Bank of St. Louis
January/February 1969
While preserving the basically residential
character of the Roxbury community, public
policy could facilitate the expansion of job opportunities for Roxbury residents through urban
renewal programs in the Lower Roxbury area.
(See Map I.) That area, unlike most of Roxbury,
is largely an industrial and commercial district.
East of the Dudley Terminal business section is
a prime area for ind us trial redevelopment. It
contains some land now vacant, in tax-title, or
occupied by deteriorated buildings.3 Many of
. the remaining industrial sites are in low intensity
general industrial use, such as warehousing and
storage, or are used as parking lots. The City
should consider whether a better use of the land
would result from relocating some of the present
businesses in the area and acquiring land in
Lower Roxbury to provide the site for a modern
industrial park. Industries locating here would
not only provide jobs for the poor, they would
also be highly accessible from all parts of the
metropolitan region. Lower Roxbury is adjacent to both the Southeast and Southwest
expressways as well as railroad lines and is
served by MBTA buses and subways. In addition, the proposed inner belt highway system
would run on the perimeter of this area.
An industrial jobs complex in Lower Roxbury
is a possibility only with public direction and
aid. As the Bank's study showed, available sites
are too expensive and too small to attract
private developers. Through urban renewal
programs, however, the City can acquire land
and lower its costs to private developers. The
City could purchase the presently underutilized
industrial sites, assemble an area large enough
for an industrial park and then sell the land at
less than acquisition and clearance costs to
private firms who will develop it along lines
planned by the City. Under Title I of the
Housing Act of 1949, the Federal Government
3 The General Neighborhood Renewal Plan, Project No.
Mass. R-50 discusses a proposal for industrial development
of the Lower Roxbury area.
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Federal Reserve Bank of St. Louis
will reimburse the City for two-thirds of the
difference between its site costs and the revenue
obtained from selling the land. The State of
Massachusetts will pay half of the City's remaining costs.
While urban renewal action can lower site
costs and increase available site sizes, these are
not the only impediments preventing firms from
locating in Roxbury. The general trend throughout the United States has been for industry to
move out of the central city. Attempts to counter
this trend by urban renewal programs seem
socially desirable, but will be difficult to achieve.
There are real economic forces behind industry's
flight from the cities. Urban renewal programs,
in addition, take several years to complete.
Attracting industry to the urban core, therefore,
must be considered a long-run project.
A more immediate means of expanding job
opportunities for the urban poor is to improve
the labor flow from the central city to industries
in the suburbs. As in other metropolitan areas,
Greater Boston has been experiencing its highest
rate of employment growth in the suburbs.
Suburban growth in the Boston area has been
closely associated with the emergence of major
industrial ring along Route 128. As of December
1967, there were 729 companies on Route 128,
employing 66,041 workers (a job complex almost
as large as that in Bridgeport, Connecticut). The
population surge to the suburbs provided the
major source of labor for the rapid employment
growth on Route 128.
a
As employment opportunities have expanded
in the Greater Boston area and the unemployment rate has declined to very low levels, the
companies on Route 128 have been increasingly
pressed to find workers. Tightness in the labor
market and a commitment to equal opportunity
employment made Route 128 employers anxious
to hire Roxbury workers to fill their employment needs.
33
New England Economic Review
A significant problem seemed to be the lack
of public transportation facilities between Boston
and Route 128. During early 1968, several conferences were held between Roxbury community
groups, the Massachusetts Bay Transportation
Authority (MBTA), Route 128 firms, the
Waltham Chamber of Comrr:erce and Job Opportunities in Needham. The meetings resulted
in a joint program: Route 128 firms were to
provide jobs, the MBTA was to run regularly
scheduled buses from Roxbury to the different
industrial parks, and the Urban League would
act as liaison with the Roxbury community and
recruit workers. The desire to get the program
started by the summer led to the decision not to
wait until the MBTA could obtain Federal aid.
Instead, the MBTA agreed to finance the expected $60,000 deficit itself. (The deficit was
estimated on the assumption of capacity use of
the buses.)
The "Employment Express" was the first
service of its kind in the United States. The
original plan called for four buses to make
round trips from Dudley Station in Roxbury to
the industrial parks along Route 128. Passengers
would pay 50 cents each way for the trip. Map
II and Table II show the two routes used by the
buses and their stops on Route 128.
Table II
Employment Express Stops on Route 128
Northbound
Polaroid
Waltham Industrial Parks Complex (3 stops)
Raytheon-Burlington
Northeast Industrial Parks Complex (2 stops)
Burlington Mall
Southbound
Muzi Motors (Needham)
New England Industrial Center (2 stops)
Westwood Industrial Parks Complex (2 stops)
Allied Container Corporation
34
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Federal Reserve Bank of St. Louis
The original time schedule provided for buses
to leave Dudley Station at 7 and 7: 30 a.m. with
return trips scheduled to leave Route 128 at
4:20 and 4:50 p.m. Trip time to the last stop
was estimated at 1 hour and 15 minutes.
