The Federal Reserve Bank of Richmond 9780231893794

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The FEDERAL RESERVE BANK of RICHMOND

The

FEDERAL RESERVE BANK of RICHMOND By CHARLES

GUERNSEY

NEW

COIT

YORK

C O L U M B I A U N I V E R S I T Y PRESS 1941

COPYRIGHT COLUMBIA

UNIVERSITY

1941 PRESS, N E W

YORK

F o r e i g n a g e n t s : OXFORD UNIVERSITY PRESS, H u m p h r e y M i l f o r d ,

Amen House, London, E . C . 4, England, AND B. I. Building, Nicol Road, Bombay, India; MARUZEN COMPANY, LTD., 6 Nihonbashi, Tori-Nichome, Tokyo, J a p a n M A N U F A C T U R E D IN T H E U N I T E D STATES O F A M E R I C A

To R. H. C.

PREFACE

T

H I S V O L U M E is one of a group of books appraising the operations of the twelve regional Federal Reserve banks, undertaken under the direction of the Department of Banking at Columbia University. T o determine the success of the Federal Reserve Bank of Richmond as a regional central bank is the purpose of this study. Toward this end certain questions have been considered, of which the following are the most important: T o what extent has the Federal Reserve Bank of Richmond exercised independent and effective control over credit in the Fifth Federal Reserve District? Has the Bank adequately fulfilled the short-term credit demands of the District? T o what extent has it been necessary for other regional banks to assist the Federal Reserve Bank of Richmond to meet credit emergencies? Has the Federal Reserve Bank of Richmond succeeded in its efforts to establish universal par-clearance of checks in the District? Other questions pertain to the Bank's cost of operation, its functions of issuing currency and acting as fiscal agent for the United States Treasurer. Since the credit problems are closely allied to the economic and banking conditions of the area, the first two chapters are devoted to a survey of economic resources and banking institutions for stated years from 1890 to 1937. No extended digression into the theory of central banking as a whole has been undertaken. Although the Federal Reserve Bank of Richmond has shared many of the problems which have confronted the entire banking system in recent years, the present study is concerned solely with problems which were peculiar to the Federal Reserve Bank of Richmond. This study was greatly facilitated by the staff of the School of Business Library at Columbia University. Also, generous cooperation was offered by the Division of Bank Operations of the Federal Reserve Board, Washington, D. C. T o President Hugh Leach, of the Federal Reserve Bank of Richmond, I wish to express my sincere gratitude for the valuable criticism of the manuscript from time to time by various members of his staff.

viii

PREFACE

T h e principal sources of material used in this study were: the annual reports of the Federal Reserve Bank of Richmond; the annual and monthly reports of the Federal Reserve Board; the annual reports of the Comptroller of the Currency and Congressional hearings. In addition to these reports, a number of personal interviews were obtained from the officers of the Federal Reserve Bank of Richmond as well as from commercial bankers and university professors in the Fifth Federal Reserve District. A visit was made also to the branches of the Federal Reserve Bank of Richmond at Baltimore, Maryland, and at Charlotte, North Carolina. T h i s manuscript, in the various stages of its preparation, was read in whole or in part by Professors James W . Angell, Benjamin H. Beckhart, John M . Chapman, R a l p h W . Robey, and Raymond J. Saulnier, all of Columbia University, and Messrs. P. B. Nortman and Leigh Quackenbush. Professor Benjamin H . Beckhart was especially generous with his time and advice. I a m particularly indebted to Professor R a y m o n d J. Saulnier, for his guidance and patient encouragement. I further wish to express my gratitude to Miss Alice Sarno for her able assistance in preparing the manuscript. T h e conclusions in this thesis are, of course, wholly those of the author. CHARLES GUERNSEY

New York August 15, igqi

COIT

C O N T E N T S I. II. III.

IV. V. VI. VII. VIII.

ECONOMIC BACKGROUND B A N K I N G BACKGROUND

I 19

ESTABLISHMENT OF THE F E D E R A L R E S E R V E B A N K OF RICHMOND

35

O P E R A T I O N S OF F E D E R A L R E S E R V E B A N K OF RICHMOND

45

M E M B E R AND NONMEMBER B A N K O P E R A T I O N S

66

B A N K SUSPENSIONS AND P U B L I C SUPERVISION

79

FINANCIAL STATEMENTS

95

S U M M A R Y AND CONCLUSIONS

112

APPENDICES

A.

Natural Resources

117

B.

Tobacco Production, Prices, and Cash Income by States in Fifth Federal Reserve District for Stated Years, 1909-1937

119

Cotton Production, Prices, and Cash Income by States in Fifth Federal Reserve District for Stated Years, 1909-193 7

120

Manufacturing Statistics in the Combined Fifth Federal Reserve District States, for Stated Years, 1889-1937

121

Directors of the Federal Reserve Bank of Richmond from October 5, 1914, to December 3 1 , 1940

122

C.

D.

E.

CONTENTS

Operating Practices—Baltimore and Charlotte Branches Annual Dollar Amounts of Checks Cleared in Baltimore and Richmond Clearing Houses, BIBLIOGRAPHY, 1 2 9 INDEX,135

CHARTS I. II.

III.

IV.

V.

VI.

VII.

VIII.

IX.

X.

Fifth Federal Reserve District

2

Annual Production of Cotton and Tobacco in the Fifth Federal Reserve District for Stated Years, 1889-1937

5

Cotton, Tobacco, and Fertilizer Prices and Personal and Collateral Loans Outstanding to Farmers by Commercial Banks in Four Combined Fifth Federal Reserve District States, 1 9 1 3 - 1 9 3 7

8

Seasonal Variation in Cotton and Tobacco Receipts and Discounts for Non-reporting Member Banks in the Fifth Federal Reserve District

14

Number and Total Resources of All Banks in the Fifth Federal Reserve District, as of June 30, 18901937

21

Per Capita Deposits in the United States, Combined Fifth Federal Reserve District States, and Carolinas, as of December 31 for Stated Years, 1890-1936

24

Suspensions per 100 Active Member Banks in the Fifth Federal Reserve District States and the United States for 1921-1936, 1921-1929, and 1930-1933

81

Number, Loans, and Investments and Deposits of Member Banks Suspended in the Combined Fifth Federal Reserve States, 1921-1936

86

Total and Net Earnings, Dividends Paid and Discount Rates by the Federal Reserve Bank of Richmond, 1 9 1 7 - 1 9 4 0

108

Selected Balance Sheet Items of the Federal Reserve Bank of Richmond as of December 3 1 , 1917-1940

110

TABLES 1.

2.

3.

4.

5.

6.

7. 8.

9.

Annual Production and Average Prices of Cotton and Tobacco in Fifth Federal Reserve District, for Stated Years, 1889-1937

4

Cotton and Tobacco Prices Received by Farmers in the United States and Fertilizer Prices Paid by Farmers in South Atlantic States, 1 9 1 3 - 1 9 3 7

6

Persona] and Collateral Loans Outstanding to Farmers by Commercial Banks in Four Combined States of Fifth Federal Reserve District, 1914-1937

7

Seasonal Variation in Cotton and Tobacco Receipts and Discounts for Non-reporting Member Banks in the Fifth Federal Reserve District

13

Value of Selected Manufactured Goods Produced in the Combined Fifth Federal Reserve District States During Years 1919, 1929, 1933, 1935, and 1937

16

Number and Resources of All Banks in the Fifth Federal Reserve District and in the United States, as of June 30, 1890-1937

20

Population per Active Bank in Fifth Federal Reserve District States, as of December 3 1 , 1 9 1 0 - 1 9 3 7

22

Per Capita Deposits in the United States, Combined Fifth Federal Reserve District States, and Carolinas, as of December 31 for Stated Years, 1890-1937

23

Outstanding Loans and Discounts of Production Credit Associations and District Banks for Cooperatives by States in the Fifth Federal Reserve District, March 31,

10.

1

937

Annual Rental and Benefit Payments by Agricultural Adjustment Administration, 1933-1936

25 26

xiv

TABLES

11.

First Choice Vote for Reserve Bank City in Fifth Federal Reserve District, by States

37

National Bank Statistics for States of Virginia and Maryland as of March 4, 1914

39

13.

Certificates of Indebtedness Sold, 1 9 1 7 - 1 9 1 9

49

14.

Liberty Loan Bonds Sold During 1 9 1 7 - 1 9 1 9

50

15.

Ratio of Liabilities to Total Reserves of Discounting Member Banks in the Fifth Federal Reserve District, as of December 3 1 , 1920-1923

51

Annual Dollar Amount of Bills Discounted, Federal Reserve Bank of Richmond, 1 9 1 4 - 1 9 4 0

56

Note Circulation of the Federal Reserve Bank of Richmond as of December 3 1 , 1 9 1 5 - 1 9 4 0

61

Number and Amount of Checks Handled by the Federal Reserve Bank of Richmond, 1 9 1 4 - 1 9 4 0

63

Changes in Membership in the Federal Reserve Bank of Richmond, 1 9 1 4 - 1 9 4 0

67

Number, Capital, Deposits, and Assets of Member and Nonmember Banks in the Fifth Federal Reserve District, December 3 1 , 1 9 3 9

71

Exchange and Collection Charges as Percentages of Total Earnings for North Carolina Banks, 1931 - 1 9 3 7

74

Membership in Par Collection System; Number of Banks on Par List and Not on Par List, December 3 1 , 1939

75

Suspensions per 100 Active Member and Nonmember Banks in Fifth Federal Reserve District States and Member Banks in the United States for 1 9 2 1 - 1 9 3 6 , 1 9 2 1 - 1 9 2 9 , and 1 9 3 0 - 1 9 3 3

80

12.

16. 17. 18. 19. 20.

21. 22. 23.

24.

Number and Deposits of Suspended Member Banks in the Combined Fifth Federal Reserve District States, 1921-I936

8

3

TABLES

xv

Number, Loans and Investments of Member Banks Suspended in Combined Fifth Federal Reserve District States, 1 9 2 1 - 1 9 3 6

85

Number of Suspensions per Hundred Active Banks by States in the Fifth Federal Reserve District and by Size of Town or City as of J u n e 30, 1920—for Period 1921 '93i

87

27.

Member Bank Reserve Requirements

91

28.

Condensed Comparative Earning Statement Federal Reserve Bank of Richmond, 1 9 1 4 - 1 9 4 0

25.

