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Thank you, Paul.

We appreciate very much having you with us today.


know that everybody here enjoyed your remarks very much.
We are very delighted that the newly elected president of the
Minneapolis Federal Reserve Bank could be with us today, and I hope that before
the day Is over many of you will have the opportunity to meet him and to get to
know him.

As you know, he has lived all of his life In Montana.

He told me

this noon that he was right now In the process of moving to the great state of
Minnesota, and we hope that you get the job done real soon, Hugh.
attorney as well as a certified public accountant.

He Is an

He is a bank director and

was a director of the Minneapolis Federal Reserve Bank prior to his recent
election to the presidency.

It is indeed a pleasure to Introduce to you Mr.

Hugh Galusha, whose subject is "Banking in Transition."

Mr. Galusha.


"Banking In Transition"
Hugh D. Galusha, Jr.
Following a virtuoso like Paul Nadler reminded me of a story of a famous
violinist, Effrem Zlmballst, who was sitting with an equally famous pianist,
Arthur Rubinstein, at the debut of Yehudi Menhuin.

Shortly after the per­

formance had started Zlmballst said, "My God, it's hot In here," and Rubinstein
said, "Not for pianists, it isn't hot."
Bankers have always lived in an age of transition.
old days never did exist.

I think the good

But we're being forced to take a new look at banking

because of the tremendous speed-up in our society.

We had an extraordinary

talk this noon which gave us an idea what's taking place in the scientific

All 1 could think of when I was listening to that was that when

this new community starts out in space, I hope to God it isn't in the Ninth

Federal Reserve District, because I ’ got all the problems I can accommodate
right now.
We're aware of what's happening in agriculture; the fact that if we were
to have the same level of agricultural production or would have had in 1962
that we had had in 1940, there would have been half again as many people
employed in agriculture.
These rapid changes are happening to banking.
to our economy, the financial world.
as dramatic, but they're here.

These things are happening

They aren't as well known, they aren't

We've seen examples of action and reaction in

our society, some planned, but most of them are accidental.

I've been impressed

in the reading of the history of the Federal Reserve System that the Open
Market Committee, which has been an extremely successful tool in terms of
monetary policy, came about as an accident.

The system had to get more earnings

in the early 20's, so they bought government securities.

When they bought

government securities, they found it had an immediate effect upon the banking

From that accidental discovery came a very useful tool.

We're now in an era when perhaps the Open Market Committee as an instrument
is not as effective as it was before because of evolution that has taken place
in the banking community, such as the growth of CD's, the growth of negotiable
notes, the changes that have been so well discussed by Dr. Nadler.

We have a

new monetary instrument; speeches by the chairman of the Federal Reserve
System - - a n example of action and reaction that wat unrehearsed, spontaneous
and probably fortunate.
can't be ignored.

But these things are happening.

They are facts that

I'm mindful of the story about Gallileo when he maintained

against the Roman church that the earth went around the sun, he was forced to
recant, but as he left the stand after his public recanting, he was overheard

to mutter, "But the earth still goes around the sun.” Change does occur.
Change will occur.

It's occurring fast.

W e ’ aware of w h a t ’

happened in the industrial world; for example, it is estimated that 50%
of General Electric sales are products devised since 1950.

There has been

an acceleration in every phase of our society, and this includes banking.
What's going to happen in the Ninth Federal Reserve District?

I feel

very strongly about this, because this is the district in which I have made
m y life.

This is an area with many small businesses and banks.


particularly sensitive to the problems of small banks and the problems of
survival of small business generally.

I made ray living serving small business,

fighting against organized society in one way or another, whether it was the
Internal Revenue Service, the FCC, the SEC, or what have you.

And it is a

The interesting thing to me, though, is that small business does

survive, that there are ways to survive, that the resourceful businessmen do
succeed, and they are making profits.

This is true of small banks, but they

survive only if the management is aggressive, if the management is fully
apprised as a matter of deliberate policy of everything that's taking place
in their own industry.
There are a lot of glamorous things going on in the banking industry.
Computerization is one.

I read a paper (the amount of papers I find I have

to read in this job is just incredible.

I have a feeling some day my secretary

is going to come in and find me suffocated) having to do wit h the compatibility
of second generation computers, which itself is a lovely, lovely title.


thought of the freauent cause for divorce out in Montana, recited as a lack
of compatibility, and then I got a picture of one computer divorcing another

While the whole broad spectrum of communications -- furnishing


Information, the use of encoding, securing statistical data -- back and forth
across the district is important, it is very easy to go overboard on hardware.
I am afraid there is a status factor involved in having a computer, just like
there is a status factor in having an economist.
bank can afford either*

I am not sure that every

Many of these items of hardware, and economists belong

in this category, are essentials in the banking industry.
the larger banks can afford them.

