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DATE DUE DATE DUE MTE DUE 31:93 tact? 5 1/98 cums-mu Howard Ralph Neville candidate for the degree of Doctor of Philosophy 'nal examination, Dissertation: An Historical Study of the Collapse of Banking in Detroit, 1929 - 1933 Outline of Studies Major subject: Sconomics Minor subject: History Biographical Items Born, March a, 1926, Rank Ree, Illinois Undergraduate Studies, University of Illinois, l;h3- l9Lo Graduate Studies: Louisiana State University, 1951-1 Achiga n State University, 952-195 0 Experience: Graduate Assistant, Michigan State Univer- sity, 1952-1953; Instructor, College of Business and Public Service, Michigan State University, 1953-1954;.Administrative Assistant to Director of Continuing Educa- tion Service, llCfllQ n State University, l9)~-l9)-° Graduate Teaching Assistant, Louisiana State University, 1951—1952; Sales and Advertising Representative, Proctor and Gamble Distributing Company, l9L8—I9Sl; member of United States Army, I9L3-l9h3. fl ”"‘~'l‘3\f r‘ ’“I’J‘ r“? 3‘3"? " T.“ lUIJI Li‘ 1:... |u"vL4LJ‘Ll C)... LI I). " AH HISTORICAL 3 an, lac”) 7C - /’L)'\) Howard Ralph Neville 3‘ v r F n r“ ' AV AM my: AQJTIUu/l d s d Science Ho (0 hool for Advanced Graduate Stu y of Aariculture and Applie Submitted to the Sc i rsit 9 Michigan State Un ve in partial Department of Economics Year 1956 Approved COPYRIGHTED By Howard Ralph Neville 1957 r4- 1 ABSTRACT On Narch C, 1933, the newly inaugurated President of the United States, Franklin Delano Roosevelt, proclaimed a banking holiday for the United States. During the previous twenty days authorities in almost every state had either proclaimed banking holidays or had made provision for the restriction of payment for deposits. The first state to reach a crisis and to have a banking holiday proclamation was Michigan on February 1;, 1933. Some banking authorities put much of the blame of the Hich'gan crisis and, therefore, .0 ol the national holiday on two large group banking systems operating at the time in Detroit. The purposes of this study are to try to determine whether the Michigan banking holiday was a catalyst instru- mental in making President Roosevelt's proclamation inevi- table and to determine whether or not the group banking systems should receive the main force of criticism they have received. The procedure followed was to examine the literature in the general field of banking but also in the narrower field of multiple banking. Further, the testimony of banking people taken before the Senate Committee on Banking and Currency and that taken before a Detroit one-man grand jury inquiring into the Michigan banking holiday were studied. In addition, interviews were held with people who were directly connected with the banking holiday in Detroit and also with authorities of the state banking department of- fi,es in Lansing. It was found that although the officers and directors of the two group banking systems carried out procedures not L.) J generally accepted as good bankinc prac ice, factors other t ‘A ! influence on the stability pr L H O han economic exerted consider of the banking structure in Detroit in 1933. It has been pointed out that it was not necessarily the group banking system itself which contributed to the col- lapse of banking in hichigan as it was the lack of control and supervision of the system by banking authorities. Finally, it can be said that the holiday proclamation by the Governor of Michigan and the closing of the banks was a contributing factor, if not the catalyst, which led to the closing of all the banks in the country. Two prOposals are outlined for reducing the possibility of a renewal of banking problems such as those arising in the period from 1929 to 1933. The first proposal would increase the capital require- ments for the establishment of new banks of all kinds through the machinery of the Federal Deposit Insurance Corporation. The second proposal would introduce a permanent com- mittee, appointed by the Secretary of the Treasury, which should constantly review the banking structure and which should make recommendations to the Senate and House Com— mittees on Banking and Currency. AN HIS.ORlCfi STUDY OF THE COLLAPSE OE BANKING IN DETROIT, 192 — 1933 I \‘ Howard Ralph Neville .A ThiSIS Submitted to the School for Advanced Graduate Studies of Michigan State University of griculture and Applied Science in partial fulfillment of the requirements for the degree of DOCTCR OF PHILOSOPHY Department of Economics Year 1956 o / ' -// :3" 7 CHIIPTCR I. II. TABLE OF CONTENTS I IJT RODUCT I CI“! 0 o o o o o o o o o o o o o o 0 Problem of the Thesis . . . . . . . . . . Limitation of the Study . . . . . . . . . Source 01 Data 0 o o o o o o o o o o o 0 Statement of Organization of Chapters . . BANKING.AND THE ECONOMIC ENVIRONMENT . . 0 Introduction 0 O O O O O O O O O O O O 0 Population . . . . . . . . . . . . . . . hanufacturing . . . . . . . . . . . . . . Agriculture . . . . . . . . . . . . . . . General Economic Setting . . . . . . . . Michigan Banking Structure, Jan. 1, 1929 Michigan Banks, 192 . . . . . . . . . . I‘liChigan Banks, 1930 o o o o o o o o o 0 Michigan Banks, 1931 . . . . . . . . . . Michigan Banks, 1932 . . . . . . . . . . Michigan Banks, 1933 . . . . . . . . . . smary O O O O O O O O O O O O O O O O 0 III. MULTIPLE BANKING FORLS DEFINED AND BXPLAINCD IV. IntI‘OCIUCtiOn o o o o o o o o o o o o o 0 Definition of multiple Banking Forms . . Why Group Banking Became Extensively Used Late 1920's and Early 1930's . . . . Advantages of the Group Banking System . Disadvantages of the Group Banking System SLUllIllaFYOoooooooooooooooo FORMATION OF THE GROUP SYSTEM IN DETROIT . .. IntrOdUCtiOn o o o o o o o o o o o o o 0 Formation of the Guardian Detroit Union Group, Incorporated . . . . . . . . Formation of the Detroit Bankers Co. . . Causes of the Group movement in Detroit . Surn-Inary O O O O O O O O O O O O O I O O 0 ii F“. O p n c n \ I t‘ raga H «we ~J \nhrmr- IO J: 4:: . \OUI U‘L C\O\\J‘L\fl \04‘: 030) K] p... \l H are oxoer CO CD CHAPTER V. PROCEDURES OF THE GROUP BANK NG SYSTSMS CI? DL'STRCIIT O I O O O O O O O O O O O O O O O O IntPOGUCtiOn o o o o o o o o o o o o o o o (l) Undue Concentration o Contro in the ( R) 03 . LT‘ ) (5) 8111711718 Ty . O O O O O O O O O O O O O O O O O Doard of Directors of the Group System. Drainage of Resources from the Unit Banks to Maintain Dividends to the Owners of the Holding Company Shares of Stock . . False and Lisleading {enorts of the Group | I ‘ System and of the Unit Banks within the System . . . . . . . . . . . . . . . . Loans to Individuals and Businesses with Stock of the Holding Company Being Held as Collateral . . . . . . . . . . Loans to Officers and Directors of the Group System and of the Unit Banks . . V10 COLLAPSE OF BM§I\II\IG IN DJTI’IOI’T o o o o o o o 0 Introduction . . . . . . . . . . . . O O 0 Political Aspects of the Crisis . . . . . . Personal Factors Entering the Crisis . . . Events Leading up to Banking Holiday of SUHTIllaI‘y o o o o o o o o o o o o o o 0 February IL, 1933 . . . . . . . . VII. SUBRARY AND CONCLUSIONS . . . . . . . . o . . BI-BLIC‘AGMPIIY O O O O O I O O O O O O O O O O O O O O AJ’PSI‘IDI X iii PAGE C \O Co \0 \O H 125 125 130 131 1:52 1:42 1k3 155 159 TAB . l. 2. 9. IO. 11. L... 13. 1h. LIST OF TABLES v" Population Figure 0) o o o o o o o o o o 0 Concentration of Population in Michigan . Countries with Great st Concentration of Industrial Interest (1939 and 19LW . Value of Farm Products Sold . . . . . . . Net Change in Gold Stock of United States 1 Bank cussin m1 for hicniuan and U.S. . Summary Of Actions Taken by the Hoover Administration to Bolster the Danting Sj’St€.:l, 1731‘17»); o o o o o o o o o o ‘7- Summary, Changes in lumber o Hichic gan, 1929-1932 l4) 7“ ‘4. {‘J -.ks in 0 O O O O O O O 0 Number of Banks Operating Branches . . . Chain Banks in the United State, 1925 . . Groups and Chains; Banks Owned by Bach, June, 1929 to December, 1931 . . . . Groups and Banks by Geogralhical Division DCCCI‘IIDCI‘ 31, 1931 o o o o o o o o o a Bond and Stock Yield, 1931 - 1932 . . . . Money in Circulation, December 21, 1932 — PCGI‘CI‘L 3, 1933 o o o o o o o o o o o o PIP erl: \ II D.) I no LU CHART LIST OF MARTS I. Organizational Chart of the Guardian Detroit Union Group, Inc. . . . . . . . . a II. Structure of the Detroit Bankers Co. . . . . . III. Number of Bank Failures for U.S. fI‘ONI 1918 " 1933 o o o o o o o o o o o o 0 IV. Factory Employment: Total Industry of Table I Table II Table III Document I U.S. and Automobile Industry, I'Iovember‘, 1931 """""" IVIaI‘CI—I, 1933 o o o o o 0 APPENDIX A Michigan Banking Resources and Liabilities Ratio of Spending Money in Circulation . . Money in Circulation as Related to Level of Spending and Level of Industrial Production . . . . . . . . . . . . . . . ; APPENDIX B Petition for Hearing into Bank Holiday . Document II Proclamation of President Roosevelt Closing all the Banks in the U.S. . . . CHAPTER I INTRODUCTION Problem of the Thesis In the United States some rather drastic financial ex- periences have occurred in the past thirty years; experiences that as a whole have no precedent in history. Of these ex- periences, the closing of the banks in the United States on March 6, I933 undoubtedly represents one of the phenomena of the century. Banking in the United States has and always has had a very complex structure. Banks can be divided into two main categories, national banks or state banks. They can be divided into categories representing members of the Federal Reserve System as against those which are not members. Fur- ther, they can be categorized on the basis of belonging or not belonging to the Federal Deposit Insurance Corporation. They can be identified on the basis of either belonging to the group of banks affilliated with some multiple office bank- ing group1 or of belonging to a group of banks called unit banks. In addition to these categories, banks within any 1Multiple office banking in this study means those forms of banking systems which operate a banking business at more than one office. The three forms are branch, chain, and group banking systems. one category can be distinguished further. There are L9 different groups of state banks within the continental limits of the United States. Furthermore, there are at least three different types of bank examiners who are ad- ministered by separate agencies: there are examiners for national banks as well as for state banks, and there are examiners for those banks belonging to the FDIC. Primarily the banking system has grown without direc- tion, limited only by general restrictions of the national and state banking authorities. During the days of the depression beginning in 1929, banks came under the watchful eye of the general populace because the banks were the depositories for their funds. When all the banks were closed by presidential proclamation, people were confused and uninformed. Especially was this so in Detroit where only a few months previously two giant group banking systems stood, seemingly as towers of strength. Certainly the economic depression which spread over the world had much to do with many bank failures. Mismanagement was another factor in other failures. Failures were reported periodically, and with each new report more people became un- easy. Obviously the banking holiday of March 6, 1933 was a culmination; there were a number of specific events which pre- ceded and apparently led to that proclamation. One of the problems of this study is to investigate these eVents and to ,1 attempt to find the catalyst instrumental in making that proclamation inevitable. A second problem of this study is to determine whether or not, on the basis of the experience in Michigan, group banking systems should receive the main force of criticism they have received. It is not uncommon to find that the ”group banking systems of Detroit are found guilty of bring- ing about the banking holiday".2 .A third problem is to make recommendations regarding the banking system on the basis of the experience of the years 1929-1933. Limitation of the Study For the purpose of the study it was necessary to define limits both in span of time and in subject matter of the larger field of money and banking. The time period chosen was January 1, 1929 to March 6, 1933 for the following rea- sons: (1) The depression became known to almost all people in the fall of 1929, and it was at this time that concern for the safety of banks began to spread. (2) Group banking systems were not segregated from the wider field of chain and branch banks until 1929 and after 1933 were restricted by both state and federal law. (3) More statistics are available vv gJoseph Ernest Goodbar, Managing the Pegple's Mone , (New Haven: Yale University Press, 1935), p. 36I; and Jules I. Bogen and Marcus Nadler, The Banking Crisis, (New York: Dodd, Mead & Company, 1933), pp. 1L2¥ILHT from the Federal Reserve System and other governmental col- lection agencies for these four years than for other years immediately after or preceding these. (L) The March 6, 1933 date was chosen as the final date of study, for after the presidential holiday proclamation almost all banking prob- lems became national problems and solutions were presented by national banking authorities. This study is limited to group banking systems and to the specific events leading to the March 1933 closing of banks. Branch banking and chain banking systems are not mentioned or analyzed in relation to their part in the bank- ing crisis. Unit banks are mentioned only in that general summarized figures are presented. Source of Data Sources of data for this study include the Annual Re- ports of the Comptroller of the Currency, of the Commissioner of Banking in Michigan, of the Federal Reserve Board and of the Federal Deposit Insurance Corporation. The Federal Re- serve Bulletins furnished data along with the Annual Issues of the Statistical Abstract of the United States. Published testimony of the hearings of the Banking and Currency Com- mittee of the Senate and newspaper reports of the testimony of a one man Grand Jury Hearing into the Michigan Banking Holiday were invaluable:3 In addition to the above sources personal interviews were secured with the late Maurice Eveland, Banking Commissioner until May 1956; with Herman Taylor, presently Deputy Commissioner of Banking; Burton Daugherty, Assistant Attorney General who is assigned to the state banking department; and James Holden, formerly a director of the Detroit Bankers Company. Statement of Organization of Chapters Before analyzing the group systems of Detroit it has been necessary to present a brief picture of the economy of Michigan in 1929 and to show an overall view of the changes in the banking structure from 1929 to 1933. This is done in Chapter II. In Chapter III the reasons why group banking systems developed and the advantages and disadvantages of these systems will be pointed out. Chapter IV will show the evaluation of the two group systems in the metropolitan Detroit area. Chapters V and VI will be devoted to the methods of operation and practices of these two systems and to the final collapse of banking in Detroit, in Michigan, and in the United States. SThe official records of these hearings were de- stroyed by fire and, therefore, are not available. Because of the importance of the testimony, how- ever, almost complete records were printed in the daily newspapers of Detroit. The final chapter will summarize the findings, draw conclusions from the data and make recommendations for a safer operation of the banking system. It is hoped that by analyzing these past events, a basismay be provided not only for appraising past events but also for formulating future policy in the interest of a safer operation. CHAPTER II BANKING AND THE ECONOMIC ENVIRONMENT Introduction Banking development goes hand in hand with the develop- ment of the total economy of an area. The total economy is assisted by the banking segment, and the banking structure reflects the industrial, agricultural, population and economic changes which occur in the nation. Before beginning any de- tailed study of the banking operations in Michigan, it seems necessary to examine some of the other parts of the economy which both directly affect banking and are affected by it. Therefore, (1) the population of the state; (2) the over-all importance of industrial interests; (3) the place of agri- culture in the economy; and (L) a general economic picture of the period under examination will be shown in this chapter. The final part of this chapter will present a panoramic view of banking in Michigan from 1929 to 1933. Population In the period 1920 to 1930, the population of Michigan grew from 3.6 million to L.8 million; the population increased by a third in a period of ten years. (See Table l) The per- centage increase in population in Michigan was almost twice as fast in the period 1920-1930 as it was for the United States as a whole. .Almost LO percent of the population of Michigan was concentrated in Wayne County and the city of Detroit in 1930. The ten counties with the largest total population are in the downstate area and are listed and ranked in Table 2. TABLE 1 POPULATION FIGURES MICHIGAN UNITED STATES “%”Increase S%"Increase Year Population .Over Year Population . Over Past Census Past Census 1920 3,668,h12 1920 105,710,620 1930 L,8L2,325 32.0 1930 122,775,0L6 16.1 Source: United States Census g£_Population, VolumeI, p. as. TABLE 2 CONCENTRATION OF POPULATION IN MICHIGAN, 10 GREATEST POPULATED COUNTIES WITH RANKING FOR 1930 County Rank 1930 Wayne 1 1,888,9L6 Kent 2 2L0,511 Genesee 3 211,6L1 Oakland L 211,251 Saginaw S 120,717 Ingham 6 116,587 Jackson 7 92,30L Macomb 8 18L,961 Calhoun 9 87,0L3 Kalamazoo 10 8L,630 Total for 10 Counties 3,1LL,998 % of Total Population 6L.9% Source: United States Census 2; Population, Volume I, p. 826 10 This concentration of population has a relationship to the amount of banking services offered in these particular areas. The continued increase in population in concentrated areas is likely to have some bearing on the expansion of general banking facilities in these areas. Manufacturing Population concentration in Michigan has paralleled manufacturing. Those counties with concentrated manufactur- ing interests correlate very closely with those of concen- trated population. Table 3 shows the counties with the greatest concentration of manufacturing as indicated by the two manufacturing censuses. These ten counties account for approximately 70 percent of manufacturing done in the state. Manufacturing interests have been important customers of banks in all counties of the state. However, the con- centration of manufacturing with the income it generates in a few counties in the state has had much to do with the concentration of banking interests in these same areas. TABLE 3 ll COUNTIES WITH GREATEST CONCENTRATION or INDUSTRIAL INTERESTS (1939 and 19h?) Census of Census of County of 1939 19h? Michigan Value addedL lValue added1 Rank (Millions Rank (Millions of Dollars) of Dollars) Wayne 1 1,00L.6 1 2,5LL.L Genesee 2 133.5 32L.5 Kent 3 71.8 L 255.3 Calhoun L 52.9 Not Ranked Kalamazoo 5 L5.9 6 150.L Muskegon 6 38.6 7 1L2.6 Saginaw 7 37.3 9 113.9 Jackson 8 25.9 Not Ranked Berrien 9 2L.3 10 89.8 Ottawa 10 18.3 Not Ranked Oakland Not Ranked 261.L Ingham Not Ranked 155.1 Washtenaw NotLRanked 4 8 120.3 A A 1Value added in manufacture here is interpreted as industrial interest. Source: Census 2; Manufactures, Volume I, 19L8, p. L5. 12 .Agriculture .Agriculture maintains a prominent position in the economy of Michigan. However, those counties which are pre- dominantly industrial have very little agriculture, and the agricultural sections of the state are almost completely void of manufacturing. The predominance of agriculture in so great an area of the state has been partially responsible for a large number of small banks, both state and national, which were designed to meet the needs of agriculture. The total value of farm products sold in Michigan is shown in Table L. .As can be seen from the Table, although the total dollar amount is not large or does not rank high in compari- son with other important agricultural states, there is a good basis for the establishment of banking for the agricultural communities.1 Though there has been an extension of the facilities of Federal Government into traditional agricul- tural finance areas, there is still a need for a number of small banks scattered widely throughout the state to service the agricultural interests and auxilliary businesses. 1Statistical Abstract of the United States, (Wash— Ifigton,D.C.:‘United'States GovernmenTHPrinting Office, 19L9), p. 615. Value of farm products in 1930 in the State Of Michigan was low in comparison to value added in manufacturing, $266,15L,193 worth of farm products as against $30,591,L35,000 value added in manufacturing. 13 TABLE L VALUE or FARM PRODUCTS SOLD 1930 United States 11,011,329,325 Michigan 266,15L,9l3 Rank of Michigan in U.S. 15 Source: Census ovagriculture, Volume 11, Depart- ment of Commerce, Bureau of the Census. General Economic Setting After World War I, the world was torn by such unsound commercial and financial policies as tariff warfare, currency rivalry, and disorganized balance of payments. In the United States parts of the economy experienced depressed incomes during the early 1920's, and these areas remained depressed A for the next decade. The boom of the 20's was not a general boom but one which was localized both in geographic area and in manufacturing interest.2 The city of Detroit and the state of Michigan prospered throughout this whole period; hordes of workers from all over the United States migrated to Michigan to work in the automobile factoriesf3 Everyone wanted to buy one of the ‘2E. A. Goldenweiser, American.Monetary Policy, (New York: McGraw-Hill Book Company, Incorporated, 1951), p. 137. Malcolm Bingay, Detroit 13 My Home Town, (New York: The Bobbs-MerriII Company, 9L6), p. 206. , 3 111 new horseless carriages and many wanted to work in the new assembly line factories. Detroit to a very great degree, and Michigan to a lesser degree, became a one industry area; almost everyone was dependent directly or indirectly upon the automobile industry or upon servicing it.l‘L Between the years 1919 and 1929 the value of manufac- tures in Detroit increased 6L.2 percent, and this was largely due to the phenomenal growth of the automobile industry;3 With the stockmarket crash in 1929, and with the develop- ment of depressed economic conditions, people throughout the United States began to stop buying automobiles. .As purchases began to dwindle, unemployment in Michigan and Detroit began to grow. (Federal Reserve Statistics show that employment in the automobile industry was reduced by more than L5 percent in the year following the beginning of the depression in October 1929.f5 "Unemployment on a scale unparalleled in any other great industrial city piled up a staggering volume of .3 delinquent municipal taxes. Speculators who had borrowed LLUnited States Census 2; Manufacturers, (Washington, D.C.: United’States Governmeht Printing Office, 1927), p. 932. The lack of diversity of Detroit's industry is recognized when one realizes that over-56 percent of the total product of Detroit in 1927 represented motor vehicles, bodies, and parts. isUnited States Census of Population, (Washington, D.C.: United States Governmenthrinting Office, 1930), p. 10L6. 