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SUMMARY OP THE REPORTS
Prepared for the information of the
Federal Reserve System by the
federal Reserve Committee on
Branch* Group, and Chain Banking

Members of the C ommittee

1. A. Goldenweiser, Director, Division of Research and Statistics,
Federal Reserve Board, Chairman
Ira Clerk, Deputy Governor, Federal Reserve Bank of San Francisco
M. J. Fleming, Deputy Governor, Federal Reserve Bank of Cleveland
L. E. Rounds, Deputy Governor, Federal Reserve Bank of New York
1. L. Smead, Chief, Division of Bank Operations, Federal Reserve
Board

J. H. Riddle, Executive Secretary and Director of Research

The Committee was appointed February 26, 193°t ^y the
Federal Reserve Board




". . .to assemble and digest information on
"branch banking as practiced in the United States,
group and chain hanking systems as developed in
the United States and elsewhere, the unit "banking
system of the country, and the effect of omiership
of bank stocks by investment trusts and holding
corporations."

GENERAL LETTER OP TRANSMITTAL
(To " e inserted in Volume I)
b

To the Federal Reserve Board:
The Federal Reserve Committee on 3ranch, Group, and Chain
Banking was appointed on February 26, 1930* by

tlie

Federal Reserve

Board
". . .to assemble and digest information on branch banking as practiced in the United States, group and chain
banking systems as developed in the United States and elsewhere, the unit banking system of the country, and the effect of ownership of bank stocks by investment trusts and
holding corporations,"
Under the terms of its reference the Committee has prepared
and is submitting reports on the following topics:

(l) Branch Bank-

ing in the United States; (2) Branch Banking in California: (3) Branch
Banking in England: (k) Branch Banking in Canada: (5) Banking Groups
and Chains; (6) Changes in the Number and Size of Banks in the United
States. lg~&-iq"U: (7) Bank Suspensions in the United States, 18921221; (8) 225 Bank Suspensions. Case Histories from Examiners' Reports; (9) Banking Profits. 1890-1931: (10) The Dual Banking System
in the United States.
The Committee also submits herewith a summary of the material
in the detailed reports.
The appointment of the Committee was prompted by the banking difficulties during the preceding ten years, which had resulted
in a large number of bank suspensions, and by the growing trend towards
concentration through branches, chains, and groups . When the Committee




- i -

- ii -

began its work, speculative activity in the securities market and in
other fields had recently culminated in a collapse of security prices,
but the extent and scope of the decline in economic activity that had
begun in the summer of 1929 was not then clearly defined. The decade
just concluded had witnessed extraordinary activity in construction and
rapid expansion of industrial plants, particularly the rapid growth of
the automobile industry which has had profound effects on many phases
of the country's life. Installment selling had developed on a large
scale and had stimulated buying by the consuming public.
The decade was characterized by an abundance of credit, to
which an inflow of gold from abroad greatly contributed, and by an
extraordinarily large volume of security flotations, both domestic
and foreign. It witnessed speculation in real estate, in securities,
and in business enterprise. Throughout the period, however, commodity
prices after a precipitous decline in 1920 and 1921 remained relatively stable around a level somewhat higher than the low point reached
early in 1922.
Broadly speaking, the decade was one in which industrial
and city populations were prosperous, while agriculture was going
through a difficult adjustment.
While the Committee was conducting its investigation, there
developed an economic depression of unprecedented depth and duration
which has affected every part of the world. This subjected the banks
of the country to new destructive forces. The impact of the depression
on the banking system was severe by the end of 1930 a n d became more




- iii serious i n 1931, the l a s t year covered by the organized material a c cumulated by the Committee.

I t s studies of bank earnings and expenses

cover the five year period 1926-1930; i t s studies of f a i l u r e s are c a r r i e d through 1931, but do not include the year 1932 during which the
establishment of remedial agencies, such as the Reconstruction Finance
Corporation, introduced e n t i r e l y new elements into the s i t u a t i o n .
Developments during 1932 are r e f l e c t e d in the study only in a gene r a l way and in p a r t i c u l a r cases where -information was available and
appeared to be e s s e n t i a l for completeness*
The Committee's i n v e s t i g a t i o n s were organized and directed
by J , H. Riddle, the Executive Secretary and Director of Research.

The

various r e p o r t s were w r i t t e n under h i s supervision, and the major p a r t
of the e d i t o r i a l work was done by him.

Mr. G. W. B l a t t n e r , of the

B o a r d s Division of Research and S t a t i s t i c s , prepared Banking P r o f i t s .
1890-1911 and collaborated in two other r e p o r t s ;
England and Banking groups and Chains,

Branch Banking in

He also a s s i s t e d in the e d i t -

ing of other r e p o r t s and was frequently consulted as to methods and
procedure in other research p r o j e c t s .
Other members of the research s t a f f p a r t i c i p a t e d in one or
more p r o j e c t s .

Mr. Guy Greer prepared Branch Banking in Canada and

Branch Banking in California.

He also collaborated in the prepara-

tion of JJhg Dual Banking System in, Jjhje. United S t a t e s .

Mr. Oliver S.

Powell, of the Federal Reserve Bank of Minneapolis, prepared 22ft
Bank Suspensions. Case H i s t o r i e s from Examiners' Reports.




Mr. Clarence

- iv Hammond prepared Branch Banking in the United States, and collaborated in the preparation of Changes in theflumberand Size .of Banks
in fa© United States. 161UT»1Q/S1. Mr. Clark Warburton collaborated
in the preparation of Bank Suspensions in the United States. 18921931. Changes in the Number and Size jof Banks in the United States.
18^-1931. and The Dual Banking System i£ the United States* Mr.
Richard Garlock collaborated in the preparation of Bank Suspensions
in .the United States. 1892-1911; Mr. Cyril B. Upham in Banking Groups
and Chains: Mr. Jett Lauck in Ttj6 Dual Banking System in the United
States: and Mrs. Louise Sissman in Branch Banking in England. Mr. J. E.
Horbett, of the Federal Reserve Board's Division of Bank Operations,
helped in the preparation of much of the statistical data used in
some of the reports and has participated in the planning and execution of several of the statistical projects. The Committee is indebted
to Mr. Carl E. Parry, Assistant Director of the Division of Research
and Statistics of the Federal Roserve Board, for having read most of
the reports and for many valuable suggestions. The Committee is also
indebted to the counsel of the Federal Reserve Board for the preparation of digests of various laws and to members of the Board's staff
for criticisms and suggestions*
The Committee expresses its appreciation to the various
Federal reserve banks, the Comptroller of the Currency, and the
various State banking departments for the assistance they have
rendered in this investigation. Some of the projects entailed
the collection of n vast amount of statistical and other factual




- V data, and much of these were supplied by the Federal reserve banks,
or through them by the State hanking departments* Without this
assistance some of the projects could not have been carried out
successfully*
To the various public officials, bankers, economists,
and others in this country, Canada, and England, who have supplied information, given the benefit of their counsel, or rendered other assistance, the Committee expresses its thanks*




Respectfully,

E. A* Goldenweiser, Chairman
Ira Clerk
M. J* Fleming
L. R. Rounds
E. L* Smead




CONTENTS
Page
Growth in Number of Banks Prior to 1920

5

Net Profits of Banks

13

Suspension Record by £!ize of Banks

21

Causes of Bank Suspensions since 1920

28

Weakening Influence of the Dual Banking System

^3

Group Banking in thetfnitedStates

52

Chain Banking in the tfolted States

55

Branch Banking in the tfnited States

56

Development of the Branch Banking Issue

64

Branch Banking in Canada

77

Branch Banking in Jogiaad

82

SUMMARY

The tanking system of the United States has not met successfully the test of adverse economic conditions. In the past twelve years there
have been over ten thousand hank failures involving deposits aggregating
nearly five billion dollars. Daring these twelve years, one failure has
occurred for every three active banks in the country in 1920. These failures have involved deposits aggregating over one-eighth of the deposits
of all commercial banks in existence in 1920. In no previous period of
equal length since the establishment of the national banking system in
1863 has so large a proportion of the country's banks suspended.
The failures during the past twelve years have had far-reaching social and economic consequences. The serious disturbances to the
credit and business structure of the country indicate an urgent need for
greater stability of banking institutions and greater protection to depositors. The aggregate losses to depositors alone have been a disturbing factor, but this represents only a part of the damage done. It would
be difficult to appraise the personal hardships, the lost opportunities,
and the impediments to trade which have been occasioned by the tie-up of
funds in closed banks.
The country's banking difficulties as reflected in this heavy
mortality rate have been a major factor in the more serious stages of the
depression following the boom of 1929. and in a measure are responsible
for the extreme depths to which security prices and public confidence
declined. The growing feeling of insecurity, the withdrawals of de~




- 2 -

posits, and the frequent suspensions led to an almost continuous sale
of securities at depressed levels, thereby endangering other banks and
setting up a vicious circle which it has been difficult to break.
Economic developments during the post-war period have created
difficult conditions for the banks. Agriculture has been burdened by a
large volume of debt incurred largely during the war and post-war booms,
and during the past three years the financial machinery of the country
has been subjected to extraordinary pressure on account of a world-wide
depression of unusual dimension and duration, A banking structure, however, which results in the failure of banks on the scale witnessed during
the past twelve years is one that challenges careful analysis with a view
to determining the causes of weakness. A bank, perhaps more than any
other type of institution, needs to fortify itself against depression,
and the management is properly expected to strengthen its position in
good years in order to be prepared for the problems of lean years. Not
only must bank management cope with the short-term ups and downs of business, but it must also confront the problems presented by long-time tendencies.
Although bank closings have been running at a high rate during
the entire period since 1920, the number has greatly increased during
the past three years as shown in the table below.




- 3~

Table 1 - National and State Bank Suspensions
1921-1932U)
tear

Number

46i
343

1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932 ;

1,292
2,213
1,416 ,

Total

10,352 ! -

{!)

623
73s
579
92U

636
^79
628

Gross deposits
(000 omitted)
$

163,299
89,274
146,347
202,423
159,904
250,434
194,992
139,400
222,931
821,834
1,669,075
698,382

*4,75&,<>95

During the same period 47° private banks and 8 mutual savings
banks suspended. Trust com*
panics and stock savings banks
are included among the State
banks.

A comparison of the percentage of bank suspensions with the percentage of failures among other business enterprises during the period
I892-I932 is shown in Chart 1,

Since 1920 the percentage of bank suspen-

sions has been on the average three times that of other business failures,
bank suspensions rising in I93I to the record figure of 10.5 per cent of
the active banks. In contrast, failures of all business enterprises in
1931 were less than 1,5 per cent.
Back of the banking difficulties of the past ten years lie two
decades of rapid expansion of banking facilities, nourished by a variety
of favorable circumstances.







_ 4 -

CHART 1

BANK SUSPENSIONS AND ALL BUSINESS FAILURES
PERCENT

11

Per cent of national and State banks and of all business enterprises failing each year from 1890 to 1932. The figures for
business failures are those compiled by R. G. Dun and Co.

- 5Growth in Number of Banks Prior to 1920
The number of 'banks operating in 1920 was two and one-half
times the number in IS95.

In 1895 there was one bank for every 5,800

persons, while in 1920 there was one for every 3.500 persons, as shown
in the following table.

Table 2 - Number of Banks and the Population per Bank
in the United States, I877-193I
Year
June 30

1877
1880
I885
1890
I895
1900
1905
1910
1915
1920
1925
1930
1931

Population ver bank(2}
Number of hanks
All
Incorporated
Incorporated
All
hanksU)
hanks(l)
hanks
banks
2,709
2,726
3,704

5.73J*

8,0S*+
8,738
l4,682
21,486
25,3^5
28,659
27.639
23,0%
21,123

5.1^1
5.299
7»l60
10,039
12,008
13,925
19.973
25,155
28,082
30,395
28,554
23.643
21,627

17,266
18,438
15.297
10,997
8,607
8,712

5.736

4,294
3.920
3,713
4,156
5,346
5,874

9.098
9,485
7,913
6,281
5.794
5.^67
4,217
3,668
3,538
3,501
4,023
5.211
5,737

(1) Incorporated banks include State and national hanks.
All banks include State, national, and private hanks,
hut exclude mutual savings hanks. The precise number
of private hanks in any year is unknown, and these figures are therefore only approximately accurate.
(2) Population figures used were mid-year estimates as published in the Statistical Abstract of the United States.
Growtfo Centered in Agricultural Regions. - This growth in hanks
occurred largely in the agricultural States. The number of hanks in New
England and the Middle Atlantic States reached a peak in the first decade
of this century.

In the other regions, however, banks continued to in-

crease for 10 or 15 years, or more. The greatest increase occurred in
the Southeastern, Southwestern, and Rocky Mountain States, where the num-




- 6ber of banks increased from 300 to 400 per cent between 19OO and 1920.
The Western Grain and Southern Mountain sections also showed increases
of about 150 per cent during the same period.

In many of these States

the chartering of new banks was incidental to the opening and development of new areas.

