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( COPY ) X-4359

"BRANCH BACKING BEFORE THE CIVJI, WAR"

Address to be Delivered by Edmund P i a t t , Vice Governor of the Federal Reserve Board, Before the National Bank Sect ion, New York State Bankers Associat ion at Ithaca, New York,

June 22, 1925.

Branch banking has sometimes been c a l l e d un-American, and i t i s of

course true that in every other commercial nat ion, including Canada and

Austral ia , branch banking i s the rule while in the United S ta te s i t i s the

exception. I t may be i n t e r e s t i n g to take a look into the h i s t o r y of the

early days of banking in the United States to see whether t h i s has always

been true. Apart from the two United States banks which were each in ex-

i s t ence for 20 years, and the second of which went out of ex i s tence a.s a

national i n s t i t u t i o n in I836, banking before the C iv i l War was carried on by

s ta te banks and by a few pr iva te banks. L i s t s of incorporated banks were

published from time to time, and one needs only to glance a t them to see

that in some sec t ions of the country, p a r t i c u l a r l y in the West and South -

sec t ions which have always prided themselves on their Americanism - branch

banking was very ranch in evidence, was in several the s t a t e s the ru le , rather

than the exception.

The Bankers' Magazine for February 1848 has a l i s t of "Banks of the

United States" from which we f i n d that in Ohio out of 48 banks, 29 were

branches of the Ohio State Bank. Indiana l i s t s 17 branches of the State

Bank of Indiana and no independent banks, Missouri had. one bank and 5 branches,

Kentucky 3 banks and 13 branches, Tennessee 3 banks and 17 branches,

Virginia 6 banks and 30 branches, North Carolina 4 banks and l 4 branches,

South Carolina 12 banks and 2 branches, Georgia 13 banks and 7 branches,

Delaware 5 banks and 3 branches and Alabama 2 banks and 4 branches.

I l l i n o i s , Iowa, Mis s i s s ipp i , Florida and Arkansas cajne under a spec ia l Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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heading a s "Sta tus and T e r r i t o r i e s w i t h o u t Banks", w h i l e Wiscons in had one

bank and Michigan f o u r . I t may t h e r e f o r e be s a i d that so f a r a s banking had

been d e v e l o p e d i n t h e West branch banking was the r u l e , and was g e n e r a l a l s o

i n the South. No branches were l i s t e d i n the e a s t e r n s t a t e s , e x c e p t i n g two

i n the S t a t e of Now York - The Bank cf U t i c a i s l i s t e d a s h a v i n g a branch ,*

a t Canandaigua, and the Ontario Bank c f Canandaigue. had a branch i n U t i c a .

There were two branches in Maryland - b r a n c h e s of an A n n a p o l i s bank , -and ap-

p e a r to have been two i n Now J e r s e y , though they arc n o t l i s t e d as b r a n c h e s .

The l i s t of banks of the United s t a t e s in June I860, published in the

Bankers Magazine of that year makes a s imi lar shewing, though I l l i n o i s ap-

pears with 75 hanks (only cue of which was i n Chicago), Iowa with 13, a l l cf

which were branches of the State Bank of Iowa, and not only Miss i s s ipp i , and

Florida, but Kansas, Nebraska, and Minnesota come on the scene with a few banks.

Missouri at t h i s time had 42 banks, cf which 33 were c l a s s e d as branches'.

New York's two branch banks shewn in the lS4g l i s t had disappeared in

I860, and in f a c t the Legis lature cf New York had cn April 12, 1S4S, passed

an amendment to the Free Banking Act which has been genera l ly regarded as

prohibi t ing branch banking. Pennsylvania had passed a s imi lar amendment in

1850 and l e g i s l a t i o n against, branch banking had been passed at about the same

time in Massachusetts and in Connecticut.

One t h i n g t h a t h a s p u z z l e d me c o n s i d e r a b l y i s the q u e s t i o n - Why d i d

t h e s e e a s t e r n s t a t e s p r o h i b i t branch banking? What m o t i v e s prompted the

amendments? Dr. Davis B. Duwey i n h i s " S t a t e Banking B e f o r e the C i v i l War"

( p . 143) makes the s ta tement t h a t the New Ycrk amendment of .1848 was "due t o

a f e a r tha t banks i n l a r g e c i t i e s might monopol ize the p r o f i t s of n o t e i s s u e

by o r g a n i z i n g branches in smal l i n a c c e s s i b l e towns and t h u s throw o b s t a c l e s

