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The Economics and Politics of Unit Banking: Evidence from the McFadden Banking Bill of 1927

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Book cover Public Choice Analyses of American Economic History

Part of the book series: Studies in Public Choice ((SIPC,volume 37))

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Abstract

This chapter recounts the debate over branch banking in the 1920s. It demonstrates that there was intense and overwhelming opposition to branching in any form. This hostility was both materially and ideologically motivated. Tracing the debate of the McFadden Banking bill, this chapter demonstrates that its passage was due to special interests—in particular the American Bankers’ Association—who ultimately realized that while the bill would allow limited branching of national banks, it would also end branching among the state banks and therefore ensure the continuation of a unit-banking system. While most economists agree that branch banking would have prevented the type of widespread bank failures the United States experienced during the Great Depression, this chapter shows that it was politically impossible to enact such a system in the 1920s.

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Notes

  1. 1.

    A branch system is a banking system in which a single bank in one locality opens banks other than the parent bank. The second bank is still under the management of the parent bank, but it is located in a separate place. Branch banking allows capital to reach small communities that might not have the capital to open a unit bank. A unitary banking system is a system where each bank is a single operating bank, meaning that the bank has no branches or offices in separate localities from itself. Many unit banks are small in scale and develop in small towns and rural communities to meet the credit needs of those communities. They are locally run and do not need the permission of a parent bank to make loans.

  2. 2.

    I would like to thank Dave Welky and Joe Horton for serving as my advisers during my undergraduate studies. This article was part of my honors thesis, which they advised. I also owe Spencer Ayers a debt of gratitude for accompanying me on what was my first archival research trip and for taking excellent photographs of the materials I needed to make this paper a success.

  3. 3.

    For a comprehensive analysis of banking in the Early Republic see Hammond (1991).

  4. 4.

    RG 82, Records of the Federal Reserve System, Board of Governors, Central Subjects File, 1913–1954, Box 151. File: 111.1-T-5 Branch, Chain & Group Banking Legislation H.R. 6855, 68th Congress located at National Archive II. Specific information found in a report titled “Recommendations, Regulations and Administrative Policies re Branch, Chain and Group Banking.” Issued by Walter Wyatt on March 1, 1930 and addressed to the Federal Reserve Board.

  5. 5.

    RG 82, Records of the Federal Reserve System, Board of Governors, Central Subjects File, 1913–1954, Box 151. File: 111.1-T-5 Branch, Chain & Group Banking Legislation H.R. 6855, 68th Congress located at National Archive II. Specific information found in a report titled “Recommendations, Regulations and Administrative Policies re Branch, Chain and Group Banking.” Issued by Walter Wyatt on March 1, 1930 and addressed to the Federal Reserve Board.

  6. 6.

    Biographic Directory of the United States Congress, Louis T. McFadden.

  7. 7.

    U.S. Congressional Record, vol. 67, pt. 1–3, 69th Congress, 1925.

  8. 8.

    U.S. Congressional Record, vol. 67, pt. 1–3, 69th Congress, 2827–2829.

  9. 9.

    U.S. Congressional Record, vol. 67, pt. 1–3, 1925–1926, 69th Congress, 2831.

  10. 10.

    U.S. Congressional Record, vol. 67, pt. 1–3, 1925, 69th Congress, 2832.

  11. 11.

    U.S. Congressional Record, vol. 67, pt. 1–3, 1925–1926, 69th Congress, 2832–2833.

  12. 12.

    In 1922, the First National Bank of St. Louis, Missouri, opened a branch several blocks from its parent bank. The bank did not consult the Comptroller of the Currency. The state of Missouri, which did not allow branch banking commenced with a suit against the bank. The Missouri Supreme Court ruled in favor of the state and declared that the prohibition on branching, within Missouri, applied to both state and national banks. First National appealed and the case proceeded to the United States Supreme Court. The Supreme Court upheld the decision of the lower court. The Attorney’s General for Illinois, Connecticut, North Dakota, Washington, Wisconsin, Iowa, Arkansas, Minnesota, Indiana, and Kansas took the position with Missouri (all the before mentioned states either prohibited branching or did not have a law that explicitly stated legality). What gave Rep. Nelson the license to say what he did on the floor was that three New York Banks: The National City, Chemical National, and National Bank of Commerce, along with the Solicitor General of the United States, all challenged the courts authority to pass judgments on national banks (these three banks were part of the so called “money trust” so feared and disdained by progressive politicians throughout the early Twentieth Century). Chapman and Westerfield describe the Courts decision as such: “The decision of the Supreme Court (January 28, 1924) upheld the power of a state to enforce state legislation prohibiting national banks from establishing branches, unless the authority of national banks to establish branches is expressly conferred by Congress. It also decided that the state was not trying to interpret and enforce a Federal Statute, but merely to vindicate and enforce its own law, which prohibited branch banking; and since this law did not frustrate the purpose for which the bank was created or interfere with the discharge of its duties to the government or impair its efficiency as a federal agency, the state statute as applied to national banks was valid, obligatory, and enforceable” (Chapman and Westerfield 1942, pp. 98–99).

