If the United States Had Branch Banks

IT is of course manifest that no system of banking or currency that was ever devised can afford a sure protection against financial crises and panics. Bank runs happen everywhere. If it suddenly came out, in England, France, Germany, Canada, that an important bank was in trouble, the news accompanied by a crashing of prices in the stock markets, and followed in two or three days by the unexpected stoppage of a large deposit-holding institution, believed to be sound and solid, it is pretty certain that runs on banks would develop, and that panicky conditions would prevail.

It is said of some of the ablest stockmarket operators that they like at times, when conducting important campaigns, to go away a little distance from Wall Street, where they can shake themselves free from the thousand and one rumors and factors which often serve to obscure and confuse the judgment of those on the spot.

In the same way, when it comes to the matter of determining the causes and development of the panic of 1907, there is something to be said in favor of a viewpoint a little removed from the turmoil and strife of the battleground. Such a view-point exists in the head offices, in Montreal and Toronto, of the big Canadian banks that have agencies in Wall Street. As these banks habitually employ a large part of their available reserves in New York call loans, as they take a respectable share of the dealings in foreign exchange in New York, and invest part of their surplus funds, when they have them, in American railroad bonds, the men in charge of them make it their business at all times to inform themselves pretty thoroughly about United States conditions. They have no axes to grind in the United States; they have no direct interest in American politics or finance, except that they wish the latter to be sound and stable. The opinions and conclusions they form are therefore apt to be based strictly on the merits of the questions considered. They have a further advantage. The Canadian people are not radically different from the people of the States. General conditions in the Dominion and in the northern half of the Republic are not at all dissimilar. It is an advantage, when studying American conditions, to have knowledge of what effects are produced when a different system of banking is applied to people and to conditions resembling the American people and American conditions.

Ask any Canadian general manager what is the real trouble in the States, and he will probably say, “ the banking system.” From his view-point he can see clearly that the fact of the banking business being in the hands of six thousand odd institutions, each one with its president, directors, and complete organization, and many of the officers having little real knowledge of the science of banking, is the prime financial disability under which the great Republic staggers. Compared with this defect the currency question is of minor importance. If the defect of the banking system were removed, the currency problem would be easy of solution. It is seen clearly enough in Canada that this doctrine gets but short shrift with United States bankers. The six thousand bank presidents, the six thousand boards of directors and their friends can see no good in the inauguration of branch banks because it would mean that they would be superseded by the branch manager. Therefore branch banks are “ politically impossible.” If the American people— the discounters and depositors, that is, not the bankers — ever got anything like a fair idea of the benefits that would be theirs if they possessed a system of strong branch banks owned and operated as such banks are in other highly civilized countries, they would never tolerate the present system. They would fare better not only in times of panic and in times of special stress, such as crop-moving, but every day in every year. It will be well worth while to sketch briefly the kind of banks from which the most benefit might be expected, and to explain the chief points in which they would be superior to the isolated banks.

This can best be done perhaps by supposing that instead of the thousands of independent banking offices there were one hundred and fifty or two hundred banks, each one having from fifty to five hundred branches. (The Report of the Comptroller of the Currency shows that on June 18, 1906, there wore in the United States 6053 national banks, and 11,852 state banks of various kinds; in all 17,905. This total is now exceeded. Lloyd’s Bank, one of the great English banks, has five hundred branches.)

These large banks, instead of having names of purely local significance, such as First National Bank of Albany, or Poughkeepsie National Bank, would be called after the great cities, stales, and sections, or after important industries. Among them probably would be the Bank of New York, Bank of Philadelphia, of Chicago, of Boston, Bank of Massachusetts, of Pennsylvania, of Virginia, Northwestern Bank, Bank of the Pacific Coast, Merchants’ Bank of America, and others. Though taking their names from certain cities and states, their operations would not be confined in narrow limits. Each one of the more important institutions would have its branch office in every big centre, wdth scores of other branch offices in the respective districts tributary thereto.

The first thing to strike an observer about such a system would be the enormous economy of administration that would result. The branch manager would replace the president, board, and organization in over twelve thousand banking offices. It may be assumed also that he would do the work better than they now do it. He would be a trained banker, having come up from the bottom, and having served in various districts and localities. Besides, he would be controlled and guided by the best banking talent in the whole country. Another inevitable result would be the pushing of branch offices into thousands of places not now possessing banking facilities (because of the greater economy of working). A banking office would pay on a much smaller volume of business. In Canada there is hardly a hamlet, in the east or west, with three hundred people, that does not possess its branch office of a strong chartered bank, which will accept deposits of from one dollar upwards, allowing interest thereon, and lend to every worthy borrower, small and big, who can furnish proper bankable security.

