But the Office of the Comptroller of the Currency regulates only about 5,000 nationally chartered commercial banks. What of the approximately 9,000 commercial banks organized under the laws of the 50 states? Approximately 1,350 state-chartered banks have elected to join all national banks as members of the Federal Reserve System; these state member banks, as they are called, are subject to the administrative supervision of the Federal Reserve. Nearly all the rest of the state-chartered banks (7,385 at the end of 1966) are insured, nonmember banks. Because they are insured, and at the same time not members of the Federal Reserve System, they are subject to administrative regulation by the Federal Deposit Insurance Corporation; moreover, they are subject also to regulation by state authorities. Finally, a handful of state-chartered banks, 236 at last count, are noninsured and so fall entirely within the jurisdiction of state authorities.

To beginner and initiated alike, these interrelationships are puzzling. Table 1-1 helps to keep things straight, but the intellectually curious are likely to ask why the division of authority developed among the federal administrative triumvirate. For example, if three agencies have theoretical jurisdiction over national banks, how did the Comptroller of the Cur rency become in fact the administrator of national banks? Why did the Board of Governors of the Federal Reserve System assume the chief examining and supervisory authority over state member banks? Under what circumstances did the Federal Deposit Insurance Corporation acquire extensive regulatory functions when the other two agencies had been in business for many years at the time of the FDIC's inception?

1 National banks must be members of the Federal Reserve System; all member banks are insured by the FDIC.

2 State banks are also subject to the jurisdiction of state supervisory agencies; the small number of noninsured banks are exclusively so.

Answers to these questions abundantly prove Justice Oliver Wendell Holmes' observation that a page of history tells us more than a book of logic. They begin far back in the story of American financial institutions. And they are very important answers, for the present fact is that a few agency heads, among the top public officials in America, influence materially the allocation of the financial resources of the country. In these agencies, to say nothing of the 50 lesser but important state bodies, is substantial authority to determine the number and location of commercial banks and their branches, the size of the individual institutions, the variety of services they provide, and the conditions under which they provide them. These authorities largely determine the structure and competitive environment of the commercial banking industry and so indirectly affect the use of financial services by business firms and households.

In banking, as in the rest of the business world, prices play their part in determining the amount and variety of the industry's output. The rate of interest—the price paid for the use of borrowed funds—is one of the most significant prices in the economy, for it largely determines in what proportions funds are channeled into different markets. Moreover, it drastically affects the competition of commercial banks with nonbank financial institutions like savings and loan associations, mutual savings banks, credit unions, and life insurance companies. Yet the price system is less useful as an allocator of resources in banking than it is in unregulated industries. For on the one hand, the total supply of commercial banks' stock in trade-money-is determined by the central bank. On the other hand, the amount and kinds of investment in banking are largely circumscribed by the regulatory authorities.

The Aim of the Book

This book will examine the emerging roles of these regulatory authorities. It will trace the evolution of the complex pattern of administrative and supervisory regulations and provide a brief analysis of the changing economic effects of these regulations on banks in particular and on the financial community in general. Books about money and banking crowd the shelves of libraries large and small, yet none of them attempts to sketch the history of commercial bank regulation in the United States. It is the purpose of this book to do just that.

Our topic is thus narrower than the reader might have supposed. For the most part, it leaves out of account the subject of stabilization policy, the strategy by which modern governments try to reduce the magnitude of swings in production, prices, and the level of unemployment. So it largely excludes the fascinating subject of regulation of the money supply and interest rates by the Federal Reserve, the American central bank. It omits

The United States Treasury Building, which lies just to the east of the White House, was completed in 1869 in substantially its present form.

the equally intriguing subject of management of the public debt, the intricate process by which the Treasury sells government securities in order to finance the government of the United States. Nor does it consider, except in passing, questions of deposit insurance, the financing of certain government agencies that cannot draw directly on Treasury funds, and the regulation of the securities markets.