Table 3 - Geographic Distribution of Active Banks in the
United States in 1900 and 1920

New England
Middle A t l a n t i c
North Central
Southern Mountain
Southeastern
Southwestern
Western Grain
Rocky Mountain
P a c i f i c Coast
UNITED STATES
•

•• • • •

in

Population 1oer bank
Per cent
igood) 1920(1) increase or
decrease

Number of banks
Per cent
increase or
1900
1920
decrease

Geographic
division

• • • • — • « — • w » — ——4—'•

997
3.02S
3,052
785
693
681
3,879
3k7
46^ •
13.925
••• wi

i.«

^••••iiu.iiw-wil

111 1

mm • • . • • • i in m ii

.im

|

i

9.920
7.537
3,656
4,360
4,329
2,998
1,363
2,113
4.o4*5

5.^57

+118.3

30,395
>•

5,609
5,649
5,238
8,893
13,505
9,592
2,667
4,827
5.220

-24.7
+7.5
+93.9
+150.3
+310.8
+405.3
+137.9
+359.7
+200.9

751
3,256
5,919
1.965
2,81+7
3,^1
9,228
1,595
i.*n

3.501

• • • i • « * •»•— fr— •

»

i

+76.q
+33.4
-30.2
-51.0
-67.9
-6S.7
-48.9
-56.2
-22.5
-35.8
|.

w w m

•••• m i m

(1) For 1900, census figures of population were used; for 1920, mid-year
estimates.

In 1920 eighteen States had less than 3,000 persons per bank,
and half of these less than 2,000. The latter 9 States constitute a
solid block in the Middle West and Northwest, including Minnesota, Iowa,
Kansas, Nebraska, South Dakota, North Dakota, Montana, Wyoming, and Idaho,
In two of these States, the Dakotas, the population per bank was less than
a thousand. This would roughly indicate an average of only two or three
hundred individual customers per bank.




- 7-

Years of Agricultural Expansion. - The increase of banking facilities in these regions was associated with a prosperous and expanding
agriculture, which the commercial banks were financing to a considerable
extent. Agricultural development during the years I895 to 1920 was characterized by an almost continuous increase in demand for capital. With the
disappearance of the frontier and the growth in the world's demand for
agricultural products, the prices of farm commodities rose somewhat faster
than the general price level until 1919i and. on that date were over three
and one-half times as high as in 1895*

This was accompanied during most

of the period by an even more rapid rise in farm land values.
The demand for farm products continued strong despite the increasing output of the country. Great numbers of immigrants were settling
in the cities and requiring farm products. The value of exports of agricultural products increased from one billion dollars in 19IO to one and
one-half billions in 1915* During the war years the foreign demand for
American agricultural products increased greatly. Agriculture thus had
the fortunate combination of large marketings and high prices. This resulted in a continued increase in farm income per acre.
Much of the agricultural territory, especially in the West,
was comparatively undeveloped, and although the original settlement of
land was nearing its close, there were wide areas with only meager improvements and the state of the country generally testified to its recent
emergence from range conditions. There was a large demand for farm machinery and vehicles, and extensive amounts of fencing were needed to enclose
and divide the new farms. New or better buildings were required to pro-




- g -

tect grain and live stock and more labor was hired on farms. Purchases
of additional or better live stock increased as facilities became available and as better roads and railroads afforded more ready access to markets.

Community improvements followed those on the farms as better roads

and schools were provided and taxes were levied to include the new items.
The soil was comparatively new in the West, while in the South commercial
fertilizers were coming into more general use to improve long cultivated
land. This added an increasingly important item to the farmer's expenses.
So long as farm land remained free and abundant only limited improvement
was warranted. As the country's supply of free land diminished, improvements were extended.
Competition and Indiscriminate Charterina; of Banks. - In addition to prosperous and expanding agricultural regions, there were other
conditions favorable to the rapid growth in the number of banks. Bank
profits averaged relatively high during the early years of this century,
while business failures and bank losses were low. The increase in the
number of banks had legislative encouragement in the provisions of State
laws, permitting in some States the organization of incorporated banks
with a capital of $10,000, and in one State with only $5,000, Several
States had no capital requirements at all for many years. As authorities
in many regions were without legal power to deny an application for a
charter, even where they felt it was desirable to do so, there was little
restraint upon the number of new bank organizations. In some States there
was no banking department, until well into the present century, and charters might be issued by officials and by judges whose main responsibilities
lay in other fields.




- 9~
An important factor in the increase in some States, however,
was the competition between the State and national systems in the granting of charters. One of the first efforts of the national system to meet
the competition of State hanks was the redaction in 1900 of the minimum
capital requirement from $50,000 to $25,000. After that there was a rapid
growth in the number of both national and State banks but the number of
State banks continued to increase more rapidly. Chart 2 shows how the
number of State banks outdistanced national banks after 1900.
The national supervisory authorities, as well as those of some
of the States, have for years refused charters in their discretion if for
any reason the proposed banks were not deemed reasonably certain of becoming sound and stable institutions. But both classes of supervisory
agencies have been solicitous for the relative importance in numbers and
resources of the banks under their respective jurisdictions, and this fact
has had an important bearing upon the exercise of their discretionary
powers. Organizers of new banks have been able to play one supervisory
authority against the other. Many new charters have been granted without
adequate consideration of the needs of the community or of the probable
safety of the new institution for its depositors.
Too many banks were chartered in communities which could not
support a bank or in communities in which banking facilities were already
ample. One town in Iowa with a population of 1,300 had four banks in 1921,
but only one in 1931 • A town in South Dakota with a population of 300 had
one State bank when the Comptroller of the Currency granted a national
charter. The result was two crippled banks. Another city in South Dakota







-10 -

CHART 2

NUMBER OF COMMERCIAL BANKS AND TRUST COMPANIES
I N T H E UN,
TED STATES, 1884-1931

NUMBER OF BANKS

25,000

State banks include trust companies and stock savings banks.
Mutual savings banks are not included. Figures are as of
June 30 of each year or nearest reporting date.

-11 -

with a population of 600 people had three banks. All failed. One county
in North Dakota with a population of 10,000 had 18 hanks. By the end of
1931 there were three hanks in that county.

These are not isolated cases

but are typical of many communities in the agricultural States around
1920.
These charters were granted frequently with little or no regard
to the qualifications of the applicants. In many cases the men running
these banks knew very little about the principles or practices of banking.
Many of the new banks were not only foredoomed to failure but were also
likely to imperil the existence of other banking institutions. The establishment of such large numbers of small banks has in itself presented many
problems, the principal of which are the difficulties of making adequate
earnings, providing reasonably competent management, and exercising proper
supervision over a large number of small institutions.
Chart 3 illustrates the preponderance of small banks in the
country in 1920, At that time there were about 19,000 banks with loans
and investments of less than $500,000, of which 83 per cent were State
banks. Over 6,500 banks had loans and investments of less than $150,000,
Accompanying the increase in the number of banks prior to 1920, the margin
of profit per $100 of bank portfolio had been decreasing.
many classes of banks were typically unprofitable.




In recent years




12 -

CHART 3
DISTRIBUTION OF STATE AND NATIONAL BANKS
IN 1920 BY SIZE GROUPS
NUMBER OF BANKS

NUMBER OF BANKS

7000

7000

Number of State and national banks on June 30, 1920, grouped
according to amount of loans and investments

-13-

Net Profits of Banks
Over the four decades 1891-1930 the net profits of "banks on
invested capital, as indicated by the official figures for all national
banks taken together, fluctuated between about 4 percent and about 11
percent.

In 1931 they were under 1.5 percent and in 1932 a net deficit

was shown. Over the period 1900-1931, for which comparison has been mado
between the net profits of all national banks taken together and the average yield on a group of high-grade bonds, it appears that the rate of
return realized on capital invested in national banks was the higher in
all years except 1931, and that the differential was seldom less than
2 percent and not infrequently more than 3 percent. Although comparablo
figures for all State banks were not available, it would appear that prior
to the development of the current depression the banking system of the
United States, considered as a whole, was fairly profitable.
The use of aggregate figures for all national banks does not
afford an adequate basis for understanding the recent history of the banking system of the country, however, because those data reflect the composite
experience of banks with records that vary all the way from very good to
very bad.

In order to dovelop a more adequate basis, through isolating by

groups the banks that were typically profitable from those that wore not,
the official reports of national banks for the five-year period 1925-1930
have boon analyzed in detail.
During this five-year period somewhat more than half of the banks,
or about 4,000 annually on the average, having well over half of the loans
and investments of all national banks, realized not profits of 6 percent or




- lU-

moro on their invested capital.

Somowhat less than half, or 3,403 "banks,

failed to realize as much as 6 percent. Of those there were 1,396 that
earned more than 3 percent, 836 that earned less than 3 porcont, and 1,171
that earned nothing or had annual net deficits.
Hot Profits by_ Size of Banks. 1936-1930. - A majority of the
"banks reporting not deficits had less than $500,000 of loans and investments, and ovor three quarters of thorn had less than $1,000,000 loans and
investments. Dividing the banks into size groups and beginning with the
small institutions, the record of net profits showed a progressive improvement from one size group to the next. This is illustrated in Chart 4,
which shows that 55 out of every 100 banks with loans and investments of
less than $150,000 on the average earned loss than 3 percent during the
five years 1926-1930. Twenty-five percent of all national banks with loans
and investments of less than $500,000 showed annual net deficits dur»
ing the five years. On the other hand, loss than 3 percent of the national
banks with loans and investments of $50,000,000 and over showed annual net
deficits.
Comparing the same size groups it was found that nearly 40 percent
of the banks with loans and investments of less than $500,000 against 7
percent of tho banks with loans and investments of $50,000,000 and over
reported annual net deficits or net profits of less than 3 percent on invested capital. Almost 60 percent of the first group of banks against 21
percent of the second group of banks reported annual net deficits or not
profits of loss than 6 percent. About 37 percent of all national banks
in 1930 had less than $500,000 of loans and investments, but for State and







- 15 -

CHART h

PERCENTAGE OF NATIONAL BANKS REPORTING ANNUAL
NET DEFICITS OR NET PROFITS OF LESS THAN 3 %
BANKS GROUPED ACCORDING TO" SIZE OF LOANS AND INVESTMENTS
PER CENT OF BANKS

Average 1 9 2 6 - 1 9 3 0

PER CENT OF BANKS
6Q

- l6-

national banks combinod about 68 percent of the total number of banks,
holding about 6 porcont of the loans and investments of all commercial
banks, was in that size group.
There were many profitable small banks in all localities, some
highly profitable ones.

Many small banks succeed because of good manage-

ment, in some instances assisted by other particularly favorable circumstances.

In the group of banks with loans and investments of less than

$150,000, 26 out of 100 annually showed net profits of 6 percent or more
on invested capital during the period 1926-1930 as is shown in Chart 5A.
In the group with loans and investments of $150,000-$250,000, 38 out of
100 reported net profits of 6 percent or more.

In the group with loans

and investments of $250,000~$500,000, 47 out of 100 reported net profits
of 6 percent or moro.
It is not possiblo to draw a sharp distinction as to what rate
of net profits constitutes success.

Clearly, however, a rate of net

profits on invested capital of less than 3 percent is unsatisfactory,
and a bank which cannot average at least as much as 6 percent a year is
not likely to build up reserves sufficient to insure its safety.

Chart 5

shows the number of banks per hundred in each size group which did not earn
as much as 6 percent annually on the average during the period 1926-1930.
Hha contrast between different groups of banks was apparent in
each of the five years 1926-1930, although in the depression year 1930 it
was somewhat less pronounced.

In the Mid-continent States the comparative

record of net profits of banks with loans and investments of loss than
$500,000 was below that for the country as a whole. Half of all banks







- 17 -

CHARTS
PERCENTAGE OF NATIONAL BANKS REPORTING ANNUAL
NET DEFICITS OR NET PROFITS OF LESS THAN 6%
BANKS GROUPED ACCORDING TO SIZE OF LOANS AND INVESTMENTS
PERCENT

Average

1926-1930

P E R CEHT

CHART 5A

PERCENTAGE OF NATIONAL BANKS
REPORTING ANNUAL NET PROFITS OF 6% OR MORE
BANKS GROUPED ACCORDING TO SIZE OF LOANS AND INVESTMtNTS

PER CENT
90

Average 1926-1930

PERCENT

90

- lg -

with loans and investments of less than $500,000 aro located in the agricultural Mid-continent States. During 1926-1930 the record of hanks of
this size was host in the industrialized States of the Northeastern part
of the country.
Becauso of a lack of data, tho oarnings analysis could not bo
made for State hanks generally,

for Iowa Stato hanks, however, the neces-

sary information was made available.

Among Iowa State banks, the contrast

between different groups of banks was comparable to that among national
banks in that area, and in view of the relatively larger number of suspensions among State banks it is probable that a like condition obtained
among State banks the country over.
Costs of Different Groups of Banks. - The unit costs of doing
business, and consequently tho charge upon the community per $100 of accommodation, have been generally higher among banks of limited resources
thau among those with more ample resources.
The size group $150,000-$250,000 of loans and investments may be
taken as an example of small banks, and $5,000,000-$10,000,000 as an example of large banks. Among the small bank group the typical gross return
during the period was $8.06 por $100 of loans and investments against
$6.37 for the large banks.

The small banks, however, paid out $6.23 of

this amount in expenses, wrote off $1.33 in losses, and showed a margin
of profit of only $0.50.

The expenses of the large banks wore $4.61 and

their losses $0.62, leaving a margin of profit of $1.14.

The relatively

narrow margin of profit of the snail bank results in a still loss satisfactory rate of profit on invested capital compared with that of the largo
bank, owing to the fact that the large bank has a greater volume of business
per unit of capital. Those figures are illustrated in Charts 6 and 7.







-19 -

CHART 6

GROSS AND NET EARNINGS OF NATIONAL BANKS
DOLLARS
10

BY SIZE GROUPS

DOLLARS
10

Average gross earnings and net profits available for dividends of national banks for years 1926-1930. Both gross
and net are expressed as amounts per $100 of loans and investments. Banks grouped according to size of loans and
investments

- 20 -

CHART 7 ,
EXPENSES AND LOSSES OF NATIONAL BANKS
DOLLARS




BY SIZE GROUPS

Average expenses and losses per $100 of loans and investments of national banks in eaoh size group for years 19261930. Banks grouped according to 6ize of loans and investroents

« 21 Suspension Record " y Size of Banks
b
Banks which suspended during the years 1921-1931 involved more than
10 per cent of the average "banking resources of the commercial banking system
as it existed during the period.

