During the past ten years a business revolution has taken place. Whereas formerly each town had independent grocery, clothing, drug, and other retail stores, an ice plant, a local trolley system, an electric-light plant, a power house, coal yards, and thriving local industries, to-day the whole aspect of the town has changed. The independent retail stores have given way to chain stores; electricity, gas, water, and transportation are now supplied by public-utility corporations that are state-wide or regional in character. Local industries have been merged with larger corporations. The financing of these enterprises, once a profitable outlet for investment of the funds of the local banks, is now being done by central banking institutions, equipped to render adequate service to the larger business units.
The banks of the country have lagged behind industry in aligning themselves with the new order. The local store is only a distributing office of a vast national system of chain stores. It is in charge of a manager who receives the produce and sees that it is sold, but one who does not buy or secure credit, and who is not in any way active in the financing of the company. To be sure, he deposits his daily receipts in the local bank, but the transfer from the local bank to the central institution is of such short duration that this checking account, in common with a large number of other small checking accounts, is a loss to the bank rather than an asset. Certainly the bank has lost the opportunity it had with the independent merchant to deal with his substantial checking account, to take care of a part of his money in a savings account, and to finance him with loans. Instead of dealing with a local, independent business man, the bank is now dealing with a transient, promotion-seeking manager. The same holds true of the local gas office, now a branch of a regional utility corporation; or the local electric-light office, or scores of other local business institutions. Tires, drugs, automobiles, groceries, clothing, hardware, dry goods, shoes, candy, tobacco, household furniture, kitchen equipment, electrical equipment, radios, refrigerators, heaters, and scores of other commodities are to-day sold through chain stores, and distribution is directed from offices in central cities outside of the town.
This change in merchandising has had its effect on banks in the metropolitan cities, which have been forced to expand their capitalization in order to supply credit to these new clients whose annual business runs into the hundreds of millions of dollars. The legal loaning capacity to any one client is 10 per cent of the bank’s capital and surplus. When there were developed such businesses as Woolworth’s with $287,000,000 sales annually, or Sears, Roebuck, with $347,000,000 sales, or the Goodyear Tire Company with $233,000,000 sales, or hundreds of other organizations with annual sales running well into nine figures, even the largest bank in America, with its capital and surplus of $75,000,000 in 1927, was able to lend only $7,500,000 to any one of these clients. This seems like a good-sized loan, but it is wholly inadequate when we deal with an expanding industry running its sales up to three and four hundred million dollars annually. In consequence there was the need for expansion of the loaning capacity of banks by increased capitalization and by mergers. During the past five years, in the ten largest cities in the United States fifty-two mergers have taken place, creating three banks with over one billion dollars deposits; twelve with over five hundred million; and one hundred and eight with over fifty million. The extent to which industry has driven banks toward concentration of their resources is shown by the fact that seven banks, comprising 0.1 per cent of the total number in these ten cities, have 18.7 per cent of the total invested capital and 20.3 per cent of the total banking resources.