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i n the way of easy redemption of b i l l s " , 'but the evidence he g ives in a

f o o t - n o t e supports a very d i f f e r e n t view - tha t country banks, sometimes

organized in small i n a c c e s s i b l e towns, i s s u e d the ir n o t e s and transacted such

other b u s i n e s s as came In t h e i r way through branches or agents i n the im-

portant c i t i e s , evading redemption cf the i r n o t e s in the c i t i e s by r e f e r r i n g

holders to the remote towns where the s c - c a l l e d p r i n c i p a l o f f i c e s were l o c a t e d . .. New York

The word "branch" does n o t appear in the/amendment, which provides tha t

"a l l banking a s s o c i a t i o n s or indiv idual bankers, organized under the pro-

v i s i o n s of the act p a s s e d Apri l 16, 18)8 * * * s h a l l be banks of discount <oid.

depos i t as w e l l as of c i r c u l a t i o n and the usua l bus iness of banking of s a i d

a s s o c i a t i o n s or ind iv idual banker s h a l l be transacted a t the p l a c e where such

banking a s s o c i a t i o n , or i n d i v i d u a l banker s h a l l be l o c a t e d . " Millard Fi l lmore

was a t that time Comptroller of the State cf New Ycrk and i n a c i r c u l a r

dated May 2 , 1848, announcing that the amendment was now the law and would

be enforced, says :

"A p r a c t i c e had grown up under the general banking law, of e s t a b l i s h -ing banks i n obscure p l a c e s , in remote p a r t s of t h e s t a t e where l i t t l e or no b u s i n e s s was done, wi th a view of obtaining a c i r c u l a t i o n merely, and doing no other b u s i n e s s . This c i r c u l a t i o n was then redeemed i n New york or Albany by the agents of the bank, at one-hal f of one per cent* d i s c o u n t , and again put i n c i r c u l a t i o n without being returned t o the bank, thereby enabl ing the bank to redeem i t s own paper a t a d i scount , and then again put in c i r c u l a t i o n i n t h e same p l a c e where i t was redeemed. The objec t of the present law appears to be t o b r e a k u p that p r a c t i c e , and to ensure obedience to i t s requirements, the l e g i s l a t u r e have enacted that the p r e s i d e n t and cash ier s h a l l in every report made t o t h i s o f f i c e , s t a t e that t h e i r bus ines s has been transacted a t the p l a c e required by that a c t , and that such report s h a l l be ver i f ied , by t h e i r oaths". Bankers' Magazine, June 1848, Vol . 2 , page 744.

This e x p l a i n s the amendment, and shows that i t was d i r e c t e d not aga ins t

genuine branch banking, but aga ins t wi ld c a t c i r c u l a t i o n banking. The amend-

ment required that every bank organized under the general banking law mist be

"a bank of d i scount and Aenoalt as w e l l as of c i r c u l a t i o n " , and that i t s usua l

bus iness - i t s loans as we l l a s i t s note i s s u e s - mast be made in the p l a c e Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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^ • c l f l e d in JLts c e r t i f i c a t e .

I have no t been able to f i n d the s l i g h t e s t evidence that the large well-' v.< /

es tabl i shed banks in New York Ci^y had ever attenpted to "organize branches in

•mai4.-inacc.essibls towns", as Dr. Dewey impl i e s , a id I th ink i t i s reasonably

c l ear that t i e c i t y banks not only did not oppose the amendment, but were in

favor of i t . Certainly there was no a g i t a t i o n of the subject of branch banking

before the passage of the amendment, such as would surely have been the case i f i t

had been passed a t the instance of the country banks, or through fear of the

monopolization of note i s s u e s by c i t y banks. I t i s d i f f i c u l t to f i n d any r e f e r -

ence to the amendment iii any of the p u b l i c a t i o n s of the day, N bank

I t should furthermore be noted that t h i s so -ca l l ed anti-branch/amendment

applied, only t o the "free banks" and not t o the Safety Fund Banks, of which there

were about 80 in operation a t that time, including several large c i t y banks. An

amendment to the Safety Fund Act , passed on the same date as the s o - c a l l e d ant i -

branch amendment to the Free Banking Act, express ly mentions branches. "But i n

a l l cases where a bank has a branch located a t another p lace" . The f a c t that

the r ight of Safe ty Fund Banks to ojoerate branches was confirmed at the same

time that f r e e banks were prohibi ted from transact ing t h e i r usual bus iness in any

other p lace than that named i n their c e r t i f i c a t e i s d i rec t evidence that there

was no oppos i t ion of consequence to branch banking, and no f e a r of banking

monopoly through branches.