There were failures among "banks of all

sizes, from very small ones to large ones, and Table 1 shows that the banking
+
resources involved in suspensions in each of the designated size groups were
large.

Among banks of less than $1,000,000 loans and investments, 30 P e r

cent of the average banking resources during the period 1921-1931 were involved in bank suspensions.

.Among banks with loans and investments of less

than $150,000, 54 P e r c ® n * of the average banking resources during the period
were involved in bank suspensions.

Among some of the larger size groups

suspensions involved less than 10 per cent of the average banking resources
during the period.
Table k - Loans and Investments of Suspended and Active Banks by Size Groups

Size group
loans and
investments
(000 omitted)

Under
150 25O 500 750 -

$150
250
500
750
1,000

Total under 1,000
1,000 - 2,000
2,000 - 5.000
5,000 - 10,000
10,000 - 50,000
50,000 and over
Grand total




Loans and invesl;ments of State and national banks
Active banks
Eatio of suspenBanks suspending averaged for three
sions to active
during 1921-1931
dates: June 30.
banks
(000 omitted)
1920, 1925, and
(per cent)
1910 (000 omitted)
$

298,780
341,1+90
661,992
393.483
, 291,885

556,915
377,350
2,127,47*+
1,684,825
l.taq.006

53.6
38.9
31.1
23.I+
20.3

1.937.630

6,685,570

29.7

618,^81
693,896
1+53,822
690,664
271.82q

3,727,000
5,369,166
3,972,133
8,215,652
13,826.988

16.6
12.9

$4,716,322

$41,796,503

11.3

$

11. h
8.1+

2.0

- 22 -

Nearly ko per cent of the banks suspending during the
eleven years I921-I931 had loans and investments of less than $150,000, and SO per cent had loans and investments of less than $500,000.
Furthermore the rate of suspensions among these small institutions
has been much greater than among the large banks.

Chart 8 gives by

size groups the suspensions during 1921-1931 per hundred active banks
on June 30, 19 2 0.

.Among banks with loans and investments of under

$150,000 there were 5^ suspensions per hundred active banks.

This

rate was progressively smaller among each successive grouping of
larger banks and was less than 3 VeT hundred for banks with loans
and investments of $50,000,000 and over during the period 1921-1931.
Among all banks with loans and investments of less than $500,000
the suspensions during the eleven years amounted to 38 per hundred
active banks in 1920.

In 1930» however, there remained more than

13,000 banks of this size in existence and they constituted nearly
60 per cent of ail active banks at that time.







- 23 -

CHART 8

SUSPENSIONS PER HUNDRED ACTIVE BANKS
PER HUNDRED

GROUPED BY SIZE OF LOANS AND INVESTMENTS

PER HUNDRED

60

Number of national and State bank suspensions during
1921-1931 per hundred active banks on June 30, 1920,
grouped by size of loans and investments.

60

-24-

Suspensions in Agricultural Districts. - The great majority of suspensions during 1921-1931 have occurred in the agricultural sections of the
country where the growth of small hanks prior to 1920 was greatest.

During

the nine years I92I-I929, 70 per cent of the suspensions occurred in 12 predominantly agricultural States.

During 1930 and 1931 suspensions spread

into industrial districts, "but those in agricultural regions were not reduced,
the number in these 12 States being greater in 1931 than in any previous year.
Chart 9 shows on a map of the United States the location of suspensions during the eleven years 1921-1931*

Ehe regions showing the largest number of

suspensions during 1921-1931 per hundred active "banks in 1920 were the following;
ern

Southeastern States, 55 suspensions per hundred active banks; West-

Grain States, Hi; Eocky Mountain States, 39?

sa

^

Southwestern States,

30.
The agricultural States have a large proportion of banks with
limited resources.

In the Western Grain States there were 62 suspensions

per hundred active banks with loans and investments of less than $150,000,
compared with 9 suspensions per hundred active banks with loans and investments of $5«000,000-$10,000,000, and 3 suspensions among banks with loans
and investments of $10,000,000-$50,000,000.

The following table shows the

rate of suspensions by size groups in the four geographic divisions where
fatalities were the heaviest.







- 25 -

CHART 9

-26-

Table 5 - Number of National and State Bank Suspensions during 1921-1931
per Hundred Active Banks on June 30, 1920, Grouped
by Size of Loans and Investments
Size group
Rocky
United
South- Western
South-loans and investments
Mountain States
Grain
eastern western
(000 omitted)
Under $150
150 - 250
250 - 500
500 - 750
750 - 1,000
1,000 - 2,006
2,000 - 5,000
5,000 - 10,000
10,000 - 50,000
50,000 and over
Total

76.3
1*8.8
52.O

37-5
41.5

39.6
36.O
350

U6.0

6l*9

2k.k

U2.5
31*7
2U.3
21*8
16.8
1U.1

23*3
19.4
22.2
21.5
13.9
12.5

57.2
39.0
3^.1
26.8
26.5

27.I
20.5
18.5
16.2

36.7
9.9

1U.7

9.3

11.8

13.2

9.8
2.8

22.2

8.7

3-1

-

*~

-

-

U0.7

39.2

5^.8

29-9

53.5
3^3

30.9

Suspensions in Small Towns. - Banking difficulties have "been most
acute in small towns and rural communities.

Seventy-five per cent of the

banks suspending during the eleven years were located in towns of less than
2,500 inhabitants, and 35 per cent in towns of under 500 inhabitants*

In

towns of less than 500 population the suspensions during the eleven years
amounted to 38 per hundred active banks in 1920, while among towns and cities
of over 2,500 the suspension rate was about three-fifths that large.
State and National Bank Suspensions Compared. - Suspensions have
been nearly six times as numerous among State banks as among national banks.
Eighty-five per cent of the suspensions in the eleven years were State banks
and only 15 per cent national banks*

This is not altogether due to the fact

that many more State banks have been chartered than national banks, since
the rate of suspensions has been more than twice as high for State banks as
for national banks.

During the eleven years 36 State banks suspended for

every hundred active State banks in 1920, while the ratio for national banks




-27-

was 17 suspensions per hundred active "banks.

This was due in part to the

fact that among State institutions there was a larger proportion of extremelysmall banks.

In 1920* 7^ per cent of the State banks had loans and invest-

ments of less than $500,000, while only 39 P e r

cent of

national banks were of

the same size*
On the other hand, further analysis brings out the fact that in
every size group State banks showed a higher rate of suspensions than national banks.




This is illustrated in the following table.

Table 6 - Number of Suspensions during 1921-1931
per Hundred Active Banks on June 30, 1920,
by Size of Loans and Investments
Size group
loans and investments
(000 omitted)
Under $150
150 - 250
250 - 500
500 - 75O
750 - 1,000
1,000 - 2,000
2,000 - 5,000
5,000 - 10,000
10,000 - 50,000
50,000 and over
Total

National
banks

State
banks

UU.6
33.3

3^5

20.4
12.9
10.3
11.0

9.1
7.7
2.7
2.7
16.7

5^.0
29.9
25.9
25.9
21.S
20.7
19.0
16.8

National
and State
banks

53.5
3^-3
27.I
20.5
1S.5
16.2
1U.7
13,2

2.9

9.8
2.8

36.3

30.9

- 28 -

Causes of Bank Suspensions since 1920
For twenty years prior to 1920, bank suspensions in the United
States averaged less than one-half of one per cent of the number of active
banks.

That was a period of rising prices and rising land values. Follow-

ing the price decline of 1920 and 1921, however, there was a sharp upturn
in the number of suspensions and they have continued

at an abnormally high

rate for the entire ensuing period.
Agricultural Conditions. -

Rising prices of agricultural co^nod-

ities prior to 1920 led to a continued increase in income per acre* Land
values, however, gradually outran the current income from farms, and proceeded to discount future income, The ratio of net cash rent to land value in
Iowa, for example, declined from 6| per cent in 1900 to less than 2§ per cent
in 1920, as illustrated in Chart 10. This tendency to discount future income
was based on past experience and the expectation of continued annual increases
in current income. The reduction in returns on farm land, furthermore, was
running counter to other capital yields. For example, bond yields during the
period rose from h to nearly 6 per cent, as the chart shows.
The rising land values were stimulated by means of loans based upon
f a m real estate. Lending agencies, of which banks were the most important,
increased the size of loans as land values rose. Insurance companies and other
lenders considered farm real estate loans as one of their best outlets for investment funds and steadily increased their holdings of such securities. The
establishment of the Federal farm loan system in 1917 added an important
source of farm mortgage credit. These funds flowing into the rural communities supplemented the income from the farms and provided an increase in the
amount of available funds.







29 -

CHART 10

RATE OF RETURN ON BONDS AND FARM LANDS
PER CENT

1900-1920

Standard S t a t i s t i c s Company's Annual Average y i e l d on 60
Bonds. Department of Agriculture 1 s computation of the
ratio of net cash rent to land value in Iowa

PERCENT

- 30The lending policy of the banks reflected the trend of prices in
their communities. Not only were prices of farm commodities rising "but the
land itself was increasing in value and constituted a generally accepted
basis for loans. This created a background which was favorable to competition in the acquisition of land and the inflation of land prices.
Increase in Mortgage Indebtedness. -

In the circumstance farmers

increased their borrowings with confidence. The value of crops per acre
moved steadily upward and the annual returns from livestock were proportionately large. The experience of finding the actual farm returns larger year
after year induced borrowing not only for strictly production purposes but
for buying more land, farm improvement, and other expenditures. The rising
price level gave confidence for purchasing on the strength of future income,
and there was a steady increase in the number of farm sales. Land required
a larger dollar outlay than formerly, so that past savings were insufficient
to pay for as large a part of acquired property as in earlier years and
relatively more borrowing was necessary to effect transfer. The fact that
more purchasers of limited means entered the land market resulted in mortgages on an increasing percentage of the farms transferred.
In the country as a whole, owner-operated farms having mortgage
debt increased from 30 per cent in 1900 to 33 P e r
in 1920, and U2 per cent in 193°»

ce

^t in 1910, 37 per cent

The increase in the proportion of farms

mortgaged was particularly great in the Western States, where borrowing was
on a large scale in response to the urge to develop new farms. In North
Dakota 71 per cent of the owner-operated farms carried mortgages in 1920,
and 50 to 60 per cent of the farms of neighboring States were similarly




-31encumbered.

In over one-fifth of the co-unties in Montana more than 70 per

cent of the owner-operated farms were mortgaged, and in nearly one-tenth of
the counties in North Dakota more than SO per cent of farms were encumbered.
The westward drive which had "been in process for a century had seized upon
the stimulus of land s c a r c i t y and the encouragement of high prices for farm
products to venture i n t o the farthermost areas in which land might be t i l l e d
and to contract debt freely in order to acquire a base for independent farm
operations and to reap the reward of r i s i n g land v a l u e s .

Such a r i s e had

come to be generally expected.
Prom 1910 to 1920 the mortgage debt per acre of farm land increased
about 135 per cent, about the same as the r i s e in the per acre value of ten
leading crops.

This i s i l l u s t r a t e d in Chart 1 1 .

With the decline in income a f t e r 1920, however, the farmer was l e f t
with t h i s exceedingly high mortgage debt, as well as other debts, and large
numbers of foreclosures followed.

The average value per acre of ten leading

crops for the years 1886-1S90 was $9-971890 was $2.66.

Mortgage indebtedness per acre in

Value of crop production per acre and indebtedness went up

a t the same r a t e through the a g r i c u l t u r a l boom culminating in 1920.

Subse-

quently, the value of crops per acre declined, while mortgage indebtedness
increased.

Crop values per acre have dropped below $10 against an average

of $3^ i n the years 1917-1919. while mortgage indebtedness advanced to about
$11 per acre, more than four times the figure of forty years ago.
This excessive growth of the indebtedness of farmers during years
of r e l a t i v e prosperity g r e a t l y accentuated the d i f f i c u l t i e s with which they
have had to contend in years of depression.

By making a large volume of

loans on farm land at high valuations banks in rural communities not only







- 32 -

CHART 11

PER CENT

CROP VALUE AND MORTGAGE DEBT PER ACRE
1890-1931

PER CENT

350

350

Average annual value per acre of ten leading crops,
1905-1914 - 100, and average mortgage debt per acre
on a l l farms operated by their owners, 1910 = 100,
Department of Agriculture figures.

-33weakened their own condition but rendered a serious disservice to agriculture.
Overbanked Condition and Unsound Assets* -

The overbanked con-

dition, which reached its peak shortly after 1920, caused banks struggling
for existence to increase services to their clients, thus adding to expenses.

It served to introduce into many banks high risk and marginal busi-

ness, which contributed to the piling up of bank losses in the past decade.
Some of the results of indiscriminate chartering of banks and the
resulting competition were stated as follows by the Study Commission for
Indiana Financial Institutions:'1'
"Authorities are unanimously agreed that the indiscriminate
chartering of banks has been one of the major causes for the difficulties through which we have recently passed. Receivers, liquidating agents, and other persons familiar with the affairs of
failed banks suggested, in hi instances, that bank failures in
Indiana have been due to improper chartering. . . . Intinat©
knowledge of individual failures, however, leads to the inescapable conclusion that many of the practices leading to bank failures, were directly caused by 'cut-throat' competition which
sprang up in various communities as a result of too many banks or
of the chartering, often for direct or indirect political reasons,
of •spite' banks.
"Instances are known in Indiana of new bank charters being
sought and obtained by church groups, lodge groups, or political
groups antagonistic to the church group, lodge group or political
group in control of the existing institutions. In numerous instances from 1920 to 1932, villages of less than 500 people had
two or more banks operating. Competition in such communities
necessarily was bitter because it was nothing less than a death
struggle between the contending business groups, and consequently
desperate chances were taken nearly always making for bad banking
practice. In some instances, bankers with long records of successful management were driven by the emergency in which they
found themselves to take 'long' chances and to indulge in practices not sanctioned by sound banking management.