6Federal Reserve Bulletin, VOlume 16, 1930, p. 777. 7Lawrence Sullivan, Prelude to Panic, (Washington, D.C.: Statesman Press, 1935), p. 83. 15 money were called upon to raise collateral; business men who had borrowed on increased inventory and borrowers of all types were called upon to reduce their indebtedness. Workers who had borrowed to build homes were unemployed and mortgages became delinquent. "It would do banks and financial houses little good to foreclose or to bring debtors to the courts, because they could not liquidate property or goods."8 This was truly a very dreary setting but it is the pic- ture of Detroit in the early years of the depression. The banking collapse of 1933 in the United States "marked the culmination of one of the most dramatic and mov- ing chapters in the history of modern capitalism. It came as the climax of a series of episodes that followed each other with startling inevitability --- disaster followed dis- aster in unerring fashion, so that the final catastrophe, we can see in retrospect was inescapable."9 Michigan Banking Structure, January 1, 1929 From January 1 to December 31, 1928, there were no bank failures in the state of Michigan, one of eleven states to 8Personal interview with Mr. James Holden, formerly a director of the Detroit Trust Company, an affiliation of the Detroit Bankers Company, January 5, 1956 in his Detroit office. 9Nad1er and Bogen, 0p. cit., p. 3. 16 post such a record.10 .At the beginning of 1929 of the 787 commercial banks in Michigan, there were 585 state commer- cial banks, 13L national banks, 10 industrial banks, 22 trust companies, and 36 private banks. Of the state banks of Michigan 155, or 25.1 percent, were members of the Federal Reserve System. State member bank aggregate resources totaled $1,177,699.5L3.82, or 73.6 percent of the total resources of state banks in Michigan on December 31, 1928.11 These 155 banks, along with the 13L national bank members (National Banks are required to maintain membership in the Federal Reserve System)12:made a total of 289 banks with resources of approximately $1,818,533,000, or approximately 81.2 percent of total re- sources of all banks in Michigan. Though Federal Reserve member banks accounted for 81.2 percent of total resources of all banks, they were only 36.7 percent of banking units in Michigan. Though only 36.7 percent of banking houses were Federal Reserve members, they were scattered all over 1OBanRing and Monetary Statistics, Washington, D.C.: BBard of Governors of the Federal Reserve System,. 19L3), . 28L. In thirty-seven other states, there were L9 commercial bank failures. 11Report____of the Commissioner of Banking, 1928, (Lansing: Franklin *DeKIeine Company, 1929), p. xv. . 12Goldenweiser, Op. cit., p. 31. 17 the state, with particular concentration in the lower pen- insula and around industrial and population centers where the larger banks had developed. Table I in Appendix A shows a composite balance sheet for the 787 banks of all classes chartered to do business in the state of'Michigan as of December 31, 1928. Michigan Banks, 1929 In 1929,83.L percent of all banking units of Michigan had a paid-in capital of $100,000 or less. .A breakdown by classification of banks shows that 527 of 617 banks under state supervision, or 85.L percent of them, had a paid-in capital of $100,000 or less; 93 of the 13L, or 69.L percent, of the national banks and all 36 of the private banks were in this same category.13 In 1929 the speculative interests of the country were very active. The participation of commercial banks in this speculative boom, both directly and indirectly,”L was made l3Annual Re ort of the Comptroller of the Currengy, (WashIng on, TCL?_UhItedCStates GEvernment Print- ing Office, 1929), pp. 688-689. The exact figures of the capital accounts for the private banks are not available since it was not necessary that they report to state officials. The total capital accounts for private banks was $L60,000, so it is reasonable to assume that each of the banks had a capital paid-in account of under $100,000. The average was $12,777.78 per bank. . . llJ’H. Parker Willis and John M. Chapman, The Bankin Situ— ation, (New York: Columbia University Press, I93fi), p. 53. See for summary of analyses made by the committee and its counsel. f‘ 18 clear in testimony before the Subcommittee of the Senate Banking Committee which was authorized to undertake an offi- cial investigation into the general financial situation.15 The collapse of a considerable portion of the speculative boom in October, 1929, had an immediate impact on the value of the assets of the commercial banks of the United States. There was a close dependence of the banks upon the stock market, "by reason of the enormous volume of brokers' loans which had been developed (running close to 8 billion dollars during the latter part of 1929), these loans being subject to call, and hence likely to impel a sudden and exceptional strain upon the banks."16 The bank failure record for 1929 shows it to have been a year of heavy economic cross currents. In 1929 for the nation as a whole, 580 banks of all classes failed, whereas in 1928 there were L68 fai1ures.17 In Michigan 9 banks failed while in-l928 there were no bank failures. The Michi- gan bank failures consisted of 1 state bank, 7 private banks 1sAuthorized by "Senate Resolution No. 71" passed in July, 1930 and championed by Senator Carter Glass of'Virginia. 16Willis and Chapman, Op. cit., p. 56. 17In 1928 there were 1.8% of all banks failing, and in 1929 there were 2.L% of all banks failing, a percentage increase of one-third. l9 and 1 national bank with combined total resources of $1,601,206.18 But births were greater than deaths, and 15 nethichigan state banks, trust companies and safe deposit companies were authorized to commence business in that year, indicating that some people thought the future in banking to be bright. Of the 15 new banks only 5 had a capital ac- count of over $100,000; 8 of the new banks had capital of $25,000 or less. By December 31, 1929 the commercial bank- ing structure of Michigan had changed somewhat but not radi- cally. There were 613 state banks (L fewer than at the beginning of the year) and 130 national banks (L fewer than at the beginning of the year) plus 3L private banks (2 fewer than at the beginning of the year), making a grand total of 777 Michigan banks. There were 17 banks which consolidated with other banks during the year of 1929. The change in the number of banks came about as follows: Michigan State Banks & Trust Banks, Jan. 1, I929 ------- ---- 617 New banks during the year -------------- 15 33'? Less: Consolidations ------- l7 Failing State Banks -- 1 Conversion r---------- 1 19 "" STE National Banks -------------- 130 Private Banks -- ------------- ._§L Total 77 ===a 18Annual Report of the Com troller of the Currency, EEC. Cite, W29: 3...? 3 p 130-765. mu.“ ~‘ 9. hy— .... —. HH~N 20 1930 The upheaval of the commercial banking system of Michi- gan and the nation did not become evident in an increaSing number of failures until 1931. However, in 1930 many banks encountered difficulties in maintaining solvency and earn- ings. The 1930 readjustments were aimed at higher earnings rather than greater liquidity as would be expected. They took the form of expansion of loans and investments into in- vestments other than United States government securities and eligible paper for rediscounting.19 Bankers were anxious to get a high return on their new investments to compensate for the declining value of previous investments; hence, the de- sire to stay away from the United States government securities which carried a very small return.’ "This changing character of bank assets resulted in a further, though not impressive reduction in banking liquidity."20 In 1930, L17L banks of all classifications failed in 21 the United States. They included 959 state commercial 19viiiis and Chapman, Op. Cit., Table Lo, p. 118. 20ibid, p. 128. 2lAnnual Report of the Comptroller pf the Currency, I935, p. , I931, p. 103L. 21 banks, 53 private banks and 162 national banks. In Michigan 22, or 2.8 percent of all banks operating at the beginning of the year failed before the end of the year. The bank failure rate in Michigan was below the na- tional average. Michigan had 3.2 percent of all banks in the nation but only 1.9 percent of all bank failures in the country. The 22 banks in Michigan which failed were classified as L state banks, 16 private banks and 2 national banks. In 1930 as in 1929, despite a growing realization that commercial banking was in serious trouble, 5 nethichi- gan state banks and trust companies were authorized to begin 22 These banks were all authorized to begin and did business. actually commence business before the fall of 1930 when there was an increase in the bank failure rate.23 None of these banks commencing business in 1930 had a paid-in capital of more than $100,000, and 3 of them were of $25,000 or less, indicating that there was to be a very narrow safety margin for times of stress.2h On December 31, 1930, the banking structure of Michigan showed the effects of a continuation of the consolidation 2233223: g: the Commission 23 Banking, 1930, p. xi. 23Ibid, p. xi. The last authorized bank began opera- tIons.August L, 1930. 2I‘LIbid, p. xi. 22 movement of the previous year. Again there had been a de- cline in state bank members of the Federal Reserve System, this time 7 fewer members from the previous year, or a total of 137. This shows a decrease of 18 members in two years. .At the end of 1930 the banking structure of Michigan con- sisted of 597 state banks (16 fewer than at the beginning of the year), 125 national banks (5 fewer than at the begin- ning of the year), plus 2L private banks (10 fewer than a year previously), making a total of 7L6 banks. There were 17 consolidations of state banks during the year. The change in the number of banks came about as follows: Michigan State Banks & Trust Companies, Jan. 1, 1930 --------------- 613 New Banks --------- - .................... 5 238' Less: Consolidation --------- 17 State Bank Failures --- _Q; 21 - 397 National Banks -------------- 125 Private Banks --------------- _§&' Total 1L6 1931 Though bank failures were large in 1930, the first real crisis with which the Federal authorities could not cope came in the fall of 1931. Banks had been supported by the Federal Reserve since the beginning of difficulties and, though there were numerous failures, the financial sector of the economy could still carry on business as usual. There ——A - 23 had been relatively little shrinkage in bank credit since October 1929.25 Since the crash in 1929, throughout 1930 and during the first half of 1931, the Federal Reserve Banks 26 had taken measures to maintain the position of commercial banks' reserve in such a way that the commercial banks would be under no general pressure to call loans and sell invest- ments except where special local economic and banking condi- tions deveIOped.27 Though banks of all classes continued to fail in great numbers in every section of the United States, there seems to have been no general panic. "The sur- est sign of general anxiety about banks - an increase of cash in the hands or the Public - was not in evidence.”28 2SAlbert Gailord Hart, Debts and Recovery, (New York: The Twentieth Century Fund, 1938), Table 5, p. 290. 26Bankin and Monetary Statistics, Op. cit., p. 3L0. The eserve Banks bought'bafikefs1 accep ances and govern- ment securities enabling the commercial banks to pay off most of their borrowings. Discounts were reduced from $1,037 million in June 1929 to $251 million in December 1930. 27Hart, 0 . cit., p. L5. 28Banking and Monetary_Statistics, pp. L11, L12, LIL. .According to officIal figures published by the Federal Reserve, cash in circulation was less in each week of 1930 than in the corresponding week of 1929. The aver- age figure for 1929 was $L.L76 billion, compared with $L.2L5 billion for 1930. In 1931 money in circulation began to creep up above 1930, and at the very end of the period here under discussion, it rose above 1929. In June 1931 the circulation was $L.535 billion, as against $L.235 billion in 1930 and $L.L59 billion in 1929. But when we remember that 3200 banks had disap- peared by failure and merger since 1929, leaving many 2L In the spring of 1931 bad news began to come from Europe. The Austrian banking system began to have difficulties; shortly following came the "Stand-Stilergreement" involving the transfer of funds out of Germany; in the summer,runs developed on London banks; in late September England went off the gold standard and the United States began to lose gold to overseas depositors. Some of this returned in the next two months, but then began a steady decrease in our gold stock. September, 1931, to September, 1932, gold stock figures are as follows: TABLE 5 Net Change in Gold Stock of United States (Millions of s)29 Sept. 1931 + 20.6 March 1932 - 2L.6 Oct. - 337.7 April - 30.2 Nov. + 89.L May - 195.5 Dec. 0 + 56.9 June - 206.0 Jan. 1932 - 73.0 July - 3.L reb. - 90.6 .Aug. + 6.1 This drain of gold caused the Federal Reserve authorities to reverse their "easy money" policy of the past year by raising communities without banking facilities, the rise in early 1931 need not be taken to register a panic. Further see Appendix I, which shows the amount of money in circulation as related to amount of spend- ing. 29Banking and Monetary Statistics, p. 537. 25 rediscount rates.30 This tightening of money supply came at an inopportune time for the commercial banks since they had already been losing reserves from a double source: (1) the outflow of gold to foreign depositors, and (2) an in- crease in cash hoarding in this country.31 This double pressure on bank reserves caused bankers to speed up the process of the contraction of bank credit.. The drop in total bank deposits, other than interbank deposits, for the last half of 1931 was $5.8uu billions, more than double the decline than that from June 30, 1929 to June 30, 1931."52 .A. G. Hart says that "during the second half of 1931 -- a transition took place from the orderly, if unpleasant, early depression situation of 1930 to the state of fear and panic which characterized 1932 and early 1933."33 30Goldenweiser, Op. cit., p. 158. slBanking_and Monetary Statistics, p. u12. Cash in circulation in May, $E3u15 billion; June, $h.S3S bil- lion; July, $u.550 billion; August, $u.765 billion; September, $0.959 billion; October, $5.253 billion; November, $5.2u9 billion; December, $5.360 billion. This indicates an increase of 21.h percent in seven months, whereas there was a decrease of $136 million from September 1929 to May 1931. 321616, p. 18. BZHE'Deposits: June 30, 1929, $53.9 billion; June 30, 1931, $51.8 billion; December 31, 1931, $u5.9 billion. 33Hart, Op cit., p. 50. I. 26 In the United States during the last half of 1931, there were L611 bank suspensions, more than twice the number for the first six months of the year, and almost as many as for the entire year of 1930. This alarming rate of bank suspen- sions in the fall of 1931 induced the Federal Government to begin some kind of remedial action in addition to previous Federal Reserve action to help the banking sector of the economy. On October 31, 1931, the National Credit Corporation was incorporated as a non-profit organization under the laws of the state of Delaware at the suggestion of President Hoover and his advisors.3u Hoover said it was "created to help banks with sound assets to obtain liquid funds when necessary."35 The Corporation obtained funds with which to operate by asking banks throughout the country to subscribe to notes of the corporation to an amount equal to 2 percent of each bank's net demand and time deposits. Banks subscribing to the notes organized themselves into one or more associations in each Federal Reserve District. If a bank needed a loan, the association would paSs on it and then recommend action to 3#New'York Times, October 12, 1931, p. 16. Mr. MT'N.fEuckner, President of the New York Clear- ing House Association, served as Chairman of the Organizing Committee. ssggELYork Times, October 18, 1931, Section II, p. 11. 27 the loan committee of the corporation which actually advanced the funds. Each loan was secured by adequate collateral and became first, an obligation of the borrowing bank, and sec- ondly, a Joint liability of the other banks of the local association. The plan of the National Credit Corporation was thus one of mutual assistance. .A second boost to troubled banks during the year came in December, 1931, when the Comptroller of the Currency informed all national banks that bonds en- Joying the four highest ratings of any standard rating ser- vice would be valued at cost because of the low prevailing 36 market prices. Depositors would have none of this type of action; only by paying money of one sort or another on demand could the banks regain the confidence of the depositors. For the United States as a whole there werei$296 banks of 37 all classifications which suspended operations during 1931. These included u09 national banks, L807 state banks, of which only 55 were members of the Federal Reserve System, and 80 38 private banks. In 1931, 113 banks of all classes suspended operations in Michigan. Since three of these reopened the séflgpggt of the Comptroller of the Currency, 1931, p. 2. sifigpggt of the Comptroller of the Currency, 1932, p. 1037 38Ibid, p. 568. same year, total suspensions for the year were 110. 28 These 110 banks constituted 18.h percent of the banks in Michigan as of the first of January, 1931. (See Page 22.) This 18.h percent failing rate need only be compared with the less than 12 percent failing rate for the nation to see that in a period of one year a situation had developed in Michigan which was dangerous to all banks in the state. TABLE 6 Bank Suspensions for Michigan and U.S. Michigan U.S. Year Bank Sus- Total Rate of Bank Sus- Total Rate of pensions Banks Suspen- pensions Banks Suspen- ion sion (percent) (percent) 1927 6 77h .8 669 25800 2.6 1928 - 787 .0 .h98 2h968 2.h 1929 9 777 1.16 659 2&026 2.7 1930 21 7H6 2.81 1350 22172 6.1 1931 113 61h 18.h 2293 19375 11.8 1932 87 567 15.3 1853 17802 8.2 With almost one of every five banks failing, the rest hardly could be expected to remain solvent for very long. The 110 failing banks in Michigan were classified as In national banks, 82 state banks and In private banks.39 There were 6 new state Michigan banks authorized to commence business in 1931.' Three of these had a capitalization of 39Re ort of the Commissioner of Bankin , 1931, p. xi. ne 0 'the_§tate banks went—Into voluntary liquida- tion by vote of its stockholders. This was the HOJcik State Bank of Hamtramck, Michigan. 29 $25,000 or under, again indicating that there was a very narrow safety margin for unanticipated trouble. .At the end of 1931, the banking structure of Michigan had changed materially from the previous year. There were now only 109 state banks which were members of the Federal Reserve System, or 29 fewer than the previous year.— These 109 banks had aggregate resources of 77.2 percent of the total resources of Michigan state banks.1+0 There were h8h state banks (113 fewer than at the beginning of the year), 106 national banks (19 fewer than at the beginning of the year), and 2h private banks (the same number as at the begin- ning of the year), to make up a total of 61h commercial banks (13u fewer than at the beginning of the year) in the banking structure of Michigan. During the year there were M3 banks of all classes consolidating in Michigan. The change in the number of banks came about as follows: Michigan State Banks and Trust Companies, Jan. 1, 1931 --------------------- 597 New banks (state banks) --------------------- 6 603 Less: Consolidations ----------- 38 State Bank Failures ------ 81_ 119 .. ESE National Banks ------------- 106 Private Banks ------------- uolbid, p. xix. ". r~ . a... run. “a 30 1932 The year 1932 was a particularly trying one for the economy of the United States in that it was this twelve- month period that was characterized by stop-gap measures by the Federal Government. In addition it was a year of political crisis, of the low point of the depression, of ' the first state-wide bank moratorium, and of other happen- ings which were preliminary to the ultimate general banking disaster and Holiday in March,l933. In general, with the possible exception of the early summer months, the year 1932 was one of monetary and over-all disturbances. The new year was hardly three weeks old when the Congress es- tablished the Reconstruction Finance Corporation. The Reconstruction Finance Act (entitled "An Act to Provide Emergency Financing Facilities for Financial Insti- tutions, to Aid in Financing Agriculture, Commerce and Industry and for Other Purposes") was passed on January 22, 1932. The aim of the Administration in setting up the RFC is given in the words of President Hoover in a statement announcing his approval of the.Act: It brings into being a powerful organization with adequate resources, able to strengthen weak- nesses that may develop in our credit, banking and railway structure, in order to permit business and industry to carry on normal activities free from the fear of unexpected shocks and retarding in- fluences. 31 Its purpose is to stop deflation in agricul- ture and industry and thus to increase employment by the restoration given to their normal jobs. It is not created for the aid of big industries and big banks. Such institutions are amply able to take care of themselves. It is created for the sup- port of the smaller banks and financial institutions, and through rendering their resources liquid to give renewed support to business, industry, and agriculture. It should give opportunity to mobilizEIthe gigantic strength of our country for recovery. The RFC had an expiration date of January 31, 1935, but the President of the United States could extend this time under certain conditions. The authorized capital was $500,000,000, but the Corporation could, in addition, bor- row $l,500,000,000 through issuance of its own obligations.LL2 .All loans of the RFC had to be fully secured, and the law further stated that neither obligations of foreign gov- ernments nor of foreign corporations could be used as col- lateral. By the end of 1932 the amount of authorized loans of the RFC had reached the sum of $1,937,000,000.hrs This absorbed the best collateral of many banks. A #---- .p-p LLlFederal Reserve Bulletin, Vol. 18, Feb., 1932, p. M9. LL2The initial capital was entirely subscribed by the United States Government. usFederaI Reserve Bulletin, Vol. 19, Feb., 1933, p. 65. There were outstanding debts of $1,225,000,000, since some of the authorized amounts had not been advanced, and $300,000,000 had to be repaid on previously made loans. 