While the MBTA's commitment was only to
run the buses for one year, the program was
announced as a permanent addition to the transportation network. The idea was to establish
awareness in the Roxbury community of a new
transportation link, one that could be depended
on. Since a new alternative takes time to become
part of people's thinking, a sense of its permanence was felt to be important.
The "Employment Express" was inaugurated
with great hopes and much fanfare on June 24,
1968. The Mayor, television cameras, and newspaper reporters were all there to launch the first
busloads of workers. The previous week, the
Baystate Banner, a Roxbury weekly newspaper,
had run a special supplement about "Jobs in
the Suburbs." Pages of advertising announced
the availability of jobs for unskilled workers at
prestigious electronics companies. The Boston
Globe's editorial declared: "It is hoped that by
Labor Day 1,000 Roxbury job holders will be
using the buses." The Saturday before the first
Monday bus was to leave, a Job Day was held
at the Urban League in Roxbury. Representatives of the Route 128 firms were on hand to
interview and hire.
On Monday 68 people arrived to take the
bus; two-thirds of them were students hired for
summer jobs. By December only 60 passengers
were riding on all four buses, with virtually all of
them on the buses heading to Waltham.
One explanation often given for the small
number of bus riders is that many persons who
initially obtained their jobs by riding the
Employment Express joined car pools or bought
a car soon after they started work. If this is so,
January/February 1969
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Federal Reserve Bank of St. Louis
,~
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New England Economic Review
then the number of people on the bus at any one
point in time is a very poor indicator of how
many people have bettered their economic position because of the buses' existence.
To determine how many people used the bus
as their initial means of getting to a new job on
Route 128, the Federal Reserve Bank of Boston
contacted 84 firms which employ 73 percent of
the people working on Route 128. The Bank
was seeking to learn how many people employed
on Route 128 could attribute their jobs to the
transportation link made by the MBTA bus
program.
The survey indicated that 89 persons used
the Employment Express as their initial means
of getting to new jobs. Of these, 67 are still
working at Route 128 firms. In addition, 44
students used the bus as their means of transport
to summer jobs. The availability ofMBTA buses
to Route 128 increased only marginally the
number of Roxbury workers already employed
at Route 128 firms. The companies surveyed
reported that they employed 1,255 Roxbury
residents.
Since the survey was not a complete accounting, persons may have been hired by firms not
included in the survey. The Bank's survey
covered all of the firms on Route 128 employing
250 or more persons. We assumed that the
larger firms have the most openings, especially
for persons needing training in skills. In addition, however, we contacted smaller companies
which had either sent representatives to meetings
setting up the bus program or which had expressed interest in the program by contacting
the Urban League or by signing petitions asking
for the bus service to be continued. One way of
estimating from our sample data how many
persons obtained employment at all the firms on
Route 128 would be to use a straight proportional projection. If it is assumed that companies
not contacted hired the same proportion of
36
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Federal Reserve Bank of St. Louis
people through the busing program as did the
surveyed companies, then we estimate 122
persons found jobs because of the MBTA
program, of which 92 are still working at these
jobs. 4
The actual number of persons using the MBTA
buses as their initial link with permanent employment on Route 128 is probably somewhat
less than this. It is rather unlikely that small
firms could hire or would attract the same proportion of workers as the larger, better known
firms. 5
The Bank's survey does substantiate the view
that many persons who intially used the MBTA
buses have subsequently bought cars or joined
car pools. Of the 89 persons found in our survey
initially using the bus, 67 are still working on
Route 128 but only 45 of them are still riding
the bus. This means that a third of the people
transferred to cars as their primary means of
transportation to work. The survey showed
that the buses are also being used by persons who
already had jobs on Route 128. The firms contacted indicated that about 18 of their employees
found it convenient to use the bus. The Bank's
4 The figure used for total employment on Route 128 was
73,000. The Massachusetts Department of Commerce and
Development surveys the number of firms and employees on
Route 128 every 2 years. The last survey in 1967 indicated
66,041 persons were employed on Route 128. Since our
survey was taken a year later, we are using for our ratio a
figure for total employment 10.6 percent larger. This was
the average annual growth in employment in the period
1965-1967.