(1) Report of Study Commission for Indiana Financial Institutions, 1932, p. 87.




-3^-

"Many of the new banks that were chartered between 1910 and
I92U were chartered by groups not in sympathy with the conservative or anti-inflationary policies of existing institutions. During this period in which the most rapid increase in banking units
took place in Indiana, much ' inflation-madness' was apparent
throughout the state. If certain groups were unable to satisfy
their demands for banking facilities at one bank, they would
threaten to take their business to competing banks where perhaps
more agreeable treatment in the matter of borrowing awaited them.
Many customers borrowed from several banks, but allowed each
banker to think that he alone was advancing them credit. If all
the bankers in a community were 'old-fashioned' and 'unreasonable',
the usual procedure was to start a new bank by way of protest, a
bank that would be unfettei'ed by 'old fogey ideas' as to the caution with which banks should be operated.
"As time went on and inflation increased, deposits in all institutions mounted steadily, funds accumulated faster than loan
applications were made, and consequently competition for loans was
keen. Equities seemed always to increase. As a result the new
and oftentimes untried and unsound bank executive appeared to succeed as well or even better than the more experienced and conservative executive. It was not surprising, therefore, that many seasoned bankers were swept into this mad maelstrom of reckless and
'cut-throat' competition."
Furthermore, certain changes were going on during the period of expansion in the kind and quality of business transacted by commercial banks.
Additions to the monetary gold stock of this country and the successive reductions in reserve requirements incidental to the Federal Reserve Act and
its amendments put banks in possession of easy reserves. Additions to reserves placed the banks under temptation to expand. It would appear that
these new reserves were in excess of the needs of credit to finance the flow
of goods and services, and that there was a tendency to create commercial
bank credit on the basis of capital commitments, or putting it the other way,
a tendency to invest demand deposits in long-time enterprises. These tendencies had an important effect upon the quality of assets of many banking institutions, which were constantly reaching for high yields.







- 36 -

CHART 12
GROWTH OF SECURITIES AND LOANS OK SECURITIES
AND OH REAL ESTATE IN NATIONAL BANKS
BILLIONS OF DOLLARS

1915-1932

BILLIONS OF DOLLARS

1^

-37trouble during a period of rising prices, but was wholly unsuited to the
period of falling prices which gradually underndned equities beneath capital
values. Losses accumulated gradually over a period of years and ultimately
had to be dealt with. Losses incidental to loans on self-liqui dating paper
of business becone apparent in a short time and are usually absorbed currently.

This is less true with respect to long-term loans on capital values,

where losses may accumulate over a period of years without being written off..
When the final accounting cones, through bank suspension or otherwise, the
bank's equity in many cases has largely disappeared.

The effects of this

tendency can be traced in the matter of losses sustained by stockholders and
depositors following the liquidation of failed institutions. The estimates
in the Committee's study of suspensions show that in liquidating banks the
loss to general depositors has averaged from ko to 50 per cent of their deposits.
The effects of these factors were most apparent from 1921 to 1929
in the agricultural districts where land values declined continually. The
banks with small resources, limited facilities, and restricted activities
found it particularly difficult to cope with the situation. Their assets
came largely from one industry, and when that industry was not prosperous
they suffered the consequences, especially where improvident loans had been
granted.. During 1930 a^cL 1931» however, the banks in other districts were
similarly affected through the decline in the prices of securities and urban
real estate.
It is clear that much of the banking difficulties of recent years
grew directly out of bad banking practices. In countries where a commercial
banking tradition exists, such as Canada or England, it is a fundamental




-3«p r i n c i p l e t h a t deposits payable on demand or short notice may not with safety
"be locked up in long-term commitments.

Many of the banks of deposit in t h i s

country, while remaining within the law, have consistently violated t h i s
fundamental p r i n c i p l e of sound commercial banking.
For example, r u r a l hanks have not confined t h e i r financing to the
current s h o r t - t e r n needs of the farmer, "but have supplied him c a p i t a l i n
large proportion to t h e i r t o t a l loans and so eventually "became heavily imp l i c a t e d in the farm r e a l ©state boom and i t s collapse.

In the banking

troubles that followed, one out of every two small banks in a g r i c u l t u r a l
regions f a i l e d with d i s a s t r o u s consequences to many r u r a l communities. Many
of the large i n s t i t u t i o n s have also experienced serious d i f f i c u l t i e s .
Case Studies of Bank F a i l u r e s .

-

Many banks in t h i s country have

been so managed in periods of prosperity that they have been able to cope
with the d i f f i c u l t i e s of the past twelve years and to continue to operate as
sound i n s t i t u t i o n s .

Even i n the a g r i c u l t u r a l regions where the t r i a l s have

been most severe there are many sound and ably managed banks.

The pressure

of economic conditions has been common to a l l the banks in the country.

In

order to determine the f a c t o r s which r e s u l t e d in some banks being unable to
r e s i s t the pressure of adverse business conditions while others have continued in operation, an intensive study has been made of 225 selected banks
that have suspended during the years 1921 through 1931.

The material ana-

lyzed was drawn largely from examiners' reports of the condition of these
banks for a period of years p r i o r to suspension.

One hundred and twenty of

the banks analyzed suspended p r i o r to 1931* wwl 3

ou

-t of U of these were

located in towns of l e s s than 5»000 population in Federal reserve d i s t r i c t s
predominantly a g r i c u l t u r a l .




One hundred and five of the banks analyzed

- 39 -

suspended in 1931; of t h e s e , hj were located in tovms with a population of
5,000 and over, and many were in the i n d u s t r i a l d i s t r i c t s of the Northeast.
Assets and Li l a b i l i t i e s of Suspended Bnnks.

-

Analysis of the

balance sheets of 225 banks suspending during the years 1921-1931 indicated
that the d e t e r i o r a t i o n of a s s e t s which r e s u l t e d in the f i n a l closing of
banks was i n most instances the r e s u l t of a process developing over a period
of y e a r s .

According to bank examiners' c l a s s i f i c a t i o n s , the questionable

a s s e t s of suspended banks a considerable time before f a i l u r e assumed r e l a t i v e l y l a r g e proportions when compared with the c a p i t a l and surplus of
these banks.

In many cases these questionable assets were more than 200

per cent of the c a p i t a l and surplus of the bank p r i o r to suspension.

Large

borrowings were c h a r a c t e r i s t i c for a conaiderable period p r i o r to suspension
of the 225 banks.

There were instances in which borrowings were several

times the amount of c a p i t a l and surplus.

In fS cases out of the 225, *^ e

management was c r i t i c i z e d for continuous borrowing.

The 105 banks which

suspended in 1931 had for a considerable time before f a i l u r e a higher p r o portion of loans and investments in loans to customers than did a l l member
banks outside of c e n t r a l reserve c i t i e s .

The suspended banks had a somewhat

lower proportion of open-market loans and a somewhat lower proportion of
investment s e c u r i t i e s .

Among 225 suspended banks, the r a t i o of loans to

officers, d i r e c t o r s , and t h e i r i n t e r e s t s was higher as compared to c a p i t a l
and surplus than was t h e case in a group of banks t h a t did not suspend.
Typically, the suspended bank p r i o r to f a i l u r e was advancing to o f f i c e r s ,
d i r e c t o r s , and t h e i r i n t e r e s t s a figure equivalent to about one-third of
c a p i t a l and surplus.




- UoCriticisms of Loan and Collection Policies. - Examiners' reports
constantly criticized officials of a majority of the 225 suspended tanks because of lax and careless lending policies, which were often accompanied by
slackness in collection efforts. Criticized lending practices were often
associated with real estate mortgages and general loans to farmers. Frequently, loans were made to farmers without specific security, and in an effort to secure the loans junior mortgages on farms were subsequently taken.
Examiners' comments showed that other types of capital commitment were common.
Loans were made which could not he paid in the ordinary course of business at
maturity, such loans were constantly renewed, and were thus furnishing capital
to borrowers. "Placed paper" and the evasion of loan limits by splitting
lines with other banks were often specifically criticized by examiners.
Criticisms of Investment Policies. - Among the 120 banks, which
failed during the years 1921-193°. portfolios were heavily weighted with
local loans and included relatively few investment securities. Among the
105 banks which suspended in the year 1931» however, a number had relatively
large bond accounts. In this group of banks, difficulties with bond investments arose in part from purchases for yield rather than for safety. Bond
trading, unlisted bonds, real estate bonds, and convertible bonds were often
the specific causes of troubles. Nearly one-third of the 105 banks were
criticized by examiners, more or less severely, because of their investments,
and a number of others held bonds of poor quality.

In several cases where

bond depreciation was the primary cause of failure, investments formed a
larger proportion of portfolio than loans. During the period covered by the
study, depreciation in bond accounts was not found to be serious for many of
the banks analyzed until the second examination of 1931. In the Northeastern




- kl part of the country especially, "bond depreciation was a much larger factor
in "bank difficulties in 1932 than it had "been in 1931 or previous years.
Criticisms of Bank Personnel. -

In 135 out of 225 suspended

banks evidence of disregard of banking law or regulations on the part of
officers or employes was reported by the examiners. In some cases, the offenses were of the most serious nature, as in the case of 28 defalcations,
5 conversions of funds, 8 forgeries,' and 27 false statements.
Exceeding the legal limitation on loans to one interest, failure
to keep up legal reserves, payment of dividends not currently earned, and
excessive investment in banking house were often alluded to by bank examiners.
In 101 of the 225 suspended banks, bank directors were criticized because of
their lack of attention to the affairs of the banks. Managing officers or
influential directors of a number of the failed banks included in this study
used their positions to secure favors from the bank, and at times to finance
speculative or fraudulent transactions of their own. Attention was often
called to the payment of excessive salaries to bank officials.
In 71 out of 225 banks, examiners' criticisms frequently referred
to weak management. Weak loan, investment, and collection policies referred
to in previous paragraphs are additional indications of ineffective management.
Every bank must be prepared to go through periods of declining deposits. Withdrawals may be the result of reduced business activity generally,
or the flow of funds away from a region or community for economic reasons, or
the loss of confidence on the part of depositors. When deposits begin to decline, a bank may be forced to dispose of some of its assets or use them as
a basis for borrowing.
withdrawals can be met.




So long as the assets are high-grade and liquid these
If the process continues until the bank has left

-teonly an inferior grade of assets, however, and cannot realize on them as
rapidly as deposits are withdrawn, then it must close its doors. Many
banks with a considerable proportion of their funds in long-term commitments, no natter of what origin, and having a large proportion of their
liabilities payable on demand, have failed when they were subjected to
withdrawals of deposits because they could not realize on their assets.
The value of long-tern commitments changes in response to cyclical movements and long-time trends; these assets nay be stable or increase in
price for long periods, but when a slump comes they are subject to heavy
and widespread shrinkage.
The depreciation in investment securities and the difficulties
of the banks generally during the depression have been greatly aggravated
by the cumulative effects of large numbers of suspensions of weak banks
over a period of years. This has been gradually wearing down public confidence, thus giving impetus to the hoarding movement and causing the contraction of credit by stronger institutions. The result has been an increase in the volume of securities thrown on the market, with the consequent spreading of the ill effects of liquidation throughout the credit
structure.




- 13 *

Weakening Influence of the Dual Banking System
Many of the problems of commercial banking in the United States
today have arisen from the division of responsibility between the Federal
and State Governments in chartering and supervising banks. Competition
between the two systems has not only been an important factor in the incorporation and fostering of thousands of weak banks, but it has led to
the relaxation of legal regulations, tended to diminish the effectiveness
of supervision, and hampered the work of the federal reserve banks in
maintaining proper standards for membership and in promoting sound banking policy.
Attempt at Unification. - At the time of the Civil War an attempt
was made to bring about unified control through the establishment of the
national banking system, A large measure of unified control was temporarily achieved, primarily because national banks were accorded the privilege of issuing currency while the notes of State banks were subjected to
a prohibitive tax. For about twenty years the amount of banking business
controlled by State incorporated institutions was negligible. If such a
condition had obtained through the subsequent decades, it is likely that
supervision, unaffected by the kind of competition that was later to develop, would have been able to maintain a higher standard of banking practice. The practice of deposit banking began to develop on so large a
scale towards the end of the century, however, that State banks found it
increasingly profitable to operate without the privilege of issuing notes;
and from the early eighties State banks have grown steadily in relative
importance.




-1&It soon became evident that State banks had many competitive
advantages over national banks, notably in the matter of lower minimum
capital and other requirements for receiving charters, and in more extensive powers and privileges. The granting of similar powers and privileges to national banks tended to remove some of the restrictions previously imposed by the National Bank Act.