Constitution of the Banks

The constitution of these big branch banks would be an important matter. They would stand the better chance of gaining and keeping the confidence of the general public if they were constituted similarly to the Canadian banks. The stock of each bank in the Dominion is widely distributed all over the country, a large part of it in odd lots of less than ten shares. The presidents and directors would be chiefly merchants and business men following callings apart from promotions, stock speculations, and the like. The banks would be devoted to commercial banking, that is to say they would employ their resources mainly in discounting commercial paper. There would be also a few banks specializing in financial business. These, however, would not extend their branches into the small places; their offices would be found only in the large cities.

The active management of the commercial banks would be in the hands of highly-trained general managers acting under the close supervision of the directors.

A word first as to the staffs of clerks. In every bank there would be a large number of dignified and highly-paid positions. all of which would be open to be won by the junior clerks. The service would be attractive, too, by reason of the pleasing uncertainty as to the place and nature of the promotion next to come. This would draw a good class of men into the service. It comes about, too, that the men in the staff of a great branch bank are knit together like a clan. The establishment of mutual guarantee funds and pension funds aids materially in bringing this to pass. In Canada the bank clerks do not have to pay premiums to outside companies for fidelity insurance. Mutual funds are established. Each man pays in less than half what he would pay to a guarantee or fidelity company, and, if there are no defalcations, he gets back all his payments with compound interest. And as for pensions, he pays in so much a month. His bank pays in a bulk sum out of its profits for a series of years. Out of the fund thus created every contributor has a legal right to a pension graded according to his length of service.

Bank Frauds would be more difficult

Every once in a while, under the present system of independent banks, the public faith in banks is rudely shocked by disclosures of fraud and crookedness. One of the latest cases is furnished by a bank in Brooklyn. While it cannot be said that a system of branch banks would banish frauds of this kind, it can be said that it would make them vastly more difficult to accomplish. The great majority of bank frauds in the United States are committed by men firmly fixed in the control or management. They rarely or never occur in the greatest banks in the big centres, because the system of prevention is better there.

Under the branch system an elaborate set of rules is provided, to be observed at every office, the object of which is to prevent frauds. On top of the rules there is in vogue a method of moving and changing the men. No officer, be he junior or manager, knows whether or not he will hold his position unchanged a -week later. Orders may come any day for his removal to another branch. And over all these is the system of inspection. The inspection practiced in the big branch banks is far more efficient and thorough than any system of government inspection can ever be. The men selected for the work are among the brightest and best on the staff. Their reputations and prospects depend on the way they do their work. If even a petty defalcation by a minor officer occurred at a branch shortly after it had been inspected, the inspector would have to explain why he found no trace of it.

These considerations have an important bearing on the matter of the confidence, respect, and good-will the branch banks are able to inspire in the public. If the rank and file of the staff is of good material, if it is actuated by esprit de corps, and if bank defalcations are of rare occurrence, popular confidence in the banks is bound to be greater.

How Bank Borrowers would benefit

One of the vexatious and troublesome features of the system of isolated small banks is the necessity under which it places large borrowers of having recourse to note-brokers in placing their paper. An American firm or company borrowing $100,000 or more may have to be beholden to a number of institutions in various parts of the country for its accommodation. This is said to have brought about the receivership of the Westinghouse concerns. Notes held by divers country banks coming due; the country banks wanting to get cash because of the panic, and insisting on payment; nobody, and no banks, lending money during the panic — hence the receivership. No doubt hundreds of other firms and companies have been in situations hardly less comfortable, from exactly the same cause. All the dislocation of business, the distress resulting from this phenomenon, is without doubt due to the defects of the banking system. Had the branch banks, which are being described, been in existence, the Westinghouse people would have had their account divided among two or three banks. These banks would arrange to give the company a line of credit sufficient to enable it to carry on its business. They would arrange among themselves and with the company what share was to be advanced by each bank. They would insist, as a condition of granting the credit, that the company confine its borrowings to them. In return they would be under obligation to carry it and lend it money so long as it was solvent and prosperous.

With regard to smaller borrowers, those requiring less than half or a quarter of a million, each one would be expected to borrow altogether from a single bank, which would support its customers through thick and thin. Under this system the relations between banker and customer are closer, more mutually helpful, and far pleasanter than they ever can be under the present American system. Commerce and industry of all kinds reap the benefit. All through the crisis of 1893, and all through the crisis of 1907, the Canadian banks stood by their customers. The customers saw scarcely any difference in their business because of the panics. They knew of them from the newspapers and from the large quantity of American goods offered in the Dominion at reduced prices — largely because of the liquidation forced by the country banks south of the line.

Small Borrowers benefit also

Biff it is not merely the large companies and firms that would benefit from a change to branch banks. The little fellow who wants to borrow only fifty or a hundred dollars would also gain. The great Canadian banks, without exception, reckon the burners among their most valuable customers. In the tiniest towns and villages, the farmer, the workingman, the cattle-dealer, the storekeeper, the hotel man, have right at hand a banking office which is ready at all times of the year to lend them money if they can procure acceptable backers or provide other security that is suitable.