5 Another method of testing the reliability of our sample
estimate of the number of new employees using the bus to
obtain permanent employment on Route 128 is to do a
statistical test showing the likelihood of obtaining our
sample results if the actual number of persons working at
Route 128 firms were much larger. Using a significance level
of 5 percent, the binomial test was used to determine the
largest number of persons who could be employed on Route
128, given our sample results. The binomial test indicated
that there was 95 percent certainty that the actual number
of new employees now working at Route 128 firms who used
the Employment Express was less than 112. While our
sample was not random, the bias introduced is most likely to
result in too high an estimate.
January/February 1969
survey was thus able to account for virtually all
of the 60 to 65 people riding the buses.
until it can reasonably expect many people to
be waiting for the bus.
The bus program has not yet shown itself to
be a means of opening extensive job opportunities for Roxbury residents. Several reasons can
be given to explain this result, but further research would be needed to determine the appropriate weight to be given to each.
While the variation in shift times is partly the
result of the efforts of some firms to ease the
flow of traffic in and out of the industrial parks,
other firms have just arbitrarily set their shift
times. Coordination among the firms in setting
more uniform times, taking into account traffic
problems, would certainly increase the convenience and usefulness of the bus program.
One limitation to the effectiveness of the bus
program is that the bus schedules do not coincide
well with plant shift times. Starting and quitting
times at Route 128 plants vary substantially.
For many workers, taking the bus would mean
always arriving late to work. Even if supervisors
were instructed to ignore lateness due to the bus,
it would still present an uncomfortable situation
for a new employee.
In September, the bus schedules were changed
to conform better to the dispersion of plant
hours. Buses were scheduled to leave for the
northern route at 6:20, 6:50, and 7:20 a.m. and
return from Route 128 in the evening at 3:40,
4:05, 4:35, and 5:05 p.m. The bus schedules on
the southern route were also changed so that
buses left Roxbury at 6 :00 and 7 :20 a.m. and
started out from Route 128 at 3:35 and 5:00.
At the same time that the times were changed,
the route was altered by adding additional stops
in Boston so that the bus could attract passengers
from Cambridge.
Another problem of scheduling occurs because
many of the plants have revolving shifts.
Workers at these plants must do time on the
night and swing shifts. When workers are transferred to these shifts, the bus becomes useless
for them because it is scheduled for the day shift.
In plants not using rotating shifts, the most
numerous openings are available on the night
shift. Again, as long as so few people use the
buses, the MBTA would have to provide an
enormous subsidy if it were to make buses
available for all shifts. It would, however,
probably be useful to experiment with buses
scheduled for the night shift when openings are
most numerous and most difficult to fill. Since
rr.ore coordinated scheduling of buses with
plant shift times, especially to accommodate the
night shift, appears to be a major handicap to
the success of the bus program, it would seem
that the MBTA should be expanding rather than
curtailing the buses' operations.
The time changes, however, only partially
helped the situation. Overtime opportunities
are abundant at Route 128 firms and are certainly one attraction to working there. However,
if a bus rider were to take advantage of overtime
work, he would miss the evening bus. There is
little the MBTA can do about this as long as so
few people ride the buses. It cannot be expected
to run buses at many different times during the
evening to provide for the contingency that
someone is working late that night, at least not
The size of the present deficit should not be
the limiting factor in continuing this experiment.
The U. S. Department of Transportation has
announced that it will pay 90 percent of the cost
of a bus program between poverty areas and
employment sites. The MBTA's failure to apply
for a Federal subsidy last spring because of a
desire to get the program started quickly is
understandable, but it is not reasonable to discontinue the bus program when other funds
appear available. To assure adequate funding,
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Federal Reserve Bank of St. Louis
37
New England Economic Review
the MBTA planned to apply for Federal aid in
January.
Even with a Federal subsidy, the costs of the
bus program must be measured against the
resulting benefits. On a marginal cost basis,
revenue covers about 30 percent of the costs of
the Employment Express. There is a sharp difference between the routes in the percentage of
costs covered, with revenue from the northern
route amounting to 45 percent of costs compared
to revenue from the southern route which
amounts to only 10 percent. While the revenue/
cost ratio for the northern route is similar to
that on a number of other MBTA routes, the
low ratio on the southern route seems to indicate an inefficient allocation of public resources.
Another drawback to the bus service is that
the ride is too long to attract many people.
Workers in Greater Boston, and particularly
Roxbury residents, are not accustomed to commuting an hour to an hour and a half each way
to work. (In addition to the bus trip, the workers
spend time travelling to and from Dudley
Station.) The earlier experience of plants which
relocated on Route 128 was that their workers
either moved to the suburbs or found other jobs;
rarely did they continue to make a considerably
longer trip. Past experience would seem to
indicate that to tap a large labor supply of low
skilled workers, the companies will have to
provide their employees with housing in their
surrounding communities.
