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Federal deposit Insurance corporation WASHINGTON 25 ADVANCE — FOR RELEASE AFTER 10:30 A.M# EDT, WEDNESDAY, M Y 12, 19 »OHIO'S BANKING HERITAGE« ADDRESS OF HONORABIE H. EARL COOK, CHAIRMAN FEDERAL DEPOSIT INSURANCE CORPORATION BEFORE THE ANNUAL CONVENTION OF THE OHIO BANKERS ASSOCIATION COLUMBUS, OHIO WA% 12, 19$h ADDRESS CF HON* H. EARL COOK, CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION BEFORE THE ANNUAL CONVENTION OF * THE OHIO BANKERS ASSOCIATION COLUMBUS, OHIO MAY 12, 1951* "OHIO'S BANKING HERITAGE'» President Ed» distinguished guests, and my many friends in the Ohio Bankers Association: It is good to be home again — » home in the land that nurtured me and that I love — home among the fine folks whose friendships I cherish so deeply. Time won't permit my greeting each of my friends from the rostrum, but I must pause to salute Mr* Bill Blicke, whose 88th birthday occurred on April ii of this year* For many years in Bueyrus we were competitors during business hours and inseparable friends after the whistle blew* Bill, during our years of association, has been a source one minute of exasperation and the next of inspiration* May the years continue to fit you as gracefully, Bill, through decades to come* It is a great honor to appear on today's program with such distinguished fellow Ohioans asi Ev. Reese, of Ohio, President of the American Bankers Association; Ray M* Gidney, of Ohio, Comptroller of the Currency; and Gordon H* Scherer, Representative, First Ohio Congressional District* We see in Ohio today a strong, dynamic banking system. Six hundred and forty-seven State and national banks of all sizes, are working together to provide the farmer, the businessman, and the consumer with the services and assistance that each requires* In total assets Ohio banks rank fifth among the States; in strength, character, and stability I am sure they are second to none* »Ohio Ts Banking Heritage11 — 2 It is my sincere belief that primary credit for this achievement does not belong to any Federal agency, nor to any State agency, nor to any one individual« It belongs, rather to the thousands of men and women of Ohio who, over the past century and a half, have devoted their lives to the unique and difficult business which we call banking« Today I want to describe one of the crucial periods in the development of our great banking heritage* In the course of research on the history of deposit insurance we at the Corporation were fortunate in discovering a set of Ohio bank records which had been misplaced for nearly a century« These records deal with the day-to-day operations of the State Bank of Ohio between the years 181*5 and 1865* More should be known of its part in Ohio’s banking history« Let me make clear at the outset that in the State Bank of Ohio we are dealing with a banking system and not a bank« As a matter of fact, there was no State Bank of Ohio if we mean thereby an institution conducting a banking business« The name simply applied to a group of independent banks who had voluntarily joined what we might call the State Bank system« Unfortunately for clarity1s sake, each bank so joining received the title of Branch Bank but it was no more a ,fbranch,f in the modern sense of the term than any national bank today is a branch of "The National Bank" in Washington« It was not by chance or accident that Ohio started at this time what was to be one of the great banking systems in the nation« The year 181*5 came just after one of the most severe depressions the United States has ever known« When it began in 1839 Ohio had 3l* banks with total assets of about $22 million; when it ended there were only eight banks with $5 million in assets« The confidence of people in banks, and in bank obligations, was at a low ebb« Casting about for a new approach Ohio could not help but observe that Indiana’s banking system had come through the great depression almost unscathed« This system embodied one of the pioneer insurance plans of the country, in that participating banks mutually guaranteed the obligations, both deposits and circulating notes, of a failed bank. Also, New York had been moderately successful in the operation of a plan under which creditors of failed banks were paid out of an insurance fund, created through assessments levied on participating banks« Alfred Kelley, whose contributions to Ohio banking were already sufficient to insure that his name will always be prominent in our State’s history, introduced a bill which combined some of the best features of the Indiana and New York plans« All newly formed banks were required to enter either the State Bank system, or one known as the Independent system« »Qhio,s Banking Heritage" — 3 Most banks chose to become Branch Banks in the former system* Supervision of the Branch Banks was given to a Board