26.

of the 96

CHAPTER ECONOMIC

1

BACKGROUND

T

HIS C H A P T E R surveys the economic factors of agriculture and industry which relate to commercial bank problems of the Fifth Federal Reserve District. Farming is the chief occupation and provides an important source of income. Not only is a large part of the population dependent upon the cash income from crops but so is the success of most of the commercial banks. This relationship is especially marked in North Carolina and in South Carolina, where cotton and tobacco are extensively grown. The concentration of farmers on the growing of one cash crop creates a special problem. This problem becomes serious during periods in which the cash income from either cotton or tobacco is severely decreased, because the solvency of the borrowers and that of the lending banks are endangered. Such a condition is further aggravated by the fact that the cost of production of each of these crops is relatively constant as compared to the annual fluctuations of cash income received. LOCATION A N D RESOURCES

The Fifth Federal Reserve District lies about midway along the Atlantic seaboard, bounded on the north by Pennsylvania and Delaware, on the west by Ohio, Kentucky, and Tennessee, and on the south by Georgia. It includes the District of Columbia, 1 Maryland, Virginia, West Virginia (except six counties),2 North Carolina, and South Carolina (see Chart I, page 2.) The territory is endowed with five natural resources: tillable farm lands, bituminous coal reserves, timber, hydroelectric power, and harbors and navigable rivers. Of these varied resources, tillable 1 For purposes of simplification the District of Columbia is considered a state. * Hancock, Brooke, Marshall, Ohio, Tyler, and Wetzel counties. Less than i o percent of the total banking resources and tangible wealth of the District is contained in these combined counties, and for the purposes of this study the entire state is included except when otherwise indicated.

CHART I F I F T H F E D E R A L R E S E R V E DISTRICT

SHADED

AREA

IN

WEST

VIRGINIA

IS

IN

THE

F O U R T H

DISTRICT

ECONOMIC

BACKGROUND

3

farm lands are of outstanding importance. Tobacco and cotton are the two cash crops around which agricultural and commercial banking activity is centered. Therefore, to understand the underlying credit problems of the Fifth Federal Reserve District, one should examine changes in the factors influencing the cash income from these crops. T h e other four resources, are not significant to this study and consequently have been described only in Appendix A . LONG-TERM CHANGES IN COTTON AND T O B A C C O PRODUCTION AND PRICES

T o provide a general background for the study of commercial banking problems in this District, a brief statistical analysis of longterm changes in cotton and tobacco production has been included. Tobacco production had a splendid record. It showed an irregular but sharply increasing trend from one hundred million pounds in 1889 to over eight hundred million pounds in 1937. T h e rate of expansion was greatest between 1889 and 1899, 1924 and 1929, and 1934 and 1937, as indicated in Table 1, page 4 and Chart II, page 5. Cotton production, on the other hand, showed a comparatively less favorable record, especially after 1919. Between 1919 and 1924, and between 1929 and 1934 there was a downward trend in cotton production. However, a slight improvement occurred in the 19341937 period. From 1889 to 1937 the rate of change in cotton production, in general, was less than that for tobacco. T h e explanation for the varying trends is given later in this chapter. The long-term changes in the prices of cotton and of tobacco afford an interesting comparison between 1889 and 1937. In general the behavior of the prices of these two commodities appeared less stable than the quantity of the respective crops produced. This relationship was particularly true of cotton. T h e analysis of long-term cotton and tobacco prices is based upon Table 1, page 4, and may be summarized as follows: 1. Between 1889 and 1919 the relative increase in cotton and in tobacco prices was approximately the same. The period of greatest price increase was between 1909 and 1919, an increase which was chiefly due to the first World War demand. 2. Between 1919 and 1937 there was little similarity in the move-

OI Oí oo co

O f pí u u Pí J< a¡ w a w

E

O

e s to CI O CO co m o to r^. ó » CT) co « o CO 01 Cl

ft. ^ J < p Z

°96

2

.793

468

41

509

NORTH CAROLINA

3,961

160

4,121

SOUTH CAROLINA

3,223

34

3,257

10,219

2,071

12,290

WEST VIRGINIA

Total

* U . S., Department of Agriculture, Farm Credit Administration, Farm Quarterly, M a r c h 3 1 , 1937, p. 20. 1

Credit

National Industrial Conference Board, Incomes in Agriculture, 1929-1935, p. 30.

26

BANKING

BACKGROUND

31, 1937, important government agencies were granting credit in the cotton- and tobacco-growing states of the District. Table 9, page 25, gives the amount of their loans outstanding on that date in the various states of the District. Short-term agricultural credit was provided chiefly by the Production Credit Association and the District Banks for Cooperatives. O n March 31, 1937, the total amount of their loans outstanding in the Fifth Federal Reserve District States was $12,000,000. These outstanding loans underestimate the financial assistance from these organizations, for the reason that seasonal demands for shortterm credit are usually not at their peak until the fall when the crops are harvested. Financial aid to the farmers was not restricted to the previously mentioned credit agencies, but was supplemented by the Agricultural Adjustment Administration, as shown in the following table. Maryland and West Virginia are not shown in Table 10 as no benefit payments were received. TABLE

10

A N N U A L R E N T A L AND B E N E F I T P A Y M E N T S B Y A G R I C U L T U R A L ADJUSTMENT ADMINISTRATION,

1933-1936A

(In thousands of dollars) State

'933

615

1934

¡935

'93s

Virginia North Carolina South Carolina

4,456 19,787 10,286

3>°94 10,480 7,614

301

2,977 4,7i7

Total

8,309

34,5 2 9

21,188

33°

29 0

* U . S., Department of Agriculture, Agricultural Statistics, 1937, pp. 414-415. CONSOLIDATION A N D CONVERSION OF N A T I O N A L A N D S T A T E B A N K S

In 1933 the Federal Reserve Committee on Branch, Group, and Chain Banking completed a study on consolidations and conversions of national and state banks for the period 1921 to 1931. This study 2 indicated that consolidations of banks with loans and investments 1 Report oj the Federal Reserve Committee on Branch, Chain and Group Banking, II (Table 14), p. 104.

BANKING

BACKGROUND

27

of $5,000,000 or more took place chiefly in the two largest cities of the District—Baltimore and Richmond. The largest number of consolidations in any city of the District was in Baltimore. Six banks were consolidated, with total loans and investments amounting to $59,000,000. In Richmond three banks were consolidated, with loans and investments of $44,000,000. In the rest of the District only four other large banks were consolidated (all in North Carolina and South Carolina), with combined loans and investments aggregating less than $34,000,000. These consolidations principally involved national banks. Only two banks in the District, with loans and investments of $5,000,000 or more, were merged through conversion during the interval 1 9 2 1 - 1 9 3 1 ; these were state banks in Norfolk, Virginia. B R A N C H AND GROUP BANKING

Branch* and group 4 banking among member banks in the Fifth Federal Reserve District states are not outstanding. Of these two types of banking, branch banking appears to be more extensive according to recent information. 6 On December 3 1 , 1 9 4 0 , there were 431 member banks, of which 36 banks maintained branches or additional offices in certain of the Fifth District states. These 36 banks operated a total of 138 branches, which were located in every state of the District except West Virginia. The average number of branches maintained per member bank was three, which compared with six for all member banks in the Federal Reserve System. Maryland was exceptional in that the average number of branches per member bank was seven. Group banking among member banks in the District was limited to two group banks in West Virginia and one group bank in South Carolina on December 3 1 , 1940. Of these three group banks, one was a state member bank and the other two were national banks. The total deposits of the South Carolina group of banks repre* T h e term " b r a n c h " includes any branch bank, branch office, branch agency, additional office, or any branch place of business . . . at which deposits are received or checks paid or money lent. 4 G r o u p bank figures include till groups of three or more banks controlled by ( 1 ) a " h o l d i n g company affiliate." For a more specific meaning of group banks see p. 459*1 of the Federal Reserve Bulletin, M a y , 1 9 4 1 . ' Federal Reserve Board, Federal Reserve Bulletin, M a y , 1 9 4 1 , pp. 4 5 9 - 4 6 1 .

BANKING

28

BACKGROUND

sented $28,000,000, or more than four times the amount of the deposits of the two group banks in West Virginia. Additional statistics regarding member and non-member branch and group banks can be seen in the Federal Reserve Bulletin for May, 1941. NEGRO BANKING

Separate banks for Negroes in the South are an outgrowth of race problems. White bankers in the South have discouraged Negro clientele and encouraged Negroes to organize their own banking institutions.6 Two Negro banks were founded during 1888—the Savings Bank of the Grand Fountain United Order of True Reformers at Richmond, Virginia, and the Capital Savings Bank of Washington, D. C. By 1905 twenty-eight southern banks had been organized by Negroes. Most of these banks were called upon to serve as depositories for Negro fraternal insurance orders.7 In 1920 the total resources of Negro banks in the Fifth Federal Reserve District amounted to $4,983,000, as compared to $446,000 in 1900. 8 Negro banking institutions in general, according to Abram L . Harris, were confronted with the following difficulties: (1) small total deposits in proportion to capital investment; (2) lack of diversification of earning assets; (3) lack of diversified credit risks; (4) difficulty in securing capable and experienced management; (5) difficulty in securing expert supervision on the part of state and Federal banking authorities. Such difficulties give additional evidence that commercial banking problems are sometimes acute in the cotton- and tobaccogrowing states where a large Negro population is concentrated. Chapter V I , which deals specifically with bank suspensions, substantiates in more detail this conclusion. BANKING IN VIRGINIA

Banking legislation in Virginia was marked by outstanding success in the operations of banks in this state for a period of about 70 years before the Civil War. 7 ' Harris, The Negro as a Capitalist, p. 22. Ibid., p. 46. ! U. S., Bureau of the Census, Population Census, 1900, 1920.

BANKING

BACKGROUND

29

On December 23, 1792, the Virginia state legislature granted a charter to the Bank of Richmond. Since this charter served as a basis for all charters granted by the state prior to 1837, it may be considered as typical. The charter was so drawn that the bank was virtually in partnership with the state. The state subscribed to a portion of the bank's stock and had the right to receive an annual statement of the bank's operations as well as to elect the majority of its directors. Restrictions on the banks were numerous. The rate of interest could not exceed 6 percent. The bank could not make loans to any government or state in any amount unless previously authorized by the state of Virginia. The total amount of notes emitted by the bank together with debts of every kind could not exceed three times the capital stock over and above deposits without authority from the state. All these regulations were designed to keep the bank from overextending credit or from granting loans outside the state. • The charter, however, permitted the corporation to purchase and to sell bills of exchange and gold or silver bullion. The bank thrived under the provision of its charter and retained a virtual monopoly until 1812. At that time its position was challenged by a second bank, The Farmers' Bank of Virginia, with branches at Norfolk, Lynchburg, Winchester, Petersburg, and Fredericksburg, Virginia. The charter for this new bank was granted on the basis of a loan to the state, which was in need of money to build new roads. 1 0 The seriousness of recurring financial crises and the suspension of specie payments by Virginia banks were recognized by the Governor of the Virginia Commonwealth. In June, 1837, he called a special session of the legislature, which appointed a committee to investigate the solvency of Virginia banks. This committee reported that all banks were solvent and made recommendations for a bill of relief. In the same year legal restrictions on banking operations were considerably broadened. This was a natural outcome of an increase in the number of banks, necessitating closer supervision by the state. * Starnes, Sixty Tears of Branch Banking in Virginia, pp. 31-33.