Trip time could also be shortened by using
buses which are equipped to run at higher
speeds. Instead of leasing or buying new higher
speed buses (like the ones used on the NewtonWatertown line), the MBTA simply transferred
city street buses to the Route 128 service. Although these buses are run at their maximum
speed, they are still considerably slower than
other vehicles on Route 128. Moreover, driving
the buses beyond the speed at which they were
38
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Federal Reserve Bank of St. Louis
designed to travel increases depreciation charges
and, consequently, the cost of the bus service to
the MBTA.
Another reason the bus program has not been
more successful in attracting new workers to
Route 128 is that wages there are not appreciably
higher than could be obtained by working in
Boston. The firms in the Bank survey were
offering new entrants an average wage of $2.20
an hour. While this may be somewhat higher
than the pay for comparable jobs in Boston, it
is not enough to compensate for the longer trip.
The expectations raised by the MBTA bus
program were out of proportion to what it could
reasonably have been expected to accomplish.
Realistically, Roxbury is not Watts; while it is
a low income area, it is not isolated by a lack of
public transportation to jobs. Roxbury is well
served by bus and subway lines to downtown
Boston and Cambridge.
The Employment
Express was only an additional transportation
link to another employment center.
The MBTA bus was expected to be the
answer to hardcore unemployment in Roxbury.
Lack of transportation may be one reason why
the hardcore unemployed do not have jobs, but
it is certainly not the prime reason. A man who
is unemployed, despite the tight labor market
prevailing in Greater Boston, has more b,arriers
to employment than lack of transportation.
Unemployment in Roxbury is "primarily a story
of inferior education, no skills, police and garnishment records, discrimination, unnecessarily
rigid hiring practices, hopelessness. " 6 Only a
few of the bus riders could be characterized as
having been hardcore unemployed. Most of the
riders have had previous employment experience
and are at least semi-skilled.
One possible explanation of why unemployed
Roxbury residents did not obtain jobs on Route
6 "Sub-Employment in the Slums of Boston," a survey by
the U . S. Department of Labor.
January/February 1969
128 is that few openings are available for persons
without skills, experience or a high school
education. The BLS survey of the RoxburySouth End area in 1966 provides a profile of the
unemployed and sub-employed which shows
that typically males in these categories have had
inadequate education and training. Two-thirds
of the unemployed had not graduated from high
school, and one-third of these had not gone
beyond eighth grade. In addition, unemployment was found to be heavily concentrated
among the 16-19 year old age group. It is doubtful that many openings for people with these
educational handicaps are available at Route 128
firms.
The conclusion that transportation is only
part of the problem for the unemployed is
supported by the results of a similar bus program started last July in Baltimore. On 17
scheduled bus runs between the inner city and
suburban employment centers, the Baltimore
buses carry a daily average of 200 riders. Like
the Boston buses, trip time runs about 45 minutes and the average fare is about 50 cents. The
Baltimore program, which is also running a
deficit, is operating under a grant from the
Department of Transportation.
While bus programs do not seem to provide
the solution to hardcore unemployment, it can
rather safely be guessed that no one program
will. Each program can be expected, however,
to have some small impact on changing the
conditions that generate the hardcore unemployed.
The bus riders can roughly be divided into
two groups. The majority of Negroes riding the
buses are young men and women who possess
some skills. The bus program appears to have
helped some of them get better paying jobs with
greater opportunities for advancement. About
a quarter of the riders are whites who use the
bus for convenience.
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Federal Reserve Bank of St. Louis
Recruitment efforts may have been as important in obtaining jobs on Route 128 for
Roxbury residents as the bus program. The Job
Day organized by the Urban League last June
brought to Roxbury personnel recruiters who
had the power to hire on the spot. The survey
conducted by the Federal Reserve Bank of
Boston indicates that approximately 49 persons
were hired that day and that contacts made
resulted in an additional 179 persons being
hired. 7 The success of the Job Day seems to
demonstrate the ·effectiveness of hiring directly
in Roxbury. Having Route 128 personnel representatives stationed in Roxbury who could interview, check references, give medical examinations and hire would be a fruitful complement
to the bus program. Job recruitment and hiring
centers of this type have been opened by the
Ford Motor Company ·in low income areas
in Detroit.
These personnel representatives could work at
recruiting stations like Jobs Clearing House,
which is financially supported by businesses in
Greater Boston, and at Action for Boston Community Development, a Government supported
program, both of which have done an admirable
job as liaison between employers and workers in
the urban core. These organizations are supplied
with a list of job openings by companies in
Metropolitan Boston and through their contacts
in the Roxbury community recruit applicants
and arrange employment interviews.
