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I. Introductory Ccmments

"The dual hanking system needs no Justification.

It works*./*

These words written "by the distinguished gentleman who was your president
last year, Frank G. Rathje, epitomize the sentiments of Americans who
apply the test of practicality to this important segment of their economic

Thus tested, the many elements of strength in our banking

system are brought to sharp focus.
For more than 80 years, this country has conducted its banking
through the facilities of institutions free to choose between Federal
and State law as the source of '¡charter powers and governmental supervision*
The system Bince its inception in 1863 has played an important part in the
successful financing of four wars as well as a continuing industrial
revolution which has now established the United States as the leading
economic power in the worlds
Associated with the rise of the dual banking system the nation
has increased tremendously in size as well as in the volume and richness



of its economic life.

The annals of history are replete with illustrations.

In this same period, for example, population has grown from more than 30
million to nearly-1^3 million, and the value added by manufacturing
establishments has expanded from less than a billion dollars annually to
a pre-World War II total of approximately $25 billion.

Moreover, the

system has facilitated the rise of many new industries and the widespread
distribution of the products thereof.

The development of automobiles and

the electrical industries are cases in point.

Indeed, It is difficult to

envisage any other system of bank organization which might function as
well as the dual banking system, and it is easy to see important reasons
why alternative forms of organization could impose serious handicaps.
A study of banking in other nations emphasizes the uniqueness of
our dual system.

As a matter of fact, we should be well advised to call

it the American rather than the dual banking system because it is really
a counterpart of the Federal structure of Government.

Fundamentally, the

strength of the dual banking system is nothing more nor less than the
strength inherent in our organic political philosophy.
Highly developed and intelligent competition is an essential
condition for our economic and social progress.

The existence of a dual

system of banking furnishes the necessary competitive setting.

It makes

possible the flexibility whereby men can adjust their activities most
efficiently to the economic facts of life.

As long as the dual system

prevails, men in the exercise of their abilities always have an alternative.

- 3 -

Students of political science observed long ago that the Federal
system of government maximizes the opportunity for testing policies while
at the same time it minimizes the risks of so doing.

Likewise, this same

feature is an advantage afforded hy the dual banking system.

From time to

time the various States have established provisions for bank regulation
which proved their worth on a small scale and then were widely adopted.
Thus, sound improvements soon permeate the entire banking system: the
others wither away with little or no harmful effects.

One could argue with

a considerable show of reason that this aspect of the dual system is in
itself a sufficient justification.

We tend to forget, for example, that

the early experiences of certain States in the field of deposit insurance
contributed importantly to our Federal legislation.

In the absence of

that experience, I am confident that the Federal Deposit Insurance
Corporation would have been quite a different, and certainly a much less
satisfactory agency.
Cooperation between the Federal and State authorities is the
unifying principle which makes the dual regulation of banking a system,
just as cooperation between the Federal and State governments makes the
United States a nation.
limits to competition.

This cooperation maintains standards and


Cooperation between the State and the Federal

banking authorities establishes the rules which encourage wholesome
competition and prevent it from degenerating into conflict and disorgan­

Cooperation is the .American way of getting the best out of


II. Brief Resume of the Dual Banking System to 1933

Historically, the dual banking system began with the National
Banking Act of

1863 . Prior to that time, America tested and after two

experiments, finally abandoned in

1836 the idea of a single bank chartered

by the U. S, Government, largely because of its monopolistic features.

1836 and 1863, the banking system consisted solely of institutions

chartered by the States.

The principle of "free banking" first enacted

by the Michigan Legislature in 1837 rapidly spread to the other States.
Calculated to eliminate the old abuses which developed when the chartering
of a bank required special legislation, these "free banking" acts provided
that charters were to be granted automatically to all bank organizers
who conformed to minimum requirements, the most important of which involved

Under liberalized charter procedures, State banks increased

rapidly in number from about

500 in 183*+ to a peak of 1600 in 106l.

In the passing'of time , it became evident that a banking system
composed entirely of State chartered institutions was no more in accord
with basic American social philosophy than one dominated by an institution
operating under the charter of the Federal Government.

Moreover, "free

banking" legislation was not accompanied by any important advances in bank

Widespread abuses developed, most of which involved the issue

of bank notes with inadequate provisions for specie redemption.
attempts at correction were undertaken by the various States.