10

Ibid., p. 43.

BANKING

3°

BACKGROUND

S e v e r a l of the p r o v i s i o n s 1 1 of the B a n k R e f o r m A c t , passed by the V i r g i n i a A s s e m b l y o n M a r c h 22, 1837, w e r e as follows: 1. Banks could go into operation after three-fifths of the capital had been subscribed and paid in current coin of the United States. N o bank could make any discounts, emit notes, or transact any business whatsoever until the required three-fifths of the capital had been paid in and an account thereof had been verified to the Governor by an oath of affirmation on the part of its president. Any bank which opened for business without having fulfilled these conditions would forfeit its charter. 2. Total debts of any bank could not at any time exceed the amount of its deposits and twice the amount of stock paid in. In case of debts contracted in excess of this amount, the directors were held responsible therefor in their own private capacities. 3. No bank was permitted to have in circulation at any one time a total amount of notes or bills exceeding five times its reserve of gold and silver coin of the legal money of the United States. In case of any sudden increase of notes above this ratio, the bank could make no more loans nor discounts until, by curtailment, or otherwise, the required proportions of one to five had been recovered. 4. Any bank which refused to pay specie could be sued, and the plaintiff could recover 15 percent damages plus costs. T h e bank would also forfeit its charter. 5. No bank was allowed to pay a yearly dividend of over 6 percent on capital stock until it had accumulated and laid aside a surplus or contingent fund equal to at least five percent of its capital. T h e said contingent fund, after deduction of the bad and doubtful debts, could not at any time exceed 10 percent of capital paid in. 6. Directors were required to make a strict examination of cashiers' books every three months and to furnish a complete quarterly statement of their bank's affairs to the Governor. T h e right was reserved for a joint committee of both houses, or a committee of either house, or one or more commissioners appointed by the General Assembly or by the Governor, to make a full examination of the books and business in general, of any and all banks. 7. No loans were to be made for a longer period than six months, nor could any bill of exchange, bond, note, or other obligation, be discounted which fell due at any time beyond the period of six months from the time it was discounted. It w a s f o r t u n a t e t h a t this g e n e r a l b a n k l a w w a s passed in 1 8 3 7 ; for the p e r i o d 1 8 3 7 - 1 8 6 0 w a s o n e of u n p r e c e d e n t e d b a n k c r e d i t 11

Ibid.,

pp. 81-64.

BANKING

BACKGROUND

31

expansion. Four times in this period—in 1837, 1839, 1841, and 1857—a national financial crisis was accompanied by suspension of specie payment. T h e Virginia branch banks, as a whole, were successfully managed in all but the last of these crises, when they were obliged to suspend specie payment. During the ensuing years of the Civil War (1861-1865) the assets of the Virginia banks were gradually replaced with worthless Confederate notes. 14 Virginia was one of the most progressive states in the South in the matter of bank regulation. First the establishment of branch banking helped to centralize the funds of scattered communities and to use them to advantage. Branches were able to offer banking facilities to communities which could not support an independent bank. Centralization of able management provided communities with prompt and adequate expansion of currency when and where the traders and business men required it. Likewise it enabled notes to be returned quickly to the bank issuing them in times when contraction was necessary. 13 BANKING IN OTHER FIFTH F E D E R A L RESERVE DISTRICT STATES

A bill was passed in 1790 granting a charter for a bank in Maryland, to be called the Bank of Maryland. 1 4 In 1804 a charter was issued for the first branch bank in Maryland, known as the Farmers' Bank of Maryland. This bank was organized at Annapolis with a view to assisting the farmers. A branch was located at Easton, and in 1807 another was added at Frederick. Charter regulations of the earlier banks were not strict. T h e public was almost entirely dependent on the integrity and the ability of bank officers for adequate banking facilities and administration. There was no security prescribed for notes and deposits, and practically no limit was set on note issues. It was not until 1826 that a penalty was imposed on a bank that did not comply with the request of state authorities to permit inspection. 15 One of the most crucial periods in the early banking history of Maryland was between 1814 and 1820, when nine of the state's Ibid., pp. 115-116. " Ibid., pp. 127-128. Bryan, History of State Banking in Maryland, "John Hopkins University Studies in Historical and Political Science," X V I I , 23. 15 Ibid., pp. 33-35. u

14

BANKING

32

BACKGROUND

twenty-one banks failed. This crisis, which eliminated the weaker country banks, was attributed to poor organization and extensive loans on inflated real estate. It was not till 1852 that important measures were taken to regulate the operation of Maryland b a n k s . u Banking in South Carolina, as in Virginia, proved to be especially sound before the Civil War. Among the early banks in South Carolina were the Land and Loan Bank, the Bank of South Carolina, and the State Bank—all of which were in Charleston. T h e two latter banks were granted charters in the early nineteenth century. The provisions of these charters were somewhat similar to those of their predecessor, the Farmers' Bank of Virginia. Other banks chartered later were the State Bank of Charleston, Union Bank of South Carolina, and the Planters' and Mechanics' Bank. ESTABLISHMENT OF N A T I O N A L B A N K S IN T H E F I F T H F E D E R A L R E S E R V E D I S T R I C T STATES

Banking experience in the United States as a whole prior to and during the first years of the Civil War proved the need for nationwide banking reform. T h e chief objectives of the reformers of that period were to secure a more stable and uniform currency, to provide a market for Government bonds, and to establish machinery for bank supervision and examination. T o achieve these ends on a national scale the National Banking Act of 1863 was passed. According to one banking authority, this law was not a new development of banking regulation; rather it was an extension of state control which set up a national standard of commercial banking and bank supervision. 17 T h e establishment of national banks in the states of the present Fifth Federal Reserve District was hastened by criticism of state bank notes. Nearly all the old banks were thus forced into the national system. Since the comptroller did not limit the rate of interest on loans, high profits could be made and wealthy Northerners were encouraged to found national banks. One of the first banks to be organized in Virginia under this system was the First National Bank of Richmond, established on " Ibid., p. 134.

17

White, Moiuy and Banking, p. 384.

BANKING

BACKGROUND

33

April 14, 1865. Chartered on the same day were the National Bank of Virginia and the Exchange National Bank, to be followed later in the year by the Planters' National Bank, of Richmond. Near the close of 1899 national banks in Virginia totaled thirty-six, with a combined capital stock of $4,591,000 and a surplus of $2,028,000.18 BANKING REFORM PRIOR T O THE F E D E R A L RESERVE ACT

From the end of the Civil War to the close of the nineteenth century, banking reforms in the United States generally grew out of the exigencies of a critical banking or currency situation. Although currency problems continually demanded the attention of legislatures, the first noteworthy attempt at reform did not occur until 1893, when at the meeting of the American Bankers Association, held in Baltimore, a plan was advanced which proposed a joint guarantee of note issue—to be maintained by all the banks in the country which desired to participate. This so-called "Baltimore Plan" influenced future developments in banking legislation. 19 A more serious and fruitful effort to deal with banking problems was made at the Indianapolis Currency Convention in 1897. A t this meeting a monetary commission was appointed to study national currency problems. In its report the following year this commission proposed the issue of bank note currency based upon the commercial assets of banks and jointly protected by participating banks. It also urged reform of the Independent Treasury System. Plans were advanced for the refunding of government bonds, for the establishment of a system of branch banking, and for the separate protection of greenbacks. No doubt several of these suggestions later influenced the framers of the Federal Reserve Act. In 1900 the Gold Standard Act was passed. This law provided support for greenbacks and made the gold dollar the standard unit of value. Instead of strengthening or maintaining the capital requirements for national banks, this legislation weakened them by reducing the minimum required capitalization. T h e Act further complicated the currency problem by permitting a more abundant currency based on Government bonds. " Ibid., pp. 534-536.

" Laughlin, Banking Rejorm, p. 27.

34

BANKING

BACKGROUND

The severe panic of 1907 was followed by numerous bank failures and the suspension of specie payment—events which convinced Congress that the national banking system should be improved. In 1908 the Aldrich-Vreeland Act was passed, providing for an emergency currency and creating the National Monetary Commission to study the monetary systems of the leading nations. This survey provided a basis for the formulation of the Federal Reserve Act.

CHAPTER ESTABLISHMENT BANK

OF OF

THE

III FEDERAL

RESERVE

RICHMOND

H E F I R S T S T E P taken after the passage of the Federal Reserve A c t was the establishment of the Federal Reserve Banks. T h e authority for the establishment of the Federal Reserve System and the outlines of procedure to be followed were embodied in Section 2 of the Federal Reserve A c t : As soon as practicable, the Secretary of the Treasury, the Secretary of Agriculture, and the Comptroller of the Currency, acting as "the Reserve Bank Organization Committee" shall designate not less than eight, nor more than twelve cities to be known as Federal Reserve cities and shall divide the continental United States, excluding Alaska, into districts, each district to contain only one of such Federal Reserve cities. The determination of said organization committee shall not be subject to review except by the Federal Reserve Board when organized; provided that the districts shall be apportioned with due regard to the convenience and customary course of business and shall not necessarily be conterminous with any state or states. The districts thus created may be readjusted and new districts from time to time be created by the Federal Reserve Board, not to exceed twelve in all. No Federal Reserve Bank shall commence business with a subscribed capital of less than $4,000,000. The organization of reserve districts and Federal Reserve cities shall not be construed as changing the present status of reserve cities, except in so far as this act changes the amount of reserves that may be carried with approved reserve agents therein. ORGANIZATION

COMMITTEE

T h e Reserve Bank O r g a n i z a t i o n C o m m i t t e e engaged the services of experts and began a nationwide survey preparatory to the selection of Federal Reserve cities and the determination of district lines. Its study of the Atlantic Coast was begun on J a n u a r y 5, 1914, with hearings in N e w Y o r k C i t y . 1 1

Unpublished stenographic minutes of the hearings have been consulted.