32 One of the original requirements of the RFC was that a quarterly report be submitted to Congress stating "the aggre- gate loans made to each of the classes of borrowers provided for and the number of borrowers by states in each class."uu However, in July, 1932 there was a change in policy which re- quired that "the RFC shall submit monthly to the President and to the Senate and the House of Representatives (or Sec- retary of the Senate or the Clerk of the House of Representa- tives, if those bodies are not in session) a report of its activities and expenditures, together with a statement show- ing the names of the borrower to whom loans and advances were made, and the amount and rate of interest involved in each v "45 This publicity instruction came as an amendment to case. the Emergency Relief Act of 1932. In signing the Act, Presi— dent Hoover said, "The possible destructive effect on credit institutions by the so-called publicity clause has been neutralized by the declaration of the Senate leaders of all Parties that this provision is not to be retroactive, and that the required monthly report of future transactions are all of a confidential nature and must be so held by the Clerks of the Senate and the House of Representatives, I 1H‘Ibid, Vol. 18, Februan» 1932, p. 98. uslbid, August, 1932, p. 521. 33 unless otherwise ordered by the Congress when in lib-6 Speaker of the House of Representatives, John Nance session. Garner, disregarding the statement of President Hoover, ordered the Clerk of the House to release all the names of the borrowing institutions to the press as soon as they were received. Speaker Garner declared that he personally would be responsible for this action. As protested by the RFC directors and other banking leaders, this publicity was particularly bad for two reasons: (1) the publication of the loans threw need- less alarm into thousands of communities at the end of every month, and (2) this publicity requirement kept many needy banks from applying for RFC loans because of the fear of bad public feeling from depositors. The reaction of the public to the Reconstruction Fi- nance Corporation in the beginning was that of complete confidence. They felt that with the huge resources of the RFC at the disposal of the banks, bank failures would de- cline and eventually cease almost altogether. However, with the publicity given to banks making use of the RFC funds, depositors became very nervous about funds kept in a bank which had borrowed money from the RFC. Many of these depositors immediately transferred their accounts 1+6The Detroit News, July 18, 1932, p. 2. from a 31+ borrowing bank to one which had not yet been forced to approach the RFC for help.u7 The banks losing deposits were in dire circumstances and many of them were forced to close. The publicity given to the RFC loans actually made a bad situation worse. At the "lame duck" session of Congress in January,l933, Speaker Garner, now the Vice President-Elect of the United States, drove for more publicity};8 He personally got through the House of Representatives a resolution to publish a list of all banks which had ever received assistance from the RFC regardless of whether the banks had repaid the loans or not.L'L9 u7Nadler and Bogen, Op. cit., p. 132. be 119 Apparently, the demand for publicity of the RFC loans developed out of the heat of the election campaign during the summer of 1932. It seems the out-party felt that loan applications from Republicans were being given preferential treat- ment at the RFC. Once the newspapers began picking up the story, it is only logical that those of the out-party would try to capitalize on the publicity and continue the pressure for an investigation of the operations of the Corpo- ration. Since Speaker Garner was one of the key leaders of the party, it was only natural that he should carry the burden in trying to prove some kind of preferential treatment for various banks. Sullivan, Op. cit., p. 50. 3S The result of this publicity was that thousands of banks which had borrowed from the RFC prior to the first public release in July 1932 were exposed to pressures from depositors who felt that they should withdraw their money while they could. In addition to the Reconstruction Finance Corporation and the National Credit Corporation, which liquidated its assets and ceased operation in March,l933 for lack of busi- ness, there were a number of other steps taken by the Admin- istration to strengthen the collapsing banking system during 1932. The Treasury, on March 6, 1932, put on sale new 2 percent Treasury Certificates maturing March 15, 1933, in denomina- tions of $50, $100, and $500, which were popularly known as "Baby Bonds". The object of these "Baby Bonds" was to induce people hoarding currency to invest in these securities and to put idle funds back in circulation.50 The Glass-Steagall Bill was passed on February 27, 1932, in order to utilize the gold reserve of the United States to full advantage in expanding credit. The bill amending the Federal Reserve Act authorized the Reserve banks to pledge government securities acquired through open market opera- tions as eligible paper as a cover for their notes. A second SONadler and Bogen, Op. cit., p. 112. 36 provisions of this bill authorized loans to groups of five or more member banks secured by collateral otherwise not acceptable as security on loans. In the early months of 1932 the Federal Reserve Banks began open market purchases on a new large scale. Govern- ment security holdings increased from $7h1,000,000 on February 2h, l932,to $1,801,000,000 by the end of the fiscal year in June,1932. The objective of the Federal Reserve in buying the larger amount of securities was two-fold: ."one, to offset the outflow of gold and, two, to pump large amounts of reserve funds into the banks, so as to reduce interest rates and create extremely easy money market conditions."51 It was felt that with lower interest rates the banks would be able to extend loans more freely to industry and trade. The authorities were working on the old theory that the only thing necessary to halt deflation and decrease economic acti- vity was a large increase in the amount of money in the market. .. On July 22, 1932, the Federal Home Loan Bank Act was passed, which established 12 Federal Home Loan Banks, 1 in each Federal Reserve district. These banks were authorized to make advances against installment home mortgates. From 51ibid, p. 118. 37 late in 1929 to the early part of 1932 increasing numbersof home owners found themselves unable to meet interest and prin- cipal payments on their mortgages. Lending institutions were to subscribe to the capital of the banks up to 1 percent of the aggregate unpaid principal of their home mortgage loans. Congress appropriated $125,000,000 to be added to this sub- scribed amount. The Home Loan Banks might then advance up to 60 percent of the unpaid principal of a home mortgage loan. To the Federal Home Loan Bank Act was attached the Glass-Borah Amendment which incorporated a provision permit- ting a substantial increase in the circulation of national bank notes by extending for a period of three years the cir- culation privilege to all bonds of the United States bearing interest at 3 3/8 percent or less.52 The passage of this amendment was again designed to in- crease the money supply. However, the Comptroller of the Cur- rency in his Annual Report of 1932 said the chief currency prob- lem had not arisen out of a lack of power to issue currency but out of hoarding after it was issued. Further he pointed out that issues of new national bank notes for the first three months aggregated $125,000,000 and that the total amount of currency outstanding did not rise by this amount, but that in 52 Annual RBEOFt.2£ the Comptroller of the Currency, 1933, P0 0 38 fact, there was an offset by the retirement of the Federal Reserve notes during the period of more than $125,000,000.53 The passage of the Federal Home Loan Act and its attached amendment, the Glass-Borah amendment, ended the emergency ac- tion methods by the Hoover administration of dealing with the financial and economic crisis. In Table 7 below a summary of these emergency type actions are listed with the date inaugu- rated and the purpose for which they were taken. TABLE 7 Summary of.Actions Taken by the Hoover Administration to Bolster the Banking System, 1931-1932 Action Date ‘ Purpose (1) National Credit Oct. 1931 Mutual assistance through Corporation making loans to needy banks from funds provided by all. (2) Revaluation of Bonds Dec. 1931 Comptroller of the Currency would allow bonds enjoying the four highest ratings of any standard service to be valued at cost in bank exam- inations, to maintain sol- vency of banks. (3) Reconstruction Jan. 1932 Resources to be placed at Finance Corp. the disposal of financial . institutions by loans to relieve temporary pressures. (h) Glass-Steagall Bill Feb. 1932 Reduce amount of gold neces- sary to be held as collateral for Federal Reserve notes in the event of a shortage of eligible commercial paper. 53Ibid, p. 5. 39 TABLE 7 - Continued .=====fibfi%n= = Da ‘Purpose 8(5) Sale of "Baby Bonds" Mar. 1932 To induce people to take money from hoards and re- turn it to circulation. (6) Federal Reserve Open Spring 1932 To offset the outflow of 0 Market Purchases gold and to create easy market conditions with lower interest rates. (7) Federal Home July 1932 To make advances against Loan Banks installment home mortgages so people would not lose their homes through fore- closures. (8) Glass—Borah Amendment July 1932 To "monetize" the debt of the U.S. Government and tosu increase the money supply. None of these methods did more than quiet the alarms of the people for a few weeks, and thus the government failed in its obligation to the people to make a fundamental change. In the state of Michigan these opiates had much the same effect as in other sections of the country and bank failures per- sisted with a continued down trend in economic activity. During 1932 there was again a fairly large change in the banking structure of the state of Michigan. There were 72 bank suspensions from the h8h state banks operating at the beginning of the year. These 72 suspensions represent almost 15 percent of the total banks. During the year 32 banks were reopened which previously had closed, so the net decrease in the number of banks was hO. In addition the Northern Title ShWhen the Federal Reserve would purchase these bonds, or debt claims against others, they gave in exchange deposits which served as money, or their own debt in- struments, Federal Reserve notes. Thus, out of the government bonds has come money. 110 and Trust Company of Bay City went into voluntary liquida- tion. Despite a bank suspension rate of about 15 percent for the state, at least one new bank began operations; that, the Michigan Trust Company of Bay City. At the end of the year there were hhl state banks and trust companies in Operation in Michigan (h7 fewer than at the beginning 0f the year). There were 102 national banks in operation (h fewer than at the beginning of the year), and 2h private banks (the same number as of January 1, 1932). Of the state banks, only 99 belonged to the Federal Reserve System. This was 10 fewer than twelve months previously. During 1932 a total of 87 banks suspended operations. This was made up of 5 national banks, 72 state banks, and 10 private banks. .At the end of the year there were 567 banks of all types operating in the state, h7 fewer than had started the year. The change in the number of banks came about as follows: Michigan State Banks and Trust Companies, January 1, 1932 --—--— ------- ---— h8h New Banks -- --------- - ------ - ----------- ——--- 1 H85 Less: Consolidations --— ---------- u Net State Bank Suspensions “.&9 'H&% National Banks -------- ~---- 102‘ Private Banks ------- - ------ 2g Total 567 1933 Throughout January and February 1933 the convergence Though only fragmentary statistics are available for the years prior to 1929, those available serve to indicate the general growth of the group banking movement. "As early as 1922 the Federal Reserve Board made a survey which showed that there were some 800 banks in groups and chains in the United States. Later investigations showed 1p00 banks in 5Ibid, p. 297. 6ibid, p. 295. ,‘l A? groups and chains in 1926 and over LhOO banks in groups and chains in 1928."7 This movement continued to gain ground until, at the end of 1929, there were 332 groups and chains of banks involving a total of 2465 banks.8 During the late 1920's and early 1930's group banking became very popular and spread throughout the United States. The holding company, which is the primary essential of group banking, was a popular form of business organization and ex-‘ tended to almost all fields of endeavor; the banking field did not escape. Business leaders, usually of a promotional type, saw a chance to make profits by selling the shares of a holding company in a market in which Shares of stock were a much sought after item. The shares they wished to sell‘ were those connected with one of the most conservative and respected of all businesses, that of banking. Chain banking is older historically than the group sys- tem. The earliest instance of this type of multiple banking found is that of Mr. David Beecher in North Dakota in 1887:9 Some few chains developed before 1900 but it was after the 7ibid, p. 295. 8Ibid, p. 312 9Commercial West (Nov. 1, 1902), Quoted by Gaines T. Cartinhour,EBranch, Group and Chain Banking, (New York: MacMilIan Company, 1931), p. 82. U8 panic of 1907 that this form of banking control came to be used more widely. Though chain banking systems are not limited to states prohibiting branch banks, this prohibi- tion has no doubt been a factor in the beginning of many chain systems. Table 10 shows the most reliable list of states with chain systems available in 1925. TABLE 10 Chain Banks in the United States, 192510 State “Number of Chains Banks in Chain Arkansas 2 2h Arizona h 15 California 20 66 Colorado Two or three reported, but banks failed Florida 1 5h Georgia 2 163 Idaho 18 73 Illinois 3 18 Iowa 8 . Massachusetts 1 Reported for an earlier date in Boston Minnesota 5 103 Mississippi 2 17 Missouri 1 6 Montana Report made but number not given Nebraska 2 11 Nevada 1 9 New Jersey 8 26 New Mexico 2 8 New York 10 35 North Dakota Report made but number not given Oklahoma 6 h5 Oregon 6 22 Pennsylvania 2 16 South Dakota 1 6 Texas 2 28 Utah 9 52 Washington 16 69 Wisconsin 2 1“ Wyoming __;L ._;8 Total 13k 933 10 H. P. Willis, Surve of Bankin in the United States, (New York: Colum 1a HTversity Press, 1926), p. 12. L19 The heaviest concentration of Chain banking systems is in the Northwest and Southeast. In the Northwest there are at least 56 chains with 399 banks, more than h2 percent of the total number of banks. In the Southeast, in only three states and with only 5 chains, there are 23h banks, more than 25 percent of the total banks involved in chain systems. The chain system lost much of its glamour in 1926 when the Witham Chain of Georgia and Florida fai1ed.11 Definition of Multiple Banking Forms There has been a problem in distinguishing between multiple forms of banking. In discussions regarding chain and group banking, until about 1929, few if any banking people made any differentiation between the two systems. However, with the advent of the greater use of the group system, and with the falling into disfavor of Chain banking, bankers in general, and group bankers in particular, began to make a definite distinction between the two. For purposes of clarity the three forms of multiple banking are defined. Branch banking, as defined by Cartin- hour, is a system "in which the branches are merely offices 'of the parent institutions, extensions of it, but under its direction, with the same officers, management, and corporate 11Haynes McFadden, "The Chain Bank Crash in Georgia": American Bankers Association Journal, Septemben 1926, Col. XIX, No. 3, p. 137. 50 existence where all of the units of the organization become, merged into a single corporation with a common capital, and the entire resources of the parent bank stand behind the branch".12 The Board of Governors of the Federal Reserve System defines branch banking as "a type of multiple office banking under which a bank as a single legal entity operates more than one banking office".13 6 Chain banking, of little importance after 1926 (see page M9), is Characterized as "a type of multiple office banking in which the operations or policies of at least three independent incorporated banks are controlled by one or more individuals", and generalb/the system is built around a key bank considerably larger than the other banks in the Chain.1LIr Cartinhous makes one further distinguishing Charac- teristic regarding chain banks. He points out that in the chain system "an individual or group of individuals, in con— trast to a corporation, have established majority control or are in a position through stock ownership, or otherwise, to "15 exercise some control. 12Gaines Thomson Cartinhour, Branch, Group and Chain Banking, (New York: MacMillan Company, I93I), p. 59. 13Banking and Monetary Statistics, p. 29h. l 1"’ribid, p. 295. 15Cartinhour, Op. cit., p. 58. 51 Group banking "indicates the type of multiple office banking structure in which three or more independently incor- porated banks are controlled directly or indirectly by a corporation, business trust, association, or similar organi- l6 zation". Again, Cartinhour makes a distinction which is necessary to separate chain banks from group banks. He says that in order for a group banking system to exist the stock- holders must exchange their shares for a price, or permit them to be placed under a trusteeship, or exchange their shares in another corporation. .Although technically each bank in the group is a separate corporation operating with its own capital funds and under the direct supervision of a local board of directors, a degree of unity is achieved for the group as a whole.17 The main feature distinguishing Chain banking from group banking is that in group banking there is always some form of concentration in a central management, usually by way of a holding company. .A secondary difference is that in chain banking there is usually a close distribution18 of the stock, while in group banking the stock of a holding company is usually offered through organized exchanges and this stock is 16Banking and Monetary Statistics, p. 295. 17Cartinhour, Op. cit., p. 59. 18Most often this close distribution takes the form of family stock or two or three business associates holding the stock by themselves. 52 widely held by the public. It is, however, sometimes dif- ficult to distinguish between Chain banking and group bank— ing as a form of multiple banking. Branch banking, on the other hand, is relatively easy, even for the layman,to distinguish from either of the other two forms of multiple units. Branch banks are Clearly iden- tified in most cases and have managers appointed by the parent institution and are directed policywise by the officers of the parent bank. Group banking as carried on in the boom times of the 1920's was usually characterized by a group being built up around a large, stable, influential metropolitan bank. This was done to lend the prestige of the large bank to each of the units of the system, to take advantage of a proven exper- ienced management which normally consisted of experienced and well known businessmen, and to make stockholders willing to trade stock for that of the holding company dominating the group system. Quite often group banking systems brought into the sys- tem banks which maintained branches or, in other cases, devel- oped branches for some of the unit banks in the group. "Of the larger chain or group systems in operation on December 31, 1929, a very considerable number comprised one or more banks "19 operating branches, . . . Iowever, even in these cases 19Federal Reserve Bulletin, Vol. 6, April, 1920, p. 1h9. 53 where branches were maintained, the group system was the main element, and policies were designed to take care of the prob- lems of the system as a group system rather than of the system as a branch banking system. Why Group Banking Became Extensively Used in Late 1920's and Early 1930's Unit banks have been the predominant type of bank in the United States from the time of the early banks in Revolutionary 20 times to the present day. However, as was shown on page h6, in the decade after World War 1, all multiple forms of banking came into prominence. There was much literature written in favor of or against these multiple forms of banking during this tim8021 20Bankingand Monetary Statistics, p. 295. 2;A few representative books, pamphlets, and articles are as follows:.fl Study pf Group and Chain Bankin , (New York: American Bankers Association, 1929); C. W. Collins, The Branch Banking Question, (New York, MacMillan Co., 1926); S. D. Southworth, Branch Bankin lp_the United States, (New York: McGraw-HilI, I928); J. G.flEaurence, "Banking Concentration - Its Progress and Present Status", Bankers Magazine, Oct., 1920; B. Ostrolenk, "Revolution in Banking Theory", Atlantic Monthly, February, 1930; G. W. Dabison, "Concentration of Money Power Threatens Business Initiative", Printers Ink Monthly, January, 1920; H. M. Dawes, "The Branch Banking Problem", Saturday Evening Post, November, 1929. 1‘ [O 5L1 Though group banking had created a lot of interest in banking and financial Circles, it was in June, 1930 that this form of banking reached a high point in the percentage of total nationwide loans and investments which were kept in this type of bank. .At this time there were 269 group banks in the United States with a total of $15,285,000,000 in total loans and investments; while for banks of all Classes combined, there was a total of $58,hl7,000,000 in total loans and discounts.22 The amount of loans and investments in group banking was 26.1 percent of total loans and investments for the United States. In December, 1931 there were 97 groups of banks in the United States with 22.2 percent of the loans and investments for the total United States. In 1939 there were only kl groups with only 12.6 percent of the total loans and investments for the United States.23 In Michigan the "problem" of group banks was more acute. In 1931, 57.5 percent of all loans and investments were lo- cated in the group banks of one or two groups; and there were only two states with a higher percentage, Minnesota with 58.5 percent and Oregon with 58.1 percent loans and investments in 211 group banking systems. 