of Control* All Branch Banks were made mutually responsible for the circulating notes of a failed Branch Bank and an insurance fund was created through assessments on the Branches* In providing for the protection of circulating notes but not deposits Ohio*s insurance plan differed from those of Indiana and New York* However, circulating notes, similar in nature to demand deposits today, comprised the major portion of Branch Bank obligations. During most of the period 18U51865 from 60 to 70 percent of the obligations of the Branch Banks were insured* The procedure which was followed when a bank failed seems cumbersome now but it nevertheless represented an advance over those operating in other States. Funds to pay noteholders were obtained through special assessments levied on the sound participating banks and the banks, in turn, were reimbursed from the insurance fund. This method was probably adopted to insure that both noteholders and the community experienced the least possible inconvenience in the event of bank failure. Creditors of failed banks under the Indiana and New York plans usually could not receive payment for at least one year* As I noted a few moments ago, most newly formed banks in Ohio chose the State Bank system. During the entire period about two-thirds of all Ohio banks were Branch Banks. Sixteen Branch Banks were organized during the first year the law was in operation and the number grew rapidly, reaching I4I in 1850* The number declined slightly in the following few years and for most of the remainder of the period 36 Branch Banks were in business* One of the early problems facing the new banking system was antagonism among the banks. We must remember that banking in Ohio, as in other States during the early years of the 19th century, was a highly competitive industry* Although the majority of Ohio banks were united in a system whereby they ben efited from the strength of their neighbors, some were not able to shake off the habits of the past* This situation called for tactful handling, as we can see in a letter from the President of the Board of Control to an erring bank: **I deem it of very great importance that the harmony of the branches not be interrupted in any way and I must say that unless impelled by an absolute necessity I think a run by one branch on another is particularly calculated to create unpleasant feelings•*' Needless to say, the Branch Banks soon recognized the wisdom of this statement* The mutuality of the insurance obligation nmde banks recognize the importance of bank examinations, though they were/\uniformly greeted as an unmixed blessing. Many letters were written by the Branch Banks asking when examiners could be expected. In understandable exasperation Mr. Janney, secretary of the system, replied to one such query: ,fI know not when the HQhio’s Banking Heritage*1 *— U Examiner will *be on you* but suppose he will come at a time when you do not expect him, perhaps ’like a thief in the n i g h t T h e r e f o r e ’be ye ready1«” Defalcations, a problem with which we all here have some knowledge, occasionally rose to plague Ohio’s early bankers» A letter written June 6, I8I4. 8, to the Akron Branch Bank said in part! nI learned with unfeigned regret of the defalcation of your cashier» I think, however, that you have much cause to congratulate yourself that the (person) who could make up his mind to purloin any of the funds of the Bank was content with so little»11 I was interested to find among other letters of the Board of Control one which contained a thought as true today as it was then: "It must be well known to every practical reflecting banker that frauds can be perpetrated ••• which are difficult, often impossible, to detect until great losses may be sustained» These can for a time elude the scrutiny of the most vigilant Board of Directors, /but/ much more easily /directors/ who /only/ occasionally visit /the/ bank»..”“" I think we will all agree that the responsibilities of a bank~directorship have not been diluted by time» In the course of its 20 years of operation Ohio’s insurance system protected noteholders of ten Branch Banks in financial difficulties* Only four of the banks were placed in receivership; the others were either reorganized or, after receiving financial assistance, continued unchanged» It is worthy of note, particularly when we recall that we are dealing with banking a century ago, that not a single insured creditor suffered a loss during the entire time that Ohio’s insurance plan was in operation. The pride with which individual communities came to regard their banks • and let me note that such was not typical of community feeling toward banks before the "War Between the States — is indicated by the fact that when some Cincinnati brokers attempted to engineer a run on the Piqua Branch Bank they were met by an aroused