In some

instances-, bank commissioners were empowered to examine banks; but nothing




in the way of fundamental progress was achieved because the inherent
weakness in the system stemmed from the fact that the hanking system
consisted solely of State institutions*
The prgoncy
National Bank Act.

of war financing occasioned the adoption of the

Nevertheless, the structure created by this legisla­

tion rested on a much firmer foundation.

At the time, the Federal

Government was confronted with the urgent necessity for marketing its

Organizers of banks were given an opportunity to obtain a charter

as a national banking association which carried with it incidentally
the right of note issue.

Since the note issue privilege involved a pledge

of U. S. Government bonds as security, a broad market for these obligations
was practically assured.
Drawing upon the long and varied experience in banking, the
Act of

1863 corrected the major weakness in the State banking system by

providing the Nation with a sound hand-to-hand currency.


it avoided the error hitherto demonstrated by experience with the first
and second Banks of the United States.
After the prohibitive tax was imposed in

1865 upon the issue of

notes by State banks, the feeling became widespread that banking by State
chartered institutions was doomed.

The statistics seemed to bear out

these sentiments because the number of State banks declined from
approximately 1600 in l86l to
the country were changing.
circulating medium, and by

2J47 in 1868,

However, the banking needs of

Deposits were growing in importance as

1885 the State banks discovered that they could

operate profitably on the basis of their deposit business without the note


issue privilege.



Thereafter, the number of State banks increased rapidly,

2250 in 1890, 5000 in 1900 , and 17,000 in 1913.

These years

likewise were characterized by tremendous expansion in the economic field,
and the dual banking system afforded the necessary flexibility to cope
with the current financial problems.
Snbodying the best thought then prevailing with respect to bank
chartering and supervisory practices, the National Bank Act was effective
in bringing these features to the attention of the various


Slow but more or less steady progress in improving standards

of supervision both at the Federal and the State levels was achieved over
the last quarter of the 19th century.

Competition between the Federal

and the various State authorities in liberalizing charter provisions

However, it certainly was much more restrained than that

characteristic of the earlier "free banking” era.
With the creation of the Federal Reserve System in 1913, State
bank-members acquired a mechanism designed to cope at the national level
with problems extending across State lines«.

This, however, was merely

incidental to the primary reasons for the legislation, namely the creation
of an elastic currency and provision for central banking facilities.
Unquestionably, the system also is one of the milestones in the course of
progress towards higher standards of bank supervision.
State banks acquired membership in the Federal Reserve System
slowly, and by June 1917 only 53 Had Joined out of a list of eligibles
totaling approximately 8500*

Clarifying legislation subsequently removed




the misgivings of State banks and the membership increased rapidly,
reaching a total of

16^8 in 1922 .

Viewed in terms of its philosophical implications to the dual
banking system, the establishment of the Federal Reserve provided a
mechanism for cooperation among State banks conducting business on a
nation-wide scale.

For one reason or another these institutions desired

to r*?main outside of the scope of the National Banking Act; yet they were
confronted with problems extending far beyond the reaches of the States
which chartered them.

A web of common interests knitted these institutions

together, and the Federal Reserve System was a legislative recognition of
this fact.

It restored a balance to the dual banking system which had

shifted off center in the period -of economic change between the Eighties
and the First World War.

Ill. Contributions of Federal Deposit Insurance Corporation
Few will deny that the Federal Deposit Insurance Corporation
was a major factor in the restoration of confidence in our banks after
the financial collapse of 1933»

It is now abundantly clear that wo could

have readily slipped into some form of absolute centralization as a logical
consequence of the crisis, and thereby sacrificed the advantages of the
free enterprise dual banking system.

Fortunately, the program of deposit

insurance adopted at that time achieved the twofold objective of restoring
public confidence in banks and at the same time preserving the system of
banking which is peculiarly adapted to the American way of Life.




Broadly speaking the Federal Doposit Insurance Corporation is
a standardizing agency.

