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ADDRESS OP

FEDERAL

H, EARL COOK
CHAIRMAN
DEPOSIT INSURANCE CORPORATION
BEFORE THE
ANNUAL CONVENTION
OP THE
IOWA BANKERS ASSOCIATION

DES MOINES, IOWA




NOVEMBER 9

,

I95I+

ADDRESS OP HONORABLE H. EARL COOK, CHAIRMAN, FEDERAL DEPOSIT INSURANCE
CORPORATION
BEFORE THE
ANNUAL CONVENTION OF THE IOWA BANKERS ASSOCIATION
November 9 , 1951*

Des Moines, Iowa
ADVANCE —

FOR RELEASE AFTER 1 0 ;0 0 A.M., CST, Tuesday, November 9 > 195 ^

"IOWA*S FIRST BANKING SYSTEM"

"It lived and operated to benefit and bless. . .its record ought to
be an inspiration and a benediction in the world of commerce, and its
history a beacon star in the firmament of honest financiering."
Thus was Iowa’s first banking system described almost sixty years
ago.

The praise may seem a little excessive to m o d e m ears, but it was

well deserved.
The story of Iowa’s first banking system constitutes one of the
brightest pages in your State’s history and I am confident that much of
it is already known to you. For that reason I will today discuss several
of the less familiar aspects of that history, making use of material
which has been developed in the course of our research on the origins of
Federal deposit insurance. This history contains a few lessons which may
be applicable to the present, for certainly none of us can deny the
importance of the events of earlier years, nor can we fail to learn when
we study them.
The structure
interest, for it was
consisted of a State
Banks which were not

of Iowa’s first banking system is of particular
one which was peculiar to the 19th century. It
Bank which did no banking and a group of Branch
branches I Let me explain these apparent contradictions.

The State Bank of Iowa, as it was known, was established in 1858
with branches operating in the major towns and cities. However, "State
Bank was simply the collective title for the Branch Banks, just as the
national banking system" is the term used to refer to all national banks
tooay. Each of the Branch Banks had its own capital, its own officers
and distributed earnings to its own stockholders. In effect, it was an
I? ofn<aent l5ank wbicll> when joined with its fellow branches, constituted
the State Bank of Iowa.




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IOWA’S FIRST BARKING SYSTEM

There were other interesting features of this system, perhaps the
most important of which was its insurance plan to provide protection for
noteholders. Iowa was one of the six States which, before i8 6 0 , introduced
a form of bank-obligation insurance to the American banking scene.
It was a form of insurance which would seem strange to us today,
even though we can recognize certain similarities to Federal deposit
insurance. For example, assessments were levied on the insured
obligations but they were paid in advance, before the bank could open
for business, on the total of such obligations which were permitted the
bank. Furthermore, the insurance fund built up by these assessments was
not to be used to reimburse the insured creditors of failed banks but,
rather, the other participating banks. This rather odd condition existed
because it was felt to be of paramount importance that insured obligations
be paid immediately in event of bank failure. Consequently, when a bank
failure occurred the insurance plan provided that the Supervisory Authority
levy upon the other participating banks for the cash necessary to reimburse
noteholders, with the assessed banks to be reimbursed from the insurance
fund.
In all there were fifteen banks in this first Iowa banking system,
most of which operated from 1858 until 1865* The system was ended after
this short life not because of any dissatisfaction with its performance
but because a prohibitive Federal tax was levied on the notes of State
banks. Note issue was then an important part of commercial banking,
for at that time there were no Treasury notes used as circulating medium,
nor any central bank like the Federal Reserve to issue notes. There was
nothing else for the Iowa banks to do but to take out national charters.
A look at several of the items in the combined statement of
condition for the Branch Banks of the State of Iowa is of interest.
Among the assets, gold and silver coin loomed large, constituting from
10 to 30 percent of total bank obligations. There was certainly no
question of the inadequacy of reserves!
Capital was substantial. In fact, the ratio of capital to total
assets ranged from 38 percent to a low of 19 percent. Liabilities
consisted almost entirely of deposits and circulating notes, although
it is interesting to observe that the amount of deposits was considerably
larger than circulating notes for most of the period.
This prompts the question
circulating notes since it meant
obligations were insured. There
was felt that depositors did not
who were more frequently persons




as to why insurance applied only to
that less than half of the bank
were probably two reasons: First, it
require as much protection as noteholders,
of modest means; second, it was not