36

ESTABLISHMENT

BALTIMORE'S CLAIMS AND E V I D E N C E

At the hearings of the Reserve Bank Organization Committee in Washington the principal organization presenting the claims of Baltimore was the Merchants' and Manufacturers' Association. An analysis of the evidence offered by the Baltimore committee on January 6, 1915, shows that the arguments presented rested on five main considerations: population, low freight rates, the preference of leading banks, and the superiority of the commercial advantages offered by this city; also that the trend of business was northward toward Baltimore, Philadelphia, and New York. These claims in turn were backed by oral testimony, as well as by numerous exhibits in the brief, 2 which was also filed with the Federal Reserve Board.* RICHMOND'S CLAIMS AND E V I D E N C E

The Richmond Committee represented thirteen local organizations. The committee made a special effort to gather evidence relative to the city's banking and business relations with the Atlantic Coast states from Virginia to Florida, as well as with West Virginia. The statistics presented by the Committee stressed the advantages of Richmond for the location of a reserve bank city. The following points constitute a brief summary of the more important evidence contained in the Richmond brief: 1. The natural geographic position together with facilities of communication of Richmond are favorable to business and banking transactions between the North and South. 2. The present trend of business transactions, as well as banking and trade connections, is favorable to Richmond. 3. The comparative commercial importance of the territory to be covered, as measured by capital, deposits, and other banking factors gives Richmond an advantage over Baltimore. 4. The wishes of those engaged in banking and commerce in 1 T h e brief was prepared chiefly by Charles Markell and Edgar H . Gans of Gans & Hansen, Attorneys. Baltimore's case was to be presented by M r . Charles Markell in Washington. A copy of this brief may be found in U. S., Congress, Senate, Location of Reserve Districts in the United States, Senate Doc. 485, 63d Congr., 2d sess., p. 9. ' T h e term, Federal Reserve Board is generally used throughout this book.

ESTABLISHMENT

37

the proposed district favor Richmond for the location of their regional bank. 4 One of the strongest points in the evidence for Richmond developed from the attempt on the part of the Comptroller of the Currency to determine which cities were preferred in various states for a reserve bank. The data furnished by this survey and tabulated in the analysis below in Table 11, page 37, indicated the preference for Richmond, which received 167 votes, to 128 votes for Baltimore. TABLE I I F I R S T C H O I C E V O T E FOR R E S E R V E B A N K C I T Y IN F I F T H R E S E R V E DISTRICT, BY S T A T E S

District City

Maryland

Richmond Baltimore Pittsburgh Columbia Cincinnati Washington Charlotte New York Total

oj Columbia

West Virginia {southern District) 16 21

95

Virginia

96 11

FEDERAL

3

North Carolina

44

South Carolina Total

11

167

I

128

34

I

35 28

26

1

12

9

I

98

I

27 2

I

18

I

I 12

97

118

28

25 19 2

64

42

43'

a Location oj the Federal Reserve Districts in the United States, from U . S., Congress, Senate, S. Doc. 445, 63d Congr., 2d sess., p. 350.

Each state favored one of its own cities, with the exceptions of North Carolina, which chose Richmond, and West Virginia, which cast 16, 21, 34, and 26 votes, respectively, for Richmond, Baltimore, Pittsburgh, and Cincinnati. Two other sources of support were the state banking associations 4 Location of the Federal Reserve Districts in United States, from U . S., Congress, Senate, S. Doc. 485, 63d Congr., 2d sess., p. 287.

38

ESTABLISHMENT

of North Carolina and South Carolina. T h e North Carolina Bankers Association filed a brief with the Reserve Bank Organization Committee expressing a strong preference for Richmond, stating that it was "unquestionably the city" best qualified to serve the territory, including Maryland and all of West Virginia.' T h e South Carolina Bankers Association likewise indicated its choice for Richmond. O R G A N I Z A T I O N C O M M I T T E E ' S DECISION

T h e Federal Reserve Organization Committee, on April 2, 1 9 1 4 , gave its final decision regarding the Reserve cities and the boundaries of their districts. Much to the surprise of the Baltimore representatives, Richmond was selected for the Reserve city in a district which included the District of Columbia, Maryland, Virginia, North Carolina and South Carolina, as well as all West Virginia except the counties of Marshall, Ohio, and Hancock. Not only was the selection of Richmond for the location of the Reserve Bank censured by several authorities of the Federal Reserve System but also criticized was the idea of creating a separate Federal Reserve District. For example, H. P. Willis asserted that the Organization Committee had made a mistake in establishing such a district. He felt that no need for it existed nor could it be deduced from the evidence, adding that, as a result, the districting of the whole Atlantic Coast would be "thrown out of gear."® Moreover, the Committee's selection of Richmond as a reserve bank city provoked such adverse comment that ten days later, April 10, this committee published a rejoinder which sought to justify its rulings. Figures and statements compiled by the committee present the basis for its choice between Baltimore and Richmond. 7 From the figures in Table 12 it will be seen that in each item—capital and surplus, individual deposits, and loans and discounts—the national banks of Virginia, including the Bank of Richmond, surpass the national banks of Maryland, including Baltimore. * Ibid., p. 3 1 5 . • Willis, The Federal Reserve System, p. 587. ' Op. Cit., Location of Reserve Districts in the United States, pp. 367-369.

ESTABLISHMENT TABLE

39

12

N A T I O N A L B A N K S T A T I S T I C S FOR S T A T E S OF V I R G I N I A AND M A R Y L A N D AS OF M A R C H 4 ,

State

1914S

Area

Population

Capital

{Square

(Census

and

Individual

1910)

Surplus

Deposits

Miles)

Loans and Discounts

(In thousands of dollars)

State of Virginia 42,450 (including Richmond) State of Maryland 12,210 (including Baltimore)

q,061,612

29,722

90,887

107,410

1,295,346

28,267

83,217

91,326

• According to sworn reports made to the Comptroller of the Currency.

The Committee's principal reasons for choosing Richmond may be summarized as follows: (1) Baltimore was too close to Philadelphia, where the Federal Reserve Bank of the adjoining district was located; (2) Richmond was more intimately associated with the proposed district than was either Washington or Baltimore; (3) North Carolina, South Carolina, and Virginia preferred to be included with Richmond; (4) in the district survey made by the Comptroller of the Currency, 8 Richmond received more first choices than any other city. PETITIONS FILED W I T H T H E F E D E R A L RESERVE BOARD A F T E R T H E DECISION

This report was followed by considerable discussion. It was natural for Baltimore to criticize the decision, especially since in ten out of twelve districts the Federal Reserve Organization Committee has previously selected the largest city in certain other districts and expressedly defended its designation of New York, Chicago, Philadelphia, St. Louis, Boston, and Cleveland on that basis. O n September 11, 1914, the Baltimore Committee filed with the Federal Reserve Board a petition and brief to have its city designated as headquarters for the district Reserve Bank.' • Ibid., pp. 370-371. * Federal Reserve Board, Annual Report, 1914, p. '93-

ESTABLISHMENT

4°

O n the same day another petition and brief were filed from bankers in Wetzel and Tyler counties of West Virginia requesting that they be transferred from the Fifth to the Fourth Federal Reserve District. 10 This request was granted by the Federal Reserve Board in 1915. No action was taken on Baltimore's petition, but in April, 1916, it was automatically rejected by the opinion of the Attorney-General, who held that the Board had no power under the law to abolish Federal Reserve banks or Federal Reserve districts as created by the Organization Committee. 1 1 INCORPORATION

During May, 1914, despite the controversy and appeal, plans for setting up the Federal Reserve Bank in Richmond, as required by the Act, were put in motion. The total capital stock subscriptions of the assenting national banks, state banks, and trust companies were substantially more than the $4,000,000 minimum prescribed by the Federal Reserve Act. As soon as the minimum amount of capital stock had been subscribed and allotted to the Fifth Federal Reserve District banks, the Organization Committee designated the following banks to execute the certificate of incorporation: the Merchants and Mechanics National Bank, Baltimore, Maryland; First National Bank, Roanoke, Virginia; Citizens National Bank, Charleston, West Virginia; Palmetto National Bank, Columbia, South Carolina; and the Murchison National Bank, Wilmington, North Carolina. O n May 18, 1914, this certificate was executed and transmitted to the Comptroller of the Currency, who at once commissioned the Federal Reserve Bank of Richmond as a legally established corporation authorized to transact business.12 G R O U P I N G OF B A N K S

T h e Federal Reserve Act required that before the election of directors the Organization Committee must classify the member banks of each district into three general groups to prevent the large banks from dominating the appointment of directors. Each of these groups was to contain approximately one-third of the aggre10

Ibid., p. 193.

11

Ibid., 1916, p. 122.

a

Ibid., 1914, p. 214.

ESTABLISHMENT

4»

gate number of member banks of a district and to be comprised of banks of similar capitalization. O n M a y 16, 1914, the Organization Committee published a list of the banks in the Fifth Federal Reserve District that had signified their intention to become members of the Federal Reserve System. T h e following analysis shows the division of member banks in this District into three groups: Group I

Number of banks Aggregate capital and surplus of each member bank

160 $140,000 or more

Group II

158 Less than $140,000, and more than $60,000

Group

III

158 $60,000 or less

E L E C T I O N OF DIRECTORS

According to Section 4 of the Federal Reserve Act, each Federal Reserve Bank was required to have nine directors, divided equally into three classes—A, B, and C. Class A represented the member banks; Class B consisted of men actively engaged in business or agriculture; and Class C directors were appointed by the Federal Reserve Board. Under the terms of the Act, each of the three general groups of banks was entitled to elect one director in both Classes A and B. T o facilitate the election of Class A and B directors each member bank was further required to choose one district reserve elector to cast a vote at the first meeting of the member bank's own board of directors after the law went into effect. 1 8 A meeting of certain member banks of the District was called in Richmond on M a y 18, 1914, to propose a plan for electing directors of the Reserve Bank. Although only 65 percent of the Group I banks participated, it was unanimously decided that one director should be elected from each of the six jurisdictions composing the District. T h e election took place, with substantial agreement, and the following directors were declared elected: Group

Class A

I Waldo Newcomer, Baltimore, Md. II Colonel J. F. Bruton, Wilson, N. C. I l l Edwin Mann, Bluefield, W . V a . 13

Reserve Bank Organization Committee, Circular, M a y 6, 1914, Sec. 4, pp. 3-4.

42

ESTABLISHMENT Class B I George J . Seay, Richmond, Va. I I D. R . Coker, Hartsville, S. C. I l l James F. Oyster, Washington, D. C.