Unfortunately, only

In the drive to hold profits, ail banks

are attempting to enlarge their areas of service, and reduce their costs

Reliance to some degree on the new technology is essential.

How can the small bank compete?

I think we are going to find a c o n s o l i ­

dation of service functions, but w h e t h e r this can be done and preserve the
integrity of the individual small bank is something else again.

I happen to

be confident that it can be done, and I think it can be done because there
exists this service/cost vacuum.

All banks have the same cost problem, but

generally the big bank can emerge with a lower unit cost structure than the
small bank.

The small bank cannot compete on equal grounds.

answers for the small bank is mounting.

Pressure to find

Somehow they are going to be found.

I would hate to see every small bank end up with a computer, but the pooling
of services ma y be an answer.
Another area of the expanding service/cost va c u u m is trust service.
Trust services are essential.

But, again, to operate a trust department

efficiently and effectively calls for an expensive department.

A trust d e ­

partment must have analysts available to provide investment service competently
and protect the investor.

The trust department must be staffed with officers

w h o have a single objective -- the trust department.
an area here for pooling of services, I don't know.


I suspect there m a y be

Please d o n ft go away saying that I am advocating pooling of services as
a sole solution to the service/cost vacuum.

I am just simply saying that these

are things that the banking industry is facing, that there are these vacuums
that exist, and something is going to occur to fill them.
versus reaction.

We think of action

I think, generally speaking, as individuals we r e a c t ; but we

urge the people we are trying to influence to act, and there is a whale of a
lot of difference.

Having bargained with banks on behalf of clients, I am

well aware of the lectures exhorting the businessman to modernize, to do this
or that as a prerequisite to obtaining the loan.

And at the same time, the

banker delivering the lecture will be violating some of the basic precepts
that he is advocating for his customers.
These changes can happen.

They can happen peacefully, which is evolution,

or they can happen violently, whi c h is revolution.

And the banking industry is

up against the same time problem to accomplish the essential evolution that
American industry has been.

American banking is the home of free enterprise.

One of the reasons that I have been able to make this shift from having been
whol l y on the side of private enterprise to at least a auasi-public institution
is because I believe, and I believe this just as sincerely as I believe there
is a Lord, that if free enterprise survives, it is going to survive through
a healthy, wholesome, growing banking community, for it is the guts of the
private enterprise system.

Now I know that for someone who is president of

the Federal Reserve Bank to speak this wa y to you is a little like the lecture
that was given at one Naval station during the second World W a r -- w h e n a man
left the training program and became a midshipman, he was read the famous
speech of John Paul Jones on freedom and democracy, knowing full well that when
he got on the warship he was to be assigned to, he was going to have neither.

But I believe that the banking fraternity can bring about these changes without
the intervention of government agencies or any other social pressure.
this very strongly, because it has happened in the past.
has changed is the timetable.

I believe

The only thing that

We are in an accelerated era.

We have a

different political climate, and we have a different economic climate.


these service/cost vacuums aren't filled by the banking industry itself
w h e t h e r operating individually or through the associations, or even, if you
please, through the Federal Reserve System, which I regard as an essential
element of the banking industry -- they will be filled by state and federal

If this happens, it will be unpleasant and uncomfortable, but it

will happen.

I don*t k n o w whether it will be a Supreme Court decision or any

of the other devices now accomplishing social change, rut it will come, and
when it comes, you will have lost something essential and something very
precious to each of you.

You will have bargained away your freedom to evolve

in an orderly, planned manner on an individual basis.

T h ank you very much.


Thank you very much for being with us this afternoon, Hugh.

I hope that

y our moving will soon be accomplished so that you can be referred to as a true
Would everyone like to stand up and take a stretch for a minute?

Gentlemen, our good friend, John Chisholm, has been Commissioner of
Banks for just a little over a year.

Personally, I think we are extremely

fortunate that John accepted the C o m m i s s i o n e r ’ job, and, John, I think


everyone here joins me in expressing their appreciation to you for the o u t ­
standing job that you have done in the short time that you have been in the
C o m m i s s i o n e r ’ office.

It has been a great pleasure to work with you and to

see the progress that has been made in many areas since you accepted that
C o m m i s s i o n e r ’ post.
Gentlemen, I take great pleasure in introducing to you The Honorable
John Chisholm, Commissioner of Banks for the State of Minnesota.











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While the bank administrator necessarily is guided by the immediate
consideration of profit, he must recognize that a bank is a "timeless1 institu­
tion in the sense that the long-run kest interest of his community is the
long-run best interest of the bank as well.

Willingly or unwillingly, he has

a very real responsibility in the shaping of our economy and in the future of
our political and economic institutions.

Both his own self-interest in the

preservation of the American system of private chartered banking and his wider
interest in the continuance of a private enterprise system demand that the bank
administrator fully understand his position in the community and in the economy
of his area and of the country.

From BANK ADMINISTRATION, American Institute of Banking