The aim of bringing industry to the central
city and of running buses to suburban industrial
plants is to expand employment opportunities
for the urban poor. Both these programs have
some potential for attaining this goal, but
neither can be expected to have more than a
7At the Job Day, Route 128 recruiters learned of the
Spanish Action Center, through which two companies hired
176 Puerto Ricans from Roxbury and the South End. Since
the MBTA buses do not serve these plants, the companies
leased their own buses to transport the workers.
39
New England Economic Review
marginal impact on eliminating poverty. Both
programs share the difficulties of reaching the
hardcore unemployed and attracting them to
the jobs being provided. These programs will
not revolutionize the economic conditions of
the Roxbury community. It should not be expected that complex problems will disappear
40
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Federal Reserve Bank of St. Louis
by adding one or two programs. Many programs
are needed, each approaching the problem from
different aspects and each contributing only a
little and slowly. It will be necessary, however,
to measure contributions against costs. The
need for varied programs should not override
the requirement of demonstrable results.
January/ Fehruary 1969
Remarks of FRANK E. MORRIS, President
of the Federal Reserve Bank of Boston
at the Twenty-third Annual Reunion
The Stonier Graduate School of Banking- New England Group
Parker House, Boston, Massachusetts
January 30, 1969
Pax America11a and the
U. S. Balance of Payments
During the past 19 years, the United States has
had a balance of payments surplus, measured on
the liquidity basis, in only two years - 1957 and,
according to preliminary estimates, 1968. The
1957 surplus, which amounted to only $578 million, was the fortuitous consequence of the Suez
War and the disruption to world trading patterns
which it produced. It appears that we had a
small surplus in 1968, a surplus produced by the
effectiveness of our control programs on capital
exports. In the remaining 17 years out of the
past 19, this country showed a deficit in its
international accounts.
1953 and the most rapid advance in price levels
since 1951. These are not the sort of characteristics which one would normally associate with an
economy breaking into surplus for the first time
in many years.
The Reason for the 1968 Surplus
All told, 1968 was a most improbable year for
us to run a balance of payments surplus. There
is nothing in any economic textbook which
would suggest that this would happen. There are
two reasons why it did happen: first, the great
success of the control programs on direct foreign
investment and banking lending abroad, and
second, the unprecedented flow of European
capital into U. S. equities.
It is ironic that 1968 should be the year in
which the United States produced a balance of
payments surplus. 1968 was a year in which our
merchandise trade surplus almost withered
away. While the final figures are not yet in, it
seems probable that we had the smallest merchandise trade surplus since World War II. 1968
was also a year in which the balance of payments
costs of our military programs abroad rose to
more than $4.5 billion. It was a year in which
we had both the lowest unemployment rate since
In recent months, I have often heard the control program on direct foreign investment described as self-defeating. If I were a businessman
struggling to keep a growing international operation flourishing in the face of these capital controls, I would certainly be inclined to call the
program a lot of names too; but in the face of
the facts at hand, I do not think the program
could be called self-defeating in terms of its nearterm balance of payments impact. The program
was a very considerable success in 1968.
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Federal Reserve Bank of St. Louis
41
New England Economic Review
We have detailed figures on capital movements
only for the first three quarters of 1968. They
show that during the first nine months of the
year, American corporations sold $1.6 billion of
new securities in foreign markets to finance
foreign investments. In addition, they borrowed
$700 million abroad and American banks reduced their loans to foreigners by $300 million.
The full year figures are likely to be even larger.
The capital controls, which produced these results, made the difference between another
sizeable deficit and the small surplus which we
actually recorded - a surplus which has kept
the U. S. dollar strong in the foreign exchange
markets during a very turbulent year.
Why Has the United States Been a
Chronic Deficit Country?
Rather than concentrate on the near-term
balance of payments situation, I would like to
focus on a more fundamental question - why is
it that the United States has been a chronic deficit
country in its international accounts? Certainly
any country which can show only two surpluses
since 1949 would seem to be in chronic deficit,
and without the capital controls program there
would have been only one surplus year since
1949.
I would like to explore with you the reasons
for the paradox that the nation which is
generally regarded throughout the world as having the strongest, most progressive and technologically advanced economy should be a
chronic deficit nation in its balance of payments
accounts.
That the U. S. economy is generally regarded
as the strongest economy in the world can be
documented in many ways. Perhaps the most
impressive documentation is the unprecedented
inflow of foreign capital into our securities markets this year - $1.2 billion during the first nine
months of 1968. In part, this inflow is a tribute
42
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Federal Reserve Bank of St. Louis
to the breadth and efficiency of our securities
markets as well as to a basic confidence in the
U. S. economy. A world fleeing from currencies
and searching for equity investments can find
only two broad and highly organized securities
markets in which to invest - the markets of the
United States and Great Britain. But the British
have not enjoyed any similar inflow of foreign
capital into their markets. They have not because world confidence in the British economy
is at a low ebb.