INTERNAL ORGANIZATION

Among the principal elective officers of the internal organization were cashier, vice-governor, general auditor, and Federal Reserve agent. George H. Keesee was chosen assistant cashier, later becoming cashier. Among other duties, he carried on the institution's routine correspondence and supervised the deposit accounts. On July 8, 1915, Charles A. Peple was selected as vice-governor. His chief duty was the general supervision of the work of the Bank. W. E. Cadwallader was chosen auditor. 14 OPENING OF THE F E D E R A L R E S E R V E BANK OF RICHMOND

Member banks were notified that the first installment of their share of the capital of the Bank was to be paid by November 2, 1914. Initial payments on account of stock and reserve deposits were made chiefly in gold, of which $1,570,000 was in coin. 16 The Federal Reserve Bank of Richmond was the first bank of the Federal Reserve System to open for business—November 16, 1914. The Class C directors, appointed by the Federal Reserve Board, were as follows: William Ingle, of Maryland, as chairman of the Board and Federal Reserve agent; James A. Moncure, of Virginia, as deputy chairman and deputy Federal Reserve agent; and M. F. H. Gouverneur, of North Carolina. PERMANENT ORGANIZATION

On October 5, 1915, the chairman of the Board of the Federal Reserve Bank of Richmond called the directors to meet in Richmond to effect a permanent organization. All the directors were present. George J . Seay was elected governor of the bank; by-laws were adopted, and an executive committee of three was provided, consisting of the governor, the chairman of the Board, and John F. "Federal Reserve Board, Federal Reserve Bulletin, 1915, p. 3. " Ibid., p. 4.

ESTABLISHMENT

43

Bruton. 1 8 It should perhaps be noted that the Federal Reserve Bank of Richmond did not conform to the practice of most other district Reserve banks by selecting a governor who was not a member of the Board of Directors. Instead, the Bank elected a director to this post, as also was the procedure of the Philadelphia and Dallas Federal Reserve banks. 17 ESTABLISHMENT OF B R A N C H E S

Shortly after their campaign to transfer the Federal Reserve Bank to their city had failed, the Baltimore bankers began to agitate for a branch bank. Because of Baltimore's commercial importance, the Baltimore Branch was one of the first in the system to be approved by the Federal Reserve Board, and it was ready for business by M a r c h i, 1918. T h e territory served by this branch comprised all Maryland and thirty-three counties in northern West Virginia. Establishment of this branch reduced the time schedule for the clearing of checks from three to two days in West Virginia, with the exception of a few cities which remained on a four-day schedule. 1 8 T h e Baltimore branch, by 1925 had offices in three buildings and employed more than two hundred persons, including officers. T h e fact that it ranked third among all branches in the country in the amount of business handled led to the construction of a new building. T h e second city in the Fifth Federal Reserve District to request a branch bank was Charlotte, North Carolina. Bankers and business men of the Carolinas began to demand a branch about 1922. T h e history of its establishment is summarized in a letter from the former chairman of the Charlotte committee: The Federal Reserve Bank of Richmond for a good many years declined to approve it, but finally did, and recommended ii to the Federal Reserve Board in Washington, and the Board in Washington turned down the recommendation. Then we had to work on Washington for a year or more and finally got their approval which took a long time and much Federal Reserve Board, Annual Report, 1915, p. 241. " Clark, Central Banking under the Federal Reserve System, pp. 73-74. 18 Federal Reserve Board, Annual Report, 1921, p. 33. ,e

44

ESTABLISHMENT

work. After the Federal Reserve Board in Washington consented to the establishment of a branch, four or five towns in the Carolinas presented their arguments to secure it before the Federal Reserve Board. I presented personally the brief and argument to the Washington Board, and it w a s awarded to Charlotte due to our geographical and railroad situation.

During 1927 the Board of Directors of the Federal Reserve Bank of Richmond approved the application for permission to establish a branch at Charlotte, North Carolina, and it was formally opened for business on December 1, 1927. 1 9 The territory assigned to the branch by the Board of Directors of the parent bank included thirty-four counties in North Carolina and twenty-one counties in South Carolina. 20 A comparative analysis of the operations of the Baltimore and Charlotte, North Carolina, branches will be found in Appendix F. " Federal Reserve Bank of Richmond, Annual Report, 1927, p. 19. " Ibid.

CHAPTER OPERATIONS

IV

OF FEDERAL OF

RESERVE

BANK

RICHMOND

HE O P E R A T I O N S of the Federal Reserve Bank of Richmond are carried out under the authority of its directors, subject to the approval of the Federal Reserve Board. Twentyeight directors have served in the period from 1914-1940, inclusive. The average tenure of office for directors in the three classes A, B, and C during the twenty-seven year period was roughly ten, eight, and eleven years, respectively. Of the ten men elected by the stockholders of the Bank to represent "commerce, agriculture, and some industrial pursuit" (Class B), only one was classified as a farmer. Five of the ten Class B directors resigned before the expiration of their terms, three of them during the first seven years of the Bank's operation. A list of the directors, their residence, and tenure, from October 5, 1914, to December 31,1940, is given in Appendix E. O C C U P A T I O N A N D T E N U R E OF D I R E C T O R S

The occupations of the twenty-eight directors prior to or during their connection with the Federal Reserve Bank of Richmond can be classified as follows: Banking and finance Manufacturing and merchandising Insurance Transportation Engineering and utilities Publishing Farming Total

11 9 2 2 2 1 1

28

These figures suggest that agriculture was inadequately resented.

rep-

46

OPERATIONS

BYLAWS

The Preliminary Committee on Organization of the Federal Reserve Board sent a tentative set of bylaws to the directors of each bank for their consideration to bring about "desirable uniformity" in the organization of the Reserve banks. 1 As a result of recommendations by the individual Reserve banks, another set of bylaws was prepared, which each Reserve Bank was permitted to modify to suit the conditions peculiar to its territory. The Federal Reserve Bank of Richmond accepted this revised set of bylaws substantially as drafted, and they were adopted by its directors on October 15, 1914.' The Baltimore and Charlotte branches also have bylaws. The chief difference between them is that the bylaws of the Baltimore Branch, known as a "full power branch," delegate more privileges to the management than do the bylaws of Charlotte Branch. ADMINISTRATION

The bylaws of a Reserve Bank, according to Section 4 of the Act, were to be so formulated that the Board of Directors of each Federal Reserve Bank should have power' "not inconsistent with law, regulating the manner in which its general business may be conducted and the privileges granted to it by law may be exercised and enjoyed." The bylaws accepted by the Federal Reserve Bank of Richmond permitted the delegation of certain powers to an executive committee consisting of the governor of the Bank, the Federal Reserve agent, and one representative of either Class A or B directors. The Executive Committee's powers included not only the power of passing on all discounts and advances but also that of establishing discount rates for each class of paper. Its activities required the approval of a majority of the Board of Directors and were subject to review by the Federal Reserve Board. Since the minutes of directors' meetings are not available, it is difficult to appraise the actions of directors with respect to bank policy. 1 Federal Reserve Board, Annual Report, 1914, p. 74. ' These bylaws of the Richmond Bank and its branches have been revised only twice, the changes being relatively negligible. * One of the most important prerogatives of the directors is to fix the salaries of the officers of the bank as well as to define their duties.

OPERATIONS

47

BRANCH DIRECTORATES

T h e boards of directors of the two branches serve only in an advisory capacity and do not initiate policy or determine branch bank operations. When the branches were first established, there were frequently joint meetings of the two boards of directors. T h e directors of the Baltimore Branch had important duties to perform in the days when the Branch was called upon to discount paper for member banks. Since 1933, however, discounts have become relatively of lesser consequence, and it is frequently a problem for the manager of the Baltimore Branch to find business sufficient to warrant attendance of the out-of-town directors at a meeting. In the Charlotte Branch the office of director may be said to be restricted in powers. This Branch has no credit department, and member banks having paper to be discounted have followed the practice of forwarding such paper for the approval of the Federal Reserve Bank of Richmond. T H E PRESIDENT

T h e president of the Federal Reserve Bank of Richmond, formerly known as "governor," is its chief executive officer, to whom all other officers are responsible. T h e powers of the president allow him to execute contracts, deeds, and similar papers, to appoint committees and to prescribe their powers, and to employ and to dismiss junior officers. 4 T h e first governor, George J. Seay, served as head of the Federal Reserve Bank of Richmond for nearly a quarter of a century (1914-1937). He was succeeded by Hugh Leach, who was incumbent on December 31, 1940. R E L A T I O N B E T W E E N F E D E R A L R E S E R V E AGENTS AND PRESIDENT

Federal Reserve agents had considerable power in shaping the policies of the regional banks between 1914 and 1935. During those years the Federal Reserve agent was active as chairman of the Board of Directors, and as a liaison officer between the regional bank and the Federal Reserve Board. In addition to his responsibil* Bylaws of the Federal Reserve Bank of Richmond in effect on January 1, 1938. Bylaws are on file with the Secretary of the Federal Reserve Bank of Richmond, in Richmond, Virginia.

48

OPERATIONS

ity for Federal Reserve note issues and collateral requirements, he was in charge of member banks relations, bank examinations, auditing, research activities, and the preparation of reports.6 The Banking Act of 1935, however, altered the powers of the Federal Reserve agent so that his former duties were almost nonexistent. • This Act stated that the office of governor should supersede that of president and that the officer bearing this title should be the executive head of the Bank. Nothing was said in the statute about the functions of the Federal Reserve agent. In consequence, this officer was left in an anomalous position. However, the Board of Governors, which replaced the old Federal Reserve Board, in accordance with the Banking Act of 1935, settled the question by making the position of Reserve agent an honorary one and assigning his previous duties to the president of the regional Federal Reserve Bank. SOURCE OF C A P I T A L FUNDS

The member banks furnished the funds with which the Federal Reserve Bank of Richmond began operations in November, 1914. The terms on which the funds were subscribed were contained in the Federal Reserve Act, which required each member bank to subscribe capital stock in its regional Federal Reserve Bank up to 6 percent of its capital and surplus. At the close of 1940, only 3 percent, or $5,365,000 has been called and paid in.7 FISCAL SERVICES P E R F O R M E D

The original Federal Reserve Act provided that the Federal Reserve Banks were to assume the fiscal functions rendered by national banks. 8 Although Federal Reserve Banks were appointed fiscal agents of the United States on June 1, 1916, they did not take over the complete fiscal agency functions until 1921, when the subtreasuries were discontinued. 9 Federal Reserve Board, Annual Report, 1914, p. 7. •Federal Reserve Board, Federal Reserve Bulletin, March, 1936, p. 145. 7 Federal Reserve Bank of Richmond, Annual Report, 1940, p. 3. 8 Willis and Steiner, Federal Reserve Banking Practice, p. 73. • Federal Reserve Bank of Richmond, Annual Report, 1920, p. 72. 4

OPERATIONS

49

The fiscal services of the Federal Reserve Bank of Richmond were at first confined to receiving public monies from Government depository offices and to paying Government checks and warrants. One of the most noteworthy fiscal functions was the assistance given in 1917 to the Treasury in the sale of its obligations. Each regional bank was asked to take charge of the distribution of Government war securities in its district. The response in the Fifth Federal Reserve District was prompt and generous. The first obligations sold were in the form of certificates of indebtedness. Table 13 shows the sale of certificates in the Fifth Federal Reserve District and in the entire United States: TABLE 1 3 CERTIFICATES OF INDEBTEDNESS SOLD, 1 9 1 7 - 1 9 1 9 » (In dollars)

Year 1917 1918 1919 ALL YEARS

Total Sale in United States 3,880,570,000 10,742,094,000 11,246,820,500 25,869,484,500

Sold in Fifth Federal Fifth Federal ReReserve District through serve District the Federal Reserve Sales as PercentBank of Richmond age of Total Sales 56,217,000 1.4 212,202,000 1.9 306,575,000 2.7 574,994,000 2.5

" Federal Reserve Bank of Richmond, Annual Report, 1 9 1 7 - 1 9 1 9 .