22"Chains, Groups and Branches", American Bankers Asso- ciation Journal, June, 1930, p. 1126. 23Bankingand Monetary Statistics, p. 321. 2"ibid, p. 3111. 55 There have been a number of reasons given for the trend toward group banking as a type of multiple banking. (1) Branch banks were prohibited in a number of states. In 1930 there were 19 states which did not allow branch banking of any kind, and there were 20 states which allowed multiple banking only on a limited basis.25 The National Bank Act of 1865 prohibited the establishment of branches for national banks. The Consolidation Act of 1918, permitting the na- tional banks acquiring state banks with branches to keep the branches open, and a ruling of the Comptroller of the Cur- rency in 1922, allowing national banks to open teller windows within the corporate limits of a City having a national bank, were significant steps forward in the development of branches for national banks. However, the longest step forward came in 1927 with the passage of the McFadden Act. This Act permits national banks to locate branches in the city of the parent bank providing that the state has no law against the operation of branches in that state by state banks and trust companies. Since there were restrictions on branch banking in so many states, it was only natural that banks whose officers desired to ex- tend their services to adjoining Cities and communities would look for and find a way to fulfill those desires. The method they used was group banking. 25Federal Reserve Bulletin, Vol. 16, April, 1930, p. 1&5. f4 S6 (2) The desire for power and profits has been the driv- ing force behind the establishment of many group banks.26 The holding company offers an ambitious banker the same op- portunity for prestige, profit, and power that it does in other fields of business. It was felt that additional profits could be made by the utilization of a better management team, by the speculation in the shares of stock of a unit bank dur- ing and after the time when it became a member of the group, and by organization, distribution and speculation in the shares of stock of the holding company itself which controlled the banks of the group system. (3) The desire to improve the conditions of the banking industry was undoubtedly of great influence in the spectacu- lar increase of group banking. "The sponsors of groups have declared themselves to be actuated solely by a desire to improve the banking and general business conditions of their district . . . "27 The abler and more farseeing bankers were aware that the undoubtedly bad banking conditions surrounding them affected unfavorably the success and growth of their own institutions. They felt that they could give to some of the weaker and less stable , 20Virgil Willit, "The Banks Go Chain-Store", The American Mercury, Vol. 20, June, 1930, p. IE7. 27Ibid, p. 1h6. 57 banking institutions the benefit of their experience and capable management and that conditions could be improved considerably.28 (h) Some of the stockholders, officers, and directors of the large metropolitan banks feared the loss to some of the other group banking systems of some, if not most, of their correspondent business upon which they depended. Therefore, they acted in the spirit of competition and self- preservation and proceeded to enter the group banking busi-. ness themselves. Thus, two ways to increase their own pro- fits were found: [a] the income from the operation of the banks which they "absorbed", and [b] the continued corres- pondent business of the banks which were in the group system plus any increase in correspondent business which might accrue 29 to them because of a Closer working relationship. Many of the large banks which had feared the loss of correspondent business which probably would result from the establishment of branches by competing banks in other communities could now in essence carry on a multiple banking operation with no fear of loss or correspondent business. (5) Though in the decade following World War I there had been great interest in chain banks, this interest lessened as some of the prominent chain banking systems failed in the 28ibid, p. 1117. 29Willis and Chapman, The Banking Situation, p. 390. 58 late 192013. (See page h9.) The one great difference in this new device of group banking was that the actual manage- ment of the individual bank was retained in that bank and the management carried out the general policies of the group system. This was different from Chain banking because there was no uniform specified operational procedure applying to all banks within the system. (6) Some group banks were established in preparation for branch banking which the promoters of the group banks felt sure would be permitted in their own states and nation- ally within a short period of time. They felt that when branch banking was to be permitted, there would be a rush by banks to start branches. These promotors wanted their own metropolitan banks to be ready immediately to enter this field. Group banks for them offered a temporary alternative and one which offered potentially large profits while wait- ing. This policy was followed in Washington when the Marine Bancorporation of Seattle definitely announced a policy of Changing individual units into branches when and where possible.30 Advantages of the Group Banking System There are a number of features of group banking which present advantages over the system of unit banks. However, 30John M. Chapman and Ray B. Westerfield, Branch Bankin , (New York: Harper and Brothers, I9h2T, p. 32E. most of these advantages are also common to other forms of multiple banking. In this section advantages common to all forms of multiple banking will be enumerated. Further, rea- sons why the exponents of the group system as a form of multiple banking feel that group banking is superior will be given. One of the strongest arguments for multiple banking in general and for group banking in particular is that the sys- tem can provide credit to large business institutions which otherwise might not be able to find accommodation from an independent unit bank, at least in the same local territory. The large business institution could go to a member of a group system; and if the resources were not available there, the bank would, in all likelihood, be able to call in other members of the group for part of the loan. The original bank then would not only be able to accommodate the customer but also all banks sharing in the loan would be able to spread the risk of their own portfolios. Group systems and multiple banking systems have avail- able better and more complete credit information than a small unit bank. Through specialization, the large group bank would probably have a man whose entire time would be devoted to credit information and large business loans, whereas in the small unit bank, this task would be carried on by the president or executive officer along with other duties. 60 Group banks and other forms of multiple banking sys- tems usually are better equipped to provide a more complete portfolio analysis and to diversify better the investment portfolio of all banks. Again, a specialized individual may be placed in Charge and can Carry out his duties uninter- rupted by distracting influences such as other miscellaneous duties. The advice and counsel of the officers and managers of a large, efficient metropolitan bank are distinct advantages of the group system. The executive officers of the small member banks may call at will on the management of the larger members of the group and can then discharge their duties more efficiently. Too, a more experienced personnel is at the head of the system than would normally be possible under the small unit system. If the management of the smaller member bank is of substandard quality, educational facilities may be put at their disposal to improve their competency. Group banks and other forms of multiple banking can put large, efficient, and experienced trust facilities at the dis- posal of the residents of the small town; whereas a small unit bank steers clear of trust activities because of the heavy responsibility attached to such activities. Thus the com- munity is not offered, and, in fact, is denied these services. .All forms of multiple banking afford an enlarged oppor- tunity for the officers and managers, in that a man may be placed in smaller banks to gain experience. Until he has 61 gained broad experience and developed his abilities, he cannot take his place in a responsible position as a well- trained banker in an upper level position. Though group banking is sometimes a precursor to branch banking, there are some group bankers who feel very strongly that their type of system is the best and say they would not Change even if the opportunity to do so were present.31 Group bankers maintain there are certain advantages in their type of system over types of multiple banking systems. One of the most important of these is that a central treasury is present which can provide the means for the expansion of the capital structure if necessary, or can make available funds in times of stress, or can make possible a bigger loan to a particular customer if need be. In addition to these advantages, the individual unit bank of a group system main- tains its own identify and own management in the community. This gives the Citizen a feeling of pride of ownership and promotes a feeling of security in his bank. Group banks can have their own supervisory and examin- ing personnel to keep the managers of the systems operating in the best manner and can instruct them in ways to improve their operation. George F. Rand, of the Marine Midland Cor— poration of Buffalo, New York, in a statement to the Committee 31Conversation with James B. Holden, formerly Director of Detroit Bankers Company, Jan. 5, 1956. on Banking and Currency of the House of Representatives, said, "An expert examiner, who was formerly a Chief bank examiner of the New York State Banking Department, has been secured to head the supervision and exam— inations department. He, with his associates, and with the assistance of auditors drawn from other banks than the one being examined, will conduct fre- quent examinations of the various member banks, thus insuring that they will be maintained in excellent condition, that their methods will be up-to-date and standardized according to the best accounting prac- tice, and that any weaknesses will be promptly dis- covered. The best methods developed in any one 39 bank will be made available for all in the group." “ Group banks may serve to make more efficient operations for the small member banks and its stockholders through mak- ing available a large mobile reserve within the holding com- pany. Unit banks in small communities during the late 1920's and early 1930's were holding their assets in a liquid con- dition so that they would be able to meet any emergency or mass withdrawal from depositors. This made many of these small unit banks unprofitable and there was a need to help them out. The existence of the large cash reserve in the holding company would release back to the use of the local community a large volume of capital held in cash, deposits with other banks, and investments in highly liquid, but low return bonds and notes. This released capital could be put into better- paying investments both in the communities to help business 32Hearingpbefore the Committee pp_Banking_and Currency, House of Representatives, 71st Congress, 2nd Session, under H. R. lhl, Volume 2, pt. 9. P. 1179. 63 there but also into higher interest-bearing safe securities which could be found by a trained, competent investment staff of the group banking system.:53 The rise of the group banking system makes it possible for the small member bank in a relatively small community to have substantial capital protecting it from adversity which is so essential to safe and sound banking. Through the broad dissemination of its stock in the community which it serves, the local member of the group system and the holding company preserves the local interest and substantial local ownership.3hr For an eight year period, ending with 1927, 71 percent of the banks that failed were capitalized below $50,000 each and 88 percent under $100,000. In 92 percent of the cases of failure, the banks were located in towns of less than 10,000 5 population.3 These statistics indicated the pressing need for increased capital or at least availability of greater . resources in a short period of time. In the group system, holders of stock have a readier market for the sale of that stock if liquidation becomes de- sirous or necessary. Stock of most of the group holding 33Ibid, Vol. 1, pt. 8, p. 905. 1 3“'“Andrew Price, "The Advantages Of Group Banking", American Bankers Association Journal, October, 1929, p. 317. P 39Hearings, Op. cit., Vol. 1, pt. 1, p. 13. [V 6L1 companies is listed on organized exchanges and there is ac- tive trading. The value of the stock does not depend on the management of one man or a small group but on the management and earning power of a whole group of banks and managers. Disadvantages of the Group Banking System Certainly there are features of the group banking system and of all forms of multiple banking which can work unfavor- ably for the financial sector of the economy. Some of these disadvantages are common to multiple banking in general; some are disadvantages of the group banking system alone. The opponents of multiple banking maintain that one of the greatest disadvantages is that all forms retard the eco- nomic development of the country. They say multiple banking handicaps the development of new businesses and industries because of a great amount of routine and red tape and because the manager cannot make risk loans without the approval of the head office. It is contended that this approval more often than not is not forthcoming or is far too late. The multiple banks do not promote and adequately service the small depositor or the small business but prefer to take care of the giant corporation or big depositor. The argu- ment has been carried further in some cases with protagonists 36 Hearings, Op. cit., Vol. 2, pt. 9, p. 1185. Also J. E. Nevil e, Advantages of Group Banking Summarized", The Commercial and Financial Chronicle, Feb. 22, 1930, p0 1176. A150 )IJi'IIIS and ChapNTan, OE. Cite, p0 3920 6S maintaining that the branch or chain manager cannot or will not make loans to a small borrower who cannot furnish col- lateral. On the other hand, the unit banker can and will make loans on character and judgment and help a new business or a young man to start a business. Another argument against all forms of multiple banking units is that they deaden the Civic pride and the enterprise that has built our communities and great cities.37 It is Claimed that multiple banks have no interest in building up a community but that the officers and directors of the head office or parent company will make loans in the market of greatest total profit, sometimes to the detriment of the local community. Other opponents claim that multiple forms of banking make for speculation in the stock market, since money is drawn from local communities through branch or member bank- ing offices and placed in the call market for the use of speculators in organized exchanges. This is bad in two ways: the local funds are not available for local businesses and depositors; and, secondly, detrimental Speculation is fur- thered. Another disadvantage claimed is that multiple bank- ing results in a dangerous concentration of power in a rela- tively few banking institutions. This concentration of 37Virgi1 Willit, Editor, Chain, Grqpp and Branch Banking, (New York: H. W. WTlson Co., 1930), . k3. 66 banking institutions can result in a virtual monopoly of the financial world, and ultimately even the Federal Reserve would be under the control of a few large banks. Former Comptroller of the Currency Henry Dawes pointed out this danger in his annual report in 1923 when he said, "To say that a large pro- portion of the banking interests of the States are centralized in the hands of five or Six or a dozen branch institutions and that these institutions will not combine, either as a result of direct conferences or agreement of mutuality of interests, is to ignore the fundamental basis of human action."38 Another disadvantage often cited is that the management and/or directors of branches or member banks are reduced to the status of hired employees. Subsequently, they lose their inde— pendence, initiative, and creative power. Other disadvantages, but considered by most to be of less over-all importance, are the undesirable speculative element which can be introduced, the impracticability of a thorough bank examination, the hinder- ance of the proper control and functioning of the Federal Re- serve System, and the concentration not only of commercial banking but of other types of financial institutions under one fl roof or management.“9 38Annual Report p: the Comptroller pi the Currency, 1923, p. 9. O 3"wiiiit, Chain, Group, and Branch Banking, pp. cit., pp. 36-5E. 67 Probably one of the biggest disadvantages claimed against group banks as a form of multiple banking is that they introduce into banking an undesirable element of specu- lation in the bank stocks. Former Comptroller of the Currency Dawes said that the holding companies were paying more for the stocks of the unit banks than the book value and that anything above book value is, in the last analysis, of course, an estimate of future earning capacity except possibly some speculative value in trading. It is very rarely that bank stocks are acquired by holding companies on their asset or book-value basis. They are absorbed rather on the basis of what it is hoped they will be able to earn in the future, the extent to which they will strengthen the general organization, and the fear that some competitor will absorb them. This has resulted in a tremendous speculation in bank stocks, and this advance and speculation has produced a dilution in the real asset value of the holding companies. It is alto- gether a sad departure from the stability and dignity which has always been a tradition of the banking profession and it is thoropphly inconsist- ent with the trustee relationship.r A second major objection to group banks is that a thor- ough and comprehensive examination is almost impossible because of the diverse types of banks usually included in the structure. National banks are examined by national bank examiners and state banks by state bank examiners of the state in which the bank is located. The two different groups of examiners frequently have different methods and are look- ing for somewhat different things so that each part of a group system is not examined uniformly.”1 It has been claimed L”Hearings, Op. cit., Vol. 2, pt. 13, p. 117k. “IVirgil Willit, "The Case for Multiple Banking Examined", The American Mercury, June, 1930, p. 151. that unless there is simultaneous examination of all units of a group "it would be possible for a bank to cover up a bad situation by an improper manipulation of shifting of assets between banks. As a practical proposition it is im- possible to make this kind of examination."u2 Further, in relation to this objection, there is no examination of subsidiary and affiliating institutions to the group bank, and in many cases the solvency and liquidity of the whole group is very Closely dependent on Sideline activities.u3 A group bank can, if it so desires, carry on the un- desirable and potentially dangerous practice of essentially loaning or investing its own legal reserves. This can be done Since in a group there are different types of banks as national banks and state banks which are members of the Federal Reserve System, and also state banks which are not members of the Federal Reserve System. This latter group can deposit its reserve in other commercial banks. It is logical that these reserves would be deposited in the bank uzwillit, Chain, Group and Branch Banking: 0 . Cit-: p. 51’ 14‘3An example of the kinds of Sideline activities carried on is that of the Guardian Detroit Union Group, Inc. At one time (1932) this group was operating in addition to its regular banking business the following types of affiliated companies: .A securities affiliate, the First Investment Company of Detroit; a trust company, the Union Guardian Trust Company; a title insurance company, the Union Title and Guaranty Company; a real estate holding company, the New Union Building Company of Detroit; and a safe deposit company, the Guardian Safe Deposit Company. (See page7h.) 69 within their own group. The group bank receiving these de- posits can then either lend or invest these funds. This type of practice defeats the very purpose for which the re- serves were set up. Weak and inefficient management is always particularly dangerous in banks and potentially leads to failure. Losses sustained in group member banks are more severe than if a bank were operated under the unit system. This is so because if one member bank fails, there is less capital in the hold- ing company and also because of the bad publicity coming to the group as a whole. Other members are naturally affected by the failure of one bank, and it is quite possible that this one break may bring about the failure of an entire group system. Summary Three forms of banking organizations—-branch, chain, and group banking-~are phenomena of the twentieth century. These forms of banking, generally known and referred to as multiple banking forms, are distinguished one from the other by their corporate structure and administrative patterns. Branch banking as a system was started in the early days of the founding of the United States and has become an impor- tant form of banking. Since 1900 it has become probably the one form of multiple banking which has received the greatest use and attention from the banking fraternity. Chain bank— ing was inaugurated in this country shortly before 1900 and, 70 though never important as a form of banking structure, gained its greatest development from 1907 to 1926 when the Witham Chain failed. Group banking began late, in 1928, and in a relatively few years developed to a point where approximately 25 percent of the total loans and investments in all banks were located in group banks. One must understand the reasons why a particular system developed and the advantages and disadvantages of that system as outlined in this chapter before a detailed study of a par- ticular group or groups can be studied. CHAPTER IV FORMATION OF THE GROUP SYSTEMS IN DETROIT Introduction The preceding chapter has described the general charac- teristics of the various forms of multiple banking, the trend toward group banking during the last part of the pros- perity period following World War I, and the various advan- tages and disadvantages of these forms of banking. With this as a background, the purpose of this chapter is to Show in detail the formation of the two large group systems which operated in Detroit from about January, 1930, to March h, 1933. Before pointing out this formation, it might be well to examine the extent of the deve10pment of group banking for the United States. At the end of June, 1930, the Reserve Committee of the Board of Governors of the Federal Reserve Board reported that there were 2,229 banks owned by groups and chains.1 This was the largest number ever reported by the Reserve Committee in any of its reports. At the reporting dates thereafter, though the number of groups and chains increased, the number of individual units decreased. 