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For release 11:00 A.M.
Central Daylight Time
September 30, 1968




Remarks of J. L. Robertson
Vice Chairman of the Board of Governors
of the
Federal Reserve System
before the
State Bank Division
of the
American Bankers Association
Chicago, Illinois
September 30, 1968

An Inside Look at Federal Bank Regulation

When I was invited to address this meeting, I
believe it was expected that I would endeavor to defend
the Federal Reserve against a variety of complaints complaints that included such words as "dilatory", "in­
flexible", "old-fashioned", and "unprogressive".
The Federal Reserve needs no defense from me.
Its record speaks more eloquently than I can of its
meritorious performance over the years - not perfect,
not beyond improvement, but good.
However, I will say a few words about the com­
plaints, although I wish to deal mainly with some of the
basic problems, the underlying conditions which have pro­
duced the conflict and criticism that has troubled the
banking community for the past several years. I refer
especially to the well known differences of opinion among
the bank regulatory agencies.
The fact that these agencies have not always been
in step with each other has been a source of considerable
concern both to the regulators and to those regulated.
For a time it became the focus of attention, virtually
to the exclusion of everything else. The situation re­
minded me of the young man who did not seem to take any
interest in girls. This worried his father, who tried
a variety of things to develop his son's interest in the
opposite sex, but all to no avail. Finally, he suggested
that he join the Marine Corps, thinking that close asso­
ciation with the manly Marines would do the trick. After
the lad had gone through boot camp, he came home on leave.
He and his father were sitting out on the front porch,
when they saw three attractive girls in mini-skirts com­
ing up the street. The father nudged his son - "Pretty
nice, eh?” The boy eyed the girls carefully, and said,
"Okay'. But the one on the left is out of step."
I cannot say that I blame the banking community
for having noted that the regulatory agencies were out
of step. I am sure that at times all of us have felt a
bit like Molly Peabody back in my home town, Broken Bow,







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Nebraska. Molly and her husband, Jake, used to have
some pretty hot disagreements. I am sure he was hard
to get along with under the best of conditions, but he
had his softer side. After one especially bitter row,
when they both said things they shouldn't, Jake was
standing by the window looking out, and called, "Molly,
come here'. I want you to look at something.” Molly
joined him at the window. "Look,” he said, "at those
two horses pulling that load of hay over the hill. Why
can't we pull together like a couple of horses over the
hill of life?" "Well," Molly explained, "the reason we
can't pull together like a couple of horses is because
one of us is a gee-haw mule."
Far be it from me to suggest that there are - or
ever have been - any gee-haw mules in the banking busi­
ness, much less the bank regulating business. But cer­
tainly there have been strong differences of opinion
about policies and procedures. I am pleased to have
this opportunity to state my own position and to advo­
cate a promising solution for problems that have caused
so much friction, confusion, and damage.
A few of us are old enough to recall the events
that led to the adoption by Congress of the rules and
regulations under which our banking system has operated
for more than a third of a century. You will recall
that a decade marked by great "permissiveness" - the
'twenties - brought almost unrestrained expansion fol­
lowed by a collapse and a depression that caused untold
suffering. In the light of the disclosures of the Pecora
Investigation, Congress adopted certain controls and limi
tations to safeguard the vital functions that the banking
system performs for our economy.
Laws were enacted to separate commercial banking
from investment banking. The affiliate system of the
1920's - bank ownership of other corporations, and joint
ownership of banks and other corporations - was severely
curtailed. Banks were effectively restricted in their
financing of certain related interests. The same prin­
ciples that resulted in this legislation - the famous