The early temporary financing through certificates of indebtedness was followed by permanent financing through the issue of Liberty Bonds. This change necessitated the establishment of a centralized organization to carry on the financing campaign, of which the governor of the Federal Reserve Bank of Richmond acted as District Committee chairman. This committee handled government bond sales in the entire District, and subsequently set up and supervised county organizations. Table 14 shows the amount of sale of five Liberty Loans.

O P E R A T I O N S

5°

TABLE

14

L I B E R T Y L O A N BONDS S O L D D U R I N G

1917-1919"

(In dollars)

Loan First loan Second loan Third loan Fourth loan Victory loan All loans

Total Amount Issued 1

>989,453,55° 3,807,865,000 4> l 75> 6 5°>°5° 6,964>58i>io° 4,495,373, 0 0 0 2I

>43 2 >9 2 2 >7°°

Fifth Federal Amount Sold through Reserve District the Federal Reserve Sales in PercentBank of Richmond age of Total Sales I0

9>737> 1 0 0 201,212,500 186,259,050

5-5 5-3 4-5 5- 1 5-o

352,685>2°° 225,146,850 I 0

, 75,°40,700

5-°

• F e d e r a l Reserve Bank of Richmond, Annual Report, 1 9 1 9 , p. 26. DISCOUNTING O P E R A T I O N S

Discount operations, as provided for in the original Federal Reserve Act, were primarily for the purpose of rendering mobile the resources of the member banks within each district. Furthermore, through interdistrict rediscounting, the banking resources of the entire nation were to be made equally fluid.10 The discount operations of the Federal Reserve Bank of Richmond successfully met their first test during the period from November, 1914, through December, 1 9 1 5 . In that brief time, the demoralized cotton markets led to frozen assets which forced many banks, especially smaller ones in the cotton area, to discount a portion of their portfolios with the B a n k . 1 1 In the eleven-month interval the Federal Reserve Bank of Richmond discounted $47,000,000 of paper with other Federal Reserve District banks—the largest volume of any district bank. This amount accounted for 25 percent of the entire discounts of the Federal Reserve System. The second and perhaps most important period in the history of the Bank's discount operations was between 1 9 1 9 and 1924. During the depression years, 1 9 1 4 - 1 9 1 5 and 1 9 1 9 - 1 9 2 1 , the prices of 10

Beckhart, Discount Policy of the Federal Reserve System, p. 1 3 7 .

11

Ibid., p. 22.

CT) ^D tD in (N co ^ CT) - CO -CTICT>

jQ B J3 "o U •g-s nj •^•y (S en 55 S

(Ö m .5 O O ÈP Ö Î3 « s ü ü c ^ J5 js 60 en

O >

^

Z

w

52

OPERATIONS

cotton and tobacco fell rapidly and seriously impaired the financial condition of banks. A n indication of the weak financial condition of banks during the agricultural depression may be judged by the high ratio of deposit liability to reserves of the borrowing member banks from the close of 1920 to the end of 1923. T h e states in which the borrowing member banks were especially weak were (1) South Carolina, (2) North Carolina, and (3) Virginia. The financial condition of borrowing member banks outside the leading cotton- and tobaccogrowing states was noticeably stronger, on the basis of the ratio of liabilities for paper discounted to the total reserves (see Table 15, page 51). I N T E R - D I S T R I C T DISCOUNTING

T o bolster the financial position of its member banks the Federal Reserve Bank of Richmond has at times been compelled to borrow from other Reserve Banks to maintain the required reserve against outstanding Federal Reserve notes and member-bank deposits. During 1919, 1920, and 1921 the annual amount of bills rediscounted with other Federal Reserve banks was at its highest level, ranging from $500,000,000 to $842,000,000.12 These annual amounts of inter-district borrowing represented from 18 to 21 percent of the total dollar amount of all types of bills discounted during each of these three years. T h e chief reason for the necessity of the large amount of interdiscounting was the critical decline in cotton and tobacco prices during 1919-1921, as indicated in Chart III, page 8. Since 1921 inter-district discounting has not been important in the operations of the Federal Reserve Bank of Richmond. P A P E R E L I G I B L E FOR DISCOUNTING

In facilitating the discount operations of the System the determination of eligible paper was of utmost importance. Paper eligible for discount, according to Section 13 (amended), must satisfy the following requirements: it must have arisen from some agricultural, industrial, or commercial transaction; be endorsed by a member bank; comply with the rules and regulations of the Federal Reserve 11

Federal Reserve Bank of Richmond, Annual Report, 1919-1921.

OPERATIONS

53

Board; and mature within a specified time. Although Section 13 did not list all transactions which might be considered commercial, industrial, or agricultural, the Board was given broad powers to define eligible paper. 1 1 COMMODITY P A P E R

Commodity paper (bills "otherwise secured") became eligible for discount chiefly as a result of the "paralyzed" condition of the cotton market shortly after the Federal Reserve System began to operate. In June, 1915, a special committee was appointed by the Federal Reserve Board to study the cotton situation. T h e Board finally decided to make commodity paper eligible for discount at an especially low rate, in order to aid in the orderly marketing of the abnormally large crop. These preferential rates on commodity paper failed, however, to fulfill the expectations of farmers and planters. In commenting on this unsatisfactory result, B. H. Beckhart, of Columbia University, observed that the low rates were not passed on by the member banks to their customers. He also felt that this policy established a dangerous precedent, namely, discount by commercial banks at a profit. 14 Commodity paper constituted only a small part of the total paper discounted during 1914-1940 (see Table 16, pages 56-57). Its use expanded chiefly from 1915 to 1923. In 1915 the volume of commodity paper discounted (customers' notes secured by agricultural products) accounted for $2,881,000, which increased during the next year to $7,338,000. From 1917 through 1923, however, the dollar amount ranged between $4,000,000 and $7,000,000 while after 1923 it declined sharply. During 1934 the total amount of commodity paper discounted was only $21,000. From 1935 through 1940 the Bank had not discounted paper of this classification. INDUSTRIAL ADVANCES

During 1936 Federal Reserve banks were permitted by provisions in Section 10-b of the Federal Reserve A c t to grant loans to 13 Section 13 has been amended in many respects since the Federal Reserve A c t was passed and those wishing to study the changes should consult the Federal Reserve Act as Amended to October i, 1935, p- 21. M Beckhart, Discount Polity 0/ the Federal Reserve System, p. 222.

OPERATIONS

54

industry in their respective districts. T h e experience of the Federal Reserve Bank of Richmond with this type of loan had not proved altogether successful. During 1936-1940 the Bank's dollar volume of industrial advances 16 totaled $4,362,000, and income from this source was $785,246. After the Bank deducted $599,043 for losses on industrial advances, a net profit of only $185,203 remained, or less than 1 percent of the total dollar volume of industrial advances for the period 1936-1940 (see Table 28, pages 96-100.) TRADE

ACCEPTANCES"

In the early years of the Federal Reserve System trade acceptances were expected to play an important part in the future operations of the Federal Reserve banks. In the Federal Reserve Bank of Richmond trade acceptances discounted were relatively small in number and in dollar volume. In 1918 acceptances were used to finance sales of cotton to mills and in the marketing of tobacco in the Fifth Federal Reserve District. 17 T h e use of acceptances increased in 1919 and 1920 when exports from this District were large. During those years the dollar amount of acceptances discounted reached its peak. From 1921 the dollar volume of this type of paper steadily decreased, since there was less occasion to rediscount paper. The annual dollar amount of trade acceptances discounted during 1914-1940 is shown in Table 16, pages 56-57. P O L I C Y IN P U R C H A S I N G T R A D E

ACCEPTANCES

Prior to November 8, 1922, the Federal Reserve Bank of Richmond made a practice of purchasing trade acceptances direct from accepting banks in the Fifth Federal Reserve District without other indorsement. This policy was motivated by two considerations: first, the Reserve Bank's desire to develop the use of this class of paper and to keep in touch with the conditions under which they were made; secondly, there were no "dealers" in the District and few in other districts through whom acceptances could be readily " T a b l e 16, pages 56-57, under heading " M e m b e r Banks Collateral Notes Otherwise Secured." u A trade acceptance is defined in the Federal Reserve regulations, as a bill of exchange by the seller on the purchaser of goods sold, and accepted by the latter. 17 Federal Reserve Bank of Richmond, Annual Report, 1918, p. 6.

OPERATIONS

55

sold. 18 In November, 1922, the Bank changed its previous policy and has since followed the practice of other Federal Reserve Banks by purchasing acceptances in the open market. 1 ® ABUSES OF T R A D E A C C E P T A N C E S

During the first few years of the Federal Reserve System there was a certain disregard for the proper use of trade acceptances. An outstanding case was that of a large tobacco company whose paper was renewed for a number of years. This procedure was the result of a syndicate agreement among the banks which undertook to market the paper of this company, a practice which insured renewal and sale of the obligations for a specified period of years. Consequently, the element of self-liquidation essential to acceptances was entirely eliminated. 20 By 1922 the abuses became so serious that a scathing report from a committee of the National Bank Examiners was filed with the Comptroller of the Currency. 21 ANALYSIS OF B I L L S DISCOUNTED

Bills discounted may be divided into three classes: (1) "secured by United States Government obligations," (2) "otherwise secured," and (3) "unsecured." The annual dollar amount of these types of bills discounted by the Federal Reserve Bank of Richmond is shown from 1914 to 1940 in Table 16, pages 56-57. Notes of member banks and customers secured by United States obligations were the largest of the three categories and totaled $25,700,000,000, or about 67 percent of the entire dollar volume of all bills discounted by the Federal Reserve Bank of Richmond from 1914 to 1940. This predominant use of United States bonds for collateral is understandable, inasmuch as member banks were among the largest purchasers of these bonds. "Otherwise secured" bills amounted to $g, 142,000, or roughly 24 percent of all bills discounted during the same period. The third general classification, "unsecured bills," included "trade acceptances," "bankers' acceptances," and "commercial paper" representing only 9 percent of all 18

Federal Reserve Bank of Richmond, Annual Report, 1922, p. 1 1 . " Ibid., 1923, pp. 1 8 - 1 9 . 80 21 Willi*, Federal Reserve System, p. 998. Ibid., p. 1007.