Thus it was that about the beginning

of the present century, or somewhat earlier, there began between the national and the several State systems a form of rivalry which has been described
as a competition in laxity.
Relaxation of Restrictions on National Banks. - Lowering the
minimum capital requirement in 1900 was the first important measure of
the national banking system to meet the competition of State banks.
Another occurred in 1913 when the Federal Reserve Act authorized national
banks not situated in reserve or central reserve cities to make loans on
improved and unencumbered farm land within their Federal reserve districts.
At the same time legislative sanction was given to the existing practice
of national banks of accepting time deposits at interest, and reserve requirements on such deposits were fixed at a lower percentage than that
required for demand deposits.
Prior to 1913 national banks had been forbidden to make loans
against the security of real estate. State banks everywhere could do so,
however, and in most instances without any restrictions as to the amount
of the loans, their duration, or the quality of the mortgages securing
them. The prohibition against real estate loans by national banks was
removed in 1913 with respect to farm lands, and in the course of the ensuing fourteen years, culminating with the passage of the McPadden Act in




-i»5-

1927» restrictions were further relaxed, until finally all national banks
were permitted to make loans against any kind of improved real estate for
periods hxp to five years and in aggregate amounts up to J O P e r
j

cent

of

their time deposits.
While the tendency to invest funds in long-term loans of a
capital nature was accelerated by the growth of time deposits, these
deposits have almost invariably been payable and actually paid on demand, This is true not only in the United States but also in England
and Canada, In the latter countries, however, the fact that time deposits are in effect payable on demand is recognized as of basic importance in determining the manner in which such deposits are invested.
In England bank loans of a capital nature are frowned upon as a matter
of traditional principle; in Canada the banking laws contain prohibitions
against loans secured by real estate and other capital assets, similar
to the prohibition of real estate loans by national banks in the United
States prior to 1913*
Other measures of relaxation have occurred in connection with
loans to single borrowers. Prior to 1906 the amount of such a loan by
a national bank was limited to 10 per cent of the paid-up and unimpaired
capital of the bank.

In many States there were no limitations of this

character upon State chartered institutions; in others the limitation
applied to both capital and surplus. To improve the competitive position
of national banks the federal law was amended in 1906 so as to make the
10 per cent limitation apply to both capital and surplus, provided the
amount did not exceed 30 per cent of the capital stock alone. Most of
the State laws, however, provided numerous exceptions to such limitations




-U6for State banks. To meet this situation the restriction on national banks
was further relaxed " y a series of amendments in 1918, 1919i &&& 1927t
b
In two other important matters Federal legislation has followed
the lead of the States; namely, in the granting of fiduciary powers and
branch banking privileges. In these respects, however, the powers granted
to national banks are not uniform throughout the country but are adjusted
to the standards set by the various States. In 1913* wi*11 tlie passage of
the Federal Eeserve Act, the Federal Eeserve Board was authorized to grant
limited trust powers to national banks "when not in contravention of State
or local law." As a result of this act and a series of amendments in 191S,
1922, and 1927» all the varied fiduciary functions of trust companies are
now commonly performed by national banks.
Limited privileges of branch banking were extended to national
banks by the McFadden Act of 1927. This change in Federal legislation,
like the grant of fiduciary powers, was made for the express purpose of
improving the competitive position of national banks.
Various other changes in Federal legislation have removed restrictions on national banks or extended their powers. Among these are:
the authorization for national banks in towns of under 5,000 inhabitants
to act as insurance agents and as brokers for real estate loans; the lowering of reserve requirements against both time and demand deposits; and the
authorization for Federal reserve members, including national banks, to
issue bankers' acceptances. All these measures have been passed at least
in part for the purpose of enabling national banks to compete with State
chartered institutions. In fact, most of the important amendments to the
national banking law since 1913 have been enacted in response to the com-




-47petitive situation inherent in the anal hanking system.
Dual Control and Supervision. - Bank officials and directors
are likely to resent criticism and the ease with which they may escape
existing supervision by changing from one system to the other greatly reduces the effectiveness of examining authorities, Ifhile there can he no
doubt that bank supervision in general is on a higher plane than it was
twenty years ago, it is nevertheless a fact that dual control of banking
has tended to keep down the standards of supervision, as well as of banking law.
Effective supervision has been handicapped largely by two factors.
In the first place, the supervisory authorities, whether national or State,
have not been endowed with adequate powers; and in the second place, they
have been unable to make full and effective use of such powers as have
been granted them. To what extent the failure of legislative bodies to
grant adequate powers is due to the dual system is difficult to determine,
but the inability of supervisors to make full and effective use of such
powers as they have arises out of the fact that banks are able to avoid
the supervision of one system by leaving it and entering the other.
From the establishment of the national banking system in 1863
to the present time, successive Comptrollers of the Currency have placed
before Congress recommendations for the improvement of banking supervision
by specifying certain standards and providing adequate powers and penalties
for their enforcement. Thus it was recommended by the first comptroller
that failure of a national bank be declared ^rima facie fraudulent and
that the officers and directors be made personally responsible as well
as punished criminally unless upon investigation it was found that the




- ks -

bank's affairs had been honestly administered.

In 1887 it was recommended

that penalties be imposed for the making of loans contrary to law; in 1895
that the comptroller be authorized, with the approval of the Secretary of
the Treasury and after a hearing, to remove officers and directors for
mismanagement or violations of law; in 191*+ that the comptroller b# authorized to penalize both banks and their officers by appropriate fines
for violation of the law and failure to comply with his regulations; and
in 1931 that a board composed of the Secretary of the Treasury, the governor
of the Federal Reserve Board, and the comptroller should have power to remove officers or directors of banks who persistently violated tli© l«w or
who continued unsafe and unsound practices. Prior to the passage of the
Banking Act of 1933i Congress had adopted none of these recommendations.
An important duty of both national and State supervisory authorities is to recommend legislation designed to improve the safety standards
of banking. They are hampered, however, by the competitive situation into
which they are forced by the existence of dual control. The dilemma of
State supervisors in recommending banking legislation was aptly described
by the commissioner of banks of Massachusetts in 1929 by the following
remarks: (1)
", . , What steps are to be taken to protect the state banking
system? I am a firm believer in harmony and I dislike to see
the cpiestion always arising as to how the national banks can
win friends from the state banking system, and on the other
hand, how the state banks can get ahead of the national banks,
I wish the question could be settled, so the banks could attend solely to the business in which they are engaged. , ,

(l) National Association of Supervisors of State Banks, Proceedings of
the Twenty-eighth Annual Convention. 1929, p. 85,




->*9"We are also careful in passing state legislation that
nothing will be done to drive out the state hanks that are now
doing a good and legitimate business. If they find that the
State legislature is inclined to be a little harsh on them, it
will be very simple for them to convert into a national bank
and be received with open arms. . . . "
That similar considerations have frequently influenced the Congress of
the United States is evident from the record of legislation actually
passed and the proposed measures defeated.
State Banks and the Federal Reserve System. - Soon after its
organization the Federal Reserve Board expressed the hope that a unified
system of banking would develop through the Federal reserve system, and
stated that, "There can be but one American credit system of nation-wide
extent, and it will fall short of satisfying the business judgment and
expectation of the country and fail of attaining its full potentialities
if it rests upon an incomplete foundation and leaves out of its membership
any considerable part of the banking strength of the country. "(1)
The board extended liberal terms of admission to State banks,
including the right to withdraw from membership on twelve months1 notice.
The State banks, however, were apprehensive of changes in the attitude of
the board and hesitated about applying for membership. By June, 1917» only
53 State institutions had joined. Consequently certain amendments were
passed by Congress in 1917,
Most of the provisions in the 1917 amendments dealing with State
bank membership followed the spirit of the regulations issued by the board
in 1915» which they extended.

State bank members were permitted to with-

(1) Federal Reserve Bulletin. July 1, 1915, P. 1^5.




- 50 ~

draw from the system on six months' written notice to the Federal Reserve
Board. They retained their full charter and statutory rights subject to
the restrictions of the Federal Reserve Act, and regulations of the hoard
relative thereto, Their examination and supervision were delegated to the
Federal reserve banks and board, which, in turn, were authorized to accept
reports and examinations from State supervisory authorities in lieu of
those of their own examiners. Furthermore, State member banks were relieved of the restrictions upon national banks as to the amount which
could be loaned to one person, firm, or corporation, subject to the restriction that no paper of a borrower indebted to the State bank in excess
of these limits could be rediscounted at the Federal reserve banks.
In spite of these concessions, only about 800 of the 12,000
State commercial banks belonged to the Federal reserve system in 1932.
These 800 members included most of the very large State banks, however,
and had something over 50 per cent of the loans and investments of all
State banks and trust companies. It is noteworthy, on the other hand,
that in the large size groups the number of nonmember banks has grown
at a greater rate since 1920 than the number of member State banks. From
1920 to 1930 the number of nonmember banks with loans and investments of
$10,000,000 to $50,000,000 increased from 64 to 128, while member State
banks in the same size group increased from 121 to 124. The number of
nonmember banks with loans and investments of $50,000,000 and over increased from 3 to 10 during the sane period, while member State banks
of that size increased from 32 to ^9.
Competition between the two banking systems, resulting in an
overbanked condition and relaxed standards, has materially hampered the




- 51
effective functioning of Federal instrumentalities, i.e., the national
tanking system and the Federal reserve system. This has been in some
measure responsible for the development of unsound hanking practices,
the ineffectiveness of supervision, and the serious banking difficulties
during the past twelve years.




-52-

Group Banking in the United States
The trend towards concentration, so apparent in other fields of
"business enterprise in this country, has also "been felt in the field of hanking.

In fact hanking concentration has taken place on a substantial scale in

recent years, notwithstanding the restrictions against branch banking.

This

concentration has been accomplished through mergers and through groups and
chains,
Tho mergers and consolidations in most cases have occurred among
institutions located in the same city, and have been moro common in the
larger cities, Frequently the consolidated institution has confined its
operations to one office, but in some cities where branch banking is permitted the larger institutions have taken over the outlying banks and
operated them as branches.

The major part of tho concentration through mer-

gers, however, has not been the result of combinations of small institutions
and has done little to bring the services of strong banks to the small towns
and rural communities.
Tho bank holding company, as it has developed since 1927, is an
instrument of banking concentration which aims at objectives similar to those
of branch banking.

Many of the managers of holding companies themselves have

indicated that they would prefer to operate their organizations as branch
systems if the law permitted.

The most significant part of the group move-

ment consists of less than two score holding companies, controlling at the
end of 1931 about 700 banks and about $6,000,000,000 of loans and investments.
These group organizations have had their greatest development in those States
where branch offices are either wholly prohibited or are limited to local areas.




-53-

Of the 674 "banks belonging to the leading groups, 307 axe in
States now prohibiting the establishment of branches, and 93 are in States
where administrative ruling does not allow new branches although the statute is silent on the subject.

Thus, these 400 banks could not now be opera-

ted as branches of the leading bank. Moreover, 249 of the banks in leading
groups are located in States which allow branch offices only in limited areas
adjacent to the head office.

Because of such limitations most of these banks

could not now be converted into branches of the dominant bank. Only 25 of
the banks in the loading groups are located in state-wide branch bnnhing
States.
In addition to the 700 banks belonging to the major groups at the
end of 1931, there were about 300 banks belonging to about 60 miscellaneous
groups, many of which bear little resemblance to the major holding company
groups. Many of the miscellaneous groups came into existence by reason of
the association of two or three small banks with some large city bank.
Because of the relatively short experience with the bank holding
company, statistical evidence is lacking with respect to what may be accomplished regarding the profits and costs of the individual banks belonging
to groups. Moreover, the complicated interrelationship of many corporations
makes it difficult to determine the position of the entire group through
formal income statements.

It is not yet clear whether the holding company

will be able to operate a small separately incorporated bank more economically than it could be operated as a separate concern.
The degree of centralization of management varies greatly from
group to group.

Some of them approximate a well organized branch system

in this respect. Others appear to leave more local autonomy to th« indi-




- 5^ -

vidual banks.

In organizations of this type, however, there is usually a

tendency towards increasing centralization of management.
The group movement, as represented " y the leading holding comb
panies, has covered such a "brief period of time that few conclusions can
bo drawn as to the safety record of this type of banking compared with the
record of independent unit banks.

Groups, however, have done little to

strengthen the banking structure in the small towns and rural communities.
Relatively speaking, holding companies have not acquired many banks of less
than $500,000 of loans and investments.
The Problem of Groups. - The chief weakness of the holding company device as an instrument for strengthening the banking structure lies
in its manipulative possibilities, and the difficulties of adequate supervision.

In the period of adjustment through which the country has been

passing, there have been frequent examples of the abuse of the holding company in fields other than banking.

The complicated interrelationship of

many corporate entities is a conveniont vehicle for the activities of the
unscrupulous.

The major part of the bank holding company movement has been

in the hands of conservative bankers, but there are oxamples of tho consequences when conditions were otherwise.

The fact that tho bank holding com-

pany movement largely matured in an ora of speculation makes difficult its
dissociation from some of tho manipulative operations of tho times. Shifting of assets between different elements of a group and tho splitting of
credit lines aro among the more important abuses to which this form of
banking organization is open.




-55Chain Banking in the United States
!Ehe control of a number of banks by one or more individuals began to appear in this country several decades ago. This is known as chain
banking. The number of such arrangements multiplied with the passage of
time, and indeed they were the predecessors of the more modern groups. On
December 31, 1931»

tlie

official statistics accounted for about 175 chains,

including about 900 banks with an aggregate banking strength of about
$1,000,000,000 of loans and investments.
The community of interest in a chain of banks is elusive, and it
is quite possible that the official statistics have not recorded all of the
cases. There are instances in which the investment in bank stock brings
about a community of interest in several banks, without a deliberate intent to control. Chain interests in many instances do not openly avow their
responsibilities as do the modern bank holding companies.
The very elusiveness of the movement presents one of its serious
problems. The ease with which new banks have been chartered, partly as a
result of the competition between State and national systems, and the small
capital outlay needed to secure control over a string of banks are associated with the growth of chains and the high rate of incompetent management among them. Many failures of chains have resulted because they were
operated by men inexperienced in banking.