- 3 -

Glass-Steagall Act and others - also prompted the legis­
lation of 1956 which barred bank holding companies from
engaging in nonbanking businesses, either directly or
through subsidiary corporations.
I happen to take the view that principles that
have been derived from experience should not be aban­
doned lightly. Admittedly we are living in a «go-go"
era. Permissiveness has again become pervasive in our
society. Our young people are impatient with those who
look at the past and see alarming similarities with the
present. Our economy has enjoyed a remarkable period of
expansion. Most Americans alive today have no recollec­
tion of the depression and the closing of all banks in
the early 'thirties. This tends to breed impatience
with old-fashioned notions about the need for restraint
and controls that were born of those harsh experiences.
George Bernard Shaw once said, "The one thing we
learn from experience is that we don't learn from experi­
ence.” One reason for this may be that history moves
too slowly for us. Experience may warn us what is going
to happen if some past errors are repeated, but we are
seldom able to tell when it will occur. A decade or two
is not long when viewed in historical perspective, but
the only prophets we heed are those who tell us what is
going to happen in the next six months or, at most, in
the next year. We have no time for those who are con­
cerned about what might happen in ten or twenty years.
This is a lesson I learned from my concern with
our balance-of-payments problem. I gave my first public
warning about the need to pay attention to this problem
in a speech ten years ago. Many of the things I then
warned against have since come to pass, but they came
so gradually that they did not shock us enough. We
would have been galvanized into action to avoid the de­
terioration that has taken place if it had occurred at
a dramatically rapid pace, but few men have the confi­
dence or the courage to take drastic action on the basis
of long-term forecasts.




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The same holds true with respect to the rules
of sound banking. We can turn our backs on the lessons
of the past, confident that the new activism will not
bring us to the brink of disaster in the next six months
or the next year or two. This is precisely what is hap­
pening. You know as well as I that more and more banks
are becoming parts - sometimes the principal part - of
a conglomeration of activities, some of which are re­
lated to banking only remotely, or not at all.
Not very many people have noticed, but we appear
to be drifting toward a repetition of serious errors
that the banking industry fell into in the 1920's. For
example, the one-bank holding company loophole threatens
to take us back into the kind of situation that only stu­
dents of history and a few old fogeys remember.
I do not intend to speak here of the implications
for the public interest of this tendency in our banking
system - implications that are indeed grave, for a sys­
tem whose existence is uniquely dependent on the use of
other people's money. But I think that the leaders in
the banking industry might want to ponder the lessons
of the 'twenties and 'thirties before they plough that
ground a second time. If nothing else, they might re­
call the tremendous drop in prestige and influence that
their predecessors suffered as a result of the public
reaction when the houses of cards they had erected col­
lapsed .
We should not allow the tendency to get caught
up in a general euphoria to blind us to the fact that
ten or twenty years from now we may look back with re­
gret upon decisions that have permitted banks, for ex­
ample, to become subsidiaries of enormous conglomerate
holding companies, to establish nation-wide systems of
loan offices, to engage in business activities quite un­
related to banking.
If we are on the wrong road - and I believe we
are - we must ask ourselves how we got started on it
and whether there is any turning back before the road




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disappears in a swamp. Clearly the problem has its
roots in the accidental and irrational system of bank
regulation and supervision that this country has been
saddled with. During the past five years the delicate
balance of the banking industry has been upset, the
dual banking system endangered, and the development of
banking on sound lines impeded by the divergent policies,
procedures and interpretations emanating from the three
federal supervisory agencies. Surely there is only one
way to achieve and maintain the competitive equality that
we want in our banking system. That is by insisting on
uniform standards of regulation as far as federal law
is concerned, and by modifying the rules and the laws
on the basis of careful study of experience and thought­
ful analysis of the likely consequences. I regret that
this is not always the way things are done.
During the past few months we have seen important
decisions made under pressures that are directly trace­
able to the irrational structure of our supervisory sys­
tem. As you all know, my own agency recently reversed
its position on two fundamental matters. In doing so,
it was trying to correct a competitive imbalance, brought
about by the decisions of another agency, which threat­
ened the very existence of a strong dual banking system.
Competition among the regulatory authorities was breaking
down not only the legal barriers to banking practices
which had previously been judged unsound, but also our
traditional banking structure. To preserve the struc­
ture, the law was bent to permit what it seemed clearly
designed to prohibit.
Is the law nothing more than a set of ambiguous
expressions that are to be "adjusted" to meet the prefer­
ences of the moment, as some have claimed? Or is there
something called "the rule of law" which requires the
official as well as the citizen to respect and obey the
statutes which have been duly enacted, altering them when
alteration is desired by the procedures prescribed by
law?
I believe that an important element in the malaise
and turmoil of our times is the reduced importance that