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* Data obtained from the Federal Reserve Board, Division of Bank Operations. b Includes capital notes and debentures sold to Reconstruction Finance Corporation. ° Exclusive only of mutual savings banks; includes 44 cash depositories, 1 private bank, and 1 financial institution not doing a general banking business. d Includes capital notes and debentures, sold principally to the Reconstruction Finance Corporation. Capita] notes and debentures sold to the public are not considered as "capital" in computations of capital requirements for Federal Reserve membership. * Represents nonmember commercial banks with capital stock equal to the applicable minimum statutory requirements for Federal Reserve membership (without regard to acceptability for membership). f Not available.

72

MEMBER

AND N O N M E M B E R

BANKS

of the large number of state banks that refused to clear their checks at par, this bank began a campaign as early as 1919 to compel the other banks to conform to par-clearance. The first effort was made in Maryland in September, 1919, when the Federal Reserve Bank of Richmond "threatened" five non-par and nonmember banks that checks on them would be collected at their counters for cash. A few months later all the banks in both West Virginia and Maryland were persuaded to go on the par-clearance basis by a threat from the Federal Reserve Bank of Richmond "to collect" in any case of refusal. Gradually all the banks in West Virginia 6 obeyed, and under similar compulsion all member institutions in Virginia became parclearance banks by 1920. This par-clearance program meant that recalcitrant nonmember banks had to maintain abnormally large cash reserves to meet any unexpected presentation of checks for cash. In fact, this sometimes necessitated the sale of income-producing assets and tended to bring about a decrease in profits. Had this situation long continued, it is likely that many of these non-par banks would have operated at a loss. Since the Bank's par-clearance program was considered particularly burdensome on non-par clearance banks in North Carolina, the legislature came to their aid by special legislation' on February 5, 1921. The new statute permitted state banks to make an extra charge not in excess of one-eighth of one percent on remittances covering checks, or a minimum charge of ten cents, and also allowed them, in case a Federal Reserve Bank, post office, or express company presented checks at the counter, to pay by means of a draft on a correspondent bank. 7 The Federal Reserve Bank of Richmond believed that this statute was unconstitutional. It persisted in presenting checks for payment at the counter of the drawee banks and declined to accept any form of payment except cash. When a bank refused cash payment, the Richmond Bank made a practice of returning the uncollected * Murchison, " P a r Clearance of Checks," North Carolina Law Review, January, 1923, pp. 1 3 9 - 1 4 0 . ' Statutes similar in purpose were enacted in Florida, Alabama, Georgia, Louisiana, Mississippi, South Dakota, and Tennessee. Federal Reserve Board, Annual Report, 1 9 2 1 , p. 70. ' Ibid., p. 140.

MEMBER

AND

NONMEMBER

BANKS

73

checks to the former holders as "dishonored" and gave the reasons for nonpayment. T h e non-par banks often found it difficult to explain the circumstances satisfactorily. As a result they discovered that a number of customers were transferring their accounts to member banks where they could be sure their checks would circulate at par. 8 In North Carolina the par-clearance problem finally became so serious that twelve state banks and trust companies (the number was later increased to 250) instituted injunction proceedings against the Federal Reserve Bank of Richmond, in the Superior Court of Union County; they were awarded a temporary restraining order on February 29, 1921. This injunction was made permanent on March 21, 1922. T h e defendant bank promptly appealed to the Supreme Court of North Carolina, which rendered its decision reversing the lower court on M a y 24, 1922. T h e Federal Reserve Bank of Richmond, although it had won a favorable decision, decided to refrain from further effort to impose par collection until the case was tested by the United States Supreme Court.' O n June 11, 1923, Justice Brandeis gave a decision from which the following is quoted: The Federal Reserve Act, however, does not command or compel these state banks to forego any right they may have under the state laws to make charges in connection with the payment of checks drawn upon them. The Act merely offers the clearing and collection facilities of the Federal Reserve Banks upon specified conditions. In each amendment as in Section 13, are the words 'may receive'—words of authorization merely . . Throughout the Act a distinction is clearly made between what the Board and the Reserve Banks 'shall do' and what they 'may do'.10 In rendering this ruling the United States Supeme Court also referred to the Federal Reserve Board's "Campaigns of compulsion," dating from their beginning in 1916, and set forth certain principles to be followed by the Federal Reserve Bank of Richmond in the receipt and collection of checks. However, adherence to these principles was considered by this Reserve Bank to be too great an 'Ibid., p. 141. • Ibid., p. 141. 1 0 U . S., Supreme Court, Farmers & Merchants Banks of Monroe, N. C. el al v. Federal Reserve Bank oj Richmond, Virginia, 262 U . S., 649, 43 Sup. Ct. 651, 67 Led. 1157, 1923.

74

MEMBER

AND N O N M E M B E R

BANKS

undertaking because of the risk and expense involved. T h e Bank finally stated (1923) that it would refuse checks upon any nonmember state bank which would not remit at p a r . 1 1 NONMEMBER BANK EARNINGS FROM EXCHANGE AND COLLECTION CHARGES IN NORTH CAROLINA, I 9 3 1 - 1 9 3 7

Earnings from exchange and collection charges of nonmember banks in North Carolina and South Carolina may account for the relatively large proportion of banks in these states which do not clear their checks at par. For example, in North Carolina (1931— 1937) the average exchange and collection charges of all nonmember banks represented from 3.8 to 9.9 percent of the banks' total earnings; this may be compared with a range of 1.1 to 4.3 percent for all the banks in the United States. Table 2 1 , below, shows the variation in collection and exchange charges as percentage of total for the North Carolina banks, grouped by size of deposits, for the years 1 9 3 1 - 1 9 3 7 TABLE 21 E X C H A N G E AND COLLECTION C H A R G E S AS PERCENTAGES OF T O T A L EARNINGS FOR N O R T H C A R O L I N A BANKS, By size of bank b

Less than $150,000

Tear 193' I932 '933 ! 934 '935 !936 1937

9-3 8.4 8.7 11.6 12.7 9-7 4-9

S150,000 to S250,000 8.0 8-5 12.i 12.6 12.6 7.6 17-5

S250,000 to $500,000 5-6 5-9 6-3 12.3 11-6 7-7 18.0

$500,000 to

1931-1937"

North $750,000 More Caroto than lina $750,- Jh ,000,- $1, 000,- Average 000 000 000 4.1 2.7 7-i 3-9 4.4 3-8 7-i 2-5 4.4 8-5 5-5 5-3 6.4 7.8 5-4 9-4 12.8 5-2 8-3 6-3 12.9 4-3 6-5 3-5 19.0 12.2 8-5 9-9

United States Average 1.1 1.1 2-9 3-6 4.2 4-3 4-3

* T h e North Carolina Bankers Association, Trends in North Carolina Banking, i 9 2 7 ' 9 3 7 . P- i°5b Size of banks measured by total deposits. 11

Richmond Federal Reserve Bank, Annual Report, 1923, p. 30.

MEMBER

AND NONMEMBER

BANKS

75

The smaller banks in North Carolina—those with deposits under $750,000—obtained in general a higher percentage of their total earnings from this source than the average of all banks in the state. Comparable data concerning income from clearing of checks in TABLE

22

M E M B E R S H I P IN P A R C O L L E C T I O N S Y S T E M

N U M B E R OF B A N K S

ON PAR L I S T AND NOT ON P A R LIST, D E C E M B E R DISTRICTS

Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Total

MEMBER BANKS

353 768 652 639 410 3!5 804 392 467

3 1 , i939 b

NONMEMBER BANKS

On par List 167 257 249 59° 306 86 1,45s 695 r 33 946 270

Not on par List

2 295 698 217 442

239

7°3 176 158 28

6,362

5,396

2,7*9

73 14 162

103 8 109

...

96 51 25

79 18

736 544 282

FIFTH F E D E R A L R E S E R V E DISTRICT STATES

Maryland District of Columbia Virginia West Virginia North Carolina South Carolina

5

...

43 6 126 120

* Federal Reserve Board, Annual Report, 1939, p. 55. b Banks not on par list comprise nonmember banks that have not agreed to pay, without deductions for exchange, such checks drawn upon them as are presented for payment by the Federal Reserve banks.

76

MEMBER

AND

NONMEMBER

BANKS

South Carolina would likely correspond to figures shown in Table 21, page 74, and would explain in part the large percentage of South Carolina banks not on the par-clearance list of the Federal Reserve Bank of Richmond. As long as nonmember banks derive a significant proportion of their total earnings from collection and exchange charges, it is likely that there will be little increase in the number of nonmember banks in North Carolina and South Carolina on the Bank's par-clearance list. The par-clearance problem remained unsolved not only in the Fifth Federal Reserve District but also in several other districts in the United States at the close of 1939. In the Fifth Federal Reserve District at that time the non-par banks numbered 295 out of 1,011 (member and nonmember) banks, or approximately 30 percent. T h e only other districts with a larger percentage of non-par banks to all banks were the Federal Reserve District of Atlanta and that of Minneapolis (see Table 22, page 75). In the Fifth Federal Reserve District, North Carolina and South Carolina continued to have the largest percentage of non-par banks to all banks in these states. For example, at the close of 1939 the percentage of non-par banks to all banks in North Carolina and South Carolina was approximately 65 and 80, respectively. Table 22, page 75, shows the number of member banks and nonmember banks (on the par list and those not on the par list) for all districts and for each of the states in the Fifth Federal Reserve District on December 31, 1939. B A N K RELATIONS ACTIVITIES

Organized in February, 1922, the Bank Relations Department of the Federal Reserve Bank of Richmond grew out of the Bank's experience in the par-clearance campaign. Several men previously engaged in this work were transferred to the new department; one was stationed in Baltimore, another in Charleston, South Carolina, and two at Richmond. In the early years the main purpose of this department was to keep the member banks fully informed about the Richmond Bank in particular and about the Federal Reserve System in general. It was hoped that the member banks, in turn, would deal successfully with any misunderstanding in the minds of

