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For release 11:30 a.m.
Central Standard Time
April 10, 1969________

Remarks of J. L. Robertson
Vice Chairman of the Board of Governors
of the
Federal Reserve System
at a Meeting of Member Banks of
Metropolitan St. Louis and the Boards of Directors
of the
Federal Reserve Bank of St. Louis
and Its
Little Rock, Louisville and Memphis Branches
St. Louis, Missouri
April 10, 1969

Back to Brandéis
While to the best of my knowledge Chairman Martin
has never undertaken to visit, much less speak in, my home
town, Broken Bow, Nebraska, it is certainly my pleasure to­
day to be once again in his, and it is a pleasure doubled
by the opportunity to pay public tribute to him and to a
distinguished career in the city where it began. My re­
marks, however, will concern another career which has St.
Louis roots, namely, Mr. Justice Brandéis, who was admitted
to the bar a few hundred yards from this very spot little
less than a century ago.
As you know, Louis Brandéis was more than a judge
and a lawyer. Both on and off the bench, he was pre­
eminently a public philosopher to whom a legal brief, a
judicial opinion, and an article for the popular press
were equally available modes of safeguarding the public
interest by an unflagging insistence on the highest stand­
ards of commercial and financial ethics. And it is from
his most popular writing on this subject, the basic "OTHER
PEOPLE'S MONEY and How the Bankers Use It" that I take my
text for today.
It was a work which sent a shock wave through the
America of the gaslight era, and in fact was one of the
forces which led to the establishment of the Federal Re­
serve. In one sense, the book now is anachronistic and
even antiquarian, for the specific abuses which moved
Brandéis to write have long been corrected. In another
sense, however, the overall philosophy captured in its
title has a continuing, and even a timeless, validity. In
fact, it has an extraordinarily apt relevance and applica­
tion to two distinct but related public questions of today on one hand, the bank holding company issue and on the other,
the problem posed by the current wave of congeneric and con­
glomerate expansion.
If I may briefly shift my authorities and borrow a
phrase from Brandéis' great colleague, Mr. Justice Holmes,
these two questions are ones which could stand more empha­
sis on the obvious and less elaboration of the obscure.
Certainly the root issues involved are neither complex nor

- 2 -

difficult, but rather are simplicity itself and turn on
the three simple points of prudence, fairness, and ex­
perience .
On the issue of prudence, I return to Justice
Brandeis and an injunction which he made a chapter title
in his book. The injunction was “Serve One Master Only1
It is as valid to the banking of 1969 as it was to the
banking of 1913, and its validity consists in this - ap­
plications for bank credit are to be granted on their
merits, not on the influence nor even the possibility of
influence of some other considerations.
Its most topical application is on the question of
whether the salutary constraints which the Bank Holding
Company Act of 1956 lays on inter-organization dealings
should be extended to one bank holding companies. On this
point there is certainly room for debate, but I must con­
fess my failure to comprehend the relevance of the argument
that the great majority of such organizations have com­
ported themselves with honor and integrity in such deal­
ings. That point can be disposed of almost out of hand,
for virtually every law on the statute books has resulted
not from the conduct of the many but the misbehavior of the
few. Hence, any invocation of a general pattern seems to
me to miss the point completely.
Rather, what we are talking about here is the rea­
sonable possibility of regrettable consequences which can
come to pass when a conflict of interest is present. When
this happens, when a banker tries to serve two masters, in­
deed, when he merely has two masters, there arise invidious
implications which cut two ways. More obvious is the pos­
sible out-and-out favoritism that may be accorded to the
applications of subsidiaries and affiliates or to the cus­
tomers of either. More subtle, and I think really more
corrosive, is the possible negative discrimination - the
loans not made, or even the double standard of judgment
which may be applied to the competitors of subsidiaries
and affiliates. Again, to my mind it is absolutely no
answer to either situation to assert that the recipients
of such potentially favored treatment, whether positive or

- 3 negative, are subject to examination ex post facto or
that only a limited percentage of bank assets may be le­
gally misapplied.
What we are dealing with here, as the very title of
the Brandeis book reminds us, is a situation very close to
the law of trusts. For both trusts and banking by defini­
tion involve other people's money and the analogy common
to both comes down to this - a banker should not only re­
sist temptation, but like a trustee, he should not even
let himself be led into it. Or to put the matter another
way, any evil inherent in allegiance to two masters is not
to be punished after the fact, but the very possibility of
its commission is to be forbidden at the outset. Hence, as
the Board of Governors has repeatedly recommended, there is
a powerful case for extending the salutary restraints of the
Bank Holding Company Act against self-dealing to their logi­
cal conclusion - i.e., to one bank holding companies.
Actually, there seems to be no serious dispute on
this issue, and most of the public debate has proceeded on
the nature and extent of the constraints rather than the
necessity of constraints themselves. Yet this very general
recognition is paralleled by a surprising lack of attention
on a related front and this concerns my second, and even more
basic, point. This is fairness.
To be sure, this issue of fairness has not gone com­
pletely undiscussed. To the extent I have been able to fol­
low the matter, however, such public utterances as I have
read seemed singularly irrelevant. So let me make a point
as emphatically as I can. In addition to the obvious viola­
tion of prudence, any alliance of banking and nonbanking
enterprise - other than that permitted under the most rare,
rigorous, and regulated exceptions - offends the elementary
principle of fairness in not one but two particulars. Both
derive from a common root, the distinctiveness of banking.
For banking is unusual in being a business of highly re­
stricted entry, and it is unique in its monopoly of demand
deposits. From these distinctive aspects two inequitable
advantages are afforded, actually or potentially, to a