populace and forcibly prevented from carrying out their plans» John Andrews, a great Ohio banker who had succeeded Gustavus Swan to the presidency of the Board of Control, wrote of the Piqua incidents ’Oh a small country village the Bank, if honorably conducted, is looked upon with pride as a public institution and in times of general excitement the people feel as if their duty was to protect it against the mercenary operations, as they consider them of brokers* All these efforts I consider*»• prejudicial to the character and true interests of the Banks»*»but they are beyond my control«’1 Incidentally, the Branch Bank of which Piqua was so proud is still In operation today under the name of the Piqua National Bank and Trust Company» »Ohio’s Banking Heritage» — 5 History, they say, often repeats itself and we find an example when we study the methods by which the Board of Control handled several of the Branch Banks in financial difficulties* The Summit County Branch Bank at Cuyahoga Falls was in trouble soon after the system started* It was decided, according to a letter of John Andrews, that noteholders could be more quickly protected, and the cost to the participating banks and to the insurance fund would be less, if arrangements were made to continue the bank rather than place it in receivership* Consequently a new bank was organized under the same name and assumed all the liabilities and the good assets of the distressed bank* The unacceptable assets were apparently taken by the Board of Control, which in turn provided the new bank with cash equal to the difference between the liabilities they assumed and the assets taken oyer* As you can see, this procedure is fundamentally the same as one which is sometimes used by the Federal Deposit Insurance Corporation* Ohio’s Branch Banks achieved their place in American banking history, and in the hearts of Ohioans, when they went through the great panic of 1857 without a single failure; indeed, without a day’s suspension of specie payments on the part of any Branch Bank* The panic was touched off by failure of the New York agency of the Ohio Life Insurance and Trust Company, a Cincinnati bank not in the State Bank system* Before it ended, hundreds of banks throughout the entire country had failed and almost all had suspended specie payments* One would have expected that the Ohio Branch Banks would have been the first to fail, or at least to refuse to redeem their notes on demand for they had been carrying heavy balances with the Trust Company*s New York agency* The history books only tell us that the Ohio banks stood firm; now, because of the discovery of the records I mentioned earlier, we know how it was accomplished# By 1857 the State Bank system was functioning smoothly. Under the capable guidance of Mr# Swan and Mr* Andrews the weak banks had been closed and those remaining were operating in almost perfect harmony and unison* Immediately upon receiving word that the Trust Company had failed, the Board of Control gave the President permission to draw on any Branch Bank for the aid of others which might be in trouble* Naturally, banks called upon to render aid could refuse, but most cheerfully complied* A letter from Andrews to a hesitant Branch Bank reflects the seriousness of the problem and the spirit in which it was approached: ’’The case presents the strongest one that can be well imagined for grounds of relief***But aside from this, we are one family, and our Branches are about as much interested in sustaining each other, as each is in sustaining itself* In fact, to sustain a sick Branch is to sustain yourself* It so happens that this calamity has fallen upon most of our strongest Brandies**»Under these circumstances but one of two courses remain, either to call upon those who have escaped this misfortune and who are well able to afford relief, or to do nothing, and let the System/ fail.** Is your Board of Directors known to coniemplate such a result?” »Ohio^s Banking Heritage» — 6 Another important factor in the ability of the Ohio Branch Banks to withstand the Panic was the confidence which bank-obligation insurance had developed in the public. All of the Branch Bank failures had occurred in years prior to 1857 so that the public was aware that in the State Bank system it had a degree of protection almost unparalleled in early .American banking. This was recognized by the president of the Board of Control who, in the midst of the Panic, wrote? "Our great source of strength is public confidence*..Let us retain that ana w e w i l l pass the crisis triumphantly.” In accounting for the successful stand of the Ohio Branch Banks in we should not forget that intangible factor usually described as courage or integrity. listen for a moment to a letter from Andrews to the cashier of the Belmont Branch Bank which, incidentally, is now the Bridgeport National Bank: "I fully appreciate the difficulty of your position...surrounded by suspended banks on all sides. Your sources of supply of specie nearly all cut off. Still you are strong. You can maintain yourself for some time and I hope go through. To our system there is but one result of suspension — it is death...by all means stand firm whilst you have a copper in your vaults.. 