In one respect, however, these loans are closely restricted. They must be based on quick or liquid assets. Nothing in the nature of mortgages on real estate or fixed property is considered. The farmer borrows in anticipation of the sale of his crop or surplus livestock, the storekeeper discounts his customer’s notes, the manufacturer borrows on his raw material in process, shortly to be sold. The business in real-estate mortgages is in the hands of loan and mortgage companies. These latter get their capital from issues of bonds or debentures payable so many years ahead. Thus they can quite properly put it out on mortgages running for five years or more. But the banks get their funds from depositors; they are repayable partly on demand and partly on fifteen days’ notice. Sound principles therefore require that the funds should be put out on securities having a short currency. And those principles are adhered to.

How Local Industries would fare

Probably the very chiefest of the arguments used by American bankers to influence the people against branch banks is that referring to local industries. To the business men of every locality they say, “ If you had branch banks the capital of this locality would be gathered up and taken to New York or Chicago. Your local industries would suffer. Now you have a local independent bank, the directors are local men. They will see to it that the deposit fund of the locality goes to develop local industries.” It only needs a knowledge of Canadian, English, or Scotch conditions, to see that this argument has no force whatever. As a matter of fact it can be demonstrated that in a great many localities local industries would fare much better if they had branch banks. Sometimes the local independent bankers read the term “ to support local industries ” to mean “ to support the local industries in which we ourselves are personally interested.” The branch manager has no personal interest in local industries. He judges all applications strictly on their merits. If the head office found out that he was personally interested in a large borrower’s business he would perhaps be moved to another branch. The experience in Canada is that at all the branch offices the banks do all the good business they possibly can — both discounting and deposit-getting. The amount of discounts carried at a branch bank will nearly always be the amount of good safe business the manager can lay his hands on. The consequence is that the amount which the branch can place at the disposal of the worthy local industries is not limited by the amount of deposits the locality can furnish. Practically all localities in Western Canada, and all manufacturing towns in the East benefit especially from this feature. And it is reasonable to assume that all localities in the Western States and all manufacturing centres in the Eastern, would benefit especially from the institution of branch banks in the Republic.

In a quiet little village of Eastern Canada, after the manager has done his utmost to find borrowers, his branch balance sheet may show deposits $120,000, discounts $20,000. On the contrary the great majority of Western branches will show discounts heavily overbalancing deposits. In the West it is not at all uncommon for a country branch to show discounts $200,000, deposits $50,000. Under the system of independent banks these Western offices could have advanced to local industries only something less than they had in deposits.

A word as to deposit facilities. With branch banks established in every little place, paying interest on small deposits, the United States would not be, so much, the paradise of the get-rich-quick swindler. The people would have depositories, in which they could trust, to put their money. There would be less cash used in daily transactions, less in bureau drawers and other hoarding-places. The check habit would become more universal. The country’s fund of cash would be, more largely, in the banks, where it would be useful, instead of being in people’s pockets and homes.

So from the gains in deposits there ought to be a larger fund than now available for financial purposes in the great centres, even although the commercial banks put only their temporary surpluses out on Wall Street.

There might be a great central bank or there might not. If there were one, it should be fiscal agent for the United States Treasury and hold all its funds. If not, the Treasury funds could be apportioned fairly among the branch banks. The currency problem would be simplified because strong branch banks could safely be given powers of note issue to which small isolated banks are not at all entitled. In Canada the associated banks guarantee the issues of the individual institutions. The Bankers’ Association has the right of supervision over the circulation books of the banks. The notes are a first charge on the assets of the issuing banks. Also in the event of failure they bear interest at five per cent from the date of suspension till the receiver advertises his readiness to redeem them. As a result the notes pass readily at par even after the issuing bank may have failed.

How Branch Banks would have handled the Panic

It is a terrible impeachment of a banking system to say that it causes perfectly solvent firms to fail, that it unnecessarily throws thousands of workmen out of employment in every extraordinary crisis, that twice in the last fifteen years it has deeply humiliated the nation in the eyes of the whole world through the partial suspension of banking payments — something which has not in late years occurred in any great country outside the United States. The handling of the panic would have been vastly easier if a system of branch banks had been in operation, because the experienced bankers in the cities would have had control over the country offices. There would not have been seen that senseless hoarding of cash at interior offices when it was not needed. The equally senseless pressing for payment of all discounted bills also would have been less. The branch managers would have been instructed to discount as usual, thereby helping to disarm the fears of their depositors. There would not have been the enormous sum of fifteen hundred millions of bank and trust company balances held by the national banks. (The last abstract issued by the Comptroller shows the following: —

Due to other national banks $823,680,087

Due to state banks and bankers 395,745,494

Due to trust companies and savings banks 337,927,872

$1,557,353,453)

Under the branch system the panicstricken interior bankers would not have had this dangerous control over the resources in the big centres. That control had probably more to do than any other factor in bringing about the suspension of payments and in delaying resumption.