1Willis and Chapman, Op. cit., p. 38h. 72 TABLE 11 GROUPS AND CHAINS; BANKS ObNED BY EACH June, 1929 to December, 1931 Number of Groups Banks Owned by Groups and Chains and Chains June 30, 1929 321 1,921 December 31, 1929 332 2,165 June 30, 1930 327 2,229 December 31, 1930 316 2,15h June 30, 1931 305 2,071 December 31, 1931 273 1,886 Source: Report of the Federal Reserve Committee on Branch, Group and Chain Banking, 1932, Banking Groups and Chains. Banking groups were located in all sections of the country. On December 31, 1931, there were only twelve states in which there were no banks directly connected with a group system; and all geographical divisions of the United States contained banks connected with some group;3 On that date there were 97 total groups exclusive of chains in the United States. Table 12 shows the number of groups and the number of banks in each geographical division of the United States. 2Bankingand Monetagy Statistics, Table 81, p. 31k. 73 TABLE 12 GROUPS AND BANKS BY GEOGRAPHICAL DIVISION - DECEMBER 31, 1931 Number of Groups Number of Banks United States 97 978 New England 10 71 Middle Atlantic 28 16b. East North Central 10 IMS West North Central 7 221 South Atlantic 7 55 East South Central 7 5h West South Central 7 69 Mountain 3 78 Pacific 18 121 Source: Banking and Monetary Statistics, Table 81, p. 31h. In Michigan on this same date, December 31, 1931, there were two groups including no banks. Though these ho banks represented only 6.8 percent of all commercial banks in the state, the loans and investments of these two group banks represented 57.5 percent of all loans and investments in all commercial banks in Michigan:3 In the state of Michigan the two group banks operating were the Guardian Detroit Union Group, Incorporated and the Detroit Bankers Company. Both of these group banks had their headquarters and the bulk of their business in the City of Detroit. These two group banks operated from late 1929 to March h, 1933, when they were put into receivership. They were not reconstituted. Ibid, p. 3111. Formation of the Guardian Detroit Union Group, Incorporated The Guardian Detroit Union Group, Incorporated was formed through the merger of two earlier group systems. The pioneer group banking operation in Michigan was established May 17, 1928, through the Union Commerce Investment Company. (Later known as the Union Commerce Corporation.) The Union Commerce Investment Company was incorporated under the laws of the state of Delaware on May 17, 1928, as a holding company and acquired the stock of the Union Trust Company which had as subsidiaries the Union Title and Guaranty Company and the Union Building Company, a company organized to enable the Union Trust Company to acquire real estate and one to build a building of its own. .Also the Union Commerce Investment Company acquired the stock of the Union Company, a company organized to take over the business and profits obtained by the Union Trust Company in the form of commissions for loans brought about as agents for insurance companies and the National Bank of Commerce with which an affiliation had been effected on October 2k, 1927}L The National Bank of Commerce had previously acquired the Griswold First State Bank on an exchange of stock basis.5 The Union Commerce Investment Company then, through one means or another but generally by exchange of stocks, acquired LLHearings, Op. cit., p. h77o‘. 5Ibid, p. k77h. {v 75 a controlling or a strong minority interest in 16 additional financial institutions. The following is a list of the insti- tutions under the general management of the Union Commerce Investment Company: Michigan Industrial Union State Bank of Bank of Commerce of Jefferson Savings Bank Union Jt. Stock Land Bank Stock Land Bank City National Bank 8 Trust Company Ohio—Pennsylvania Jt. Keene, Higbie & Company Union Industrial Bank 6 Union Industrial Trust Company State Savings State Savings State Bank of State Savings State Savings Lansing State Bank Bank Six Bank Bank Bank Lakes Thompson Savings Bank Union Trust Company Union Company Union Title 3 Guaranty Company Union Building Company National Bank of Commerce Bank Dearborn Dearborn Detroit Dearborn Dearborn Grosse Pointe Detroit Cleveland Battle Creek Detroit Flint Vestaburg Stanton Six Lakes Remus Clinton Lansing Hudson Detroit Detroit Detroit Detroit Detroit At the time of incorporation in May, 1928, the capitali— zation of the Union Commerce Investment Company was $5,000,000, consisting of 50,000 Shares at $100 par value. This had to 6 Ibid, p. h2lk. K] C\ be increased several times to take care of new acquisitions, and then prior to a merger with the Guardian Detroit Group, Incorporated, the name of the company was Changed to the Union Commerce Corporation. The Guardian Detroit Group, Incorporated was formed as a holding company on May 9, 1929. The major part of the stock was issued immediately to acquire the stock of the Guardian Detroit Bank. By acquiring the Guardian Detroit Bank, the Guardian Detroit Group, Incorporated immediately gained control over three financial institutions, since the Guardian Detroit Bank had two affiliates, the Guardian Detroit Company and the Guardian Detroit Trust Company.7 The Guardian Detroit Bank had been organized to meet a banking need which had arisen as a result of the tremendous growth in the automobile industry and the following rapid rise in population in Detroit and the Detroit area;3 The Guardian Detroit Group, Incorporated was organized Specifi— cally to take over ownership of the Guardian Detroit Bank and its affiliates and to operate as a groups; The group then set out to acquire new banks, both in and out of Detroit, in order to expand its operations. 7lbid, p. M210. 77 The general idea of acquiring the shares of bank— ing institutions located throughout the state was to have an association with a number of strong banks in different sections of the state, banks a part of whose business flowed to New York and Chicago and which could be handled just as well or better through strong Michigan banking insti- tutions, thus retaining that business within the state. Through this association these banks could more capably handle the business of their own local and out-of—state clients, could supply more com- plete credit information, and through contacts of other unit banks in the group could aid their clients in the development of the client's own business. It was thought that such an association would naturally attract to the various localounits a substantial amount of desirable business. In the five months after its birth in May, 1929, the Guardian Detroit Group, Incorporated acquired seven addi- tional financial units. These were as follows: Highland Park State Bank Highland Park Highland Park Trust Company Highland Park Bank of Dearborn Dearborn National Union Bank & Trust Company Jackson Federal Commercial 8 Savings Bank Port Huron First National Bank 8 Trust Company Port Huron Bank of Detroit Detroit These acquisitions were made usually under an exchange of stock basis. The group and the bank in question would each appoint a committee to examine the assets of the bank and to fix an exchange agreement based on the book value and the earning power of the bank. The merger was consumated 10ibid, p. u211. [‘l when and if 75 percent of the shareholders accepted and de- posited their shares of stock with a signed agreement to the exchange.11 The original capitalization of the Guardian Detroit Group, Incorporated had been $7,500,000; but from time to time, this was increased until on November 12, 1929, the authorized capital was increased to $50,000,000. It was at this time the name was also Changed to Guardian Detroit Union Group, Incorporated, to be ready for the merger with the Union Commerce Corporation.12 These two banking groups of Michigan merged on December 16, 1929, through an exchange of shares of stocks of the two corporations, and the one resulting group became known as the Guardian Detroit Union Group, Incorporated. This group then either controlled or had a strong minority interest in 32 separate financial institutions, most of which were either in the City of Detroit or in the Detroit area. On the next page is an organizational Chart as presented at the Hearings before the Senate Committee on Banking and Currency. This chart shows the organization as of March h, 1933. H D‘ I.“ O. V *0 *O 0 F3 1:. O\ O H U P. Q. 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Even if you do not need any additional deposits to offset bills payable, it is extremely important that I be informed accord— ingly, as I may be holding up several other moves awaiting to hear from you. A second method of misleading the stockholders into be- lieving the banks were financially stronger than they really were through published reports of the conditions of the group banks was by showing owned but pledged government securities among the assets of the banks. An example of the amount of this type of misleading information can be seen from the fol- lowing example. On December 31, 1932, in a report of the Comptrbller of the Currency, the Guardian National Bank of Commerce showed $16,807,728 worth of government securities fer among the assets of the bank.“3 hr. Lord testified at the Hearings, however, that at the time of the submission of in- formation to the Comptroller of the Currency on November 9, 1932, that $11,021,1hh.25 worth of these securities had been sulbid, Committee Exhibit No. 37. p- u3k8- 35 Individual Statements of Conditions of National Banks at the Close of Business, Dec. 51, 1932:5T5b1e J, 1933 57'707 109 pledged and were unavailable for use by the bank.36 This in- dicates that the total resources of the bank were expanded by this item alone by almost 7 percent since the total resources of the bank at the time were slightly over sioo,ooo,ooo.37 A third device for misleading the public regarding the true amount of resources available to the group system and to the individual unit banks was by including an item on the asset side of the balance sheet called "Customers' Securities, Safekeeping." It is true that on the liability side of the balance sheet was an item called "Customers' Securities, Safe- keeping" but a casual observor would not be aware of the fact that these two items were offsetting and would be led to be- lieve a bank had more total resources than was actually the case. Mr. Lord testified that the consolidated group state- ments ceased to include this item in 1930 but that various unit banks continued to carry the offsetting and misleading items with the permission of the directors of the group system.38 A fourth method of misleading the public and also the stockholders of the group system was that of purposely omit- ting from statements the true condition of the system. In soHearings, Op. cit., p. h379. 37 Individual Statements of Conditions of National Banks at the CTOse of Business, Dec. 31, 1932:" 'Tabfe'77 1983, p. 757 8Hearings, Op. 912;: p. h38l. a year-end report to the stockholders there appeared the fol- ’2. lowing statement:”9 The policy of maintaining a highly liquid position is naturally reflected in reduced earnings. Never- theless, your company earned more than sufficient to pay during 1930 regular dividends at the rate of $2 per annum andhan extra dividend at the rate of $1.20 per annum.‘T A statement such as this clearly led the stockholders to make the assumption that there had been a profit for the year. However, such was not the case. In a report to the Michigan Securities Commission for the calendar year 1930, the Guard- ian Detroit Union Group, Incorporated stated that a net loss of $39,387.57 had occurred. In a year-end report to the stockholders for 1931 there appeared the following statement: For the year ended December 31, 1931, the net earn- ings of the banks and trust companies of the Group, after all expenses of operation and after setting aside adequate reserves for taxes and depreciation of banking quarters and equipment, but before charge- offs, were $3,887,052.86, or it the rate of $2.51 per share on the 1,5hh,8hh shafles of the Group stock $20 per value outstanding.“ 391t should be pointed out at this point that these year-end reports to the stockholders were not examined by bank officials or any other government official to make sure the statements were accurate. It must be remembered that annual reports are issued with the al- leged purpose of giving information to stockholders. .A demand for more detailed information by inquisitive stockholders is the best remedy for more informative reports. uOIbid, p. hh35. u1$3,887,052.86 divided by l,5hh,8hh shares of stock. 1L2Ibid, Committee Exhibit No. 36, p. Mh35- 111 This report to the stockholders shows a net earning while an official report to the Michigan Securities Commission clearly contradicts the accuracy of the above statement of earnings. For the year 1931 the Guardian Detroit Union Group, Incorpo- rated stated to the Commission that there had been a deficit of $288,930.33. In answer to a question from Mr. Pecora, Mr. Robert Lord at one time testified that ". . . if these reports did not in- clude information that the stockholder should have, we were unquestionably subject to criticism."83 A fifth method used by the management of the Guardian Detroit Union Group, Incorporated to mislead the public and its stockholders was through the use of a consolidated state- ment which was almost completely uncomprehensible to the reader. .A more understandable form had been suggested by banking authorities for many years. The following passages, quoted from the minutes of a meeting of the Public Relations Committeeuiheld in June, 1931, show that a more comprehendible form was being considered: A discussion followed of the Consolidation Group state- ment, which is to be printed in poster form three or four days after the unit statements are available. It was finally decided that this consolidation statement uslbid, p. hhSO. l . 4LThis was one of a number of committees functioning among the directors of the group system. Its duty was to interpret the system to the stockholders and depositors for the best advantage of the system. 112 would be printed in the standard form rather than in the understandable form, as it had been originally set up. It was felt that the understandable form was de- vised at a time when conditions warranted such a stat r ment whereas the situation is now entirely different.“) Further the minutes reported, "At a later date it may be advisable to use the understandable consolidated statement form, and it was decided to hold it in reserve for the time being."b*6 The Detroit Bankers Company was also a party to mislead- ing the public and stockholders regarding the condition of the group system as a whole and of the unit banks within the system. The officers and managers of the Detroit Bankers Company carried on many of the same practices as did the Guardian Detroit Union, such as the manipulation of certifi- cates of deposits and reciprocal deposits among the various units of the system to create the impression of financial strength and increased deposits.b"7 The group system was warned against the reciprocal de- posit practice by the bank examiners, though this written warning really should not have been necessary for all good bankers know this type of practice is frowned upon by bank- us ing authorities. ”51bid, p. h3o7. uélbid, p. h37o. u7lbid, pp. 5355 - 5372. BB Ibid, p. 5336. The letter warning the Detroit Bankers Company said in part, "This department frowns upon the plan of building up your reserves through reciprocal "9 113 The Detroit Bankers Company had added a new type of operation to make their reports to the public misleading if not false. It was arranged that all units of the group sys- 9 tem would make deposits in the trust unit.u In these cases the deposits of both the commercial banks and the trust unit would be increased, showing increased activity and financial strength to the casual observer. As can be seen from the above accounts of the activities of the two group systems in Detroit, the managers and offi- cers knew that they were not presenting clear facts to the public, and in many cases they were intentionally mislead- ing the public and depositors and making false reports to the stockholders. (h) Loans to Individuals and Businesses with Stock of the Holding Company Being Held as Collateral Both the national banking laws and the Michigan banking laws prohibit a bank under their jurisdictions from making loans secured by the bank's own collateral or from buying any of its capital stock except under the most trying deposit arrangement with other Detroit banks. We realize the present plan of setting up reserves was recently inaugurated; however, the plan of re- ciprocal deposits should be discontinued as fast as the necessary reserves are built up." LtgIbid, p. 5335. ,4 conditions.)0 In the group system when there is no bank stock available except that held by a holding company, this type regulation has little, if any, meaning. If the holding company is organized to hold only the stock of various unit banks, all within an affiliated group, a secondary problem arises. Should a bank within the group or holding system make loans secured by stock of the holding company? This is the problem which faces examiners at both the state and na- tional level in dealing with the group banking systems over the country. This type of secured loan actually is a 50 The Michigan law is as follows: (Michigan Banking Act, 1929, Section 80) "Loans on or purchases by bank of own stock. Except as otherwise authorized by law, no bank shall make any loan or discount on the secu- rity of the shares of its own capital stock, nor be the purchaser or holder of any such shares, unless such security or purchase shall be necessary to pre- vent loss upon a debt previously contracted in good faith; and stock so purchased or acquired shall, with- in 6 months from the time of its purchase, be sold or disposed of; or, in default thereof, the same shall be cancelled and shall not be considered as part of the capital structure of the bank: Provided, That the com- mission in its discretion may extend the time within which the bank may dispose of and sell said stock for a period not to exceed 1 year." The law for national banks is as follows: (Section 5201 United States Revised Statutes, 1929) "No asso- ciation (national bank) shall make any loan or dis- count on the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares, unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in good faith; and stock so purchased or acquired shall, within 6 months from the time of its purchase, be sold or dis- posed of at public or private sale; or in default there- of, a receiver may be appointed to close up the business of the association, according to Section 523k." circumvention of the law and the intent of the original law is broken. Examiners criticized this type of activity. Both the Guardian Detroit Union Group, Incorporated and the Detroit Bankers Company were violators of the intent of the law. An example of the concentration of stock held as collat- eral for loans can be seen in examining the National Bank of Commerce, a member of the Guardian Detroit Union Group, Incor- porated. In September, 1930, there were h8,h3l shares being p held as collateral for loans;31 in March, 1931, there were 57,531;52 and in May, 1932, there were lh9,57h shares held.53- These stocks were not only held as collateral in the face of frequent criticism by the examiners but were being increased 58 Finally in January, 1933: the Comp: almost continuously. troller of the Currency in a direct message to the Board of Directors of the National Bank of Commerce called attention to the special schedules of loans of the bank. These sched- ules showed the extent to which loans had been granted on stock of the Guardian Detroit Union Group which to all intents and purposes was equivalent to loaning on the bank's own stock, since the Group owned all of the bank's stock except the 51ipid, p. 1411.91. 116 qualifying shares of the directors.55 Mr. Bert K. Patterson formerly was chief examiner of the Seventh Federal Reserve District, of which Detroit is a part, and later vice president of the Guardian Detroit Union Group, Incorporated. He stated during the Hearings before the Senate Banking Committee that the loans based on stock of the parent company could be traced to a violation of the national and state statutes pertaining to banking.56 The unit banks affiliated with the Detroit Bankers Com- pany were criticized early for their large concentration of loans which had as collateral the stock of the parent holding 'company. One of the affiliates, the Detroit Trust Company, (was censured by the examiner in September, 1931, as follows: "This department recommends that in the future no additional loans be extended which are predicated upon Detroit Bankers Company stock and that your present loans be gradually elimi- n57 nated whenever possible. A gradual elimination of this type of loan and collateral may have been desired by the officers of this unit bank and others in the system, but the very structure of the group system prevented this elimination. Once a unit bank was in the position of holding stock of d the group system as collateral for a loan, there was a vicious 55’Ibid, p. M390. Sélbid, p. hh99. 57Ibid, p. 5336. 