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many of our people, including some who are leaders,
have attached to the rule of law. This is the cement
that binds a democratic society together and makes it
workable. As pointed out by the former Prime Minister
of Great Britain, Sir Alec Douglas-Home: "Some people
are suspicious of law and order, as though the rule of
law was a mere trick to freeze the status quo. It is
quite the opposite. Its observance is the sine qua
non of peaceful change. The rule of law is a lesson
learned from centuries of human experience, from many
mistakes and much suffering. It amounts simply to
this: that only by submitting ourselves to obey the
law can we reconcile conflicting ambitions and serve
the interests of mankind as a whole. Without the rule
of law we destroy one another.”
For nearly two centuries Americans have adhered
to the principle of majority rule, subject to the limi­
tations of the constitutional protection of individual
rights. If we ever reach the point where any substan­
tial number of our citizens take the position that they
have the right to choose which laws they will obey and
which they will disregard, we will have to ask, more
fearfully than Abraham Lincoln did in 1863, "Can such
a nation long endure?"
And if our government officials, our law enforce­
ment officers, our regulatory authorities, and even the
courts are thought by the citizens to be deciding which
laws they will observe, which they will enforce, and which
they will interpret out of existence, we should not be sur
prised if this generates widespread disrespect for the
rule of law. Here again, we must look ahead at the con­
sequences that will emerge in one, two or three decades.
We know, as the Chinese say, that a journey of a thousand
miles begins with a single step. And that is as true of
a journey on the downhill road as it is of a journey up­
ward.
It is easy to see why officials sometimes are
tempted to short-circuit the law. As Winston Churchill
pointed out, "democracy is the worst form of government
except all those others that have been tried..." It is

- 7 -

often slow and cumbersome in its operations. Sometimes
years pass before the apparent will of the majority can
be translated into law. In this NOW generation we have
little patience with cumbersome procedures. We are keenly
aware of immediate evils that call out for correction, but
we may overlook the far greater evils that will ensue if
we encourage or even tolerate the idea that members of a
society may disregard the mandate of the law and act in
accord with their own individual views and desires. To
break or bend the law to fit one's personal convictions,
and to uphold this as a right, is to add in some degree,
even though it may be imperceptible at the moment, to the
forces that would push our civilization over the precipice
into chaos.
Those who contend that the law is nothing more than
a set of ambiguous principles that can be twisted to help
achieve desired ends should ponder the words of one of our
country's most profound legal scholars, Paul Freund, who
warned the graduating class at Cornell College earlier
this year that "to jettison principles of law because
your aims are pure, or holy, or patriotic, denudes you
of defenses against those who are just as certain of their
rectitude„
"
It may be said that Paul Freund had something in
mind more important than the overgenerous interpretation
of a provision of our banking laws by a regulatory body.
He was urging the young students not to succumb to the
doctrine that the end justifies the means and not to defy
the law as a means of achieving political objectives. We
of the older generation who do not like to see college
buildings taken over by mobs of students, who do not like
to see the President of the United States and the members
of his Cabinet taunted and harassed by ill-mannered young
rowdies, can lecture the young on the importance of the
rule of law with great vigor and sincerity. But our own
failures to uphold the rule of law can be - and frequently
are - thrown back at us. We find ourselves criticized for
our inconsistencies, if not our hypocrisy. The criticism
is not always well-founded or just, but it does point up
the fact that all of us, acting in our own little spheres
of influence, have a weighty responsibility to not only
preach the rule of law, but to practice it as well.







