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THE

AMENDMENTS

TO THE

FEDERAL RESERVE

ACT IN THE

MCFADDEN BILL REFERRING

TO

BRANCH BANKING-

Th e

McFadden Bi l l

(H. R.

6855)

h a s

been announced

a s a

bill drawn

fo r th e

purpose of l ibera l i z ing th e National Banking Ac t , so that National banks may no

longer

be

prevented

by law

from performing banking functions regarded

a s

useful

and

sound

i n

principle which State banks have long been performing.

The

Comptroller

of the

Currency

h a s

noted

the

fact that State banks have steadily gained

i n

numbers

and in

resources while National banks have failed

to

maintain

th e

same rate

of

growth. Since January

1 , 191 3 , he

t e l l s

us 173

National banks, each with capital

of

over $100,000 have given

up

their National charters

and

taken

o u t

State charters.

These facts a r e indisputable and in so far as the b i l l conf ines i t se l f to i t s

announced purpose

I

have

no

cri t ic i sm

to

make

o f i t ,

further than

to

state that

some

of the

departures from commercial banking need very careful consideration.

One of th e liberal izing provisions of the b i l l has to do with branch banking within

city l imits ,

and

with this provision

th e

Federal Reserve Board

i s

unanimously

i n

agreement.

I

think

I may

f a i r l y

add

that

th e

members

of the

Board regret that this

l iberal izing feature of the bill does not go to the full l imit of permitting the

establishment

of

branches

i n a l l

cities large enough

t o

have need

f o r

outlyifag

banking faci l i t ies ,

a s a

matter

of

right

and

without regard

to the

l imitat ions

of

State laws.

I t

would seem that

th e

National banks might sometimes

be

permittedto

take

t h e

lead

i n a

matter

of

sound barking vdaich every competent banker

and

every

economist approves-

So much fo r th e l ibera l i z ing , or modernizing features of the bill, designed

to

permit banks

to

transact legitimate business along sound lines

by

modern methods.

We can a l l ge t

behind

and

support these features, these amendments

to the

National

Banking

A ct. But the

bill doesn't stop there.

I t

seeks

to

amend

th e

Federal Re<*

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serve A c t , a nd here i t becomes repressive and re ac ti on ar y. Because many banke rs a r e

opposed

to any

f u r t h e r l i b e r a l i z i n g

of the

National Banking

A c t t he

b i l l seeks

t o

deprive state bank members

of the

Federal Reserve System

of

some

of

their charter

ri g h ts guar antee d them under the Act of June 21 , 1 9 1 7 , par t icular ly wi th reference

t o branch banking . Cert ain st at es permit and even encourage banks of s u f f i c i e n t

cap i t a l t o establish branches beyond city limits, on the theory that t h e farmer

i s a s much entitled t o t he best and safest banking service a s t h e city dweller i s .

Instead of advocating t h e same privileges f o r National banks that these states give

their State banks t h e Comptroller of the Currency h a s entered into a n elaborate

argument against branch banking i n general , an argument which would, i f sound,

ut ter ly des t roy h i s city branch banking recommendation i f i t were n o t f o r t h e devel-

opment of a very ingenious theory of home rule. The s t a t e s may, according t o this

theory, decide f o r themselves whether banks shall or sha l l n o t have branches within

ci ty l imi ts , b u t they must no t be allowed t o decide whether any branch banks shall

exist outside of the l a r g e c i t i e s - i f their banks a r e t o remain i n t h e Federal

Reserve System.

There isn ' t a n economist i n t h e country who would agree with t h e arguments of

t h e Comptrol le r. Some 322 independent banks have failed i n this country since t he

1s t of January this year(to .April 11th). more than two-thirds of them banks with a

capit a l less than $50,000, and more than seven-eighths of them banks wi th a cap i -

t a l le ss than $100,000. With f a i l u r es s t i l l running a t t h e r a t e of nearly 100 a

month a n unpre judic ed out sid er might b e pardoned f o r thinking that unit banking

rather than branch banking i s a t present in most need of defense.

The Comptroller bases h i s arguments on two assumptions, both demonstrably

erroneous. He assumes, f i r s t , th at branch banking I n this country i s wholly a Aig

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city proposition

-

that

t h e

banks

in the b ig

cities will establish branches through-

out each state i f allowed to do so - and, second, that country branch ban king,that

i s branch banking outside of the b ig c i t i e s , i s fostered an d protected by the

Federal Reserve System.