Branch banking never the le s s scarcely e x i s t e d in New York in 1848, and i t

does not appear from the l i s t s published that anjr of the Safe ty Fund banks had

branches at that t ime. The l i s t s are doubt less not conplete and are not con-

c l u s i v e evidence as to the ex i s tence of"branches. There had been some branch

banking i n New York State a t an ear l i er date , mostly by country banks* Not much

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i n f o r m a t i o n i s o b t a i n a b l e about i t f r o m b a n k i n g h i s t o r i e s , b u t I know t h a t the

Middle D i s t r i c t Bank, one of t'b.;'. e a r l y b a n k s i n P o a g h k e e p f i e , had a, branch i n

Kings ton , and through l o c a l h i s t c r i e s seme r e f e r e n c e s can be o b t a i n e d to branches

Of o t h e r c o u n t r y banks . Thase were a p p a r e n t l y found u n p r o f i t a b l e and were n e a r l y

a l l g i v e n up l o n g b e f o r e I b U s .

Only .one bank i n IJow York Ci-oy ever had a branch o u t s i d e the c i t y , so f a r as

I can f i n d o u t , and t h a t was t h e Bank of the Manha,ttan Company, vvhich i n 1811 had

a branch i n Pcughkeeps i e and oiie i n U t i c a . t h e r e appears to be no r e c o r d a s t o

j u s t when t h e s e branches were g i v e n u p , b u t i t was almost c e r t a i n l y l o n g b e f o r e

lSUg and b e f o r e t h e Manhattan Bank became a. S a f e t y Fund Bank.

Banking e x c e p t i n the l a r g e s t c i t i e s was i n the e a r l y days mos t ly n o t e i s s u e

banking, and t h e e f f o r t s o f t h e l e g i s l a t u r e s were d i r e c t e d towards the enactment

of laws t o s e c u r e the redemption of n o t e s . Every i m a g i n a b l e e x p e d i e n t was t r i e d

somewhere i n t h e U n i t e d S t a t e s . The S t a t e o f New York, out o f the t u r m o i l , p r o -

duced two laws which were d e s t i n e d t o be w i d e l y c o p i e d - one of them i n the

N a t i o n a l Banking A c t . These were of course t h e S a f e t y Fund Act of 1829 and the

s o - c a l l e d Free Banking Act o f I83S. C e r t a i n of the Western and Southern S t a t e s

deve loped e q u a l l y sound and perhaps rather' b e t t e r systems through branch banking.

The e f f o r t was t o produce s y s t e m s which would make t h e n o t e i s s u e s sound, and

the n o t e s of t h e Sank of I n d i a n a , of which Hugh MsCulloch was t h e P r e s i d e n t ,

were as sound a s t h o s e o f any of the b i g banks of New York C i t y . The same was

t r u e of t h e Bank of Ohio.

C e r t a i n e l e m e n t s of sound banking seem t o have been r e c o g n i z e d i n such

sys tems which were l o s t s i g h t o f when a l l t h e S t a t e banks w e r e r e o r g a n i z e d a s

N a t i o n a l banks w i t h n o t e s s e c u r e d by U n i t e d S t a t e s bonds . The f e e l i n g was t h a t

a l l e s s e n t i a l banking problems had been s o l v e d when a u n i f o r m and sound s y s t e m of

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458 X-4359

bank n o t e s had been s e c u r e d . The n o t e h o l d e r was p r o t e c t e d b y s p e c i a l l y s e g r e -

g a t e d a s s e t s . D e p o s i t o r s were f o r the t ime f o r g o t t e n , and had l e s s p r o t e c t i o n

than b e f o r e .

The Bank of I n d i a n a and s i m i l a r i n s t i t u t i o n s o b t a i n e d s e c u r i t y f o r t h e i r

n o t e s through good management and through a wide spread of r i s k s so t h a t they

c o u l d n o t be v i t a l l y a f f e c t e d by d i s a s t e r i n any one community. These a r e a s

e s s e n t i a l f o r the s e c u r i t y of d e p o s i t o r s today a s they were f o r n o t e h o l d e r s

i n the o l d d a y s . Banks t o be s a f e mast b e l a r g e enough t o a f f o r d good manage-

ment and mast ha.ve o p p o r t u n i t y t o loan t h e i r funds over a t e r r i t o r y wide

enough to i n c l u d e p e r s o n s engaged i n a v a r i e t y of i n d u s t r i e s .

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