- 4 bank-allied business over its independent competitors. The
first, as I have mentioned, is the risk of adverse odds, or
even the double standard, which the latter may meet in seek­
ing bank credit. The second is the possibility - thanks to
the indispensable business need of checking account facili­
ties - of actually having to furnish a competitive adversary
with the financial sinews of war by using the deposit ser­
vices of his banking affiliate.
This point has another application, it seems to me,
in an area where, again, much argument has a high degree of
irrelevance. This concerns what is - or should be - the
business of banking, and this applies whether or not the
bank involved is affiliated with a bank holding company op­
eration. Now the proper business of a bank is not an issue
to be resolved by analysis of nineteenth century court de­
cisions which were written in a day of virtually unlimited
market entry and of distinctions, as yet uncomprehended, be­
tween financial and nonfinancial operations. Rather, it is
to be answered in a context in which banking has become a
business of restricted entry, and one possessing a monopoly
of an indispensable resource. The consequence is that the
most elementary fairness demands that a bank stick to the
business of banking, as the latter twentieth century under­
stands it, with such facilities and powers as are necessary
to provide banking services to the public efficiently and
economically, and not foray from a protected sanctuary to
compete (either directly or via an affiliate) with enter­
prises which operate in a free-entry environment and which
must use banking services.
However, the issue of fairness does not stop here.
Bound up in the current debate is the whole vexed question
of permitting, via grandfather clauses, the continued ex­
istence of certain alliances of banking and nonbanking
business. Certainly the invidious double standard and the
ongoing special privilege of grandfather clauses seem selfevident. In the holding company context, the special unfair­
ness of a grandfather clause seems particularly manifest, for
here we have witnessed the scramble - I am almost tempted to

- 5 -

say copycat stampede - to achieve special status, under
the foreknowledge of almost certain Congressional action
on one hand, and on the other, the resulting consequence
of the arbitrary and completely fortuitous character of
any exemptions accorded.
To me, the “fairness” doctrine is perhaps the most
basic in law. Its strength is its simplicity, as the
child's complaint - "That's not fair1 - tellingly reminds


There are some other issues in the holding company
arena which are neither simple nor self-evident and which
must be mentioned. I have previously addressed myself to
them. One is the ominous parallels, obvious to anyone who
cares to look, between the corporate pyramiding of the
twenties and that of the present time. In mentioning any
parallel between the sixties and the twenties, neither I
nor any of my colleagues on the Board are to be understood
as asserting that the current situation is either a mirror
image of what is gone before or that the past will play out
its pattern once more, complete as to every minor detail.
Yet the past is not without its merit as a guide to the
future, and as the St. Louis Post-Dispatch* has noted, we
have had a long history - "predominantly unsatisfactory”
of holding company pyramiding of regulated and unregulated
We have also had a history, not so long perhaps but
certainly unsatisfactory - of the effects of a fragmented
jurisdiction and perverse cross-purposing of authority among
the federal bank supervisory agencies. I would make only
one point here - this unsatisfactory experience did not
arise because the several agencies were staffed with inept
or evil men. Rather it arose because the very structure of
supervision was faulty, and the wonder is that we did not
have more trouble. To try to put that structure to rights
is a Herculean task, I can testify, and it is a task we can­
not accomplish overnight. But what we certainly can do now
is to avoid any step, in solving the holding company problem,
■^Corporate Life among the Pyramids, February 5, 1969.

- 6 which would deliberately extend the supervisory muddle
to new fields, and particularly to do so at that critical
juncture of banking and nonbanking activities where the
possibility of divided decisions, competition in laxity,
and inequitable distinctions seem so manifestly probable.
Having spoken at length on both points previously,
it is unnecessary to do so here. I might, however, close
by noting their similarity with a return to the wisdom of
Mr. Justice Brandeis and his injunction that experience is
the best teacher. This is my final point and it applies
to both corporate pyramiding and bank supervision. Both
are products of history, and we should learn something
from that history. For while I am not saying that the
past will repeat in every detail, I do ask you to remember
that in those fields as elsewhere, the price of ignoring
the lesson of history is to be fated, in some way or other,
to repeat it.