  13. 13.

    Crissinger served as Comptroller of the Currency from 1921 to 1923. While he was in power, Crissinger encouraged the spread of branch banking and as such drew the ire of the unit banking lobby that had become almost invincible in Congress. He also was the Governor of the Federal Reserve Board from 1923 until 1927 (Katz 1992, pp. 60–65).

  14. 14.

    U. S. Congressional Record, vol. 67, pt. 1–3, 1925–26, 69th Congress, 2840–41.

  15. 15.

    U. S. Congressional Record, vol. 67, pt. 1–3, 1925–26, 69th Congress, 2842, 2845.

  16. 16.

    U. S. Congressional Record, vol. 67, pt. 1–3, 1925–26, 69th Congress, 2847.

  17. 17.

    U. S. Congressional Record, vol. 67, pt. 1–3, 1925–26, 69th Congress, 2850.

  18. 18.

    U. S. Congressional Record, vol. 67, pt. 1–3, 1925–26, 69th Congress, 3302.

  19. 19.

    U. S. Congressional Record, vol. 67, pt. 1–3, 1925–26, 69th Congress, 3302–03.

  20. 20.

    U. S. Congressional Record, vol. 67, pt. 1–3, 1925–26, 69th Congress, 3341, 6215, 8290–8293, 8294–8297.

  21. 21.

    U. S. Congressional Record, vol. 67, pt. 6–8, 1925–26, 69th Congress, 8298.

  22. 22.

    U. S. Congressional Record, vol. 67, pt. 6–8, 1925–26, 69th Congress, 8298.

  23. 23.

    Letter dated April 14, 1926 from the President of the Mercantile Trust Company to Senator Glass. Small Special Collection Library, Papers of Carter Glass, Box 248.

  24. 24.

    Letter dated April 20, 1926 from Senator Glass to George J. Seay. Small Special Collection Library, Papers of Carter Glass, Box 7.

  25. 25.

    Biographic Directory of the United States Congress, Carter Glass.

  26. 26.

    U.S. Congressional Record, vol. 67, pt. 6–8, 1925–26, 69th Congress, 8352.

  27. 27.

    U.S. Congressional Record, vol. 67, pt. 6–8, 1925–26, 69th Congress, 9295,9296.

  28. 28.

    U.S. Congressional Record, vol. 67, pt. 6–8, 1925–26, 69th Congress, 9296, 9297.

  29. 29.

    U.S. Congressional Record, vol. 67, pt. 6–8, 1925–26, 69th Congress, 9297.

  30. 30.

    U.S. Congressional Record, vol. 67, pt. 6–8, 1925–26, 69th Congress, 9297.

  31. 31.

    U.S. Congressional Record, vol. 67, pt. 6–8, 1925–26, 69th Congress, 9298.

  32. 32.

    U.S. Congressional Record, vol. 67, pt. 6–8, 1925–26, 69th Congress, 9299.

  33. 33.

    U.S. Congressional Record, vol. 67, pt. 6–8, 1925–26, 69th Congress, 9300.

  34. 34.

    U.S. Congressional Record, vol. 67, pt. 6–8, 1925–26, 69th Congress, 9302. It should be noted that in reference to the most recent financial meltdown in 2008, Mr. Lenroot would seem to have a valid point. While the financial system was considerably stronger in 2008 than in 1929, due in large part to the legalization of branching in 1994, the United States suffered a financial meltdown. Both catastrophes have a common feature, the government—both in 1929 and in 2008—passed legislation that significantly manipulated the markets. In the 1920s there was an unnatural expansion of credit that allowed investors to make poor investments that eventually caused the collapse of the banking system. In the late nineties and early two-thousands, Federal legislation encouraged bad loans by banks to people who did not have the ability to pay off their mortgages. Furthermore, throughout the nineties and early twenty-first century interest rates were kept at arbitrarily low rates causing once again unnatural expansion—especially in housing - that led to the destruction of the financial system.

  35. 35.

    U.S. Congressional Record, vol. 67, pt. 6–8, 1925–26, 69th Congress, 9302.

  36. 36.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 9338.

  37. 37.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 9348.

  38. 38.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 10020, 10021.

  39. 39.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 10021.

  40. 40.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 10024, 10025.

  41. 41.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 10026, 10028.

  42. 42.

    Letter dated May 26, 1926 from Thomas McAdams to Carter Glass. Small Special Collection Library, Papers of Carter Glass, Box 46.

  43. 43.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 11316.

  44. 44.

    From my research, I see little reason to believe that anyone in Washington was actively working towards the establishment of branch banking—at least not in the open. There existed no branch banking lobby. There was, however, a unit banking lobby that was very active and engaged in behavior that Congressman Wingo attributed to the branch banking forces.

  45. 45.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 11762.

