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Address by
Hugh D. Galusha, Jr.
Federal Reserve Bank of Minneapolis

Bank Personnel Seminar
November 28, 1967
Hickory House Motor Inn
Huron, South Dakota

The ideas I am going to share with you today are poor things,
but mine own.

This general disclaimer is for the protection of the

South Dakota Bankers Association,

its distinguished president and

secretary, and the Federal Reserve Bank of Minneapolis.

A disclaimer is

necessary because a discussion of your future in banking is inseparable
from a discussion of the future of banking -- its structure, its
mechanisms, and its aspirations -- subjects about which there are as
many shades of opinion in the U.S. as there are about sin.
not look for hidden meanings in my choice of metaphors.

Please do

The apparent

linking of banking and sin is no Freudian Patmanesque slip, but simply
to illustrate the welter of prejudices, claims and counter-claims,
which banking is conducted today.


Honest men can, and do, differ in

their analyses of and prescriptions for complex situations -- especially
in South Dakota this fall.
These ideas do not reflect what I consider to be the optimum
model -- to the contrary,

some of the constraints shaping American banking

are quite distasteful to me, but they cannot be wished away.

It must be

remembered that we are viewing a point on a moving stream that commenced
quite a ways back -- or to use still another metaphor, we are looking at
a game already in process with no opportunity to call king's X so we can
sort out the players and establish the rules.
If there is a single word to characterize American banking
today, it is variety.

The banking industry is hardly a monolithic structure.


There may have been a day when the First National Bank of Helena, Montana,
and the First National Bank of New York differed principally in scale;
but the difference between the First of Helena and Citibank in 1967 is
almost one of essence.

Functions have been added to the bank in the

major urban center in bewildering succession.

Even the merchandise has

been altered as the search for new sources of supply and new sales
packaging continues to accelerate.
What is appropriate for a bank to do within the legal limits of
a corporate charter, a body of statutory proscriptions, a pattern of
regulation by agencies that have been around a long time, should be easy
for reasonable men to define.
Mr. Saxon, to mention one.

Certainly it presented no difficulty to

But for the rest of us who see things less

the definition of a bank becomes more and more difficult, c o m ­

pounded as it is by the extraordinary fertility of imagination of the
current generation of bank management to be found in the first three
hundred or so of American banks arranged by size.
Illustrative of the point are a number of suits pending against
banks by other industrial and occupational groups whose bailiwicks have
been invaded by hungry bankers.

Computer service bureaus and travel agents

are two that come to mind.

Essentially these ventures into new areas have been responses to
market forces spurred on by pressures to maintain and expand profit margins.
In general,

they have been phenomena of the money centers, with a slower

reflection in banks away from these centers.

And for a good reason.

Scale itself has been one of the major divisive forces working to alter
the essence of these 14,000 enterprises lumped together loosely and
inaccurately as banks.

The accommodation of a major U.S. industrial




customer -- say, one of the Fortune 500 Club -- has required a complex
response on a worldwide

scale, of which the adjustment to the devaluation

of the British pound is the most recent example.

The requirements of

these customers have affected the lending patterns obviously; but more
importantly it has forced the large bank to develop management expertise
and knowledge within the narrow context of each of these major industries.
The roster of officers and their disciplines at the Chase, for example,
is almost as long and complicated as the catalog for the Harvard Business
And the hardware of banking -- here also, capital and e n t r e p r e ­
neurial skill have forced a cleavage between the large and the small.
The computer may turn out to be the instrument that forces aggregative
banking in some form.

This will flow because of (a) internal requirements

of cost and record control of the bank itself, and (b) the external
requirements of customer demands for computer services.
I could continue.

Trust services, which are becoming very

sophisticated indeed at some banks in the District; portfolio management;
the handicaps of geography and scale again which at the present time make
it difficult for the small bank to tap sources of funds available to large
My first point then, is that a gap has been created between the
small bank and the large bank, caused by internal and external market
forces, which will continue to widen -- a gap possessed of many more
elements than scale alone -- until small banks move to narrow it.

And move

they must, for as bank customers even in rural America continue to
become more sophisticated they are demanding types and quantities of
banking services similar to those they have read about in their trade
journals or heard discussed at their own association meetings.




These services require capital,

scale, and innovative skill.

Growth of the individual bank on a scale which keeps pace with customer
growth is the most obvious answer.

Other possibilities are increased

reliance on correspondent banks, small intra-state bank holding companies,
branch banking -- even banking consortiums which might be organized as
service companies to participating banks.

Certainly the efforts being

made by your banking association independently and in conjunction with
the MBA to provide training and information programs for smaller banks
are doing much to close the training gap.
So to my second point.

The pressure imposed by the marketplace

for increased banking capacity requires a combination of internal growth
of capital and management; and for the smaller banks of the state, a
step up in aggregative banking experimentation.

Otherwise the larger

banks will continue to get bigger with a faster rate of growth.
Society, in its endless preoccupation with what is good and
desirable, has always been concerned with the flow of money and credit,
but until fairly recently the mystique surrounding American banking kept
the public interest at a reasonable distance.

But a generation of aggressive

advertising -- l your friendly bank" ... ’ e ’ here to help you get what
’ re
you want"

... ’
one-stop banking"

its effect.

... "your full service center" -- has had

Congress and legislatures now regard a bank as possessed of

no more mystery than the local A & P.

In fact, the suspicion is growing

in some quarters of state and federal legislatures that the course of
banking is too important to be determined by bankers.
Not only by their own advertising, but in part by their conduct,
bankers have fueled this suspicion.


they have been victims of

their own image -- in their efforts to stress friendship for the public,
they encouraged expectations that could not be realized.