In many cases the chain of banks

has been utilized as an avenue through which to finance the often speculative outside undertakings of the dominant interests.

In some cases control

has been exercised over a string of banks with a very small investment,
stock owned in one institution being used as security for a loan the proceeds of which are used in the purchase of stock in another.




-56Branch Banking in the United States
Branch banking was not uncommon in the United States prior to the
Civil War. Following the passage of the National Bank Act in I863, however,
public policy became committed to the unit banking system. With banking
corporations limited in general to one office, the kind of concentration
which builds on branch offices was barred. Prom the end of the Civil War
until around 1900 there was very little branch banking in the United States.
The majority of State banks and their branches in existence prior to the
Civil War were converted into unit national banks, failed as a result of
the conflict, or liquidated because of the tax imposed on their note issues
by the National Bank Act. With the growth of deposit banking, however,
which gradually supplanted issue banking, the number of State banks began
to increase towards the end of the century, and the development of present
day branch banking in the United States may be said to date from approximately that time.
Growth of Branch Banking in the United States. - In 1900, according to the best information available, there were only about 119 branches
in existence. A gradual growth brought the number to 7^5 in 1915t after
which the increase was accelerated so that by 1920 there were l,2gl branches.
During the next ten years the number nearly trebled to 3i51S in 1930«

In

1935- suspensions resulted in a decrease in the number of branches as well
as of unit banks, and some branches were discontinued for lack of profitable
business. The thirty-one year movement is illustrated in Chart 13.
The greater part of the growth through 1930 w &s among branches
located within the same city as the head office of the bank operating them;




- 57 -

CHART 13
NUMBER

3 500




BRANCHES OF BANKS IN THE UNITED STATES

NUMBER
3500

Number of branches of State and national banks in the United
S t a t e s , 1900-1931. From 1900 to 1920 the figures are for five
year i n t e r v a l s , but from 1920 to 1931 they are as of June 30
each year. The final figure i s for December 31, 1931.

- 58 -

CHART \h

NUMBER




BRANCHES OF NATIONAL AND STATE BANKS
IN THE UNITED STATES

NUMBER

2500

Number of branches of State and n a t i o n a l banks in the United
S t a t e s , 1900-1931. From 1900 to 1920 the figures are for five
year i n t e r v a l s , but from 1920 to 1931 they are as of June 30
each y e a r . The final figure i s for December 31, 1931

- 59 at the end of that year roughly two-thirds of the "branches in the country
were in the city of the head office.
Prior to 1922 the development of "branches was limited almost entirely to State banks, as shown by Chart l4. Occasionally a State "bank
with branches was converted into a national bank and retained its branches,
or was absorbed with its branches by a national bank.

Hie growth in the

number of branches of national banks from this source was slow, however,
and in 1921 there were only 72 branches of national banks compared with
1,383 branches of State banks. Beginning in 1922 the branches of national
banks increased much more rapidly, and on December $1, 1931* aggregated
1,271+ compared with 2,o6o for State banks. The growth of national bank
branches from 1922 to 1927 was due chiefly to the "additional offices" authorized by the Comptroller of the Currency in cities where State banks
were permitted to have branches. At the same time there was an increasing
number of conversions of State banks with branches into national banks and
of absorptions of such State banks by national banks. The growth was accelerated by the passage of the McFadden Act on February 25, 1927, which,
with certain restrictions, expressly permitted national banks to establish
branches in cities where State banks may have them. The passage of this
act also precipitated the conversion of certain State banks with numerous
branches into national banks and caused the number of State bank branches
to decline temporarily.
Safety Becord. - Branch banking on an important scale in the
United States has been so recent in development that it does not furnish
an adequate body of data for comparing the safety record of branch operating banks with that of unit banks. In the eleven year period I92I-I93I




-6othere were 179 suspensions of banks with branches. Nearly 60 per cent of
these, however, were operating only 1 branch each, and another 20 per cent
were banks with only 2 branches each.

Such institutions are not represen-

tative of branch banking.
Seven suspensions during the eleven year period were of banks with
more than 10 branches each, and one institution with U4 branches suspended
on January 2, 1932. Only 3 of these 8 banks were operating branches outside the city of the head office. The branch operations of the other 5
banks were of comparatively minor importance, since the bulk of their business was handled at the head office. Failure of these S institutions resulted from unwise management, bad loans, frozen loans of a capital nature,
speculation in real estate, and other causes similar to those that have
been mainly responsible for the inability of so many other banks to withstand adverse economic conditions.
Branch Banking in California. - California is the only State in
the Union in which modern intercommunity branch banking has had a considerable development. A law was passed there in 1909 which permitted the
creation under State charter of a state-wide branch banking system. Ihe
movement developed rapidly after 1920 and within a few years the banking
structure of the State was transformed. By the end of 1931 nearly 60 per
cent of the total banking resources of the State were in the hands of institutions with banking offices in more than one town or city, and the
branches in operation comprised over two-thirds of all the banking offices
in the State. The same tendency towards larger and fewer banks, which has
been observed in Canada and other countries where branch banking has been
the predominant system, has also been evident in California, where a few




- 6i -

large branch organizations have grown up and are now transacting about half
the hanking business of the State.
! h e e are two separate but closely interrelated aspects of the
E.r
growth of branch banking in California*

On the one hand is the nature of

the processes by which nearly two-thirds of the banks in California gave up
their status as independent institutions and became branches of metropolitan banks. On the other hand is the functioning of the branch organizations as banking institutions. This second aspect of the development has
thus far been largely influenced by the first.
Methods of Branch Banking Development in California. - The development of branch banking in California was so rapid that it escaped effective
control by governmental agencies, and this rapidity of growth gave rise to
many problems which might not have developed had the growth been more gradual.
During the five or six years following 1920 the State superintendent of
banks, under whose jurisdiction alone intercommunity branch operation was
permitted by law, was presented at times with applications the granting of
which would extend the scope of branch banking far beyond what most bankers
believed was in the minds of the framers of the 1909 act. Unit banks
throughout the State were bought up by holding companies affiliated or associated with branch operating banks, and then the superintendent was called
upon to authorize their transformation into branches. Usually he granted
the applications, and thereby retained the power to exercise supervision
over these large group organizations.
From as early as 1919 the most important branch operating State
banks of California were members of the Federal reserve system*

But the

restrictions on branch bank extension prescribed by the Federal Heserve




-62-

Board were rendered ineffective by the utilization of affiliated or associated nonmember "banks to build up branch organizations, which later were to
be absorbed by merger with the member institutions. Restrictions were conditioned by the complexities of dual banking control, and by the fact that
all membership in the federal reserve system is in effect voluntary, since
State members may withdraw from membership and national banks may surrender
membership by converting into State banks.
The procedure employed was to use the bank holding company, which
purchased the stock of the unit banks concerned and merged them together into the nonmember branch operating bank.

Such transactions were greatly

facilitated by the rising stock market, which made possible the sale of
shares of the holding companies at such prices as to draw large sums from
the public for use in the purchase of banks at high prices. This was accompanied by speculation and stock promotion, sometimes through the branches
of the affiliated or associated institutions themselves. Without the holding company device the development of intercommunity branch banking in California could not have taken place with such speed.
Experience with Branch Banking in California. - Consideration of
the safety record of branch banking in California appears to show that
branch expansion, as distinguished from branch operation, has been an important factor in reducing bank failures in the State. While there has been
no suspension of any large scale branch organization in California, the experience there has been too short and limited to too few banks to be accepted as a test of the safety of branch banking.




In the matter of service to the community, the evidence available

«. 63 —

indicates that many small towns and villages in California have "been supplied with more extensive credit accommodation by branches of metropolitan
banks than could have been provided by local independent banks. Individual
loans have frequently been made in amounts much larger than would have been
legally permitted for unit banks of a size the community could support. The
aggregates of loans made by branches have frequently been a great deal
larger than the deposits of those branches. This has reflected the transfer of funds assembled as deposits and not needed in one community at a particular time to branches in other communities where there was a demand for
credit.
No evidence has been found in California that branch banking has
resulted in draining small communities of their funds, when such funds have
been needed locally for loans. On the contrary, a tabulation of the loans
and deposits of country branches of an important branch operating bank in
the State, as of Pebruary 22 of the three years 1927-1929, shows that the
average of loans outstanding at seventy-five offices amounted to over 70
per cent of deposits and in a great many cases to over 100 per cent, as compared with 6k per cent for all country member banks in California and 66
per cent for all country member banks in the United States. This was during a period of exceedingly brisk demand for call loans at high prices in
the financial centers of the country.
Economies of operation of the branch system, claimed to result
from centralization of all the functions of general financial administration, have not been demonstrated by the statistical information available
as to California's experience. Expenses incident to the building up of
the branch organizations themselves may have tended to offset any economies otherwise effected.




- 6H-

Develo-pment of the Branch Banking Issue
Aside from California, branch "banking in the United States has developed chiefly in the cities and metropolitan areas, and is prohibited in
most of the regions where the largest number of small banks arc located.
These are chiefly the agricultural sections where the number of banks, especially State institutions, grew so rapidly from the 80's till about 1920.
An important reason for the rapid development of State banks during the early
part of that period was the need for banking services in rural communities
too small to have national banks. At that time national banks could not
be organized with less than $50,000 capital, a requirement which was beyond
the resources of most small communities, especially in agricultural regions.
The need was met by the organization under State charter of banks with smaller capital, and State banks became more numerous than national banks early
in the 90»s.
At the outset of this rapid increase in the number of banks the
suggestion was made that the need for banking services in such regions could
be more advantageously mot by branch banking.

The idea gained support and

in 1895 both the Secretary of the Treasury and the President of tho United
States recommendod branches for national banks.

In 1896 the Comptroller of

the Currency made a similar recommendation and the Secretary of tho Treasury
repeated his recommendation of the previous year.
The branch banking movement at that time had many advocates among
economists and leading bankers, and bills containing branch bank provisions
were pending in Congress for s.everal years.

In a report dated May 11, 1898,

the Banking and Currency Committee of the House saidr 1 '
(1) United States Congress, 55th, 2nd Session, H. R. Report 1575, Juno 15,
1898, p. 30.




- 65 -

"One of the most striking 'benefits of branch banking is
that a branch may ba created and maintained at a profit in a
connunity without sufficient business for an independent bank.
This would permit the extension of credit into many localities
in the thinly settled portions of the country where it is now
impossible. Branch banking, moreover, permits the more ready
flow of capital from communities where it is not needed to
those whore it is needed than does the operation of independent
banks. . . .
'Branch banking in connection with reasonable freedom of
note issues has produced such favorable conditions in Scotland
and Canada that interest rates are almost uniform throughout
those countries, even in the most remote sections, and disclose
none of the striking differences disclosed in this country between rates in the money centers and in certain remote sections."
About 1898, however, many banks, especially the small banks, began
vigorously to oppose the branch banking movement.

It was then suggested that

a reduction of tho minimum capital requirements for national banks would
moet the exigencies of the situation and obviate the necessity for branches.
In 1900 Congress reduced the minimum capital requirement for national banks
in small communities to $25,000.

Tho agitation for branch banking then sub-

sided while the rapid growth of small unit banks continued for twenty years.
Growth of City Branches. - Although the proponents of branch banking
had failed to accomplish their aim and tho establishment of branches remained
illegal for national banks, an increasing number of branches of State banks
came into operation.

This growth in branch banking, however, occurred chief-

ly in the large cities, rather than in the rural and agricultural communities
for which it had been advocated.

At tho end of 1931, for example, there

were over 1,900 branches in 13 large cities of the country as compared with
1,400 in the remainder of the United States.
The branch banking developments which began about 1900 in the four
States, New York, Massachusetts, Ohio, and Michigan, have shown a steady sub-




-66sequent growth and have "been alsost exclusively urb.an.

City branches havo

also "been established in substantial numbers in Pennsylvania and New Jersey.
Tor the first twenty years or more the establishment of branches was wholly
a State bank activity. As its competitive force began to be felt by national
banks, however, it impelled them to acquire branches in the two ways open to
them: i.e., either directly, by the absorption of State banks with branches,
or indirectly, by affiliation with them.

Neither compensated for the lack

of power to establish branches on the same terms as the State banks, however,
and the inequality created problems for both the Comptroller of the Currency
and the Federal Heserve Board.
Intercity Branch Banking. - Meanwhile rural as well as urban branch
banking was developing in California, as described above, and in Maine, Maryland, Virginia, North Carolina, South Carolina, Georgia, Tennessee, and
Louisiana.

In none of theso States except California has there been a marked

tendency towards the building up of extensive systems. Most of the branches
in those States belong to banks with less than a half dozen branches each.
The location of branches of national and State banks outside the city of the
head office on December 31, 1931, is shown on Chart 15.
The growth of branches under State laws was much more pronounced
in urban than in rural areas, oven where laws permitted it in both. This
may have been due in part to the fact that prejudice against "absenteeism"
in management was less forceful in respect to the branches of a bank in the
same city than in the case of branches in a different town.







- 67 -

CHART 15

In California there are numerous branches in the metropolitan areas centering around San Francisco and Los Angeles,
but technically outside their city limits. On the map the
dots extend much beyond the territory in which the branches
are actually located around these cities.

- 6g -

Bearing of Stato Bank Branches on tho Gontrovorsy. - In Statos
whore state-wide branches were permitted tho national "banks did not offer
important opposition except in California, whore both the national banks
and tho small State banks resisted tho movement.