IOWA'S FIRST BARKING SYSTEM

thoroughly understood that deposits as well as notes constituted a part
of the circulating medium.
Let me turn now from a description of the system to the history of
its origin, for therein is an excellent illustration of the importance
of ideas in hanking. The story actually begins in 183^, when the State
Bank of Indiana was established. Banking was prohibited in Indiana under
its first constitution, except for a rather curious loophole which
permitted the establishment of one bank, with branches. Evidently public
opinion was opposed to a banking monopoly of this sort, so the legislature
authorized the establishment of independent banks but, to conform with the
constitution, required that they be known as Branch Banks and that,
collectively, they comprise the State Bank. The position of President of
the State Bank was comparable to that of Bank Commissioner today, while
its Board of Directors would be similar in authority to the Banking
Boards found in a number of States. Thus banking supervision was the
only important function of the State Bank.
It was required of the Indiana banks that they be mutually liable
not only for the notes but also for the deposits of any failing bank. In
part because of this mutual guaranty, or insurance, feature and in part
because of the excellent supervision and management of the banks, the
Indiana banking system soon became one of the soundest and strongest
State banking systems in the country.
The scene now shifts to my native State, Ohio, which in l8 k 5 was
attempting to reconstruct its banking system out of the wreckage of the
deep depression of the early 18 ^0 's. During that depression, when the
notes of many Ohio banks circulated at depreciated values, those of the
Indiana banks had passed at par. Consequently, the legislature provided
for .the establishment of a similar banking system in Ohio, going so far
as to call each of the participating banks Branch Banks and vesting
supervision in the State Bank.
Ohio retained the insurance feature of Indiana's law but with
some revisions. Even before Indiana adopted the principle of mutual
guaranty, New York and Vermont had established insurance systems for
depositors and noteholders which called for assessments on insured banks
and the maintenance of an insurance fund. Although neither of these
eastern systems had been quite as successful as that of Indiana, the
idea of an insurance fund appealed to the Ohio legislature and was
incorporated into the State's banking act of 18 ^ 5 , Also, New York in
18^2 had restricted insurance to noteholders and this was carried over
into the Ohio Act.
While this cross-fertilization of banking ideas was taking place,
Iowa was moving in another direction in an attempt to solve its banking




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IOWA*S FIRST BANKING SYSTEM

problems. When the first State constitution was adopted in l8*+6 the
Miner s Bank of Dubuque had just failed. This was the first bank in
Iowa, having been started in 1836 when Iowa was still a part of the
Wisconsin Territory. Partly because of the fate of the Miner's Bank
and partly because of the general prejudice toward banks which flourished
in the West, the Xowa constitution treated the subject of banking in the
following terms:
The General Assembly of this State shall prohibit, by
law, any person or persons, association, company or
corporation from exercising the privilege of banking
or creating paper to circulate as money.
As you know, this prohibition of bankiug was not really effective;
it merely led to the development of a thoroughly unworkable banking
situation. In the first place, there was a substantial increase in the
number of private banks. This was inevitable, since the rapid settlement
and economic growth of Iowa prompted enterprising men to furnish the
credit facilities which were so much in demand.
Many of these early private banks were excellently managed and
some developed into quite substantial enterprises. Others were marginal
concerns, appearing and disappearing as circumstances dictated. There
is record, for example, of one bank so small that it was described as
the place where the banker loaned, and took money in the front room and
fried eggs for his dinner in the back room. And, of course, there were
some private banks operated by men more interested in quick personal gain
thafc in the building of a whorthwile business. The basic trouble was
that, having prohibited regular banking, the State could not exercise
effective supervision over those private banks which began to spring up.
The existence of private banks did not solve a very important
problem arising out of the constitutional prohibition I described
earlier: that of providing a circulating medium. You will recall that
it was not only unlawful to start a bank but also to issue banknotes,
or anything similar to banknotes, which would serve as hand-to-hand
currency. Since gold and silver coin was a scarce item in this recently
settled area, and the deposit business of the private banks was very
meager, something was needed for ordinary business transactions. The
need was met in two ways: creation of so-called "Iowa-Nebraska" banks
and the issuance of scrip by business firms.
The "Iowa-Nebraska" banks received their name from the fact that
although they were chartered by the Nebraska Territory they were organized
to do business in Iowa. There were at least three such banks of this
"type, one of which preferred to do business under the rather misleading