The

f i r s t

of

these assumptions

th e

Comptroller partly discredits himself

i n

h i s statement that he has never y e t discovered a b i g banker who wished t o extend

h i s institution beyond city l imits . 1 think that i s true of the b ig bankers i n

Chicago and in most of the great cit ies of the East* They already do a national

business, receiving deposits from an d making loans t o large commercial and manu-

facturing institutions throughout

th e

country, without bra nch es . Furthermore they

receive deposits from, make loans to, and exercise a certain amount of control

over, thousands of small banks a l l over t h e country. I t i s doubtful i f they would

gain enough more t o compensate them f o r t h e added responsibility i f they were t o

establish branches outside city l imits.

But th e

error

of the

Comptroller's

a s -

sumption

i s

fully demonstrated

not by

conjectures

or by the

statements

of b ig

bankers

but by the

fac t s

of the

development

of

branch banking

in the

states which

have permitted i t . Although t h e laws of California have provided distinctly f o r

state-wide branch banking since I9O9 only one i n s t i t u t i o n h a s really spread i t s

branches throughout t h e State, one other has branches covering about oneithird of

t h e

State

and two

others cover territory that

i s

hardly more than suburban

or con-

tiguous.

The

overwhelming majority

of the

institutions engaging

i n

branch banking

i n

California

a r e

country banks

not

located

in any of the

larg e c i t i e s . Through-

out the Southern states branch banking i s a country bank proposition, with head

off ices general ly no t even i n towns large enough to be ca l l ed c i t i e s . The bank

having th e largest number of branches i n Alabama (about 15 branches) is not a

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but a bank a t Decatur. The largest branch banking system i n

lU

branches,

h a s i t s

headquarters

a t

Grenada,

and the

' • ' ' • • • •

i n

Maryland

h a s i t s

head office

not in

Baltimore

or

In Annapolis, or in any town large enough to be cal led a c i ty , but in Cambridgei

$»•'Alabama, Georgia, Louisiana, Maryland, Virginia, North Carolina an d South

are I3U banks operating 319 branches, less than three branches t o

' • • ' '

bank,

and

le ss than

a

dozen

of

these banks

a r e

domiciled

in t h e

larger c i t ies .

' ' ' ' ' '

Further positive proof

of the

error

of the

assumption that branch banking

i s

a

city monster which most

b e

chained

up

l e s t

i t

spread

i t s

tentacles over

the

-

i s

found

i n

connection with

th e

facts which disprove

t h e

Comptroller

1

s

. :

v i z : that branch banking i s fostered and protected by the

Of th e 13 ̂ banks which operate branches in t h e Southern

20 are member banks, le avi ng l l U non-members, and these l l U

a r e operating 233 branches, or about 2 branches t o each bank. I n V i r -

ginia there are 2 members operating 3 branches and 22 non-members with 29 branches.

e head of fi ce s a r e located i n such towns a s Clintwood., Columbia, Gloucester,

and Williams-

S i x banks in Richmond maintain brandies, but not one of them h a s more than 2

and

only

one of

them,

t h e

Richmond Trust Company,

o f

which

Mr.

John Skelton

i s president, has a branch outside of the c i t y . On© bank i n Norfolk has 2

• , . '

branches both out side

th e

ci ty

and one

bank

in

Lynchburg

has a

branch

a t

Bedford.

Exactly th e same conditions prevail i n North Carolina and in Georgia, with the

single exception of the Citizens and Southern of Savannah, which h as branches i n

Atlanta an d Macon. In the sect ion o f Tennessee within th e Atlanta Federal Reserve

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District there are 12 non-member banks operating 33 branches, and no member banks

with branches. In the other end of the dis tr ic t one member bank i n Memphis has

branches, but they a re inside the city .

Certainly this Southern development of branch banking is not fostered and

protected by the Federal Reserve System, since i t i s nearly a l l outside the Sys -

; tem . Bat even in California, th e great branch banking state, th e same thing is •

true. There are 88 state banks in that state maintaining branches, but only 19 of

them are members of the System, leaving 69 outside, and the outsiders are almost

' «

a l l

country banks.