117 circle reaction. First, the unit banks had to declare divi- dends on their own stock so that the parent company could pay dividends and thus keep the Collateral stock at a reasonably high price on the Detroit Stock Exchange. This had to be done even though the unit bank was experiencing reduced earn— ings. Secondly, the bank could not liquidate any significant amount of holding company stock because the price of stock would fall on the Detroit Stock Exchange and thus confidence in the group system and the affiliated unit banks would be weakened in the mind of the public. Further, any fall in the market quotation would make the balance of any stock held for collateral of less value. To see to what extent some of the unit banks of the De- troit Bankers Company held group stock as collateral for loans, one needs only to look at the First National Bank of Detroit as an example. On February 1h, 1933, at the time of the Michigan banking holiday, this unit held 300,000 shares of the Detroit Bankers Company or almost one-eighth of the total authorized under the Articles of Incorporation as collateral for loans of one kind or another.58 Though many of the loans made upon collateral of the stock of the two great group banking systems of Detroit were repaid after the banking holiday, the collateral held for these loans was of no value after the holiday.59 The loans were liquidated on other bases than redeeming the collateral. This practice of holding group stock as collateral for loans proved disastrous for both systems and never should have been followed. (5) Loans to Officers and Directors of the Group System and of the Unit Banks Loans to officers and directors of banks have always pre- sented a most difficult problem for bank examiners and for government regulation. In times of prosperity there is a tendency for some directors and officers to feel that with a specified amount of borrowed money they can make themselves financially secure; in times of stress the bank directors will sometimes pass on the dubious loan applications of one another in a "we're all good friends' spirit" in order that the directors and officers might ride out a period of hard times. Effective legislation to control borrowings by directors, officers and the enterprises in which they have an interest is especially difficult. Under our present scheme of unit banks, it would be almost impossible to obtain the more able 59Ibid, p. 5618. Both the Detroit Bankers Company and the Guardian Detroit Union Group, Inc. were forced into receivership. The bankruptcy proceedings which followed allowed no payment whatsoever on the shares of stock of either company. 119 men of the community to serve as directors, if they were denied bank credit.60 It is not uncommon for authorities on examining an in- solvent bank to find that loans to its officers and/or direc- tors exceed the unimpaired capital of the bank.61 When this is the case, in the final analysis, the officers and directors have borrowed the capital of the bank for their own use. It is a curious fact, indeed, that though banking author- ities for years had frowned upon the making of loans to direc- tors and officers, the group system actually encouraged sub- stantial loans to officers and directors of both the group system and of the unit banks. Robert O. Lord testified at the Hearings before the Senate Committee that the Guardian Detroit Union Group, Incorporated encouraged these loans, a substantial part of which were secured by group stock.62 To see to what extent the officers and directors of the Guardian Detroit Union Group, Incorporated availed themselves 00In 1928 the directors of the Continental National Bank 3 Trust Co. of Chicago included the following people: Edward F. Carry, President, The Pullman Co.: F. Edson White, President, Armour & Co.; Milton S. Florsheim, Chairman of Board, The Flor— sheim Shoe Co.; and Robert F. Carr, President, Dearborn Chemical Co. Had these men and/or the companies in which they had a substantial interest been denied bank credit, it is difficult to imagine that they would still have been willing to serve in that capacity. 61Goodbar, Op. cit., p. 155. 62ihid, p. h39o. Pb I“ 120 of the opportunity to borrow money from the banks in which they worked, one need only look at two of the largest units of the system. .As of November, 1932, the Guardian National Bank of Commerce had outstanding loans without collateral of over $1,7h0,000 and loans backed by collateral of over $1,7hl,000 to officers and directors of the bank.63 This total of $3,h81,000 was more than 3h percent of the total capital of the bank as reported by the Comptroller of the Currency on December 31, 1931.68, One can see the extent of the penetration of this borrowing when it is shown that loans were made to 52 of the 61 directors and to 33 of the B3 of- ficers of the main office.65 In the second of two of the larger banks of the Guard- ian Detroit Union Group, Incorporated, the Union Guardian Trust Company officers and directors of the bank were liable for a total of over $2,h77,000 on their respective individual 66 accounts. One Robert Oakman, a director in this bank, must 63ibid, p. h391. 6hIndividual Statements of Conditions of National Banks at the Close 2£_Bfisiness December 31, 1931, (Washington, D.C.: U.S. Printing Office,—T932), Table I, p. 77. 65 l Hearings, p. B394. 66 The directors of the Union Guardian Trust Company in- cluded such people as Frederic G..Austin, Walter O. Briggs, Edsel B. Ford, Charles S. Mott, Ransom E. Olds, Hiram H. Walker, Charles E. Wilson, well-known indus- trialists in the Detroit area. These men and other f) have taken the encouragement to borrow liberally, for during 1932 he increased his borrowings by almost $h00,000 even though in September, 1931, the state bank examiner had clas- sified his aggregate liability of $1,283,000 as "slow."67 The situation in regard to loans to directors and offi- cers in the Detroit Bankers Company is much the same as in the Guardian Detroit Union Group, Incorporated. As of Decem- ber, 1931, direct loans to directors were a net total of more than-$20,7h2,000 and affiliated borrowings of the same direc- tors were over $21,386,000, or a grand total of more than $h2,128,000 owed by directors of the group system to unit banks within the group system. One of the most flagrant violators of good banking prac- tice of all unit banks within this group system was the First National Bank in Detroit. As of the date of the National Banking Holiday that unit bank had outstanding loans, direct and indirect, to officers, directors and employees of over Q $33,296,000.6b This was greater than the total capital of directors were active business men, and it is en- tirely possible legitimate loans of $2,h77,000 would be extended to them. On the other hand, loans to of- ficers of this amount could almost be considered as excessive. No information is available as to the breakdown of the $2,h77,000 as to how much was loaned to officers and how much was loaned to directors. 671bid, p. h863. On December 31, 1931, this loan was 6 months overdue, though interest was being paid. 68ibid, p. 5618. ' A l n o A . ‘ _ R ‘ \ " , v - - , . n s \ t B .._. . 0 , ~ -q ., . _ ' A a . »- n _ _ ‘ _ _ ‘ N v . \ . r H . . 4 g .1 V‘ , , . , Q - Q 5 A * ~ V O - 7 ‘ ‘ fl ' 2 K x f g g ._ I, - a \ I , a 122 the bank at the time, indicating bad judgment or mismanage- ment on the part of the officials of the bank. Although the officials of the First National Bank stated that they were trying to correct a bad situation when they were criticized by bank examiners for having so much in loans to officers and directors, the aggregate of direct loans to directors was reduced from $20,7h2,000 in January, 1932 to $20,568,00069 in February, 1933, or a reduction of less than $200,000. This slight reduction seems to indicate one of two alternatives: (1) there was no real pressure brought to reduce this type of loan, or (2) the loans made were bad, never should have been made in the first place, and were now virtually losses and actually should have been written off. It is obvious to even the casual observer that the prac- tice of a bank lending money in large amounts to directors and officers is an indefensible practice. Why these two great group systems of banks condoned, even encouraged this action, was never brought out in testimony before the Hear- ings before the Senate Committee on Banking and Currency. Summary The two large group banking systems in Detroit were in- viting criticism in operating as they did. The five abuses, as enumerated, were continuously frowned upon by bank examiners 'lbid, p. 5632. m [a at the time. Yet,it appears from the evidence presented at the Senate Banking Committee Hearings that instead of cor- recting the frowned-upon operations of the banks, the management continued to operate in much the same way until February 13, 1933. It was at this time that Governor Com- stock called the first important banking holiday, which led eventually to the general Holiday of March h, 1933, called y the newly inaugurated President of the United States, 70 DA Franklin D. Roosevelt. 7 USullivan, Op. cit., p. 81; see also, Report of the Comptroller EETTEE Currency, 1932, p. 79._.ThCre had been a banking holiday in Nevada in October, 1932, but since there were so few banks and these few banks had resources totalling only Sh0,7)0,000 at the time of the holiday, little excitement was felt beyond San Francisco. CHAPTER VI COLLAPSE OF BANKING IN DETROIT Introduction Forces affecting American banking in general and Detroit banking specifically, which had been developing for several years, erupted in the February, 1933, gubernatorial banking proclamation. Banking people and legislators had been aware of mounting problems for some time, but instead of a frank analysis and reformation, measures were taken in 1931 and 1932 which could hardly be classified as anything more than "relief" or "stop-gap" measures. One clear indication of difficulty was the increase in bank failures. Though many seemed to think these failures were a result of local situations and problems, one can hardly overlook the fact that in several of the years from 1918 to 1932, suspensions amount to more than 10 percent of all banks in existence. Chart III shows the number of suspensions for the fifteen years 1918 — 1932.1 1Banking and Monetary Statistics, Table No. 66, p. 83. CHART III Number of Bank Failures for United States by year, 1918 - 1933 4000 3800 3600 I\) 3400 3200 3000 2800 2600 2400 2200 }\ / \ m, / \ / \ 1400 1200 1000 / 8. / 600 ;/ \'\ J/ 400 /) 200 V“ "/4 0 a: co 6 o ~ «to v we t~ no a o— N a: a v-‘r-‘NNNNN NNNNNMMMM o as ex a o ascx o no G as as no a as >‘ F‘F‘F‘H—‘F‘F‘ HO-II-‘I‘F'l-‘F‘Fll-l (Source: BANKING AND MONETARY STATISTICS, Table Number 66, P. 283) \JI be met, 126 ‘Another indication that a crucial problem would have to Federal Reserve Board. From December, 1930, to June, the amount of money in circulation increased from $k,603,ooo,ooo to $5,L, and soon, was apparent in published statistics of the 1932, w ’ 2 ,000 or more than 1e percent. Thereafter the amount of currency in circulation in- creased week b week until the crash and the eneral holidai J of March A, tion on Wednesday of each week from December 21, March, 1933. noticeable. 1932, 1933, when this excessive hoarding became most Table 1b shows the currency in circula- to 2m following: lhe change in circulated money can be seen from the Money in Gold Gold Standard Silver Circulation Coin Certif— Silver Certif- OO0,000 icates Dollars icates 1930 h,603 81 1,118 37 non 1932 S,L08 166 716 30 353 Subsid- U. S. Federal National Miscel- iary Notes Reserve Bank laneous Silver Notes Notes Money 1930 281 295 1,6M1 623 123 1932 256 289 2,780 701 118 It can be seen from the table that the biggest change came about as a result of an increase in Federal Reserve Notes. ways: These notes got into circulation in two main (1) Borrowing by member banks from the Federal Reserve, and (2) the discounting of eligible paper by member banks at the Federal Reserve. Source: Federal Reserve Bulletins. 127 TABLE 1h HONEY IN CIRCULATION, DECEMBER 21, 1932 - MARCH 3, 19333 (By weeks) ‘ Amt. of Money fimt. of Money Date in Circulation Date in Circulation (Millions) (Millions) Dec. 21, 1932 $5,730 Feb. 1, 1933‘ $5,652 28 S: (387 U 37’ 705 Jan. u, 1933 5,669 15 5.85 11 5,589 21 5,988 18 5,602 28 1 6,5h5 25 5,611 Mar. 1 6,720 3 7,ulu The question of how long the banking system could with- stand the strain became the concern of officials in 1932; but in 1933 the question became when and in what form the break- down would show itself first and then how far would the break- down go.lJr Detroit, Michigan, was especially vulnerable to the pos- sibilities of a banking crisis. As the heart of the still young automobile industry, the city was particularly sensi- tive to the rise and fall of the buying power of the public all over the country. Added to this was the fact that De- troit had become almost a one-industry city and was shown to 3Source: Federal Reserve Bulletins. l . . L11111113 & Chapman, The Banking Situation, p. 9. be vulnerable to a crisis. Scores of new plants and factories had been built, and many new homes were constructed in the previous decade to provide space for the new industry. The banks of Detroit had financed much of this expansion. When depression came, the buying power of people in the United States was reduced so that unemployment became widespread in the automobile center. The forced unemployment of the worker brought about forced non-payment of the mortgage and loan pay- ments. Jesse H. Jones, in his book Fifty Billion Dollars -- Ev Fifteen Years with the RFC, says, ". . . Detroit was harder hit (by the depression) than any other American metrop— 5 olis." Because of this one-industry feature, unemployment was a particular problem in the Detroit area. The following chart shows employment in the automobile industry from September, 1931, to March, 1933, along with the. factory employment record for the entire country. Few indus- tries were as depressed as the auto industry. This, coupled with the fact that the automobile industry was one of the most concentrated of any in the country, created a real problem for the leaders in Detroit and Michigan. Jones, Jesse, Fifty Billion Dollars. (New York: hachillan Co., 1951), p. 57. 8861 WNW €€6I flawed yum-‘3 OZAOEOuQC I 88 .n— .32 353:5 9680: Eovoh 30309 A 303:: magnum .655 "Son. 0 .1 o W O .m. d O A O 10 V m. m a m. m m. n .1 r. V W m m m. a. a m. m m m m m n m n m w A e A I u. .l I .l I .I. .l .I. .l I .l .l .l. 6 6 6 6 6 6 6 6 6 6 6 6 On 8 8 8 8 e 8 00 90 00 00 8 e z z 70 70 z z z z 7U 7U 70 am Manual 1861 lemma [861 imam eqzuow om mm ov mv om mm ow we Hmma 40.82 I 33 5:89:62 E333:— 236E3=< «:8 38% @215 mo ram—i:— 1309 unwaroism heaven 2 .5220 ,2. 02 H 09:25. mag c «as 130 In this chapter events leading up to and culminating in the collapse of banking in Michigan in mid-February, 1933, will be described. Much of the information presented has been taken from the hearings before a special referee inquir- ing into the state banking holiday. The original hearings are unavailable, due to loss by fire, but since the hearings had been of such importance to the people of Detroit, almost complete testimony was printed daily in the newspapers. The hearings were called by the Attorney General of Michigan shortly after the banking holiday and continued until the 6 early fall of 1933. The hearings were held before a one-man Grand Jury in the Circuit Court of the city of Detroit. Political Aspects of the Crisis There seemed to be political overtones to the advent of a crisis. in November, 1932, Franklin D. Roosevelt had been elected on the Democratic ticket. Many people felt uneasy because of the impending shift in the control of the Govern- ment after twelve years of Republican leadership. Coopera- tion between the incoming and outgoing administration was absent.7 Then, too, business and industrial leaders, as well as the general populace, uncertain of the policies to be carried out by the new administration, were anxious. The 6 See Appendix for the document asking for the hearing. 7Sullivan, Op. cit., p. 110. publicity and the effects of all RFC loans made to banks was {‘1 was still fresh in their minds.0 Personal Factors Entering the Crisis It has been pointed out several times by authoritative sources that Senator James Couzens, senior senator from Richi- gan in 1933 and an influential member of the Senate Banking and Currency Committee, and Henry Ford had become antagonistic toward each other by the early part of the 1930's.9 Couzens had made a fortune with the Ford Rotor Company several years earlier (1906-1919) but after several disagree- ments with Ford had sold out. He shortly became an acknow- ledged foe of Ford; they differed over military preparedness in 1915-1916, over prohibition, and over politics.lo On leaving the Ford Motor Company, Couzens operated a bank in Highland Park and, because he had not conformed to the regula- tions set forth, was refused a permit to become a member of the.Detroit Clearinghouse Association. 8 See Chapter 11, pages 30-35 for a detailed discussion of the creation and operation of the RFC. 9 f 0 Jones, Op. cit., pp. 55-50, Bingay, Op. cit., p. 1203 personal interviews with James Holden and haurice Eveland, present Commissioner of Banking for Michigan. 10 . n ‘ Jones, 0 . CIEL, p. 55. Both POFd and Couzens were members 0 the Republican Party, but during the presidential campaign of 192k and during the senate rate of 1918, Couzens openly and vigorously opposed Ford for these two nominations. r0 132 Couzens had also participated in a long feud with Andrew W. Mellon, Secretary of the Treasury in the Harding, Coolidge, and Hoover administrations. This quarrel had arisen in part oVer the tax the Treasury had assessed on the sale of his Ford stock. At the time of the banking crisis, because of his influential position in the Senate, Couzens was in a particularly good position to shape the destiny of banking in Detroit, in Michigan, and in the entire country. Events Leading up to Banking Holiday of February IR, 1933 In Detroit definite pressures of the general financial situation began to be felt in late January. .Apparently by Chance, at this time the two national banks of the two group systems dominating banking in Detroit were examined by Fed- eral bank examiners on January 27 and 28, 1933. At the con- clusion, in letters to the directors, each of the banks, one By the first of February, 1933, officials of the RFC were informed that Detroit was in a precarious situation because of the development of a crisis situation at the Union Guardian Trust Company, one of the larger units of the Guardian Detroit Union Company, Incorporated. It was felt that if the Union Guardian Trust Company were forced to suspend operations, the entire Guardian Detroit Union Group would be dragged down with 11The Detroit News, Wednesday, June 7, 1933. from each of the two group systems, was declared to be solvent.11 ,7 it and eventually the other group system, the Detroit Bankers Company, and then all the banks in the state. The officials of the Union Guardian Trust Company knew that, since there was some rumor that the bank could not reali7 ze on its assets, the bank must be prepared to pay off 100 cents on the dollar of all deposits. Since the Union Guardian Trust Company had deposits of approximately $21W, w,om and held not more than $6,000,000 "present value" assets,12 it was absolutely necessary that outside help be obtained. The Guardian Detroit Union group as an entity de- ’ cided to ask for loan large enough to sustain the Union 111 Guardian Trust Company in its present difficulty and also to put the whole group on a reasonably sound basis to withstand almost any difficulty. The Group system, therefore, requested a loan of $50,000,000 from the RFC, which when added to a loan previously made would have totalled $65,000,000 loaned to the entire Guardian Detroit Union Group, Incorporated. Senator Couzens at a Grand Jury hearing into why the bank- . o 1‘ I n 1’; 0 ing holiday was called on rebruary 14, 1933, J said: On February 3, 1933, a member of the RLC Board of Gov- ernors, discussing the railroad situation, incidentally remarked that there was trouble in the Detroit banking situation. He gave me some of the details. On Feb— ruary h, another director said the Guardian Detroit A 12"Present value" assets mean the asset value at which the Union Guardian Trust Co. could liqui- date its portfolio on the depressed market of early 10;33. 1\)This is the one-man Grand Jury hearing to which reference is made on page 130. :‘N’Wf‘ P Union Group was applying for a $65,000,000 loan and that the RFC had been requested not to let me know. While that made me curious, it did not make me take any action. I ha d casual talks with members of the RFC Board agd got much of the detail concern- ing t? e situation. The loan which the Guardian Detroit Union Group sought was to be secured by $90,000,000 in mortgage assets, which at D the time had a market value 01 approximately only $35,000,000. It was estimated, however, that the assets probably could be liquidated at some time in the future at somewhere between (-1 CC) 375,00 ’,C00 and $ 0,0"0,000. The RFC ruled that the loan could not be made, particularly since Senator Couzens had threatened to carry the whole case to the Senate floor if the 15 O 3 loan were made on that basis By Thursday, February 9, the situation had become so desperate that President Hoover called Senators Couzens and ‘Vandenberg of kichigan, Secretary of the Treasury Bills, and Charles Miller, President of the RFC, to the White House for a conference regarding the Detroit situation. Of this meet- ing, that ended with almost nothing accomplished, Senator Couzens later said, "I was definitely opposed and that if it 1 a o l() were made (the loan), 1 would denounce 1t from the housetops." . 1UrState of Michigan, Hearings before the Special Referee Inquiring into the State Banking Holiday: Wayne County Circuit Court, Detroit, 193h: quoted from The Detroit News, August 17, 193k. .I f“ “Sullivan, 02. cit., p. 83. 1e 1 Testimony of Senator Couzens, Detroit Hearings, quoted in The Detroit News, August 17, 193k. 1:35 On Friday, February 10, Secretary of Commerce Roy D. Chapin and Assistant Secretary of the Treasury Arthur Bal- lantine went to Detroit to try to keep the Union Guardian Trust Company and others of its group open until Saturday noon when there would be two and one—half days of closed bank time in which to find a solution to the immediate problems of Detroit banking.17 From Friday until Sunday Mr. Chapin and Er. Ballantine exerted every influence to raise new capital in Detroit to save the situation but with little results because of the sentiment aroused by rumors about the Union Guardian Trust Company and by daily statements by Couzens that the banks of . 