r5IOWA’S FIRST BANKING SYSTEM

■title of Western Exchange Fire and Marine Insurance Company* However,
the circulating medium furnished by these banks did not meet the needs
of the new State* As in the case of the private banks, lack of effective
supervision resulted in unsound banking practices. In the Panic of 1857
all of the Iowa-Nebraska” banks failed* How well they had been managed
is suggested by the fact that when one such bank closed its doors during
the Panic it is reported, and I quote: "its assets were thirteen sacks
of flour, one iron safe, a counter desk, one stove drum, three arm chairs,
and a map of Douglass County".
The issuance of scrip by business firms also provided the State
of Iowa with a kind of circulating medium. Such scrip was designed to
resemble banknotes and was used by the issuer to purchase farm produce
with the hope — frequently ill-founded -- that the scrip could be
redeemed from the receipts of the sale of that produce. An example of
this way of doing business in Davenport, Iowa was given by a contemporary
observer. He writes, "I have a very distinct recollection of seeing
/this business man/ carrying in his /“high silk hat whole printed sheets
resembling bank bills. • .and in his vest pocket a pair of scissors, so
that whenever and wherever he was met on the street or other place he
was prepared to pay in this currency for wheat or pork or any other
legal claims by simply extracting from his capacious hat a sheet of
what he called money and with his scissors cutting off the necessary
sum to liquidate the claim!"

J

As you can see, the prohibition of banking by the Iowa legislature
turned out to be no solution at all to the banking problem. The result
was that businessmen in the new State were forced to operate under severe
handicaps and the currency was completely undependable in both quantity
and quality. In fact, the banking situation had become so notorious by
lo?5 that the new Iowa constitution adopted in that year permitted two
types of banks: "free banks" and a State Bank with branches. Although
both types of bank were authorized by the legislature in 1858, "free
ban^s were not established at this time so that their characteristics
need not detain.us. However, the State Bank, a direct descendent of the
Indiana and Ohio banks I described was established.
It was more than proximity to Indiana and Ohio which prompted
Iowa to follow their example. Robert Phillips Lowe, Governor of Iowa
when the State Bank was established, was a former resident of Ohio.
Furthermore, the key individual on the standing committee on banking in
the Iowa Senate when the act was passed was Samuel Jordan Kirkwood
\later Iowa’s war Governor) a former Ohio resident who had taken an
active interest in the State Bank of Ohio.
Thus we see how Iowa came to have, as its first banking system,
a State Bank which itself did no banking and Branch Banks which did the




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IOWA*S FIRST BANKING SYSTEM

banking but were not branches, in the m o d e m sense. This limited survey
of the movement of banking ideas prompts me to raise an interesting question,
one which is perhaps worthy of research by some member of your staff when he
attends one of the graduate banking schools.
The president of the State Bank of Iowa was Hiram Price. The first
man to introduce a bill in the United States Congress for nationwide
insurance of bank deposits was W. T. Price, a republican representative
from Wisconsin in 1 8 8 6 . Both Hiram and W. T. Price originally came from
Pennsylvania and the latter (Congressman Price) lived in Iowa for a short
time before moving to Wisconsin. It would be interesting indeed if it could
be discovered that there was a relationship, either by blood or friendship,
between the two men because we would then have the link between the early
State insurance systems and the beginning of the movement In the Federal
Congress which eventually resulted in the passage of Federal deposit
insurance legislation in 1933*
Having considered the structure and origins of Iowa’s first banking
system it is now appropriate to appraise its operating record. As the
quotation with which I opened this talk indicated, it was truly an
outstanding record for the period. The banks served their respective
communities well, they were profitable, and there were no bank closings
during the entire period of operations.
It is true that several banks became involved in financial
difficulties, but in each instance discovery by supervisory officials
was so prompt and action so swift that closing was averted. In one case
it appears that, through the insurance system, a deferred deposit was
placed in a distressed bank. It might be noted that in 1950 Congress
gave the Federal Deposit Insurance Corporation the power to make
subordinated deposits. Although this power has never been used by us,
since it is only designed for exceptional cases, it is nevertheless
interesting that almost a century ago some of our most modern insurance
techniques were practiced.
Since no insured bank was closed there was never any necessity for
bringing into play those portions of the insurance plan having to do with
the payment of insured obligations. Nevertheless, the very existence of
insurance was an important factor in the successful operation of the
system.
In the first place, confidence in individual banks, always a
tremendously important element in banking stability, was possibly of even
greater significance at that time than in the present. Consider,
therefore, how reassuring it must have been to customers of Iowa banks
to know that the insurance fund was equal to about 21 percent of insured