I t i s

true

of

course that

th e

member banks maintain

th e

most

branches,

but

when

i t

comes

to the

question

of

being fostered

an d

protected

i t

should be said that th e large branch banking systems, th e Bank of Italy, the Pa-

cific Southwest Trust and Savings, and the Security Trust and Savings, have none of

tBem ever been large borrowers from th e Federal Reserve System. One of them never

has borrowed and the other two only to carry Liberty bonds. During the strenuous

months

of 1920 and 1921 it may

fa ir ly

be

said that these large branch banking

i n -

stitutions furnished a large share of the reserve funds which were loaned by the

Federal Reserve Bank of San Francisco to the independent unit banks.

The

restrictive amendments

to the

Federal Reserve

J c t a re , i t

seems

to me,

unfair,

a s

they overthrow

th e

guarantees under which

th e

larger California State

banks,

and

many State hanks elsewhere were persuaded

to

join

th e

Reserve System.

We

were wi l l ing enough

t o

invite them

in and

offer them

th e

guarantee

of

their char-

t e r rights when their funds were sorely needed, but now that th e seas are.smooth

we propose to repeal th e guarantees so far as branch banking i s concerned.

It $6t only seems to me unfair but from every, point of view unwise . Every

economist favors branch banking

a s

affording

th e

best

and

safest means

of

extending

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/ '

banking accommod&tions

t o

agricultural sections

and

small communities. Pro fes sor

• .. - • - . .

o . M. W. Sprague begins a n a r t i c l e on branch, banking in the Quarterly Journal o f

. '

Economics wi th thes e words: Upon

few

subjacts

has the

consensus

o f

opinion

o f

and financial writers been mbre general than upon t h e advantages

o f

branch banking over

a

system

of

separate local banks.

I t s

superiority

i n

respect

safety, econoiry,

th e

equalization

o f

rates

f o r

loans,

and the

di f fus ion

o f

banking f a c i l i t i e s cannot be questioned.

' • • • • . . • ' '

:

The

economists generally agree that branch banking

i s a

matter

of

most concern

c i t i e s

o r

their

b i g

banks,

but to

thinly settled agricultural

' : ? ••

'

communities. They bel iev e that

our

present scheme

of

extending banking facilities

o such communities by means of small weak independent banks, banks with a capital

• •

f

$5,000, $10,000,

or

even $25,000,

i s

unsafe

f o r

depositors

and

uneconomical,

interest rates t o t h e farmers higher than neces sary . Prof essor J . Laurence

• • • . ' .

of

Chicago University,

one o f th e men who had a

prominent part

in t h e p r e -

t o t h e

establishment

of the

Federal Reserve

A c t ,

declared

i n

that

th e

maintenance

of

such conditions necessarily involves some rather

serious suf fer ing . Hasn't th is predicti on been rather str ik ing ly

an d

painfully

' . ••• • .

by the great number of bank failures i n the Northwest?

Most

of the

Comptrollers

of the

Currency have recommended branch banking

i n

and

nearly

a l l o f

them have recognized

i t s

superiority either

as a

.

or

under certain conditions

t o

unit banking.

The

f i r s t

' '

troller, Hugh McCullough, was himself th e President of one of the most notable

i n t h e

country,

t h e

Bank

of

Indiana,

Mr*

Hepburn refers

o this bank as an exemplary illustration of the ef f i c i ency of branch banking a s

x^stem. Comptroller Eckle s, whose administration f e l t

t h e

full force

of the

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Panic

of 1S93

advocated

t h e

establishment

by

national banks

of

branches

i n

places

no t having na ti on al banks alre ady es ta bl is he d. Comptroller Charles G. Dawes

who succeeded him recommended branch banking i n places with a population less than

2000.

M r.

Dawes

in a n

address

t o

Pennsylvania bankers

in 1903

spoke against

general domestic branch banking, b u t i n t h e course o f t h e address frankly a d -

mitted that

one of the

advantages

of

branch banking would

b e

lower interest rates

t o t h e farmers who grdw crops having a cash Value * Recent Comptroll ers have r e -

commended bra nch banking wi th in c i ty l i m i t s a s something absolutely necessary i n

most of our g rea t c i t i e s i n order t o save t h e National banks o f t h e ci t ies from

dest ruct ion

by

s t a t e bank com pet iti on. Branch banking

by

counties

was

recommended

by some of them, and was recommended also by the Federal Reserve Board i n I9 I8 . I n

i t s report f o r 1 2 2 t h e Board urged that National banks b e given t h e same privileges

with regard

t o

branches that state banks have been given

i n t h e

branch banking

s t a t e s .