  46. 46.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 11763, 11764.

  47. 47.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 11767, 11768.

  48. 48.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 11769.

  49. 49.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 11770–11773.

  50. 50.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 11917.

  51. 51.

    U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 11923, 11926–11927.

  52. 52.

    Congressman Wingo does not call out Senator Glass by name in the statement but earlier in one of his comments he mentions that Glass did not allow the Senate to vote on the Hull amendments. Then Wingo states: “I feel that the blame for the killing of the McFadden bill, the blame for having no restrictions upon branch banking, the blame for failing to renew the Charter of the Federal Reserve banks, can be placed squarely at the door of one man who even refused to confer upon the only single point which was left in disagreement.” Therefore, I deducted that Glass must be the conferee that Wingo is alluding to in the above statement. U.S. Congressional Record, vol. 67, pt. 9–11, 1925–26, 69th Congress, 13089, 13091.

  53. 53.

    Letter dated July 3, 1926 from Carter Glass on behalf of the Senate Conferees to Congressman McFadden. Small Special Collection Library, Papers of Carter Glass, Box 248.

  54. 54.

    Telegram dated October 6, 1926 from John S. Drum to Carter Glass. Small Special Collection Library, Papers of Carter Glass, Box 248.

  55. 55.

    Memorandum, “Facts verses Misstatements Re The McFadden Banking Bill,” prepared by Edmund S. Wolfe,Chairman, Committee on Federal Legislation, and approved by the President of the American Bankers’ Association, Melvin A. Traylor. Small Special Collection Library, Papers of Carter Glass, Box 240.

  56. 56.

    Memorandum, “Facts verses Misstatements Re The McFadden Banking Bill,” prepared by Edmund S. Wolfe,Chairman, Committee on Federal Legislation, and approved by the President of the American Bankers’ Association, Melvin A. Traylor. Small Special Collection Library, Papers of Carter Glass, Box 240.

  57. 57.

    Memorandum, “Facts verses Misstatements Re The McFadden Banking Bill,”prepared by Edmund S. Wolfe,Chairman, Committee on Federal Legislation, and approved by the President of the American Bankers’ Association, Melvin A. Traylor. Small Special Collection Library, Papers of Carter Glass, Box 240.

  58. 58.

    Memorandum, “Facts verses Misstatements Re The McFadden Banking Bill,” prepared by Edmund S. Wolfe,Chairman, Committee on Federal Legislation, and approved by the President of the American Bankers Association, Melvin A. Traylor. Small Special Collection Library, Papers of Carter Glass, Box 240.

  59. 59.

    Letter dated October 18, 1926 from Carter Glass to Mr. Paul M. Warburg, Box 8. This letter is misdated as October 18, 1936. This date is impossible due to the fact that Mr. Warburg died in 1932; letter from Thomas B. Paton, the General Council for the ABA to Carter Glass dated December 2, 1926. Small Special Collection Library, Papers of Carter Glass, Box 248.

  60. 60.

    Letter dated January 14, 1927 from Congressman McFadden to Carter Glass and a letter dated January 20, 1927 from Carter Glass to McFadden. Small Special Collection Library, Papers of Carter Glass, Box 240.

  61. 61.

    U. S. Congressional Record, vol. 68, pt. 1–3, 69th Congress, 2169.

  62. 62.

    Chapman and Westerfield (1942, p. 107); “Bank Bill,” National Affairs, February 28, 1927.

  63. 63.

    Comments by Carter Glass concerning the passage of the McFadden bill dated February 16, 1927. Small Special Collection Library, Papers of Carter Glass, Box 240; Letter from Charles S. Hamlin to Carter Glass dated February 17, 1927. Small Special Collection Library, Papers of Carter Glass, Box 64.

  64. 64.

    Robertson (1968, p. 97), Meltzer (2003, p. 217), Chapman and Westerfield (1942, p. 108); “National Banking System Rapidly Disintegrating,” New York Times, March 7, 1922. Small Special Collection Library, Papers of Carter Glass.

  65. 65.

    Letter from Carter Glass to Mr. Walter Edward Harris of the Rotary Club of Petersburg, Virginia, dated June 28, 1927. Small Special Collection Library, Carter Glass Papers, Box 4; Biographical Dictionary of the United States Congress, Carter Glass.

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  1. West Virginia University, Morgantown, WV, USA

    Marcus M. Witcher

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Correspondence to Marcus M. Witcher .

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  1. Department of Economics, West Virginia University, Morgantown, WV, USA

    Joshua Hall

  2. West Virginia University, Morgantown, WV, USA

    Marcus Witcher

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Witcher, M.M. (2018). The Economics and Politics of Unit Banking: Evidence from the McFadden Banking Bill of 1927. In: Hall, J., Witcher, M. (eds) Public Choice Analyses of American Economic History. Studies in Public Choice, vol 37. Springer, Cham. https://doi.org/10.1007/978-3-319-95819-4_7

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