IOWA'S FIBST BANKING SYSTEM

obligations and 8 percent of total obligations (notes and deposits).
We will never know bow many bank runs were averted because of the existence
of this fund, just as we cannot adequately appraise today the benefits of
the insurance fund under Federal deposit insurance. The nature of the
relationship between banking confidence and an insurance fund is such that
results are measured by events which do not occur rather than those which
do.
Insurance of bank obligations in Iowa also brought more effective
bank examination, for it was recognized that insurance could not succeed
unless there was some control over the risk involved. As in Indiana and
Ohio, supervisory authority was vested, in the president «nd directors
of the State Bank, with the latter consisting of one representative from
each Branch Bank and three members elected by the State legislature.
Under the law there were regular examinations and examiners had full
access to bank records, procedures which are common today but were still
novel in 1858.
Because of the twin facts that each bank was represented on the
supervisory board and each was liable to a special assessment in the
event one of their members failed, supervision was exceedingly thorough.
Each bank quite naturally sought to assure that the other banks were
operating in a sound manner, since the failure of one affected all.
This very justifiable concern for good supervision should provide seme
matter for thought, for the relationship between insurance and sound
banking is fundamental.
It is true that, with more than 13, 000 insured banks, it is not
practical to have each bank individually represented on the Board of the
Federal Deposit Insurance Corporation. Nevertheless, the interests of
each insured bank are effectively reflected in the Corporation's
continuing campaign to assure a high calibre of bank supervision. Just
as it was clearly apparent to each Iowa bank that its future was closely
allied with maintenance of a stable State banking system, so it should
be apparent to you that when we press for better supervision in a State
possibly far removed from Iowa we are acting in your interests as well
as those of the bankers of that State.
I regret that time will not permit me to dwell longer on the
operating record of your State's first banking system. My account of
its structure and origin has been brief, as those of you who are
acquainted with Iowa's banking history well know. Nevertheless, I hope
that for a few moments I have been able to bring to life a period in your
banking history which is deserving of the study and approbation of all of
us.




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ICWA'S FIRST EANKING SYSTEM

This history is worth reviewing because although one hanking
system may give way to another, sound hanking principles live on.
Through the years they are handed down from generation to generation.
The principles which guided early Iowa hanking are dominant today:
insurance of hank obligations, effective supervision, and sound tank
management. Thus it is that Iowa can proudly claim a total of 665
hanks with assets approaching 3 billion dollars.
It is interesting to compare this present situation with that
which prevailed in the 1 9 2 0 ’s and early 1 9 3 0 's. Overhanking, which was
reflected in the existence of more than 1,900 hanks in 1920, is no
longer a problem. The failure rate, which was in excess of 100 Iowa
hanks per year, is hut a dim memory. Since 1933 only 6 insured hanks
have become involved in financial difficulties sufficiently serious to
warrant action by the Federal Deposit Insurance Corporation. The record
during the past twenty years testifies to the achievement of Iowa
hankers.
This is the kind of hanking stability which all of us who have
labored in hanking have sought to attain. It is the kind of stability
which your very first hanking system attained. And I hope — indeed, I
believe — that when future historians come to appraise the present
Iowa hanking system they will be as impressed with your accomplishments
as we all are today with those of Iowa's pioneer hankers.




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