1857 Thus the Ohio Branch Banks came through the Panic. Just three months after the crisis began Andrews was able to write to a friend: "So far as the Branches of the State Bank of Ohio are concerned, I reply to your inquiry that none of them has suspended specie payments. They have stood manfully and are nobly discharging their duty to the public by performing what they agreed to when they issued their notesj and this has been done under the heaviest loss ever sustained by them...'* What a financial panic was not able to accomplish was done by legislative inaction eight years later. In 186U-65 the State legislature did not renew the charters of the Branch Banks, all of which had been authorized to operate until 1866. There were probably a number of reasons for this: the still strong anti-bank feeling* the pressures of the War Between the States and the fact that the Federal government was in the process of establishing the National banking system* Most of the Branch Banks, despairing of securing renewal of their charters, converted to national banks. Others simply wound up their affairs and closed for good in 1866. The end of the State Bank system was a great disappointment to many Ohio bankers and did not come about without a hard struggle on their part to prevent it. It is interesting now to read the correspondence which passed between John Andrews of the Ohio System and Hugh McCulloch of the Indiana System. Both men took a dim view of the plans of U.S. Secretary of the Treasury Salmon P. Chase, a former Ohio governor. The depth of their feelings toward the new system of national banks is illustrated by ttOhio,s Banking Heritage11 — 7 one letter to McCulloch -which ran: ’»I have still hoped that there would be good sense enough in the Congress not to yield to Mr. Chase*s absurd and disorganizing plans of pulling down well-tried existing institutions in order to build up a political machine to control the currency...of the country...the error is* Mr. Chase supposes that men must bank...^but7* • he may force prudent men out and get reckless men in...tt Let me hasten to assure you, and also my close friend Ray Gidney, that in this instance John Andrews was coupletely wrong, both in his analysis as well as in his prediction. I cite the letter only because it reflects the justifiable pride with which Ohio bankers viewed their accomplishments. It is perhaps ironic that Mr. McCulloch, who was apparently in full agreement with Mr. Andrews at this time, was chosen to become the first Comptroller of the Currency and more than any other man is responsible for the splendid development of the entire National Banking system. The State Bank of Ohio passed into history in 1866, but in a way it never died. In cities and towns all across the State there are direct descendents of the Branch Banks, still serving their respective communities and proud of their past. And in a broader sense all Ohio banking has profited. The lessons and experiences gained before 1865 were not forgotten; the high principles which guided the Branch Banks were passed on to a new generation of bankers and have become part of our splendid banking heritage. I am proud to have been an Ohio banker for all of ray adult life; I am proud to have served as President of the Ohio Bankers Association and as President of the National Bank Division of the American Bankers Association; I am proud to have been called to serve as Superintendent of Banks for the State of Ohio under three governors of this State. Naturally, X am proud to have been called, in 19h7§ to serve on the Board of Directors of Federal Deposit Insurance Corporation and subsequently to have been elected Chairman of that Board. It is a great honor to serve in Washington in the interest of all the Nation*s banks, let it still is difficult for a country boy to reconcile himself t o being a **cliff-dweller” — as they call those of us who live in Washington apartments • In my address of welcome to the State Supervisors in Cleveland in 191*6, I used these words? »Ohio’s Banking Heritage,f — 8 »When the burden of life X am called to lay down, I hope I may die in Ohio# I never could ask a more glorious crown Than one of the sod of Ohio# And when the last trump wakes the land and the sea And the tombs of the earth set their prisoners free, You may all go aloft, if you choose, but for me I think I ’ll just stay in Ohio#» These words still express my sentiments#
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