well as a plethora of small, independent banks, has revived interest in the old plea of the Federal Reserve Board that corporations subject to its jurisdiction be required to abide by more stringent requirements for corporate mergers and consolidations. Concentration of financial resources and credit facilities are even more ominous to a competitive economy than concentration on an industry-wide basis. The continuing decline in the Nation's banking population coupled with the unrelenting merger movement in the field of finance gives rise to serious concern lest competition be severely restricted or eliminated among banking facilities or the credit resources of the country unduly concentrated within the vaults of a few large financial institutions.

In order to appraise accurately the present structure of the banking system in the United States and determine if remedial legislation with respect to bank mergers or other aspects of concentration in the field of banking is necessary, this report has been undertaken. While much of the data contained herein is readily available in statistical studies already in published form, no contemporaneous effort has been made to unite all the threads of information bearing upon the subject of banking concentration and weave them into a synthesis of the present competitive structure of the Nation's banking system.

At this juncture, acknowledgment is made of the very helpful assistance rendered in the preparation of certain materials in this report by the Federal Reserve Board and the Legislative Reference Service of the Library of Congress. Liberal resort to the excellent materials prepared by the Joint Committee on the Economic Report on Monetary Policy and the Management of the Public Debt has also been made.

BANK MERGERS AND CONCENTRATION OF BANKING

FACILITIES

I. HISTORICAL BACKGROUND

While financing of economic endeavor was necessary, even in the early days of this country's history, banking in the Colonies showed little resemblance to banking operations as understood today. Demand deposits, time deposits, checks, accounts, reserves-all these were unknown in a territory where financing requirements were relatively simple and banks were considered "simply a batch of paper money." The primary purpose of colonial banks was not to provide deposit and credit facilities as do present-day commercial banks but rather to serve as issuers of paper money upon the furnishing of security, generally real estate.

1 2

The earliest forerunner of the modern bank in the United States was the Bank of North America chartered by the Continental Congress in 1781 largely at the instance of Robert Morris who was charged with the duty of supervising the financial operations of the Revolution. In the opinion of one author, the Bank of North America "was a complete success as a war measure, making extensive loans to the Government at the time when the Continental bills had become worthless. It revived business, created a desirable alliance of businessmen with the Government, supplied a currency redeemable in specie on demand, and showed the possibility of maintaining a sound banknote issue even in the distraught decade following the Revolutionary War." 3

Meanwhile, other banks were being organized on a local level. Massachusetts chartered the Bank of Massachusetts in 1784, Pennsylvania proffered a charter to the afore-mentioned Bank of North America in 1782 when doubts as to the power of the Continental Congress to authorize such an institution arose, and in 1784 Alexander Hamilton's financial protégé, the Bank of New York, began operations in the future financial capital of the world. By 1791, most of the States had chartered at least one bank, and by 1800 there were 28 State banks and by 1811, 88.

Principally upon the urgings of Alexander Hamilton, who considered a national bank "an indispensable engine in the administration of the finances," the First Bank of the United States was chartered by the Congress in 1791, not, however, without certain misgivings and reservations being expressed by opponents of the bank as to the constitutional power to incorporate such an entity. The First Bank of the United States was completely under private management and its powers and functions were patterned largely after its English

2 Statement of Francis A. Walker cited in Dewey, Financial History of the United States (12th ed., 1936), p. 24. 3 Westerfield, Money, Credit, and Banking (1947 ed.), p. 354.

23764-52

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4

counterparts. The bank made loans to the central Government and served as a repository for Government funds. It also issued its own notes and in general had a stabilizing effect upon the Nation's still unsteady currency.

The First Bank of the United States had been incorporated for a period of 20 years, and upon the expiration of that time, over the heated protests of Gallatin, Madison, and other friends of the bank, its charter was permitted to lapse. With its establishment, however, the dual system of banking in the United States in which both federally chartered and State chartered banks operated coexistently, became a generally accepted institutional pattern which ultimately would prove to be one of the most singular characteristics of the American banking structure.

The First Bank of the United States had proven from the first a highly acceptable, and indeed a necessary, instrument of financial policy for the young Republic. Thus it was that "The embarrassments of the money market in less than 3 years after the dissolution of the First United States Bank in 1811 revived a demand for the establishment of a similar institution." 5 By 1816, the Second Bank of the United States, with a capital of $35,000,000, had been chartered for a 20-year interval and once again the dual system of banking prevailed throughout the several States.

The Second Bank of the United States did not fare as well as its predecessor, which, despite the fact that its charter had been permitted to expire, had nevertheless escaped public censure for misconduct and political activity. The Second National Bank, however, was the cause of much dissension from its very beginning. Only 2 years after its inception, the State of Maryland passed a measure entitled "an act to impose a tax on all banks or branches thereof, in the State of Maryland, not chartered by the legislature," Which in effect required the National Bank to issue it notes upon stamped paper or, in lieu thereof, to pay an annual tax of $15,000. On February 8, 1819, the State of Ohio also imposed an annual tax on the bank of the United States of $50,000 by virtue of "an act to levy and collect a tax from all banks, and individuals, and companies and associations of individuals, that may transact banking business in this State, without being allowed to do so by the laws thereof." Upon any bank's refusal to pay this tax, State agents were directed to seek the money in the bank's offices and even "to go into each and any other room or vault of such banking house, and every closet, chest, box, or drawer in such banking house, to open and search." Other States joined in the foray against the National Bank, and taxes were also levied on its branches by North Carolina, Kentucky, and Georgia.