MEMBER

AND

NONMEMBER

BANKS

77

nonmember bankers. T o carry out this objective, an official of the department visited each member bank in the District at least once a year. After the " b a n k i n g h o l i d a y " in 1933 this department concentrated its attention on nonmember banks of the Fifth Federal Reserve District. In addition to the routine calls of its regular representatives special visits were made to both member and nonmember banks by certain officers of the Federal Reserve Bank of R i c h mond and its branches. H u g h Leach, as president of the R i c h m o n d Bank, took an active interest in this work, and E. A . Kincaid, consulting economist of the Bank, addressed various banking associations throughout the District. In short, this department has m a d e excellent use of the human element in banking to establish cooperative relationships between the Federal Reserve Bank of R i c h m o n d and all banks in the Fifth Federal Reserve District. PUBLIC RELATIONS ACTIVITIES

T h e Federal Reserve Bank of R i c h m o n d keeps its member banks and the general public informed on business conditions in the Fifth Federal Reserve District through its publication, The Monthly Review of Business and Agricultural Conditions. In the early years of its existence the Bank published Questions and Answers on the Federal Reserve System and Letters to College Classes. These publications were used in many of the leading educational institutions. STOCKHOLDERS' MEETINGS

O n e of the noteworthy undertakings of the Federal Reserve Bank of R i c h m o n d was to stimulate a desire to solve mutual problems b y member banks. By 1922 so little interest was shown in the Federal Reserve System by the member banks that a Congressional c o m mittee was appointed to find out what could be done to remedy the situation. A t its hearings the Clearing House of Boston 12 suggested that an organization of N e w England bankers might benefit b y conferences with the officers of their Federal Reserve Bank. C o n 11 The Federal Reserve Bank of Boston was in contrast to the Richmond Bank in that it reported consistently large attendance at its meetings, namely, 85 percent of all the members.—Ibid., p. 100.

78

MEMBER

AND N O N M E M B E R

BANKS

sequently a committee of stockholders in the Federal Reserve Bank of Boston was formed, and meetings began in 1 9 2 3 . 1 1 The Federal Reserve Bank of Richmond followed the example of the Federal Reserve Bank of Boston and held its first stockholders' meeting at Richmond, on April 14, 1925. The program of these meetings was characterized chiefly by addresses of officers and directors on subjects of current moment. Among the chief speakers was the governor of the Bank, George J . Seay. The published proceedings suggest that there was surprisingly little discussion of the main subject by the attendants. The conferences, nevertheless, afforded a splendid opportunity for the establishment of cordial relations between the Federal Reserve Bank and its member banks. The stockholders' meetings, however, were not altogether successful, judging by the number of banks represented and the number of representatives present at successive meetings. At the first gathering in 1925, 160 banks participated, with 177 representatives; but at the last meeting, in 1932, only 89 banks registered, with 128 representatives. The greatest decrease was shown in the representation from the Carolinas, which dropped from 51 banks in 1925 to 14 in 1932. The stockholders' meetings were discontinued in 1932. 1J

Taggart, The Federal Reserve Bank of Boston, p. 99.

CHAPTER BANK

SUSPENSIONS1

VI AND

PUBLIC

SUPERVISION "J I N T E R E S T I N G phase of banking history in the Fifth Federal Reserve District is found in the number and distribution of member and nonmember bank suspensions during the period 1 9 2 1 - 1 9 3 6 . T h e analysis which follows includes the number, deposits, and loans and investments of suspended banks by states. It also considers state and national suspended banks by size of town. T h e last part of the chapter refers to likely causes for bank suspensions in certain states of the Fifth Federal Reserve District. Discussed also is the public supervision of state and national banks and member banks in the District. B A N K SUSPENSIONS.

1921-1936

Suspensions of member banks in the Fifth Federal Reserve District states, through the 1 9 2 1 - 1 9 3 6 period numbered 232, with a suspension rate 2 of 43 during the same interval. T h e suspension rates of member banks were especially high in the cotton- and tobacco-growing states of North Carolina and South Carolina, where they reached 79 and 71 percent, respectively (see Table 23, page 80, and Chart V I I , page 8 1 ) . T h e suspension rate for non1 "Bank suspensions comprise all banks closed to the public, either temporarily or permanently, by supervisory authorities or by the banks' boards of directors on account of financial difficulties, whether on a so-called moratorium basis or otherwise, unless the closing was under a special bank holiday declared by civil authorities. If a bank closed under a special holiday declared by civil authorities and remained closed only during such holiday or part thereof, it has not been counted as a bank suspension. The figures for 1933 include all banks not granted licenses following the banking holiday in March, 1933, which were subsequently placed in liquidation or receivership, and all other unlicensed banks which were not granted licenses to reopen by June 30, 1 9 3 3 . " Federal Reserve Bulletin, September, 1937, p. 866. 2 Except when otherwise stated the term "suspension rate" used here and in subsequent pages means the number of suspensions per too active banks on a specific day. In the case of a state the suspension rate refers to the average number of active banks in operation during a specified period.

H O 2 H V¡ CO a ? w o > co 01 CTi u w w Q < í*¡ Z J < CT) Cl a w CT) Q W b CH O Œ -, H h a to co 2 ? z
319

7

1930 1 931 '932

2 I

1 1

46 13

7 0

'933 ! 934 J 935 1936

102,176 7 89 0 0 0 1 I 0 1 3 3 N o suispended m e m b e r banks O

Totals

4 3 4

1929

82

Slate Banks

2

a Compiled from the Federal Reserve Board, Ftderal Reserve Bulletin, 1937, pp. 869, 870, 875, 880, 879.

3'3 September,

84

SUSPENSIONS

AND

SUPERVISION

or about i o percent of the deposits of all suspended member banks for 1921-1936. During 1930-1933, however, the deposits of 177 suspended member banks amounted to $235,000,000, or over 90 percent of the deposits of all suspended member banks in the Fifth Federal Reserve District states between 1921-1936. T h e number and deposits of suspended national and state member banks were greater during 1933 than for any year in the previous history of the Federal Reserve Bank of R i c h m o n d . In the entire United States, during 1930-1933, many of the large banks were suspended. Consequently these banks adversely affected smaller banks whose correspondent accounts were deposited with the larger banks. Likewise the hoarding tendency throughout the country contributed to the closing of many banks. 3 T O T A L LOANS AND INVESTMENTS OF SUSPENDED

BANKS,

I92I-I936, I92I-I929AND I93O-I933 In the Fifth Federal Reserve District states, during 1921-1936, inclusive, suspended member banks numbered 232, with loans and investments totaling $360,000,000. T h e first part of the period, 1921-1929, the amount of loans and investments of suspended member banks in the District states did not exceed $7,000,000 for any one year. However, between 1930 and 1933 there was a marked increase in the annual amount of loans and investments of suspended member banks, as is shown in T a b l e 25, page 85, and C h a r t V I I I , page 86. During the banking depression in 1930-1933 the amount of loans and investments of 137 suspended member banks in the District states totaled $326,000,000, or approximately 90 percent of the total loans and investments of member banks which suspended operations during 1921-1936. In order of largest amount of loans and investments of suspended member banks, the states are during 1930-1933: M a r y l a n d , North Carolina, Virginia, West Virginia, South Carolina, and the District of Columbia. 4 A n explanation for this distribution would necessitate additional research not warranted by the limits of this book. 3 4

¡bid., September, 1937, p. 1218. Ibid., pp. 879, 880.

SUSPENSIONS

AND

TABLE NUMBER,

L O A N S AND

SUPERVISION

85

25

INVESTMENTS OF M E M B E R

BANKS

SUSPENDED

IN C O M B I N E D F I F T H F E D E R A L R E S E R V E D I S T R I C T S T A T E S ,

ig21-^6* NUMBER OF SUSPENDED

LOANS AND INVESTMENTS OF

MEMBER BANKS

SUSPENDED MEMBER BANKS (In thousands of dollars)

Tear

1921 1922

National

State

Banks

Banks

i

!923 !924

4 3 3

J925

10

1926 1927 1928

4 5 9

r929

7 21 46

'93° 1 93 1 !932 !933 !934 *935 '936

!3

0 0 0 i i 0

Totals

National

State

Banks

Banks

Totals

1

327

0

4 3 4

5.251 1,961

0 0

1,961

'>994

5°4

2 ,498

11

4,768 1,857 3,°90 3,658

221 0 3,060

4,989 1,857 6,150 4,042

5,765 23,450 46,086

884 580

4 i

4 9 10

i 1

8 22

7 0

53 »3

2 4, 2 74

82 i34,34o 7 89 0 0 0 0 i 0 1 365 No suspended member banks

384

5,936 0 91,698 0 0

327

6,649 24,030 52,022 2 4> 2 74

226,038 0 365

1 T h i s t a b l e w a s c o m p i l e d f r o m the F e d e r a l R e s e r v e B o a r d , Federal Reserve Bulletin, S e p t e m b e r , 1937, pp. 869, 870, 875, 879, 880.

NUMBER OF BANK SUSPENSIONS, BY SIZE OF T O W N ,

I92I-I931

This section studies the distribution of the number of bank suspensions per 100 active banks on June 30, 1920, by towns of various population groups in the states of the Fifth Federal Reserve District during 1921-1931. The analysis further considers the suspension rates for both national and state banks in the District states and the entire United States as shown in Table 26, page 87.

86

SUSPENSIONS

AND

CHART

S U P E R V I S I O N

VIII

N U M B E R , L O A N S , AND I N V E S T M E N T S AND D E P O S I T S OF M E M B E R B A N K S S U S P E N D E D IN T H E C O M B I N E D F I F T H F E D E R A L STATES, M I L L I O N S OF

400

RESERVE

1921-1936*

DOLLARS

200

100 80 60

40 20

10 e s

4 2 1 1021

1024

NUMERALS AT

T O P INDICATE

1927 NUMBER

1030 OF S U S P E N D E D

1933

193«

BANKS.

• Data from T a b l e 25.

T h e highest suspension rates during 1 9 2 1 - 1 9 3 1 occurred among national banks in small towns of less than 2,500 population in South Carolina, North Carolina, and West Virginia. Of interest is the fact that these states had the highest suspension rates of all the states in the District. T h e suspension rates of national banks in each of these states for the period diminished with the increasing size of population groups, except for cities of 25,000 to 49,999 population. In contrast to the states analyzed, Virginia and Maryland reported the highest suspension rates of national banks in cities with a population group of 25,000 to 49,999. This may be attributed to the

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