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8

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In striving to improve our laws and their ad­
ministration, we must, of course, give due weight to
forward-looking ideas that seem logical. But we should
also remember the words of that great jurist, Oliver
Wendell Holmes, Jr., who said, "The life of the law has
not been logic; it has been experience." Pure reason
can never substitute for the lessons of experience.
When I first looked upon the world of banking
from the inside, over thirty-five years ago, there was
universal agreement, based on recent experience, that
certain legally prescribed standards and limitations
should be imposed on the banking industry. It was
agreed by all that supervision by regulatory bodies
was essential. Even today, there is rarely any ex­
plicit questioning of this need, but I sometimes won­
der how many bankers secretly harbor the view that the
industry would be better off without governing laws
and regulations, free of bureaucrats periodically nos­
ing into their affairs.
In my view, bank supervision and regulation is
desirable and necessary in the public interest, to in­
sure the soundness of our banking system. But the sys­
tem we now operate under is far from perfect. Action
to correct its faults and to rationalize the structure
of federal bank supervision is long overdue. I recog­
nize that there are those who say that what is needed
is not so much a thorough overhaul of the machinery,
but merely a good tune-up job. There have been a few
suggestions that the Federal Reserve, for example, could
improve its procedures in supervising and regulating
state member banks. Let me turn briefly to some of
these complaints.
First, it is suggested that some of our pro­
cedures need to be "modernized". Applications are
processed too slowly. They go through too much con­
sideration at too many places. This results in ex­
cessive delay, on top of which the application may be
denied without the applicant having an opportunity to
appear before the agency to rebut adverse arguments.

- 9 -

No one would condone needless bureaucratic de­
lays, and we have taken these suggestions to heart.
For example, in July of 1967 the Board of Governors
delegated some of its duties, in order to expedite ac­
tion. During the following twelve months, a thousand
items were disposed of under those delegations of au­
thority - over 400 by the Reserve Banks and almost 600
by the Board's officers.
But careful analysis and thorough consideration
do take time. We take pride in the fact that our de­
cisions have held up well in the courts. Our record is
so good that decisions are rarely challenged. Without
doubt, this owes much to the fact that each case receives
thoughtful consideration. Failure to do this would be a
disservice not only to the national economy generally but
to the banking community particularly, because it would
leave the banks more vulnerable to attack.
Another complaint - and this one seems to con­
flict with the first - is that the Federal Reserve is
not sufficiently interested in bank supervision. I give
you my assurance, based on a lifetime of experience in
bank supervision, that no agency performs its supervisory
duties more conscientiously than the Federal Reserve Sys­
tem. As you know, there is a category of what we call
"problem banks" - not many, I am happy to say - and I
imagine that the president of any one of those would
say, perhaps in colorful language, that the Federal Re­
serve is too involved in its supervisory functions'. Oc­
casionally, however, institutions that have relinquished
the doubtful honor of "problem bank" status acknowledge
that the meticulous interference of the Federal Reserve
may have been worth while, after all.
A third complaint is that the Federal Reserve has
not displayed enough vigor in attempting to correct com­
petitive inequalities between classes of banks. I have
already made it clear that in my view the proper way to
do this is to propose and support appropriate legislation.
That is not only our duty, but yours, too. None of us -