The reader may at first be disappointed to learn that he will not be enlightened on questions of monetary and debt-management policy. For one thing, he may have the impression that the narrower subject of bank regulation, in the sense of supervision and administration, is mundane and without serious public-policy implications. Or he may feel that all the problems of intervention by the financial agencies are inextricably tied together, so that a narrower subject cannot be examined outside the context of the broader one. Until recently, the first objection had more than a little merit, and the second still has a certain validity.

Both historians and economists have largely avoided study of the supervisory functions of the several financial agencies. The people who administered the laws were often pedantic and dull-puritanical types who seemed bent on maintaining a status quo that slowed the growth of the institutions they were regulating. Students of money and banking were

inclined to look on the regulatory function as being synonymous with bank examination, having to do only with figures and accounts and vouchers and auditors. In short, the regulators, if they made any social contribution at all, seemed to exercise a kind of negative authority, which protected the quality of bank assets by rooting out malfeasance or incompetence. Yet in the past five years this academic view of the supervisory role has been changing. The shift was triggered by the 1961 appointment to the Comptrollership of James J. Saxon, who viewed the role of bank regulators as positive and creative rather than negative and restrictive. But the tardy awakening of interest in the regulatory function should not mask the fact that for more than a century regulation has played a major role in the allocation of the financial resources of the country. What this role has been over the span of approximately 100 years is the subject of this book.

This central topic cannot be treated in a historic vacuum. In the next chapter we will introduce it by tracing the pre-Civil War evolution of commercial banking in this country. Throughout the course of our inquiry, we will take note of changing institutional arrangements in the private financial sector and among governmental agencies. Insofar as it is possible to do so, we shall keep a careful focus on the regulatory, as distinguished from the stabilization, aims of these agencies, but it will be necessary from time to time to treat their other activities. It is impossible, for example, to understand the tightening of supervisory rules that accompanied the Banking Act of 1933 without reference to the depression of 1930-1933 and the central bank's inability to cope with the deflation of that period. Similarly, it is hard to imagine contemporary public and managerial attitudes toward bank liquidity and consumer attitudes toward the safety of their funds without considering the phenomenon of the insurance of bank deposits.

But the economic historian is always confronted with the difficulty of separating the strands of historical change. He is compelled to abstract from the jumble of facts that is reality. It will be possible, at little cost except that of foregoing excursions down intellectual sidepaths, to stick largely to the subject of bank regulation and its effects on resource allocation in finance.

Why Banks Are Regulated

Some of the techniques of modern commercial banking were practiced by businessmen in ancient Persia and Greece. Even in the darkest of the Dark Ages the thin, tenuous lines of commercial exchange were kept alive by specialists who knew how to make payments across international boundaries without necessarily using gold or silver. But commercial banks in

Federal Reserve: Designed by the noted architect Paul P. Cret, the building that houses the Board of Governors of the Federal Reserve System was first occupied in 1937.

the modern sense did not emerge until venturers in 13th-century Genoa began the practice of extending credit to other venturers in trade and industry. From the time of the early Renaissance to the present, bankers, their customers, and the general public have considered banking a very special business, set apart from all others in many ways. Almost everyone realized, however dimly, that a banker must tread a narrow path between earning profits for his bank and keeping enough cash to meet customer withdrawals of funds. Because of their crucial role in financing the ventures of others, bankers have been viewed with awe frequently tinged with suspicion. But not until the early 18th century in England and the early 19th century in America was there a growing awareness that banks perform a social function even more important than that of financing other businesses. At first by issuing bank notes when making loans, and later by crediting the deposit accounts of borrowers when making loans, banks began to provide a portion of the money supply of an economy. As hard money (silver and gold coins) became less important in effecting transactions, the portion of the money supply provided by bank credit increased. Today, in the economically advanced countries of the modern world, commercial banks, operating under certain constraints imposed on them by governments through their central banks, for all practical purposes create the money supply. Clearly, then, the banking business is one in which households and business firms have a more than passing interest.