If these exactions of the State legislatures had been permitted to exist, the National Bank would have been at the complete mercy of the several States, many of which had openly expressed hostility to the operation of a Federal bank within their jurisdictions. "The power to tax," said John Marshall in his historic opinion in the case of McCulloch v. Maryland, "involves the power to destroy," and had it not been for the decisions of the Supreme Court in the McCulloch

National Monetary Commission, the First and Second Banks of the United States, S. Doc. No. 571, 61st Cong., 2d sess. (1910), pp. 21-22.

case and in the case of Osborn v. Bank of the United States," each of which invalidated State statutes taxing National Bank branches, the Second National Bank would have been short lived. "Had it lost either of these cases, one author observes, "there can be no doubt that it would soon have been taxed out of existence in all of the Southern and Western States." &

Not only did John Marshall's opinions in the two bank cases safeguard the operations of the Second Bank from impairment by the State legislatures but they decided as well the perplexing issue of the constitutionality of the bank itself, a matter which had disturbed the National Government ever since the granting of the first charter to the Bank of North America in 1781. Whether the National Government could constitutionally incorporate an organization for the purpose of engaging in the business of banking was, as Daniel Webster advised the Supreme Court of the United States, "a question of the utmost magnitude." Through a broad interpretation of Federal powers which aroused considerable antagonism in the minds of many who jealously guarded States rights from Federal encroachment, the two bank cases made it clear that Congress could itself create a bank since "It is an instrument which is 'necessary and proper' for carrying on the fiscal operations of government." These words of John Marshall were to play an important role in the future of national policy long after the Second Bank of the United States had been interred.

While John Marshall could grant the National Bank a refuge from repeated assaults of the State legislatures, he was powerless to intervene in the internecine warfare between Andrew Jackson and the bank in which the former ultimately triumphed. There was no opportunity for Marshall to file a dissenting opinion in connection with President Jackson's veto of the recharter of the bank in 1832 despite the fact that one of the stated reasons for the veto was the unconstitutionality of the bank. He could only express consternation when Jackson gave the bank no respite and finally withdrew all Federal deposits from its coffers. And when the charter of the bank expired in 1836, its stalwart defender, John Marshall, had departed to the dais of another court of last resort.

The demise of the Second National Bank and the temporary suspension of the dual banking system was accompanied by a rapid growth in the number of State banks. Between 1837 and the outbreak of the Civil War the number of State banks increased from 788 to 1,601. This rise was due in no small measure to the decision of the Supreme Court in the former year which upheld the constitutionality of State chartered banks and their power to issue notes,10 and to the free banking movement begun in the State of New York in 1838 whereby banks were permitted by statute to incorporate generally upon complying with certain conditions without first applying for a special enactment of the State legislature.

These extensive developments in State banking were not without their drawbacks. In many sections of the country, "wildcat banking," in which banks were situated in isolated areas in order to assure little chance of redemption of their notes, became general practice. Re

serve requirements were often inadequate or nonexistent. Ruses were employed to deceive State banking officials who sought to enforce local statutes. The repercussions of inflationary and deflationary cycles were excessively severe.

Because of these and other deficiencies inherent in a Nation-wide system of banks comprised solely of local institutions operating under diverse laws and regulations and the dire need which arose for a sound and uniform currency during the Civil War period, the National Banking Act of 1863 was enacted. Also contributing to its passage was the belief that a system of national banks might serve to stimulate the sale of Government bonds and thus provide needed financial support for the war effort.

With the passage of the National Bank Act of 1863 and subsequent amendments offered in 1864,12 the Nation was again restored to a dual banking footing. Derived largely from the New York Free Banking Act, the National Bank Act permitted national banking associations to organize upon fulfilling certain stipulated conditions and upon receiving a certificate from the Comptroller of the Currency. National bank notes, however, were expressly guaranteed by the Federal Government.

In an effort to provide a uniform currency throughout the country, notes of State banks were subjected to a prohibitive 10 percent tax in the following year. While this latter action successfully eliminated the competition of local currency vying with that of the National Government and also lent encouragement to State banks to join the national banking system, it did not otherwise substantially alter the dual system of both State and Federal banks doing a coextensive business throughout the country which had been reintroduced by the act permitting national banking associations.

The banking structure which prevailed following the National Bank Act, however, was deficient in many respects. The national banking system was indeed a misnomer. There was no central authority to integrate the policies of the many national banks throughout the country and little effective control over the expansion of bank credit. There was also a marked inability to accommodate credit to seasonal requirements of borrowers resulting in frequent periods of severe loan contraction and financial panic. The dual system of banking constituted in reality a multitude of independent banking systems ultimately reaching 48 in number. Even were the national banking system effectively organized, the many State banks and their superior resources would have rendered effective banking practices on a Nationwide level difficult of attainment.

While these characteristics of the banking structure were more than visibly apparent to many, they were emphasized by the reports of the National Monetary Commission presented to Congress in 1912 which recommended a new banking system designed to overcome the abundant failings shown to have existed in the old. In the next year, the Federal Reserve Act was enacted which embodied many of the suggestions of the Monetary Commission.12a By virtue of this legislation, a Federal Reserve Board was created whose primary duty was to supervise the operations of the 12 Federal Reserve banks which were established as so-called "bankers banks" in Federal Reserve

12 12 Stat. 665; 13 Stat. 99.

12a 38 Stat. 251; Public, No. 43, 63d Cong., 2d sess. (1913); 12 U. S. C. § 221 ff.