Banks exist, as


far as owners and management are concerned,

to make a profit.


And only if they make a profit can they attract management and capital.

this means it must be their judgment, in the main, where and

how they obtain funds, and where and for how much they loan these funds.
It also means they -- or at least the creative ones -- will always be
searching for new ways to make a buck.
More and more often these essentially private enterprise
objectives are colliding with social goals set by legislatures and
Congress -- not to mention those set by extension by regulatory agencies.
So I come to my third point.

National and local objectives -- social

goals -- are going to alter, at an increasing rate and in significant
ways, the American banking system.


.. Difficult as it is not to define a bank, the problem will
be infinitely complicated by the changes proposed for S S L s .
.. The cost of money on both sides of the equation will
continue to be regulated, and my guess is the tolerances
will be narrowed as the years go by.
.. U.S. based banking corporations will find their overseas
operations subjected to increasing U.S. control.
More legislatures are going to grapple with such thorny problems
as nonpar banking, branching, patterns of ownership,

interest ceilings,

regulatory machinery - - and who knows, there may be other states than
North Dakota experiment with their own central bank.
But it is with the allocation of funds the m a jor public concern
will be manifest.

This country is in the throes of a social revolution,

the implications of which have hardly commenced to surface.

Whether they

be in the ghetto or in rural America, the disadvantaged -- the losers of
our society -- are making themselves heard.


Charismatic industries like outdoor recreation and agriculture
have their own vocal constituency.

Some of these programs are even

designed to redistribute population and industry.

This they have in

all of these are massive programs involving billions of dollars;

all will affect the allocation of funds in the U.S. banking system.


here is the reason the public sector will have to intervene, once the
determination has been made that the investment goal of a new tenement,
a recreation complex, or industrial jobs in rural America, is a socially
desirable one:

with few exceptions, most of the situations are submarginal

credit risks within the conventional banking framework -- especially when
viewed competitively against the alternatives available to the banks with
the requisite credit capacity.

If society desires the goal, seed capital

at least will have to be provided by society.
I have no idea how these demands will affect the U.S. banking

Some certainly will be met outside.

For example, I happen to

think U.S. banking may be in the same relative position to the Farm Credit
System and U.S. agriculture as it was a few years ago to S & Ls and
residential lending.

There will be primary credit programs -- current

alternatives in outdoor recreation financing, plus those of the five or
six bills in Congress now, are typical.

There will be guaranty programs,

participation programs, moral suasion, tax gimmicks - - the possibilities
are endless.

But they will come.

Social pressures are simply too great

to be contained for long -- even with the Viet Cong sitting on the safety
The Fed will be at the interface, as the hep bureaucrats now
put it.

For us to say the Federal Reserve System cannot or should not be

concerned with social goals is ridiculous.
such a national objective.

We owe our very existence to

Look at the way the Board has been flailing




about in the holding company and merger cases.

Bigness, concentration of

markets and ownership -- these bundled together make up the factor of
competition which has been by far the most equal among the five equal
factors listed in the holding company act.

Right or wrong,

this is a

social determination -- a reflection of the national concern with the
structure of the economy -- a desire to curtail growth if the price for
growth is a material reduction of customer alternatives.


efforts like the discount study reflect the deep concern within the
System that we always be responsive to changes in the economy.
must acknowledge the special view taken of us by our parent,

And we

the U.S.

When they were looking for a place to tuck truth in lending,

it is hardly an accident we were named.

In the agonizing to come over

the control of the electronic network that one day will not only be the
courier of our credit, but the repository of all our secrets, Congress may
well rely on our vaunted independence and objectivity, and add it to our
list of responsibilities.
Many of you have probably been bankers longer than I.
experience after all is only two years and eight months.


But my sense

of excitement at being a small part of American banking has grown apace.
In part this is a reflection of an enhanced awareness of what a truly
significant role banking plays in the development of our country -- but
more important for this inquiry is the knowledge of how dramatically it
has changed just in my brief period of study.

These changes are

continuing with bewildering speed; and the pace will accelerate.


Ninth District no matt e r how remote it may seem in parts of it from the
main stream -- and some of us sometimes wish it were more so -- is caught
up in the process.

For those who are willing to study these changes, and

capitalize upon those elements that can be applied to their bank,
future is bright indeed.


May I emphasize again these are changes which

reflect changes in the marketplace.

This is not a which comes first,

the chicken or the egg, situation.

Banks react to customer changes --

customers react only to banks failure to change.

A broad generalization

with an undoubted number of exceptions, but enough truth I hope to provoke
you to think about it.
It should hardly come as a surprise that your markets are
changing -- even less of a surprise is the statement you are in the
service business.

But perhaps more of a surprise are some of the implications

your reflection upon these truisms will produce.
What kind of bank are your customers going to need ten, twenty
years from now?

A most relevant question to a consideration of your future,

because it is that kind of a bank they will be doing business with.


it is not your bank, then don't cry about a deterioration of the good
old values and customer disloyalty -- you deserted them by failing to keep
pace wi t h their needs.
This kind of self-examination is a process that can never stop
because American industry, and I include agriculture as a part of American

is the most productive and imaginative in the world.

these are your customers.


Ideally no one really can prescribe in nice

detail the pattern of change for you as appropriately as you can because
there are no two states, no two communities, and certainly no two banks
with the same economic environment.

But society will,

if you don't, and

here is the real spur to your s e l f - i n q u i r y .
But what an absorbing and exciting occupation this kind of selfexamination can be.

If it then becomes the basis of constructive action,


it can also be rewarding in every sense of the word.

There is no

question at all about the bright future of banking -- nor can there
be any question about your future in banking -- if you train yourself
to ask, and answer, what you want that future to be.