In Statos liko New York,

Massachusetts, Ohio, Michigan, and others, whero urban branch banking has
had its greatest development, the national banks sought to secure the same
right for themselves.
In the States where banks did not have branches there was a strong
movement to keep branch privileges out of the Federal laws.

This was di-

rected not merely at keeping branches of national banks from being permitted
in States locally opposed to branch banking, but at keeping them from being
permitted anywhere, so far as possible.

Tho contention was that branch bank-

ing was inherently undesirable and should bo prevented from gaining any more
foothold lest it spread uncontrollably.
This opposition to branches not only affected Federal legislation,
but found expression in the enactment of State legislation between tho years
1919 and 1929, prohibiting branch banking in Arkansas, Georgia, Idaho,
Illinois, Indiana, Iowa, Kansas, Minnesota, Montana, Nebraska, Oregon,
Washington, and West Virginia and restricting it in Tennessee and Virginia.
In some of these States there wore a few branches in existence at the timo
the prohibitions were enacted, but in most States there was either no branch
banking at all, or it was on a very small scale.

The Cook County Bankers'

Association was as aggressive as the California independent bankers in leading the efforts to keep branch privileges from being given to national banks.




-69Policy of the Federal Reserve Board. - In the annual report of the
Federal Reserve Board for 1915, the first report covering actual oporations,
thoro was a recommendation for "branches which road: ••Permission should be
granted to national "banks to establish branch offices within the city, or
within the county, in which they are located."'1'

Similar recormondations

wore made by the board in its reports for tho years 1916, 1917, 1918, and
1919, with the reservation, however, that the branch privilege apply only
in those States whose laws permitted State banks to have branches.
the recommendation was renewed.

In 1922

In the 1917 report the board said: "There

seems to be no reason for such discrimination between members of the Federal
Reserve Systom, and with the view of placing them more nearly upon terms of
equality, besides affording in many cases better sorvice to the public, it
is recommended that provision be mado for tho establishment of branches by
national banks, under proper limitations."'2' In 1918 tho board said: "As
tho law now stands national banks are at a serious disadvantage in mooting
the competition of State banks with branches."^ '
No branch banking legislation for national banks was passed, however, prior to 1927. Resolutions adopted by the board on November 7, 1923,
provided that "as a general principle," State banks should not be admitted
to membership unless they relinquished all branches established after February 1, 1924, they night have outside tho city of their main office, and
that after becoming members they night not establish branches, except within
the city. A little later, March 27, and April 7, 1924, tho regulations wore
modified somewhat to allow for branches in suburban areas.
(1) Second Annual Report of tho Federal Reserve Board. 1915, p. 22.
(2) Ibid.. 1917, p. 33.
(3) Ibid.. 1918, p. 83.




- 70 -

The Policy of the Comptroller of the Currency. - In 1915 the
Comptroller of the Currency, Mr. John Skelton Williams, like the hoard,
recommended branch "banking and ropoatod the recommendation each year from
1916 through 1930. In the report for 1915, under the hoad of legislation
recommended "to provont "bank failures," twelve amendments to existing legislation were suggested, one of i?hich applied to branch banking.

It was sug-

gested that national bahk3 be allowed to ostablish branches "within certain
limits, for example, within city or county lines, but not without the boundaries of the State" or of the Federal reserve district in which the "parent
bank" was situated; that no national bank should havo more than twelve domestic branches; .and that the capital of the bank should bo increased in proportion to the number of branches.
In 1921 anothor comptroller, Mr. D. E. Crissinger, noted in his
annual report that the legislation previously recommended had been introduced
in Congress, and indicatod his hope for a liberalization of the National Bank
Act "so as to put national banks on an equal footing with State institutions.
In June 1922, he authorized national banks to havo "additional offices" in
cities where the State laws permitted State banks to have branches. The
immediate reaction to the announcement that the comptroller was going to
authorize "additional offices" 7/as one of alarm among the State bankers who
opposed branch banking.

The Chicago and Cook County Bankers' Association

promptly convened in a special meeting and adopted resolutions strongly
condemning the comptroller's ruling.
The McFadden Act. - In February 1924, the MdFadden bill was introduced in Congress proposing among other things to give national banks additional

(l) Annual Report of the Comptroller of the Currency. 1921, p. 4.




- 71 branch banking powers.

This bill was the subject of a three year controversy

and was not enacted until Tebruary 25, 1927.

The American Bankers Association

went on record in opposition to "branch banking in every form, "'*' The principal opposition originated with the small bankers.

They desired to protect

their competitive position, and were supported by many of their large city
correspondents, who preferred to continue existing relationships.
Tho branch banking provisions of the McFadden Act embodied substantially the regulations formulated in 1923-1924 by tho Federal Reserve
3oard and the Comptroller of tho Currency for administrative purposes. This
law specifically legalized local branches in States which permit Stato banks
to have branches, but prohibits any further oxtonsion of rural branches. It
not only restrained Stato members from establishing branches outside the city
of the head office—in this respect following previous regulations—but it
also deprived the board of the power it had formerly exercised to make exceptions for such banks. Purthormoro, in allowing State banks to come
under national chartor oithcr by conversion or consolidation with only
such out-of-town branches as had been in existence when the act became effective, it tended to restrict branches for national banks more than had been
tho case before.
Growth of Branch Banking Sentiment. - The McFaddon Act did not
settle the branch banking issue. Bank failures increased and group banking
developed rapidly, particularly in those States whore the opposition to
branch banking was especially 3trong.

The effect of these factors and tho

generally adverse conditions suffered by all banks was to diminish tho opposition to branch banking on the part of many bankers t7ho no longer found it
(1) United States Congress, 68th, 2nd Session, Hearings on S. 3316 and H.B..
8887, Consolidation of National Banking Associations, Senate Committee
on Banking and Currency, January 30, 1925, pp. 85r>8bi




- 72 -

profitable to operate independent unit banks.
Since 1929 changes in the laws of several States have been in tho
direction of liberalizing branch banking provisions. By May 1932, the right
to engage in some form of branch banking had been authorized, or powers
already existing had been broadened
Iowa, Ohio, and Wisconsin.
part of the State.

in Vermont, Georgia, Montana, Indiana,

In Vermont a bank may now have agencies in any

In the other States the branch privileges are much

more restricted, tho banks being allowed to operate under certain conditions
additional offices or branches in tho same city or in the samo county or,
in some States, in contiguous counties.
In most of these States the reversal of practice appears to have
come about as a result of bank failures.
pecially evident.

In Iowa and Wisconsin this was es-

The purpose in those two cases appears to have been in

part to save weak banks by consolidating them with sound banks and converting them into "offices" of the latter, and in part to supply banking facilities where they wore otherwise no longer available.

Tho changes in those two

States wore especially striking since both States still avowed their opposition to branch banking.

In both of them branches wero still ozpressly

prohibited, but at tho samo time they were in fact allowed under other
names—"offices," "receiving and disbursing stations," "locations"—with
restricted powers and functions.

When failures had gone so far as to de-

prive commmities of banking facilities, a neod was folt which, in spite of
the hostility to branch banking, was supplied by relaxing restrictions.
Bank failures .and tho growth of group and chain banking likewise
caused Congress and federal banking authorities to continue actively interested




- 73 in the problems of tho banking structure.

Group and chain banking bocarao

especially important in territory where there was no branch banking and
where sentiment seemed strongly antagonistic to it. Furthermore it was
found possible, where state-wide branch banking was permitted, as in
California, for a member bank, which itself could not establish branches
outsido its homo city, to control through affiliation a nonmember bank
which could establish them.
The increased importance of these two developments, rural bank
failures and affiliations, was manifested in the hearings on the subject
of branch, chain, and group banking which were held by tho Houso Committee
on Banking and Currency in 1930. Those hearings were authorized by Houso
Resolution 1 4 1 / ' "for the purpose of obtaining information necessary as a
basis for legislation." In contrast to previous hearings, the majority of
the witnosses who appeared before the committee were in favor of branch
banking in some form, and the case for branch banking was presented more
fully than ever before. Among others, tho Comptroller of the Currency,
Mr. J. W. Pole, and the Governor of the Federal Reserve Board, Mr. Roy A.
Young, were heard, and both recommended that the powor of national banks
to have branches be extended.
Mr. Pole, who was tho first incumbent of his office in thirty
years or so to give emphatic endorsement to branch banking, embodied in
his testimony the recommendations he had already made to Congress in his
annual report.

Tho distinctive feature of his recommendations was that

branches be authorized for national banks "within the trado areas of the




-7*-

cltios in which such banks may be situated."'1) Tra&o area branch banking,
he believed, would make it possible for the larger and stronger banks to
serve outlying communities through branches.

These trade areas might in

some cases be coextensive with Federal reserve district lines, he thought,
but in other cases they would bo of a more limited extent.
In its emphasis upon branches as a moans of serving rural communities, the recommendation of the comptroller took the issue back where
it had been thirty years before, when the earlier advocates of branch banking
had urged it for the same reason.
The Glass Bill. - The Senate also continued to manifest interest
in branch banking.

The Glass bill, as reported by a subcommittee early

in 1932, embodied provisions for branch banking on a more oxtensive scale
than the McFaddon Act permits.

It proposed to give national banks state-

wide branch banking privileges wherever State banks have the same privileges.

(2)
At hearings held by the Senato Committee in March 1932,N ' a number of
witnesses criticized the bill because its provisions made national bank
privileges dependent on State laws.

They said that state-wide branches

should be allowed for national banks, regardless of the State laws. Mr.
J, W. Polo, the Comptroller of the Currency, again rocommonded trade area
branch banking and expressed dissatisfaction with the principle of making
the privileges of national banks depend on the privileges of State banks.
Following those hearings, in which other matters than branch banking occupied most of the attention, the bill was altered in a number of provisions.

Its branch banking provisions as reported from the Banking and Cur-

(1) United States Congress, 71st, 2nd Session, Hearings under H. Res. 141,
Branch. Chain, and Group Banking. House Committee on Banking and
Currency, 1930, Vol. I, Part 1, p. 6.
(2) United States Congress, 72nd, 1st Session, Hearings on S. 4115,
Operation of thpftfTational and Federal Reserve 3anking Systems.




-75rency Committee to the Senate on April 18, 1932, authorized state-wide branch
"banking for national banks upon the approval of the Federal Reserve Board
regardless of State laws/ 1 '

This droit

of the bill also contained a pro-

vision authorizing branches across State lines under certain circumstances.
In order to establish a branch outside of the head office city a national
bank would be required to have a paid-up capital of $500,000. The bill provided further that:
"The aggregate capital of every national banking association and its branches shall at no time bo less than the aggrogate minimum capital required by law for the establishment of
an equal number of national banking associations situated in
the various places \7hero such association and its branches are
situated.«
Opposition to. the glass Bill. - The report of the Economic Policy
Commission of the American Bankers Association in May 1932, as approved by
the Executive Council of the association, opposed some of the branch banking
(2)
provisions of the Glass bill.

it opposed interstate branch banking as

well as the principle of giving national banks broader branch banking powors
than those accorded to State banks in a particular State.

The report, how-

ever, approved the suggestion that banks in stronger centers should bo able
to extend adequate facilities to communities which have boon deprived of
banking services, or where such extension is economically justified.
At the same time individual bankers, banking commissioners, and
State banking associations attacked the branch banking provisions of the
Glass bill.

The Association of Independent Unit Banks of America, organized

to fight the proposals for state-wide branch banking, expressed the belief
"that the laws of the respective States should regulate branch banking within
(1) Ibid.. S. 4412. Section 19.
(2) The Commercial and Financial Chronicle. May 7, 1932, p. 3377.




- 76-

their 'borders"-; that 'branch hanking threatens to "wipe out our present dual
hanking system"; and thaf'tho autonomy of State laws" should be a "cardinal
principle in Federal "branch banking legislation. "^ '

Substantially the same

point of view is expressed in the resolutions of the Illinois Bankers Association, May, 1 9 3 2 . ^
As finally enacted June 16, 1933, the Glass-Steagall Act, "The
Banking Act of 1933," provides that:
"A national hanking association may, with the approval
of the Comptroller of the Currency, establish and operate
now tranches: (1) Within the limits of the city, town or
village in which said association is situated, if such
establishment and operation arc at the time expressly
authorized to State banks " y the law of the State in quesb
tion; and (2) at any point within the State in which said
association is situated, if such estahlishment and operation
are at the time authorized to State hanks by the statute
law of the State in question by language specifically granting such authority affirmatively and not merely by implication or recognition, and subject to the restrictions as to
location imposed by tho law of the State on State hanks."
The act also stipulates minimum capital requirements for national banks,
which operate branches.

(1) American Banker. June 8, 1932, p. 8.
(2) The Commercial and Financial Chronicle. May 28, 1932, pp. 1*2,.




- 77Branch Banking in Canada
Since the "banking system in the United States has exhibited
serious defects tinder the test of adverse conditions, a study of other
hanking systems operating under similar conditions has "been considered
pertinent to the Committee's inquiry.

Consequently, a study has "been

made of the branch banking systems in two other English speaking countries, Canada and England, to determine their records of safety and service during the past twelve years. The commercial banking requirements
of Canada and the United States are essentially similar in nature, owing
to similarities in the economic structure of the two countries, Canada,
furthermore, has faced the same agricultural problems in her Western or
Prairie Provinces as those with which our Western Grain States have been
struggling,
gafety Record. - The Canadian banking system, composed of 10
banks with about k,000 branches and operating under charters granted by
the Dominion Government, has provided a notable degree of safety for its
depositors. Since 1923 there have been no suspensions of Canadian banks.
In the eleven year period 1921-1931, during which nearly 9,000 State and
national banks suspended in the United States, only one institution suspended, in Canada, the Home Bank of Canada which failed on August 17, 1923,
with 68 branches.
At the time of suspension the Home Bank reported paid-up capital
of $1,960,591, and liabilities to the public of $18,356,000. Losses to
depositors have been estimated at $6,U00,000, after a donation of about
$3,^25,000 by the Dominion Government for the benefit of creditors with
Claims of less than $500, as well as of those with claims of over $500




- 78if found to be in special need.

