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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•