The European financial press provides daily
manifestations of the basic confidence which
exists in Europe with respect to the U. S. economy. Their press is filled with articles about the
technological gap in favor of the United States
(most of which conclude that Europe will never
eliminate the gap), stories about the brain drain
of young scientific talent from Europe to the
United States, and articles about the vast superiority of American management and organization.
How can it be that an economy which is
viewed with this degree of respect around the
world should be the economy of a chronic deficit
country? The answer, I believe, is not complex:
the U. S. economy, as such, has not been a deficit
economy in its international accounts, it is
simply that the private U. S. economy has not
been able to generate sufficiently large surpluses
since 1949 to finance the foreign exchange costs
of the enormous military and aid programs of the
United States Government around the world.
Our International Accounts:
Private and Governmental
I would like to quote a few numbers to you
which I think may illustrate this point. Our
Research Department has attempted to split the
U. S. balance of payments accounts into two
segments: the payments and receipts produced
by the actions of the private economy, on the
A FIRST APPROXIMATION TO THE INTERNATIONAL TRANSACTIONS
OF THE U. S. PRIVATE AND GOVERNMENT SECTORS, 1960-67
(in millions of dollars)
Total
Credits(+); debits(-)
Exports of goods and services (including military sales contracts and grants) ...........
Merchandise .........................
Income on U. S. investments abroad ....
Other U. S. services ..................
Imports of goods and services ..............
Merchandise (excluding military) .......
Military expenditures .................
Income on foreign investments in U. S.
Other foreign services .................
Private 1
U.S.
Government
Annual Average
All transactions
Private 1
U.S.
Government
All transactions
246,531
170,807
36,869
38,855
48,574
39,388
3,880
5,306
295,105
210,195
40,749
44,161
30,816
21,351
4,609
4,857
6,072
4,924
485
663
36,888
26,274
5,094
5,520
-205,058
-155,195
-33,464
-238,522
-155,195
-26,047
-12,057
-45,223
-25,632
-19,399
-4,183
-1,077
-5,156
-3,256
-430
-497
-29,815
-19,399
-3,256
-1,507
-5,653
56,583
5,184
1,889
7,073
-
-8,619
-41,244
-
-26,047
-3,438
-3,979
-
-
Balance on goods and services (including military) ..................................
41,473
15,110
Unilateral transfers, net (including military
grants) ................. . ........... .. .
-4,893
-28,377
-33,270
-612
-3,547
-4,159
U. S. capital, net; outflow ( - ) .............
Long-term ...........................
Short-term ..........................
-36,116
-28,854
-7,262
-11,969
-10,377
-1,592
-48,085
-39,231
-8,854
-4,515
-3,607
-908
-1,496
-1,297
-199
-6,011
-4,904
-1,107
Foreign capital, net; inflow ( +) ............
Long-term .................... . ......
Selected short-term ...................
6,910
6,104
896
2,552
585
1,967
9,462
6,599
2,863
864
752
112
319
73
246
1,183
825
358
Balance on capital transactions .............
-29,206
-9,417
-38,623
-3,651
-1,177
-4,828
Errors and omissions .....................
-4,897
-4,897
-612
Balance on liquidity basis .................
2,477
-20,207
310
1Includes
-
-22,684
state and local governments, which are not separately identified in published statistics.
Source : Survey of Current Business, June, 1968, pp. 28-29, 39.
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-
-2,836
-612
-2,526
A FIRST APPROXIMATION TO THE INTERNATIONAL TRANSACTIONS
OF THE U. S. PRIVATE AND GOVERNMENT SECTORS, 1950-67
(in millions of dollars)
Annual Average
Total
Credits(+); debits(-)
Private 1
Exports of goods and services (including military sales contracts and grants) ...........
Merchandise .........................
Income on U.S. investments abroad ....
Other U . S. services ..................
Imports of goods and services ........... . ..
Merchandise (excluding military) .......
Military expenditures .................
Income on foreign investments in U. S.
Other foreign services .................
U.S.
Government
All transactions
Private 1
U.S.
Government
All transactions
442,661
317,054
57,756
67,851
78,041
65,012
6,244
6,785
520,702
382,066
64,000
74,636
24,592
17,614
3,209
3,770
4,336
3,611
347
377
28,928
21,226
3,556
4,146
-354,315
-273,571
-61,944
-19,684
-15,198
-3,441
-708
-3,778
-2,823
-255
-363
-23,126
-15,198
-2,823
-963
-4,141
-12,741
-68,003
-50,812
-4,594
-6,538
-416,259
-273,571
-50,812
-17,335
-74,541
Balance on goods and services (including rnilitary) ..................... . .......... . .