18 Detroit were hOpelessly insolvent. A temporary plan was finally presented to hold the situa- tion until a more permanent solution could be found. The Union Guardian Trust Company could still be "saved" if enough depositors would voluntarily subordinate their deposits.19 There were found depositors who would subordinate to the amount of about $8,500,000-—$7,500,000 of which belonged to 17Sunday was Lincoln's Birthday, and thus Monday, the 13th of February, was a regular banking holiday. Bingay, 0p. cit., p. 129. 1CEDeposits are considered subordinated if a depositor agrees not to make withdrawals from his account for a certain period of time. In effect, this means that a bank does not need to have as much cash on hand or be as liquid as otherwise might be the case. Henry Ford. Thus it was that $5,500,000 stood between a -\ . . . 20 hepeless s1tuat10n and a cnance for success. On Monday morning, February IA, 1933, President Hoover called Chairman of the RFC Pomerene and Secretary of the Treasury Mills to the White House and informed them that unless some other solution was found by 9:00 P.M. Monday night, the RFC should be ready to loan this $5,500,000 to the Union Guardian Trust Company, regardless of what Senator Couzens had to say.21 However, this was never to happen. In Detroit the situation had become so bad by Monday evening that bankers and community leaders gathered together to discuss the crisis. Among those present were Robert O. Lord, President of the Guardian National Bank of Commerce; Ernest Kanzler, Chairman of the Board of the same bank; Clifford Longley, President of the Union Guardian Trust Com- pany; Roy D. Chapin, Secretary of Commerce; Arthur A. Ballan- tine, Under-secretary of the Treasury; John K. McKee, repre- senting the RFC; M. L. Prentis, President of Chrysler Corpora- tion; B. H. Patterson, Vice-president of the Guardian Detroit Union Group, Incorporated; Alfred P. Leyburn, Chief Examiner 2oneposits of $20,000,000, less $0,000,000 in liquid assets, less $8,500,000 of subordinated deposits, leaves $5,500,000 needed to pay off non-subordi- nated depositors 100 cents on the dollar. ZlSullivan, 03. cit., p. 80. of the Seventh Federal Reserve District; and Malcolm C. Taylor, Deputy Commissioner of Banking for the state of "O W‘o q o L‘— Mle‘ilgaI‘l. Malcolm Taylor testified at the Detroit Hearings that he first heard the proposal for a general banking holiday ' O 23 O Q C at about ten 0 clock that evening. He said that it was the general feeling that the holiday was a "must" because the closing of the Union Guardian Trust Company would put extreme pressure on the other banks of the Guardian Group, which in turn would affect the Detroit Bankers Company, and then pressure would be applied to the out-state banks which “h used the City banks as depositories.c" 25 Governor Comstock was called to the meeting from Lansing late in the evening of February 13 and was told of the impend- ing closing and of the crisis. Taylor testified that he, Hanzler, Ballantine, McKee, Leyburn and Chapin, all unani- mously recommended that the Governor proclaim a holiday for ‘2Testimony before Judge Heidan, Detroit Hearings, quoted from Detroit News, June lb, 1933. It is important to know that this was not just a meet- ing of Detroit bankers but one of financial men from all over the country. 231bid. * LL1 d. D) if; H o 2DState law required banks which were not members of the Federal Reserve System to keep half of their reserves in some bank within the state; in practice this meant Detroit. 138 a long enough time to get banking in Detroit back on a sound . 2 ‘3. . . . .‘ . baS1s. State Bank1ng Comm1s31oner Rudolph L. Reichert was not present at this meeting but was called by telephone for consultation. He approved the holiday proclamation upon in- formation submitted to him at that time; he said it was "the "27 only thing to do under the circumstances. Finally, just after midnight of February 13, 1933, Gov- ernor Comstock signed the proclamation which closed the banks of Michigan and brought on the banking holiday in all the other h? states of the Union. The text of the proclamation issued by the Governor is as follows: Whereas in view of the acute financial emergency now existing in the city of Detroit and throughout the state of Michigan, 1 deem it necessary in the public interest and for the preservation of the public peace, health and safety, and for the equal safeguarding without prefer- ence of the rights of all depositors in the banks and trust companies of this state and at the request of the Michigan Bankers Association and the Detroit Clearing House and after consultation with the banking author- ities, both national and state, with representatives of the United States Treasury Department, the Banking De- partment of the state of Michigan, the Federal Reserve Bank, the Reconstruction Finance Corporation, and with the United States Department of Commerce, I hereby pro- claim the days from Tuesday, February 1h, 1933 to Tues- day, February 21, 1933, both dates inclusive, to be public holidays during which time all banks, trust com- panies, and other financial institutions conducting a banking or trust business within the state of Michigan shall not be opened for the transaction of banking or trust business, the same to be recognized, classed and 0/ Lolbid. 27Testimony of Reichert before Holiday Hearing, quoted from Detroit News, June 15, 1933. 139 treated, and have the same effect in respect to such banks, trust companies, and other financial institu- tions as other legal holidays under the laws of the state, provided that it shall not affect the making or execution of agreements or instruments in writing or interfere with judicial proceedings. Dated this Fourteenth day of February, 1933, l Nilliam.A. Comstock /Signed Governor of the State of Michigan :32 a.m. Though Governor Comstock, as a state officer, had no jurisdiction over national banks, certain men in the federal service urged him to close the national banks and all the banks in Michigan. The key man who urged him to do so was Arthur Ballantine, Under—secretary of the Treasury and imme- diate superior of the Comptroller of the Currency under whose jurisdiction are the national banks. Though there was no legal question which was presented before any court, Congress moved slowly to make legal Gover- nor Comstock's proclamation. On February 25, 1933, both iouses f Congress passed a joint resolution permitting na- tional banks to conform to state holiday proclamations. This was known as the Couzens Resolution, because Senator n0 Couzens introduced the bill.CO It was not until April 7, 1933, that the Senate and House of Representatives in Michigan made it absolutely legal .for the Governor "to declare a holiday when necessary," 28United States Code Annotated, Banks and Banking, Public Resolution, Number 58, p. hi9 Title 12. lhO though on February 15, 1933, they had passed a joint resolu- tion approving his action of the previous day.29 Late in the evening of February 13, 1933, Secretary of the Treasury kills had been informed of the meeting being held in Detroit regarding the banking situation, and he so informed the President of the United States. The holiday proclamation of Governor Comstock halted the last minute rescue plan of making an emergency $5,500,000 loan to the Union Guardian Trust Company from the RFC regardless of the opposition of Senator Couzens. On February 1k, 1933, the State Banking Department an- nounced that total deposits of $1,510,385,767 were tied up in Michigan by the holiday order. This amount was distri- . A 30 buted approx1mately as Iollows: National Banks $800,000,000 State Banks 560,000,000 Trust Companies 150,000,000 Total $1,510,000.000 There was a feeling in neighboring states following the holiday proclamation that the problems of the Michigan bank- ing system could be solved; but when the eight day holiday passed and still the banks did not open, other states were 29Act M7, 1933, Michigan Statutes Annotated, Vol. 17, p. 59. 30Detroit News, Feb. 1h, 1933, p. 2. forced to proclaim state—wide holidays to protect the inter— ’2 ests of the depositors and the whole financial system.‘)1 The following list indicates the ever-widening circle of bank holidays and the cumulative effect they had throughout the United States: Date State February 1k Michigan February 23 Indiana February 25 Maryland February 27 Arkansas February 28 Ohio Narch 1 Alabama, kentucky, Nevada, Tennessee March 2 Arizona, California, Oregon, Louisiana, Mississippi harch 3 Georgia, Idaho, New'Mexico, Texas, Utah, Washington, Wisconsin a fiarch #32 Colorado, Connecticut, Delaware, Florida, Illinois, Iowa, Hansas, Raine, Massachusetts, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Pennsylvania, Rhode Island, South Dakota, Vermont, Virginia, Wyoming Both before and after the proclamation of the Michigan banking holiday, there were attempts made to work out problems f7 dl-fi1 O 0 , lne proclamation was extended s1x days, to February 28, then four days, until March h, by the Governor. q 3‘Dank holidays were proclaimed by law in Illinois, Massachusetts, New Jersey, New York and Pennsylvania. In the other states banks closed by their own decision or restricted withdrawals to some extent on Saturday, March h, 1933. On March 5, 1933, the newly inaugurated President closed all the banks of the country. which needed joint action by both parties. Senator Couzens, q on the one hand, and William H. Woodin, the newly announced sel ction as Secretary of the Treasury, on the other, seemed GO 1 to hinder cooperative efforts. With no cooperation, harch n, 1933, found most of the banks in the country closed either by gubernatorial proclamation or otherwise. The day after the inauguration of the new President, a proclamation was issued . . ,. . . . 33 formally c1081ng every banxlng institutlon 1n the land. Summary Industrial and commercial activities in metropolitan Detroit were dominated by the automobile industry during the period 1929-1933. With the depression, this area was partic- ularly hard hit and at once became vulnerable to the possi- bilities of a banking crisis. This crisis actually developed in February, 1933, when one of the affiliated banks of the Guardian Detroit Union Group, Incorporated reached a point where it would have to be prepared to pay 100 cents on the dollar to all depositors. Because relief was not forthcoming, a state-wide banking holiday was declared on February 1k, 1933. What initially was a temporary expedient to give the De- troit banks time to prepare themselves to continue to do a com- ‘v : mercial banking business ended in financial chaos on karch u, I 1933, for all financial institutions in the United States. ’7’? “”The order was able to be issued because of the ex- istence of the ”Trading with the Enemy Act of 1917.” The proclamation is given in Appendix B.. CHAPTBR VII SUNMARY AND CONCLUSIONS The analysis in the preceding chapters has been both of a general and of a specific nature. It has been general in that background information was necessary to show the economic setting of the years between 1929 and 1933 and to define and explain group banking as a form of multiple banking. The analysis has been specific in showing the build—up and the operation of the two large group systems of Detroit and in showing the collapse of banking in Nichigan on February 1h, 1933. As shown in Chapter II, bank failures had been exces- o l 1 Slve and ha \ l 0 reached such proportions that during the period from 1929 to 1933 in financial circles they were one of the main topics of conversation. The Comptroller of the Currency in his Annual Report for 1932 indirectly criticized, and justly so, national authorities by pointing out that Lax state laws and the passage by the Congress of the Act of March 1k, 1900, reducing the minimum capitali- zation of national banks from $50,000 to $25,000 facil- itated the organization of thousands of small banks in small towns, particularly in agricultural sections throughout the country, while rising prices and in- creasing prosperity made it possible for these banks to thrive. But with the turn of the times, which set in I m See Table 6, page 20. with the beginning of the post—war period, we have come to realize the danger in permitting the organi- zation of small under—capitalized 'nstitutions.”“ H Both the law makers and officia s of the banking depart- 2‘3 ,..) (o ,‘3 C...- H. n kichigan can be criticized for allowing under—capital- ized banks to be organized. The lawmakers were at fault for not amending the general statutes of the state (and for not making a general overhaul of the banking system) in 1932 when it became known that over 18 percent of the state banks had a suspended operations in 19313’ The officials of the banking department came in for criticism because it was they who made the final approval for any newly organized bank}? Though al- most 25 percent of the failing banks in Nichigan from 1929 through 1931 had a paid—in capital and a surplus of $25,000 or less;; and this fact was known to authorities in the bank- ing department, 1k new banks were authorized to bedin opera- \4 J A ("fit ‘/\ tions with a capitalization of s25, 00 or under from 1929 to 1933. he reasons why the group banking system became exten- sively used as a form of banking structure in the late 1920's and early 930's are shown in Capter III. The reasons may be 2Report'gf the Comptroller_g£ the Currency, 1933, p. h. ”F n0 3 . See Table 6, p. 20. ”Michigan Statute, Oct. 1929, Section 20. Rodkey, Op. cit., p. llO. summarized as follows: (1) Prohibition of branch banking in a number of states, (2) the desire for power and profits by promoters, (3) the desire to improve conditions of the bank— ing industry, (L) the fear of the loss of correspondent busi- ness to other operating group systems, (5) the establishment of group systems in preparation for a branch banking which bankers thought was to be permitted in the near future. The formation of the Guardian Detroit Union Group, Incor- porated and of the Detroit Bankers Company is discussed in Chapter IV. The Guardian Group was formed through the merger of two earlier group systems. The resulting system, which Ias formed in December of 1929, either controlled or had a strong minority interest in 32 separate financial institutions. The Detroit Bankers Company was incorporated on January 8, 1930, to obtain control of S of the largest banks of Detroit. By February, 1933, this group system either controlled or had a strong minority interest in 27 separate financial institu- tions. At the end of 1931 these two group systems controlled 87 percent of the total banking resources of Detroit. Chapter V is directed to a discussion of the procedures and practices of the two large group systems in Detroit. Five types of customary procedures are shown which can be criticized by students of banking. hese procedures are as follows: (1) Undue concentration of control in the board of directors of the group system; (2) the drainage of resources from the unit banks to maintain dividends to the owners of the holding company shares of stock; (3) fals ('0 and misleading re- ports for the holding company within the group system; (h) .L ‘fi loans to individuals and businesses with the stock of the holding company being held as collateral; and (5) loans to \ officers and directors of the group system an( of the unit banks. Both federal and state lawmakers are to be criticized for not amending existing laws or drafting new ones to control CA the new gr ui L O anking systems. In Chapter VI factors other than economic which exerted considerable influence on the stability of the financial sector of the economy are presented. A personal feud between Senator James Couzens on the one hand and Henry Ford and De- troit bankers on the other appears to have been a factor in preventing relief in a period of crisis in metrOpolitan De- troit. Couzens, an influential member of the Senate Banking and Currency Committee, declared that he would denounce a proposed loan to Detroit banks from the RFC and that he would \ carry the case to the Senate floor if the advance were made.0 The RFC, which was established by Congress through an act to provide emergency financing facilities for financial institu- tions and others, did not make a needed loan of $65,000,000 to the Guardian Group even though the loan would have been secured by $90,000,000 in mortgage assets. These assets at the time had a market value of only $35,000,000, but the / OCouzens had not objected to a $90,000,000 loan to Dawes' bank in Chicago in June, 1933. 1L1? estimated future liquidation was somewhere between F $75,000,000 and $00,000,000. Senator Couzens was within H3 H. i 5 rights to protest the technical legality of the loan because it was not fully secured by liquid assets. However, the depressed value assets were good enough that five days later President Hoover and Chairman of the RFC Pomerene and Secretary of the Treasury Mills agreed to make the $05,000,000 loan to the Guardian Group regardless of what Couzens had to saw in order to keep the banks from closing. In addition, aCCOrding to Herman Taylor, none of the deposits of the banks in Detroit lost 1 cent because of the holiday; all paid off with money to spare. However, before this infor- mation could reach Detroit, Governor Comstock had proclaimed an eight day banking holiday. Furthermore, it was unfortunate that this period of crisis occurred at the very time when there was a change of administration at the national level 7 and thus a period of uncertainty. It is entirely possible to believe that if Senator Couzens had been more cooperative and if the RFC loan had been made, that the Michigan banking holiday might never have been proclaimed. If the Michigan holiday had not occurred, the nationwide crisis might not have been as severe. Certainly the holiday proclamation of Governor Comstock and the closing of the Michigan banks was 7Comstock's proclamation occurred on February 10, 1933, only about two weeks before the inauguration of the new President. Cooperation between the incoming and outgoing administrations was absent. 1&8 a contributing factor, if not the catalyst, which brought about the crisis situation of late February, 1933, and even- tually, on March 6, 1933, the presidential proclamation clos- ing all banks in the country. Several pieces of legislation were enacted as a result of the 1929-1933 experience on both the federal and state levels. On the national level one of the most important acts was the Banking Act of 1933. Though it was essentially a re- 1 l t form measure to correct speci c abuses, it did contain sev- eral important new provisions. Probably the most far—reaching section of this act was Section 120, an amendment to the Federal Reserve Act, creat- ing the Federal Deposit Insurance Corporation. By establish- ing this institution many of the fears of people were overcome, and it was hoped that banks need not fear panic and runs again. Sections 18 through 28 of the act dealt specifically with the control of holding companies and group systems. The group systems were required to obtain a voting permit from the Board of Governors of the Federal Reserve System before vot— ing any stock of a member bank. Further, there was a require- ment that all affiliates be examined simultaneously regardless 8Banking Studies, Board of Governors of Federal Reserve System, washington, D.C., lth, p. 50. in its report on the Banking.Act, the Senate Banking and Currency Committee reported in part, ". . . the immediate emergencies were so great that it was wise to defer the preparation of a completely comprehensive measure for the reconstruction of our banking system . . . " us of whether they were national or state banks. This provision made it possible to uncover any malpractices more easily than when examiners could examine only state or national banks. Another section of the act, Section 23A, prohibited mem- ber banks from making loans on the stock of any affiliated association. It thus became impossible to continue to oper- ate as the two group systems of Detroit had in making loans to officers and directors with the stock of the holding com- pany as collateral. In Michigan little significant change was made in the general banking laws until 1937. Two years earlier, under Public Act Number 181, a commission was created to recodify the laws relating to hichigan financial institutions. The resulting law, the Financial Institutions Act, was passed and became law on July 28, 1937. It contained few if any new sections, but generally changed hichigan law to make state law uniform with federal in regard to banks to the mutual ad- Vantage of both national and state institutions.9 One act of significance passed on June 28, 1933, was an amendment to the Corporation Act of 1931. The amendment stated that corporations may hold the shares of other corpo- rations "except banking corporations, industrial banks, trust, Q “Interview with Burton Dougherty, Assistant Attorney General for the Office of the Commissioner of Bank- ing, July 12, 1950. ,3 150 .”10 This amendment made deposit and security companies . . group systems illegal in Michigan. Although some corrective legislation was adopted as a result of the experience of 1933, further changes would seem advisable. There is need for increasing the capital requirements for the establishment of new banks. This need is evidenced by the following: (1) Experience shows that the majority of bank failures have come from banks with a capital of under $50,000.11 By raising the capital requirements, a greater safety factor would be given to the creditors, thus provid- ing less chance for failure. (2) The increase in the capital account recommended would provide a greater safety factor for the Federal Deposit Insurance Corporation as well as for the creditor. This safety factor would make for a continued stable operation of the FDIC. Though there have been few bank suspensions in the past twenty years, freedom from whole- sale failure is not guaranteed. An epidemic of bank failures could put terrific strain on the FDIC and perhaps bring about another nationwide financial crisis. (3) The $25,000 minimum capital requirement was adOpted in 1900 for national banks and was reaffirmed for kichigan state banks in 1937. The devaluation of the dollar since then is such that on the in- flation basis alone, the capitalization should be raised. lonyo 1 o 0 o o nicnigan Public Acts, 1931, (Lanaing: Franklin Dekleine Co., 1931), Number 327, p. 568, 11See Chapter 11, page hG. In Michigan a state bank can be established with a capital A of only $25 ,000 with tt e approval of the banking department in a town whose population does not exceed 2500.12 A na- tional bank may be established with a capital of $25,000 on approval of the Comptroller of the Currency in a community of only 3,000 people.13 Since state banks are controlled and administered by state authorities and national banks are controlled and administered by federal authorities, and since there is a constitutional restriction keeping Congress from regulating state institutions directly, another method must be found to raise the capital requirement of all banks through- out the nation. This method is found through the Federal De- posit Insurance Corporation. In 1955, 95.8 percent of all banks were insured by the FDIC.1M It is almost impractical for banks not to belong to the FDIC because of the security which the deposit insurance gives to the creditor. The Con- gress should amend that Section of the Federal Reserve Act which created the FDIC and do indirectly what it is constitu- tionally prohibited from doing directly. The amendment should be that no new bank may participate in the fund (the FDIC) un— less it has a capital and surplus of more than $50,000 and that 1") MLIichig can Public Acts of 1937, Act 3hl, Section hO. 13United States Compiled Statutes. l‘LStatisticAbstract of the United States, D.C.: U.S. Government irinting O1fice, Washington, ) ( 95 .9 p0 1'11/° L J p..