All hanks which measure up to its standards are

eligible for insurance irrespective of membership in the Federal Reserve
System, incorporation under the National Bank Act, or the possession of
a charter from any particular State,

Since losses attending the failure

of an insured bank are sustained in the first instance by the Corporation,
it fully appreciates the evils resulting from the competitive chartering
of banks as well as inadequate supervision of operation's.


from its inception the Federal Deposit Insurance Corporation has served
as a connection between Federal and State supervisory authorities with
the purpose of onlisting their cooperation in mitigating these evils.
Efforts of the Corporation to maintain high standards have received the
wholehearted cooperation of Federal and State authorities, and many of
the difficulties which heretofore besot the dual banking system have
largely vanished.
The development of a uniform examination report for banks is
ono of the major steps in.the direction of closer cooperation between
Federal and State supervisory authorities which has been taken since the
advent of the Federal Deposit Insurance Corporation.

With slight

modifications, this form is used by all of the Federal agencies and a
majority of the States,

Moreover, in almost three-fourths of the States,

Joint or concurrent examinations are scheduled with State supervisory

Not only does this arrangement'achieve important savings

for both the supervisory authorities and the institution under examination,

- 9 -

but it facilitates cooperation among all of the interested parties in
bringing atout corrective measures when necessary.

Here again dual

banking i 3 buttressed against weaknesses which tend to call the adequacy
of the system into question.
Comprehensive and timely information is one of the necessary
conditions for intelligent policy with respect to banking.

In a very

real sense, the life of the dual banking system depends upon the avail­
ability of facts.

Accordingly, the Federal Deposit Insurance Corporation

has been steadfast in its efforts to bring about consistency in statistical
data through the adoption of uniform condition and earnings report forms.
Furthermore, it cooperates with the other supervisory agencies in compiling
the pertinent information into a useful body of knowledge.
The agreements reached in 1938 among the supervisory authorities
with respect to improved methods of asset appraisal and classification
furnish still another illustration of Federal Deposit Insurance Corporation
in its role as a standardizing agency for the dual banking system.


to that time practice was common for the supervisors to identify one of the
qualitative category of assets with the term, "slow."

Following extensive

consultation between the various authorities a new system of classification
was adopted which definitely classified assets in terms of the relative
credit risk.

In addition, a basic change was made in the appraisal of

bond investments.

For issues of investment merit, valuation at market was

abandoned and cost less appropriate amortization was substituted therefor.
Admittedly these changes fall short of perfection, but it is well to


remember that they are advances in supervisory methods which help to
make the dual banking system work in an era of economic change.
The executive committee of the National Association of State
Bank Supervisors was established as the advisory council for Federal
Deposit Insurance Corporation by Chairman Crowley in 1938»

Thereby, the

Corporation has provided itself with a mechanism for exchanging information
with the various State bank supervisory authorities.

The exchange of

ideas between the segments of the system is essential for the continued
existence of dual banking, and the arrangement has proved its worth many
times since its inception.
Of major importance although more or less incidental to its work
as a standardizing agency has been the work of the Federal Deposit
Insurance Corporation in articulating the problems of the State banks that
are not mombers of the Federal Reserve System.

The Corporation is the

only Federal agency whose contacts with the State banks are direct and

It is in a position to appreciate their difficulties and to

view their aspirations sympathetically.

This portion of the banking

system is relatively small measured in terms of financial resources, but
large numerically, and it is very responsive to the best traditions of
American free enterprise.
Owing to the fact that the other major parts of the banking sytem
could turn to other and long established Federal agencies when they were
confronted with a problem requiring a solution at a national levol, it was
to be expected that the Stato nonmember banks would turn to Federal Deposit
Insurance Corporation in similar circumstances.

During World War II, the


Corporation cooperated actively with them in a successful effort to secure
by means of legislation the right to participate in so-called "V" loans.
Other instances of a similar character could be mentioned.
In a larger sense, it is fitting and proper that the Federal
Deposit Insurance Corporation should be the Federal agency to which the
State nonmembor banks may turn.

The dual banking system works only so

long as the separate parts are able to define their problems and to
reach appropriate solutions.

Many problems confronting the small State

nonmember banks are national in scope.

The Corporation has a very real

contribution to make to the success of the dual banking system in
cooperative efforts to'deal with these problems.

sum up then, the practical man knows intuitively that the

dual banking system is good, despite its seeming contradictions.

This is

the .American system of banking wherein the free play of ingenuity is
fettered only by the necessity for cooperation when the commonweal is at

In recognition of its obligations to further the public interest

by strengthening banks generally, the Federal Deposit Insurance Corporation
continues to stand where it always stood--an ardent supporter of the dual
banking system.