88,346
16,097
104,443
4,908
894
5,802
Unilateral transfers, net (including military
grants) ................................
-9,949
- 74,132
-84,081
-552
-4,118
-4,671
U. S. capital, net; outflow (-) .............
Long-term ...........................
Short-term ..........................
-54,808
-45,360
-9,448
-16,047
-12,091
-3,956
-70,855
-57,451
-13,404
-3,045
-2,520
-525
-892
-672
-220
-3,936
-3,192
-745
Foreign capital, net; inflow ( + ) ............
Long-term ...........................
Selected short-term ...................
10,286
9,119
1,167
2,723
585
2,138
13,009
9,704
3,305
571
507
65
151
33
119
723
539
184
Balance on capital transactions . ...........
-44,522
-13,324
-57,846
-2,473
-740
-3,214
Errors and omissions .....................
-23
-23
-1
Balance on liquidity basis .................
33,852
-37,507
1,881
-
1lncludes
-
-
-71,359
state and local governments, which are not separately identified in published statistics.
Note: D ata are not available on exports financed by government spending prior to 1960, except for military.
Source: Survey of Current Business, June, 1968, pp. 28-29, 39.
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Federal Reserve Bank of St. Louis
-
-
-
-3,964
-1
-2,084
January/February /969
one hand, and the payments and receipts produced by the actions of the U. S. Government,
on the other. This sort of split is not easily accomplished; since the balance of payments
accounting was not designed for this purpose.
Therefore, cases did arise in which the proper
classification was in doubt. In such cases, the
benefit of the doubt was given to the U. S.
Government accounts.
The resulting figures show that, during the 18year span from 1950 through 1967, the private
U. S. economy had a balance of payments surplus in 14 years and a deficit in only four years.
The four deficit years were 1960, 1962, 1963, and
1964. For the 18-year period as a whole, the
balance of payments surplus of the private sector
was enormous, amounting to almost $34 billion.
This private surplus was much more than offset,
however, by a staggering U. S. Government
balance of payments deficit of more than $71 billion, resulting in an over-all balance of payments
deficit for the country during those 18 years of
more than $37 billion. In financing this 18-year
deficit, our gold stock declined by more than
$12 billion and liquid liabilities to foreigners
rose by more than $26 billion.
Perhaps these figures will take on more meaning to you if, instead of talking about the aggregate figures for the 18 years, we discuss what an
average year during this period looked like. In
the private balance of payments accounts, an
average year in the 1950-67 period would show
the following: a surplus on goods and services of
$4.9 billion, against which we charged a net outflow of capital and grants of $3 billion, producing an over-all private balance of payments surplus of about $1.9 billion per year. Looking at
the U. S. Government accounts in the average
year during the 1950-67 period, we find the
balance of payments costs of military spending
abroad averaging $2.8 billion, with an additional
$5 billion outflow in grants and loans. Even
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with some considerable offsets credited against
these expenditures, the U. S. Government balance of payments deficit, according to our
figures, netted out at about $4 billion in the
average year. Deducting the average private
surplus of $1.9 billion from the average U. S.
Government deficit of $4 billion results in an
average annual over-all balance of payments
deficit for the country during this period of $2.1
billion. In financing the $2.1 billion average
deficit, our gold stock declined by almost $700
million per year and liquid liabilities to foreigners
rose by about $ 1.5 billion per year.
The 1960-6 7 Experience
If we look only at the most recent eight years,
1960 through 1967, we find a similar pattern.
The private sector produced an average annual
balance of payments surplus of about $300 million, the smaller surplus reflecting the much
higher level of private investment abroad during
this period. The Federal Government sector
showed an average balance of payments deficit
of $2.8 billion, the smaller government deficit
reflecting the strenous efforts to offset partially
the impact of our military and aid programs.
Nevertheless, although the composition of accounts changed somewhat, the average deficit of
the 1960-67 period was roughly the same size
as the average for the longer period - $2.5
billion per year.
Why Have the Deficits Persisted?
In reviewing these statistics, a number of
questions naturally arise. Perhaps the most basic
question is this: why have we persisted, year in
and year out, in pursuing a set of foreign policies
which has made it impossible for our country to
attain balance of payments equilibrium - a fact
which has frequently had the perverse effect of
reducing the influence that the United States
could bring to bear in foreign affairs? The an45
New England Economic Review
swer to this question cannot be a simple one, but
I believe that part of the answer lies in the fact
that, when most of these policies were originally
established in the early postwar years, we had a
set of economic conditions in the world which
made these policies temporarily supportable.
world economy and, along with it, the change in
our ability as a nation to finance governmental
commitments abroad, has not yet been reflected
in commensurate changes in our foreign policies.