The last recommendation i s t h e only one that will fully meet t h e s i t u a t i o n , so

f a r a s t h e competit ion of state banks i s concerned. I f this cannot be car r i ed t h e

Committee might authorize branch banking

by

national banks

i n

ci t ies where

t h e

states limit branch banking t o c i t i e s , and in counties where states permit country

banks t o es ta bl is h branche s. Such an amendment would greatly strengthen t h e country

banks

i n

ag r i cu l tu r a l sec t ions ,

and

would enable

t h e

Federal reserve banks

t o

deal

with well managed in s ti t ut io ns , ins tea d of small banks which often hate no fa i r

chance

t o

survive

i n

times

of

s t r e s s .

The argument that branch banking i s monopolistic i s unsupported by any actual

evidence - t h e evidence on the other hand i s c l ea r ly t o t h e effect that branch bank-

in g

increases competi t ion.

I t i s

true that

t h e

number

of

chartered banks

in

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Canada,

and the

number

of

joint stock banks

in

England

and

Scotland, have greatly

d e-

creased, but except i n t h e largest cities there are more banks competing with each

other than before.

A

recent Parliamentary inv est iga tio n (19- 3) in to

the

question

o f

banking

i n i t s

relat ion

t o

agriculture

i n

England contains this statementt

Finally, from th e point of view of the agricultural community, i t

i s

important

to

realize that, notwithstanding

th e

absorption

of the

small country Banks, there

i s , i n

fact ,

f a r

keener competition

f o r

rural business than ever before; while,

i n th e

matter

of

security

t o

depositors, th e suralgamtion of the Banks h as also been of very gxeat

advantage.

The ol d

private Banks were always heavily involved

in the

fortunes

of a

restricted area

an d

this

was a

source

of

weakness

a t

times

of

loca l cr i s i s .

The

Joint Stock Banks spread their risks over

a

wider area

and a

greater range

of

industries,

and can

better carry

periods of depr ession. (Report of the Committee on Agricultural

Credit, p . 2 2 ) .

Similar findings were made

by a

Canadian committee, which investigated credit

conditions i n th e Canadian northwest a year or so ago . Furthermore Mr, Frank W,

Murphy

and Mr.

Castleman,

a

committee representing

our own

northwestern farmers,

t e s t i f i e d

a few

weeks

ago

that

one of the

advantages Canadian wheat growers

had

over

the

wheat growers

on our

side

of the

l ine

was

better treatment from their banks

and

lower interest rates.

Why

ignore th is dir ect testimony?

And why

ignore

th e

direct testimony

of the

Califomians?

Can any one

maintain that there

i s

le s s competit ion among banks

in

California today than there

was

before

th e

development

of the

branch banking systems

in

that state?

Can any one

deny that agricu ltur al' si tuat io ns

a s

serious

as

that

now

exist ing

in the

wheat growing st ate s

of the

Ninth Federal Reserve District have

been handled

i n

California practically without bank failures?

.

Isn' t

i t

rather un-American

t o

express fear

of

monoply

i n a

field where

the

unite

are so

overwhelmingly numerous?

In

union there

i s

strength

i s an

American

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shibboleth . Every week brings increased evidence

of the

lack

of

strength

of the

small unit banks

i n

agricultural sections

of our

country.

The

states chiefly

con-

cerned have tried guaranteeing deposits

and

every other remedy, except

the one

remedy

of

uniting resources

1

a

remedy which

has

been successful wherever tried*

In

conclusion

I

wish

to say

that

the

Federal Reserve Board

h as

directed

i t s

division

of

analysis

and

research

t o

make

a

complete study

and

survey

o f

branch

banking i n this country, and with some reference also t o conditions in other coun-

tr ie s . The Board h a s also recently adopted regulations dealing with branch bank-

i n g ,

copy

of

which

I

present

for the

record*

I

submit that these regulations will

take care

of the

matter adequately

and

make unnecessary

th e

amendments

to the Fed-

eral Reserve

Act

contained

in the

b i l l

•

April 17, 1924

Edmund Piatt•

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