-

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bankers or supervisors, state or national - can plead
innocent to this charge. All of us should start put­
ting our shoulders to the wheel, for it is not only
the rogues who feel the restraints of law. There are,
indeed, bad laws and bad systems, and it should be our
aim to protect the rule of law by constantly seeking to
improve and perfect the law.
These complaints and others that might be men­
tioned reflect the frustrations that the banking com­
munity now suffers, primarily because of competitive
inequalities. I am for a structural overhaul of bank
supervision that will eliminate the competitive inequal­
ities that arise whenever one agency gets behind in the
race of laxity and that cause some banks to begin shop­
ping for more lenient supervisors.
My answer is the adoption of a plan that will
give us unified supervision at the federal level - the
Federal Banking Commission plan, now pending before the
Congress. This plan would (1) eliminate wasteful dupli­
cation, overlapping, and never-ending efforts to coordi­
nate the actions of the supervisory agencies; (2) end
much friction and conflict among banks and bank super­
visors; (3) enable the banking industry to operate under
a single set of rules, in an environment of competitive
equality - as far as federal supervision is concerned;
and (4) do away with the dangerous tendency toward lax­
ity in bank supervision. In addition, it would enable
the Federal Reserve to devote its time and attention more
exclusively to the formulation and implementation of mone­
tary policy for this great nation of ours.
We should not forget that the present jerry-built
structure of federal bank supervision, divided as it is
among three different agencies, is an historical acci­
dent that does not rest on any defensible foundation of
efficiency, equity, or economy. Its effect is to deprive
banks of a reliable and competitively fair basis for the
development of their plans and policies. It also leads,
as we have seen, to 1 lowest common denominator1 supervi­
1
1
sion in which the most permissive interpretation or policy
tends to become the standard.




-

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Events this year have revealed clearly that
state-chartered banks have much to gain from unifica­
tion of federal bank supervision» Despite valiant ef­
forts to prevent a race of laxity in the interpretation
and enforcement of federal banking laws, seriously di­
vergent interpretations and policies apparently are
unavoidable when the same laws are applied to competing
banks by different supervisors. When one bank, acting
under its supervisor's rulings, embarks on a new and
potentially profitable course, competitors subject to
different supervisors find themselves in a difficult
position. One tempting solution is to apply pressure
on the other supervisors to relax discipline, even when
this involves a distortion of the meaning of laws - a
course only slightly less dangerous, and no less repre­
hensible, than an open flouting of the laws. If that
approach is closed, the conversion path from one system
to another provides a convenient way to regain competi­
tive equality - at least until the next race begins, when
the process repeats itself.
The present unfortunate arrangement, as events
have shown, has resulted in ever greater concentration
of banking resources in national banks. The ranks of
the state-chartered institutions are threatened with
decimation, resulting not only in loss of prestige for
the remaining state banks, but in loss of revenue to
state bank supervisors, with consequences unpleasant
to contemplate. The Federal Banking Commission plan
would halt this trend. It would, as you may have for­
gotten, include financial arrangements that would enable
the states to strengthen their supervisory organizations.
Indeed, the Federal Banking Commission bill looks for­
ward to an environment in which state examinations would
be adequate for all purposes, eliminating the need for
federal examination of state banks.
Let me ask: do you have a better solution for
the problems gnawing at our dual banking system today?
Our nation is confronted with many grave and dra­
matic problems. We are in the midst of an election




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campaign that centers around such important issues
as the war in Vietnam, a soaring crime rate, the be­
havior of alienated young people, and active dissatis­
faction on the part of many Negro citizens. While we
face some difficult and complex problems in the area
of bank supervision, they lack the drama inherent in
these other issues. But each of us must cultivate his
own field with care, intelligence, and self-discipline„
Even though the world may seem to be in turmoil around
us, we have a responsibility to put our own house in
the best possible order. Let us be an example of an
industry that looks at its problems honestly and dis­
passionately, and attempts to solve them in a construc­
tive manner.
We can perform a valuable service for our coun­
try. By rededicating ourselves to the rule of law and
by pressing for the adoption of the legislative changes
needed to improve banking and bank supervision, we can
demonstrate that representative democracy is not too
cumbersome to meet the needs of a modern, dynamic so­
ciety. Changes may not always come as rapidly as we
would like, but come they will, if a need exists and
sensible and promising remedies can be found. I think
the proposed Federal Banking Commission is such an answer
to a very clear need. I realize that many of you have
taken a different view of the matter. It is not sur­
prising that there should be conflicting views about a
reform of such magnitude. But it has been said correctly
that out of conflict comes change. We have the conflict.
Let us work together to insure that the inevitable changes
are of the type that will strengthen rather than weaken
the banking system and will reduce to a minimum the un­
desirable tensions and conflicts that have plagued the
industry in recent years.