During the years immediately following
World War II, the economies of Europe and
Japan were weak and disorganized. There was,
as a consequence, a virtually unlimited demand
for U. S. goods for a few years. The only real
constraints on our exports during these years
were the availability of dollars abroad and the
capacity of American industry to supply foreign
demand and still meet the needs of a booming
domestic economy. In 1947, for example, the
United States had a merchandise trade surplus
of $10 billion. If this figure were adjusted only
to reflect price changes, it would be equivalent
to a 1968 merchandise trade surplus of $13 billion. I think it is safe to say that if we had a $13
billion trade surplus now, we could easily afford
to remove our capital controls and to sustain
the current level of the U. S. Government programs abroad, Vietnam War and all.
To take one concrete example, let us look at
NATO policy, which is embodied in a treaty
signed in April 1949. Every year our military
establishment in Europe incurs foreign exchange
costs to the United States of about $1.5 billion.
The figure for fiscal 1968 is estimated at $1.6
billion by the Defense Departmnet. Ours is not
an occupying army living off the land. Our
military establishment in Europe is fed and
sheltered by U. S. dollars. I am not arguing that
NATO is obsolete; the recent Russian invasion
of Czechoslovakia has made it clear that an
American military presence in Europe is still
needed; but I am arguing that a way must be
found to reduce substantially the foreign exchange burden of our NATO operations on the
United States. The foreign exchange costs of
NATO have amounted to two-thirds of our
aggregate balance of payments deficit since 1960.
lt was back in this early postwar era, a time
when it was thought that there would always be a
chronic shortage of dollars, that the present
framework of our international commitments
was formulated. Since then the structure of the
world economy has changed enormously.
Western Europe and Japan have long since recovered and have developed strong, dynamic,
highly competitive economies. There is no
longer an unlimited demand for U. S. goods.
We can no longer assume, as we once could,
that any dollar cast adrift in Europe or Asia will
come home in the form of a demand for U. S.
goods. Since 1949, $37 billion of these dollars
have either stayed abroad or have been exchanged for our gold rather than our goods.
Unfortunately, this dramatic change in the
I am no military expert or geo-politician, but
I am certain of one thing: if NATO were being
set up from scratch today, the United States
Government would not accept the balance of
payments burden of the existing system. This
burden is a heritage of the day when we did not
have to be concerned about the international
strength of the dollar. As such, it is an anachronism.
46
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A Case in Point: NATO
A NATO Clearing Bank?
Our efforts to offset the NATO foreign exchange costs through bilateral negotiations have
not been entirely satisfactory - to us or to our
allies. A multilateral approach in finance would
seem to be called for to parallel the multilateral
January/February 1969
defense effort. Perhaps a NATO Clearing Bank
might be the answer - an international financial body designed to eliminate the foreign exchange burden of NATO by shifting balances
from those nations gaining foreign exchange
through NATO activities to those countries
losing foreign exchange as a consequence of their
role as NATO members.
The NATO treaty comes up for review in 1969.
Its military mission will certainly be reappraised
in the light of the changes in the world since
1949. Let us hope that the treaty review will produce a much needed reappraisal of the foreign
exchange burdens imposed by NATO.
The Future of Capital Controls
To those of you who are unhappy with the
control programs on direct investment and on
bank lending, let me say that I sympathize with
you.
In economic theory the most highly
developed nation of the world should be the
world's banker and should be a major capital
exporter. It is upside-down economics for the
most highly developed nation of the world to be
a net importer of capital from less highly developed nations, as was the case last year.
However, I think we must ultimately face the
uncomfortable fact that there are limits to
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American power. This is the great lesson that we
should learn from Vietnam. We had to impose
a tax increase to make room in our domestic
economy for the requirements of the Vietnam
War. As a nation, we found that we could not
have both guns and butter. Similarly, the capital controls were needed to make room in our
balance of payments accounts for $4.5 billion of
military spending abroad in 1968. As a nation,
we have found that we could not afford to play
an unlimited role both as the banker for the free
world and as its military protector.
The merchandise trade surplus of the United
States is now at an unusually low level. It will
certainly rise in 1969 and, hopefully, in the years
to follow. However, I think it is unrealistic to
believe that the United States can generate a
merchandise trade surplus, year in and year out,
of a magnitude sufficient to finance an unlimited
role as world banker and at the same time to
meet the present financial requirements of the
Pax Americana. I believe that we face one of
three options: to scale down our governmental
commitments abroad, to refinance those commitments so that our allies will assume an
equitable share of the foreign exchange burden,
or failing this, to resign ourselves to continuing
to live for an extended period with restraints
on our natural role as a world banker and
capital exporter.
47
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