Subsequent investigations by a Royal

Commission showed mismanagement in the head office of the bank extending
over a period of several years. The failure of the institution led to
the inauguration in 192U of a system of governmental inspection of Canadian
banks, designed to reveal to the authorities the development of unsound
conditions in time to permit remedial measures.
The ratio of total assets of banks suspending during 1921-1931
to average total yearly assets of active banks during the same period was
less than one-twentieth as great in Canada as in the United States, Even
during the years 19OI to 1920 inclusive, before the present large number
of suspensions in the United States began, the ratio of the assets of
suspended banks to the average yearly assets of active banks was about
seven times as great in the United States as in Canada,
Post-war agricultural conditions have proved a severe test for
Canadian banks. The story of rising agricultural prices, rising land
values, expansion of credit, and the overdevelopment of banking facilities prior to 1920 was much the same in the Prairie Provinces of Canada
as in the Northwestern States across the border. The number of branches
in the three Prairie Provinces increased over 50 per cent from 1916 to
1920, Ifter 1920 both sections likewise experienced declining prices,
declining land values, frozen bank loans, and profitless banking offices.
In 1923 the president of the Canadian Bankers' Association testified before a committee of the House of Commons that ". , , out of the 1,219
banks'1J operating in Western Canada U19 are operating under an actual
loss, an operating loss,"

As a result of these conditions many branches

were discontinued, From 1920 to 1926 nearly one-third of the branches
(l) Banking offices.




-79in the Prairie Provinces were closed, but the losses incurred were absorbed by the banks, that is by the proprietors or stockholders. Except
for the branches and subagencies of the Home Bank, the reduction in the
number of branches was accomplished without suspension of payments to
depositors. The accounts of the closed offices were transferred to
neighboring branches of the same or other banks.
The structure of the Canadian banking system is an important
factor in its record of safety. The Canadian banks are powerful institutions having:

(a) a wide diversification of assets; (b) large reserve

funds for the absorption of special and regional losses; (c) adequate
facilities for formulating and pursuing effective credit and investment
policies; {d) ample resources for providing managerial ability; and (e)
wide facilities for training the personnel in the traditional principles
and practices of commercial banking.

In Canada the facilities of large

institutions have been made available to the smaller communities through
the development of branch banking,
A further factor in connection with the safety record is the
degree of adherence to commercial banking principles and the tendency to
resist the practice of using deposits to supply capital funds. This is
due in some measure to legal restrictions but in large part to management.
Service Record. - Safety to depositors does not appear to have
been attained at the cost of adequate service to the community, Facilities for banking service are provided for all the settled regions of
Canada, often in frontier towns and other communities too small to support independent banking institutions. There are more than twice as many
banking offices in Canada as in the United States in proportion to the




- 80 -

population, and nearly four times as many in proportion to the commercial
banking resources of the country. While loans are generally made on business principles rather than on a personal basis, no evidence has been obtained that either communities or individuals have suffered from the withholding of credit warranted on the basis of sound banking practice. Banking funds in Canada have a high degree of mobility through the network of
branches, and are readily shifted to communities where they are most needed.
The evidence available shows that the loans of the branches in the great
agricultural areas of the Dominion exceed their deposits, whereas for the
country as a whole deposits exceed loans. This indicates that the newer
regions of the country are financed in part through the loan of the surplus funds accumulated in the older and more thickly settled regions.
Effective Competition. - While the banking resources of the country have been gradually concentrated in a few large institutions, there is
no evidence that competition between these institutions has been diminished.
On the contrary competition is keen, both in the establishment of branches
and in the development of business.

In fact competition in the establish-

ment of branches has resulted in what many observers have described as an
overbanked condition. Towns of under 2,000 inhabitants all over the Dpminion frequently are served by the branches of as many as three banks.
Many villages of less than 1,000 have two or more banking offices. In
the cities the multiplication of banking offices is equally apparent.
In Montreal, for example, with a population of about 1,000,000, there were
about 230 banking offices in 1931* compared with about 660 commercial
banking offices in New York City, which has a population more than seven
times as great as Montreal, Toronto, a city of about 700,000 inhabitants,
had about 300 banking offices, more than four times as many in proportion




- 81 to its population as New York, two and a half times as many as San Francisco*
and twice as many as Detroit.
The costliness of competition in the number of banking offices is
recognized by the general managers of the Canadian banks. There appears to
be a conviction, however, that if one institution refrains from opening a
branch wherever a profit can eventually be made some other bank would be
sure to do so. At the same time it is believed by bank officials that a
concerted attempt on the part of the banks to limit the number of branches
in a given city or community would be likely to meet with public criticism
as a monopolistic practice.
Costs to the Community. - In view of the differences in banking
practice in Canada and the United States and the difficulties of securing
comprehensive data on earnings and expenses of banks, it is not possible
to draw definite conclusions as to the relative costs of the two banking
systems. The evidence available, however, does not indicate that the total
cost per unit of business is higher for the Canadian system than for the
American system, although the former maintains a much larger number of banking offices and personnel in proportion to the volume of business than the
latter. On the contrary, the average gross earnings and the average operating costs (including net losses) of Canadian banks, in percentage of
loans and investments, appear to be nearly the same as the averages for
all member banks of the Federal reserve system. Taking into consideration
the thousands of small high-cost nonmember banks in this country, there is
reason to believe that the cost to the economic community of the unit banking system of the United States per unit of banking accommodation is at
least as large as the cost of the branch banking system of Canada. In
addition, the public in the United States has had to bear a much larger
cost resulting from bank failures*




- 82 -

Branch Banking in England
Since 1920 England has suffered even greater economic and financial difficulties than the United States. Industry as well as agriculture
has been in a state of depression a large part of that time. Problems of
public debt and taxation have been far more serious than in this country.
Yet there have been practically no losses to depositors or serious upsets
to business in England as a result of commercial bank failures in recent
years.
Safety Record. - Losses to depositors because of bank failures
have been negligible in England since the rise of the great branch banking
organizations in recent decades. There were less than ten failures among
commercial joint stock banks from 1900 to 1925t and since that date there
have been none.
The existing banking structure in England, where about 80 per
cent of both commercial banking deposits and offices are concentrated in
five large branch systems, is the outcome of a long period of competition
between small local banks and joint stock branch banking companies, A
century ago there were scores of local banks operating as small partnerships, many of which failed daring the course of the nineteenth century.
After the law of 1826 gave joint stock companies the right to operate in
the commercial banking field, they began to develop branch office systems
and their growth was rapid, especially after the Act of 1862 definitely




- g3permitted banks to operate as modern corporations with limited liability.
The large branch systems of England, in contrast to small local
banks of earlier periods, serve a wide geographical area and are in contact with a variety of business interests. Therefore, they have a wide
diversification in their portfolios. Management in England has endeavored
to operate along traditional commercial banking lines, keeping funds liquid
in the form of short-term loans and investments. Careful attention to the
problems of internal audit and supervision of large and small banking offices alike has been essential to the stability of these large organizations.
Many of the branch banking offices in England that have proved
unsuccessful have been liquidated but this liquidation has not caused
losses to depositors. Assets of the discontinued offices have been transferred to other offices and losses sustained by the operation of these offices have been absorbed ~by the banks. About U.000 offices were closed in
England between IS76 and 191^» as compared with about 9»000 tk&t were
opened during the same period.t1' The number closed was almost half as
large as the number opened.

In 1915* 15^ n e w branches were opened and 53

(2)

were closed,v * but during 1916, when the war made the banking situation
very difficult, more offices were closed than opened.^'

This indicates

that adjustments to changing economic conditions and expansions into new
fields have been made in England as in other countries, but these adjustments have not caused losses to depositors because forced liquidation of
assets was avoided and operating losses have been absorbed by the banks.
Bankers1 Almanac and Year Book.
(2) Ibid., 1917, PP. 2f>.27*.
(3) ISM.. 191S, P. 25.




- gkAvailability of Credit* - Government commissions in England
charged with investigating the problem have concluded that all classes
of borrowers at the commercial banks, including farmers, are well served
by existing facilities there. It is recognized, however, that the large
banking institutions extend their accommodations on a less personal basis
than small local concerns. Since this has served to bring fewer undesirable assets into the banks, it has been generally regarded as more of a
gain than a loss to the community.
Available data indicate that a substantial proportion of the
loans of the great branch banking organizations are in small units, and
that the small man in England who represents a reasonable commercial banking risk receives adequate consideration and accommodation. Although the
widely diffused branch banking systems are channels for the mobilization
and distribution of funds, the investigating commissions have concluded
that this does not result in draining deposits from the outlying communities to the industrial and financial centers. Comparisons which have been
made between the rates of interest charged for short-term accommodation in
England and elsewhere indicate that English borrowers are in a favorable
position.
On the other hand, a body of opinion for years has been critical
of the attitude of the banks, holding that they should make longer term
commitments to industry and agriculture. Bank management has resisted
these suggestions on the ground that it is not sound banking to lock up
for long periods deposits payable on demand or short notice. Responsible
investigating commissions have concurred in this view. They report, however, that England needs more adequate investment banking machinery to
handle capital financing.




- 85 -

Effective Competition. < After the emergence of the "Big Five"
•
»
more than a decade ago public policy set its face against further uncontrolled concentration of "banking resources.

It was felt at that time that

continued reduction in the number of banking units might lead to joint
agreements among the remaining banks resulting in a "money trust." The
Government has been an advisor and adjudicator in connection with all
subsequent moves toward concentration.
Government commissions have concluded, however, that "up to
the present there has been little or no attempt on the part of the
amalgamated banks to exercise any monopoly powers, or to suppress competition by districting or other working agreements."'1' Indeed, many
believe that concentration so far has been accompanied by increased competition, which has found expression among other ways in the spread of
banking facilities through new offices.
The large banks have branches and sub-branches spread over
practically all of England and Wales in competition with each other.
Usually a town which needs banking facilities has two or more banking
offices (branches or sub-branches) representing two or more of the
joint stock banks.

It has often happened that a bank has opened a new

office in a locality where a competitor was operating when there was
not enough business to justify the outlet.

In some cases these redundant

offices have been put on a paying basis after a period of several years.
On the other hand, such overbanked situations have affected earnings
substantially and have frequently led to the closing of unprofitable
banking offices. Nevertheless, the number of banking offices has increased during nineteen out of the last twenty years,
(1) Committee on Industry and Trade, Final Report. 1929, pp, 52-53.




»

- 86The increase in the banking offices in England has been raach
more rapid than the increase in population.

The population per banking

office declined from about 6,800 in 1901 to about 5,000 in 1921 and to
about 3,900 in 1930, compared with ^,800 in the United States. Liverpool
had a commercial banking office for every 5»5 0 0 persons; Birmingham had
one for every 6,200 persons. Because of the peculiar boundaries of the
City of London, the number of banking offices there is difficult to determine; The best evidence, however, appears to indicate an office per
5,000 to 6,000 persons. As of a comparable date Hew York City had a
commercial banking office for every 10,500 persons; Chicago, one for
17,100 persons; Detroit, one for 5,000; Baltimore, one for 9»S00; and
San Francisco, one for 5,800 persons.
There was one banking office in England for each six square
miles, while in this country there was jone national or State banking
office for about one hundred and twenty square miles. In the densely
populated States of New York, New Jersey, and Pennsylvania, there was
a banking office for each twenty-five square miles.
These figures illustrate the relative accessibility of banking
offices in England. The responsible heads of English banks have on occasion commented on the problem of excess offices. In I92U one of them
spoke of "fresh branches which take a long time before they can pay their
way, and in some cases, one may fear, are not likely ever to pay at a l l , " w
Some evidence that steps are being taken by the banks to protect themselves

(l) Chairman of the Westminster Bank, Statist. May 10, I92U, quoted by
Patrick Fitzgerald, Industrial Combination in England, p. 181.




«g7-

against excessive competition among branches is found in an address to the
shareholders of Lloyds Bank early in 1932 by the chairman, Mr. J. Beaumont
Pease, who said:* '
"Banks have sometimes been criticized for opening new offices in places where banking facilities were redundant. The
multiplicity of branches has been to the advantage of the public, but, undoubtedly, there are places where the business is
not sufficient to ensure satisfactory results to all the banks
represented there, and, with this in mind, and by mutual arrangement with other banks, we have closed down a good many
sub-offices, with a consequent saving in expense."
Costs to, the Community. - Data available with respect to the
earnings and expenses of the joint stock branch banks of England are so
meager that it is difficult to draw conclusions in respect to the relative cost of banking services to the public. Although the English banks
make smaller charges for their services than do small unit banks in this
country, their advantage over large banks here is not clear. It is clear,
however, that the costs of the great British branch systems are the result
of averaging low cost large offices with high-cost small ones. The competition for new branch outlets has been reflected in the costs and profits
of English banks. Although there has been a reduction in the margin of
profit per unit of business among English banks during the past two decades,
a commensurate reduction in the rate of profit on book invested capital has
not occurred, owing to a large increase in operations per unit of capital.

E. A, Goldenweiser, Chairman
Ira Clerk
M. J. Fleming
L. R. Bounds
E. L. Smead
J. H. Riddle,
Executive Secretary and Director of Research
(l) Address to shareholders quoted in American Banker. February 24, 1932, p.k.