- \) I Fx) present members must fulfill the requirements of this sec- tion within a period of two calendar years. In effect, this provision would force almost all banks with $50,000 of capi— tal or less to increase their capital accounts. A permanent committee should be appointed by the Secre- tary of the Treasury which should meet at least quarterly to review the banking structure and situation in the United States and which should make recommendations to the Senate and House Committees on Banking and Currency. There is a Federal Advisory Council consisting, as a rule, of one mem- ber banker from each Federal Reserve district. This Council {—f ( ives frmn LJ (‘1- provides an arrangement through which repres (‘3 n all sections of the country are enabled to present their views directly to members of the Federal Reserve Board and to communicate to their several communities information ob- tained directly from the Board concerning official Federal .J 15 Reserve System policies and actions. The committee here suggested would be an unofficial body made up of bankers O 1! I from the several classes and s1zes. U Were this comm1ttee to If . . A . ”Banking Studles, up. c1t., p. 378. L 1J\ The committee should include representatives from unit banks, multiple banking systems, state banks, national banks, the Federal Reserve System, the Federal Deposit Insurance Corporation, the Senate Banking and Currency Committee, the House of Representatives Banking and Currency Committee, a member representing the banks with over $1,000,000,000 in resources, one representing banks with resources of between $100,000,000 and $1,000,000,000, and one representing banks with resources under $100,000. f) /) 153 be appointed and were it to operate efficiently, the banking laws of the states and nation might be amended more quickly when a new type of institution or a new method of operation developed. A committee such as this potentially could have helped to correct some of the practices and procedures of the group banking systems and could have suggested changes in the laws to permit a complete examination of all affiliated units. One of the real disadvantages of the group banking sys- tem is that the group potentially is only as strong as its 17 weakest unit. During a stable or prosperity period this potential threat to the safety of the group is not likely to cause trouble. However, with adversity the danger becomes more apparent and in some cases, as in the Detroit situation, creates a crisis which can cause many banks to fail. There is reason to believe from the evidence presented in Chapter VI that the weakness of the Union Guardian Trust Company was in- strumental in bringing about the collapse of all banking in Detroit and finally all banking in hichigan. Legislators and banking officials throughout the country accepted this failure as prima facie evidence that the group banking system was bad and either asked for legislation to outlaw the system or actually passed laws to forbid the sys- tem. From 1933 to 1936, thirteen states made provision of 1(See Chapter III, page 69. one kind or another to limit the existence of the group bank- 1ng system. One, Mississippi, prohibits it specifically, and twelve others restrict it through the proportion of stock that may be held by a company or by making illegal the holding of bank stock by a corporation as was done in Michigan.18 It would be difficult to say that the group banking system and its operational procedures did not contribute to the collapse of banking in 1933; but, on the other hand, there is good reason to believe that it was not the system itself as it was lack of controls and factors other than economic which made a substantial contribution to the down- fall. The categorical blame of all banking ills on the multiple bankinc system 1 (.0 false. What is needed is an objective study by lawmakers both at the state and federal levels to bring order and unity out of the dual and sometimes multiparte systems. 18 Banking Studies, Op. cit., p. 131. These states are Arkansas, Indiana, dansas, Kentucky, Michigan, Minne- sota, New Jersey, Oregon, Pennsylvania, Washington, West Virginia, and Wisconsin. y’? B 1 BL I OGRAPHY ”A Study of Group and Chain Ban} ing.” Feport of the Economic Policy Commis ion. he ‘: m1 rican Jan€F1.MQbOFIaElCn, Banking and Nonetary Statistics. Board of Governors of the Fedcral L-scrvc System. Washington, D.C.: U.S. Government Printing Office, 1023. Banking Studies. Washington, D.C.: U.S. Government Printing Cffice, l?il. t s My Home Town. New York: The Bingay, kalcolm. Det . , “CT—w —- Bobbs-merrill Co., 1, ‘\r) r1 O Ho Q I Bogen, Jules 1., and Marcus Nadler. The Banking Crisis. New York: Dodd, head and Co., 1933. Bremer, C. D. American Bank Failures. New York: Columbia University Press, 1935. Brown, E. F. ”Roosevelt Takes Control." Current Histor‘, April, 193:5. V "i ‘—1 (U (d. ‘1 Cartinhour, Gaines T. Branch, Group and Chain Bank ng. York: Nackillan Co., 1931. "Chains, Groups and Branches." American Bankers Association Journal. New York: American Bankers Association, June, 1930. Chapman, Charles C. The Development of America n Business and anking Thought, 1913—1936. New York: Congmans, Green and 1536. \JO.’ Chapman, John M., and Ray B. Westerfield. Branch Banking. New York: Harper and Brothers, 19h2. Detroit News. w“ re :deral Reserve Bulletins. Washington, D.C.: U.S. Govern— nt Printing Office. volumes 1h - 19 Goldenweiser, E..A. America n Monetary Policy. New York: McGraw-Hill Book Co., 1951. Good dbar, Joseph Ernest. Han ging the People's honey. New Haven: Yale University Pres , 1935} Q) Na art, Albert Gailord, Editor. D>bts and Recovery. New York: The Twentieth Century Fund, 93b. Hearings before the committee 01 Banking and Currency. 7lst Congress, 2nd Sessi Individual Statements of the Condition of National Banks. 81innton, D.C.: L.S. _Governnent Print1mrg Ofiice, 197t~l933. Jones, Jessee. Fifty Billion Dollars. New York: Macmillan Company, 1C 751. McFadden, Haynes. ”The Chain Bank Crash in Georg ia," American Bankers Association Journal. New York: Ame erica n Bankers As so— ciation, SepteTber, 92S. C11 an Commissioner of Banking. Annual Report. Lansing: ranlzlin Dekleine Co., 192 8-1733. >- a b—~J “a l-H "TWO p I" L *1" ( vim D ‘ Il lic Acts, 1931. Lansing: Franklin Dekleine Com- ” (0 an P ub 19C1. £90 <1». Nunn, G. G. anvclone~1a of Banking and Finance. Cambrid e: Arr- (A‘L- .. . ._._.... Bankers Publishing Co., 1719. 5th :th1on. (L Neville, J. 3. "Advantages of Group Banking Surmmarized," ’ The Commercial and Financial Chronic e. February 22, 1930. York Times. Pecora, Ferdinand. Wall Street under Oath. New York: Simon and Schuster, 1939. Phillips, C. A., T. F. NcHanus, and R. w. Nelson. Banking and the Business Cycle New York: Macmillan Co., l93b. "The Advantage of Group Banking," America: Pri ce, Andrew. . ssoc1a tion Journal. New York: October,'T929. Ba 1kers A Rodkey, Robert G. DSta te Bank railires in N1chigan. Ann Arbor: Bureau ofS siness Rese arch,‘T93T. Statistical Abstract of the Unite d States. Washington, D.C.: U. S. Government Printing Office, 19E9. Sullivan, Laurence. Prelude to Panic. Washington, D.C.: Statesman Press, 193C. Census of kanufactures. Washington, D.C.: f\:‘ es ~tates_Government Printing leice, 1927. United Statr S ‘7Gn1ted United States Cens is f Population. Washington, ‘.C.: U.S. Getrcrn1entTPr1nfing Cifice, 1936. United States Comptroller of the Currency. Annual Report. M'CiiSllingt'DH, Dot/:0: 1,}2'12-1; Uphar, Cyril B. and Bd'.1in A. Lemke. Closed and Distress ed Banlr. Nashi ngton, D.C.: The Brookings in stitu te C, 193L. Villard, H. H. ”The Federal Reserve System IJonetary Policy in 1931 aid 1932,” Journal of Political Econozv. Dec., l9k7. D 1J8?" Px-l A I‘S Volpe, Paul A. The inter national Financial and 3.: 1ne Catholic Unive 1931-1933. 1548.531111]? Jt0$1’ Ljo‘ America Press, Inc., 19 nki ity of Willis, H. Park~e r. Survey of Banking in the United States. .22222. .22222 K U S) . The Theory and Practice of Central Banking. New York: Harper and Brothers, 1936. , and John M. Chapman. The Banking Situation. New ?ork: Columbia University Press,“T93h. Willit, Virgil. "The Banks Go Chain-Store," The American Mercury, Philadelphia, June, 1930. . "The Case for HultipleP Man ing Examined," The American kercurv, June, 1930. ”The Rise of Multiple Banking in the United States," W . r" n 1ne American mercury, June, l9aO. T. , Editor. Chain, Group and Branch Banking. New York: W . . __...._.._ 1-, ,- inc n. N. Wilson Company, l9SJ. Woodworth, G. Walter. The Betroit Money Market. Ann Arbor: Bureau of Business Research, 1932. ' The Detroit Money karket. Ann.Arbor; Bureau of R038 aI‘ClL, 1950. U L2 ('7 P :3 (U (n (.0 o /4‘ APPENDIX A TABLE I MICHIGAN BANKING RESOURCES AND LIABILITIES (In Thousands of Dollars) LSOURCCS Na tional State Trust Privatg , 1 , n- n , T0tal Banks Banks punks aanhs No. of Banks 13A 595 22 30 787 Loans & Discounts 315,7h8 933,737 102,769 b.875 1,h17,129 Overdrafts 138 3 3 --- 21 532 Investments 160,55t 335,270 £7,3h1 8 5hh,329 Bkg. iouse, Farm 2h,h93 u7,373 5,023 250 77,1hh Real Estate Owned 1,657 5,977 2,095 238 10,107 Cash in Vault 10,016 28,995 215 195 39,M21 RES. with :ed. A] a r, J ’ or ot_'1er ‘5’191 CO:091 19:52M 85 oh,961 ‘. 1.8.(18 1 r” ’ \’ tgigmagznks u 55,821 129,235 5,371 us; 189,1“2 Ekchanges for Clearing Hse. & 899 32,6M3 --- M9 33,591 other cash items Other Resources 12,752 h0,586 Sh,9h6 Q9 108,333 TOTAL 6h0,833 1,600,255 237,29u 7,077 2,u85,u59 W W 1 . , Pr1vate banns in Michigan are not under the supervision of Michigan banking a1thorities. This data was taken from the .ilnnual R cport of the Comptroller of the Currencv, 1929, nd t21e iigures are *presented as of Jun e 29, 1929, the end of the government fiscal year. All other figures were taken from the ing, Michigan, .Annual Report of the Commissioner of Bank- 199” 7a7, and are as of Decemoer 31, 1728. . . ‘ p 1 ~ , l . . ' A n p 3 ~ ~ ‘ 1 I V , - 1 (- y , . I \ . v 1 1 | \ ‘ A" \ V A ' \ v . 1 . n 0 w « \ ‘\ V- \ F ‘ g s — « . . 1 . 1 . . I . , 1 1 ' ‘ 1 o . , -_ , I _ _ 6 _ _ .- . , TABLE I — Continued LIABILITIES L- . . ghat1onal State Trust Private 1 n 1 m h 2 h n TOtaI [ oanms menus DGHAS Banns Capital Stock Pno ,nn Ho a Pqid in J 31"~)\\;l 77,9L“J 114,920 )1530 121;.’:-)3\J Surplus 26,633 55,958 15,020 228 107,8h2 WW Fro una1V1ueu rr011ts 1 “an o , 1, Di‘rid ’1 1U,\7L‘J 11.1”717 {2,327 83 313,093 " 9 - n Reserves C71 1,935» 18h 1 3 2,993 Rf“erves taxes * o ’ L Q, r) f: 1.0 r) I f 1' ‘ interest, etc. 1’“1/ L,IOU 131%U 5 0,29) Circulating notes ”a, V. 1 l \ -—- --- --- O outstanding 7"”) 4 17’7'6 Due to Banks 33,159 31,275 --- 2 69,hu6 Certifieizf Cashiers Checks, ‘ , Letters of Credit 10’1““ 0 13,909 Time Deposits 2;C,9C3 833,9h3 --- 2,992 1,085,918 U.S. Deposits 1,7h8 k,101 ——- --~ 5,8L9 Deposits not ___ ___ 7 37 ‘H classified ‘ ““ Trust Funds -_- 18 70,1h9 70,3”8 Bills Payable 15,679 33,923 7,2:7 239 60,108 Shcurities sofd subject to re- 53 2,7U3 57 2,810 purchase Securities‘Tor on 0,1 K 0 Ga 13 safekeepino "-_ LL’UUL 2’”1 1 LJ’IIL Other Liabilities 5,287 10,038 1 70,113 LO 85,h69 f‘, A /1 "\ Cr r. :4 ’ ,- f-s f‘, '.. J . J TVTAL “349:933 1,600,495 537ydgu 7,077 23h853h59 ‘V 1 ~ _ g ~ u \ . ‘ 7 'V , ' .. - . ,7 . , , \ ~ , \ n . _...rr._ .a-VLH -o—‘r. - 1 I 7 . w —--'\ Hr‘fi ~ . I 1 w \ .—.-.—‘ a 3 , A.,—1“ v . .— «‘ n‘ r‘ ~. ‘ . L r' r‘ '— v. , "‘ , a a .. ' - ~. ' . ‘ , 1 . . 1 v u—~ . 1 ' A 0 K 7 . 1 ‘ h « n 7 1, . ‘» 1 ~ 2 \ ‘ w i‘ . . x r . . 1 RATIO OF SPENDING T TABLE II 102 O HONEY IN CIRCULATION" 930 through February, (January, 1933 Jan. 1930 15.03 Jan. 193 11.h7 Jan. 1932 6.7u Feb. 12.,9 Ftb. 9.38 Feb. 5.52 March 13.25( igh arch 11.57 March 6.20 April 15.38 April 11.33 April 6.22 may 15.32 hay 1t.59 May 5.29 June 15.57 June 10.60 June 5.bl July 13.58 July 9.30 July 5.02 Auo. 11.55 Aug. 7.67 Aug. h.99 Sept. 12.29 Sept. 7.9M Sept. 5.18 Oct. 13.78 Oct. 7.9M Oct. 5.11 Nov. 10.32 Nov. 5.99 Nov. b.20 Dec. 12.12 Dec. 7.31 Dec. 5.3 Jan. 1933 b.92 Feb. 3.86(Low) *"Only in a broad way do (bank debits) reflect changes in general business conditions by showing, among other things, changes in the attitude of the public towards holding or spending money. n1 For he purposes here bank debits are a o o 0 ~ ‘ I o (:— cons1dered as 1nd1cat1ve of the spen01ng of the nat1on. 1Banking and Monetary Statistics, Op} cit., p. 230. dRatios determined from amounts shown in Banking and Monetary Statistics. 163 F5 Cash ne ds of the public and 0 business are generally (0 related to the level of spending and of industrial output. In the period here under observation, however, both Spend- ing and industrial production were reduced significantly, but money in circulation remained approximately the same. (See Table III.) 16h TABLE III MONEY 1N CIRCULATION AS RELATED TO LEVEL OF SPENDING AND LEVEL OF INDUSTRIAL PRODUCTION October, 1929 to December, 1930 31111095.:f 5 Billions of s industrial “money it Spending Production C1rculao1on Oct. 1929 h.6 100. 121 Nov. h.6 86.1 108 Dec. h.o 70.7 93 Jan. u.2 6h.2 103 Feb. h.3 55.7 109 March 2.3 69.2 106 April h.2 66.5 107 May L.3 o5.3 105 June h.2 65.9 99 July u.l 56.2 91 Auo. 1.2 h,.0 90 Sep . h.2 51.7 92 Oct. 4.2 57.9 90 NOV. LLolJ. L501 81.1. Source: Banking and Monetary Statistics, p. 230 and p. h12; Federal Reserve Bulletin, Vol. 33, January, 1933, p. 2:. H O \ U1 11131753501 >1 3 DOCUHENT I PETIT OM POR RDAR_NG INTO DASH HOLIDAY State of hichigan in the Circuit Court for the County of Wayne To the Circuit Court for the County of Wayne, Honorable {arry B. heidan, Presiding Judge; Your petitioner, Patrick H. O'Brien, Attorney General of the State of Michigan, reSpect— fully shows to the court: 1. That certain information has been received by your petitioner that indicated that certain crimes and violations of the law have been committed within this county and that there are persons who can give material information with relation thereto. 2. That the information particularly related to the crimes committed by the employees, stockholders, directors, and officials of banks and trust companies located within such county or affiliated therewith, and the improper conduct of public officials charged with duties relating thereto. 3. That the information indicates that imprOper withdrawals were made by employees, directors, and stockholders in these banks. That deposits were received after insolvency or in contemplation thereof. That the crime of perjury had been committed, together with numerous other crimes which are too complex and with reference to which the facts are too indefinitely determined to make any detail allegations with reference thereto. h. That investigation of some of these charges has been attempted by your petitioner, but that it has proved to be impossible to properly investi— gate them and arrive at the truth of the relation thereto, except by means of compelling the attendants of certain wit- nesses to testify before the court sitting as a Grand Jury. 5. That as a result of the closing of the numerous banking institutions and trust companies, which have closed within the City of Detroit and the events prior and subsequent thereto, including the numerous charges made regarding such closings and the conduct of the officials of the banks and the public officials dealing therewith, it appears advisable in the public interest to conduct an investigation before a Judge who is not a resident of Wayne County or the Metropoli— tan district of Detroit and who is in no way affiliated with any bank or trust company located therein or affiliated with any such bank or trust company or the Union Guardian Group or he Detroit Bankers Company or its affiliates. Wherefore your petitioner prays that an order may be entered herein for the appointment of some Circuit Judge not a resident of the 113' o County of Wayne or the hetropolitan district of Detroit, nor affiliated with any bank or trust company located therein or affiliated with any such bank or trust company or the Union Guardian Group or tine Detroit Bankers Company or its affil— iates, as a One Aan Or and Jury under the statutes provided therefore O'Brien ttorny General and Charles r. Loomis Assi sta’ nt Attorney General State of hichigan County of Ingham On the fifth day A.D., 1933, before me a notary public in and for said county of Ingham, personally appeared Patrick H. O'Brien, Attorney for the State of lichigan to me known as the person named in and who signed the forego— ing petition and made oath that he has read the said peti- tion subscribed by him and knows the contents thereof, and that the same is true of his own knowledge, except as to matters therein stated to be on information and belief, and that as to those matters he believes it to be true. /Signed Helen P. Bushnell, Notary Public Ingham County, hichigan Ry commission expires February 2a, 1937. End of Document 137 " (”\f‘ j’17:“ff'f ll ‘ UV L A.I_4.L'I PROCLAMATION OF PRESIDENT ROOSEVELT CLOSING.ALL THE BANKS IN T15 UNITED STATES March 6, 1933 Whereas there have been heavy and unwarranted withdrawals of gold currency from our banking institutions for the purpose of hoarding; and Whereas continuous and increasingly extensive speculative activity abroad in foreign exchange has resulted in severe drains on the Nation's stocks of gold; and Whereas these conditions have created a national emer- gency; and Whereas it is in the best interests of all bank deposi- tors that a period of respite be provided with a view to pre- venting further hoarding of coin, bullion, or currency or speculation in foreign exchange and permitting the applica- tion of appropriate measures to protect the interests of our people; and Whereas it is provided in section 5 (b) of the act of October 6, 1917 (LO Stat. L. hll) as amended, "That the Presi- dent may investigate, regulate or prohibit, under such rules and regulations as he may prescribe, by means of licenses or otherwise, any transactions in foreign exchange and the export, hoarding, melting, or earmarkings of gold or silver coin or bullion or currency n**%; and Whereas it is provided in section 16 of the said act "that whoever shall willfully violate any of the provisions of this act or of any license, rule, or regulation issued thereunder, and whoever shall willfully violate, neglect, or refuse to comply with any order of the President issued in compliance with the provisions of this act, shall, upon con— viction, be fined not more than $10,000, or, if a natural person, imprisoned for not more than ten years, or both; %%%3 Now, therefore, 1, Franklin D. Roosevelt, President of the United States of America, in view of such national emer- gency and by virtue of the authority vested in me by said act and in order to prevent the export, hoarding, or earmarking of gold or silver coin or bullion or currency, do hereby pro— claim, order, direct and declare that from Monday, the sixth day of March, to Thursday, the ninth day of March, nineteen hundred and thirty-three, both dates inclusive, there shall be maintained and observed by all banking institutions and all branches thereof located in the United States of America, including the territories and insular possessions, a bank holiday, and that during said period all banking transactions M - 3 1 9 \ n .. \ . 7 -‘ z I —-u ,0 138 shall be suspended. During such holiday, excepting as here- inafter provided, no such banking institution or branch shall pay out, export, earmark, or permit the withdrawal or trans— fer in any manner or by any device whatsoever, of any gold or silver coin or bullion or currency or take any other action which might facilitate the hoarding thereof; nor shall any such banking institution or branch pay out deposits, make loans or discounts, deal in foreign exchange, transfer credits from the United States to any place abroad, or transact any other banking business whatsoever. During such holiday the Secretary of the Treasury, with the approval of the President and under such regulations as he may prescribe, is authorized and empowered (a) to permit any or all of such banking institutions to perform any or all of the usual banking functions, (b) to direct, require or per- mit the issuance of clearing house certificates or other evi— dences of claims against assets of banking institutions, and (c) to authorize and direct the creation in such banking insti- tutions of special trust accounts for the receipt of new de- posits which shall be subject to withdrawal on demand without any restrictions or limitations and shall be kept separately in cash or on deposit in Federal Reserve banks or invested in obligations of the United States. As used in this order, the term "banking institutions" shall include all Federal Reserve banks, national banking associations, banks, trust companies, savings banks, building and loan associations, credit unions, or other corporations, partnerships, associations or persons, engaged in the busi- ness of receiving deposits, making loans, discounting business paper, or transacting any other form of banking business. In witness whereof, I have hereunto set my hand and caused the seal of the United States to be affixed. Done in the city of Washington this 6th day of March, 1 a.m., in the year of our Lord one thousand nine hundred and thirty—three, and of the Independence of the United States the one hundred and fifty-seventh. (Seal) Franklin D. Roosevelt By the President: ‘ /Signed Cordell Hull, Secretary of State. '5va“ v"- rgl “y 12.14-3-3’“ “-39. W 9116-“ U j .‘ U “111111583 Demco-293 nICHmnN smTE UNIV. LIBRARIES llHllmllmWHIWHIIHIWWWHIIWNIIHW 31293010044414