next 15 years would see a slow, steady increase in branching as economic forces began to exert inexorable pressure for change.

Chains and Groups

Although the simplest way to organize a multi-office bank is to utilize. the device of branching, other means may achieve the same end. In general, wherever branch banking is prohibited or restricted, two other forms of multi-office banking will thrive-groups and chains. A "group" of banks consists of two or more banks under the control of a holding company that may or may not be a bank. In contrast to a branch system, a group of banks may operate across state lines, though some groups are intrastate and are obvious substitutes for branch systems in states that prohibit branch banking. A chain of banks is similar to a group but is characterized by the control of several independently incorporated banks by an individual or a group of individuals or through interlocking directorates. Although chains tend to center around a nucleus bank, ordinarily the largest in the chain, they may be simply a "string" of banks organized for the sole purpose of achieving several office outlets.

Origins of groups and chains are obscure. Historically, chains appear to have emerged first at almost the same time in the South and Midwest, probably in the 1880s. By 1902 at least two chains were operating in North Dakota, and by 1911 the Witham chain had 125 banks located mainly in Georgia and Florida with a few units in New York and New Jersey. By the turn of the century several chains had been organized in the Pacific Northwest, though there is no record of the number of banks or the total resources involved. In New York, the Morse-Heinz chain of six banks called public attention to chain organization with a spectacular failure that sparked the Panic of 1907.

32

By 1900 aggressive entrepreneurs were starting to form banking groups. When it became apparent that the linkage of banks through common ownership was profitable, companies were formed for the purpose of holding stock in several banks. In the early days, groups, like chains, tended to take advantage of one or two names familiar to the financial community and already associated with the ownership of more than one institution. For example, in 1900 Adam Hannah, well-known for his interest in several country banks, became the first head of the Minneapolis holding company that took control of a number of banks. On the other hand, some groups maintained the anonymity of a single corporate name. Thus, the Union Investment Company, organized in 1903 in Minnesota, gained control of 31 banks within five years.

32 The term "group banking" was not in common use until the mid-1920s. Gerald C. Fischer, Bank Holding Companies, New York: Columbia University Press, 1961, p. 18.

Groups and chains, like branch-banking systems, were only beginning to make their influence felt by 1914. In the financial exuberance of the 1920s these novel forms of business organization would make rapid headway

as alternate forms of multi-office banking.

1914 To The Great Depression

During the first half century of its history the national banking system

did all it was engineered to do, and more. Yet as the 19th century drew to a close there was spreading concern that the monetary system was seriously defective. A few sophisticated and unusually perceptive businessmen and political figures, along with a handful of university professors, saw that only a central bank would provide an adequate remedy. Actually, some rudimentary central bank functions were performed in the latter half of the century by harried Secretaries of the Treasury, who violated the independent Treasury law to protect the money market from destabilizing swings in monetary reserves. The correspondent banking system, after a century of development, performed the so-called service functions of a central bank—providing cash, collecting checks, effecting long distance remittances, and the like.

The great difficulty with the system was that it had a propensity to break down in times of economic stress. During recurring monetary panics, banks suspended cash payments, and the currency supply all but disappeared. Fundamentally, the problem was one of structure. New York banks, which held a large part of the country's monetary reserves, were a focal point for interbank deposits because of the city's financial pre-eminence; moreover, they attracted correspondent accounts by paying interest on deposits and collecting checks drawn on Eastern banks. Since the funds so attracted involved a cost, they had to be put to some profitable use. In an embryonic money market there were relatively few short-term securities for banks to hold, so they tended to lend their excess funds "at call" to dealers in securities.

Country banks and reserve city banks in the interior withdrew deposits from the New York banks whenever they needed cash. Even when business was "normal," there would be seasonal movements of funds that were sometimes disturbing. But bank managers in New York ordinarily could predict routine flows of funds to the interior and could prepare for them in advance. Every few years, however, as economic activity slid into the first

stages of a major economic downturn, the demand for cash remittances to the interior would become greater than New York banks could meet, even by letting their own reserves fall seriously below the legal minimum.

At such times each bank had to think of its own solvency. A point was quickly reached at which cash could no longer be paid out. Most analysts, including the most highly respected academicians, tended to think, as their fathers and grandfathers had before them, that something was seriously wrong with the "currency." Indeed, a distinguished National Monetary Commission sponsored voluminous studies, published in 1912, that described for the public the weaknesses of the monetary system. The major defect, according to the Commission, was an "inelastic" currency—that is, a supply of coin and paper money that did not expand and contract in accordance with the "needs" of the business community. The quantity of currency, it was argued, should increase and decrease with the rise and fall of business activity. Moreover, since the chief manifestation of seasonal panics was a disappearance of cash, it was believed that bank reserves should be "pooled" to make them readily available in times of stress.

Modern economics would not be so concerned with the "elasticity” of the currency. What was really needed was a central institution that could create reserves and inject liquidity at appropriate times. Writers of that period, who thought the problem could be solved by putting cash reserves in a central place, forgot that reserves were pooled in New York in banks that could not create more cash.

Advent of a Central Bank

The basic plan of the National Monetary Commission, introduced as the Aldrich Bill,1 provided for the establishment of a weak central bank, to be known as the National Reserve Association, with its head office in Washington and 15 branches located in various parts of the country. The Association would carry a portion of the member banks' reserves, determine discount rates, and, most important, issue currency based upon gold and commercial paper that would be a liability of the Reserve Association and not of the federal government. The Association would be managed by a board composed of government officials and private members and would be controlled by a board of 46 directors, 42 to be chosen by banks and four by the government. Bankers, favoring private control of banking, supported the bill; agrarian radicals criticized it as being exclusively a bankers' bill. To William Jennings Bryan and his followers passage of the Aldrich Bill meant the continuation of the "Money Trust" and Wall Street's control of

1 The bill was named after the Chairman of the Commission, Senator Nelson Aldrich of Rhode Island.

the nation's credit resources. Their objections were given increased weight by the shocking findings of the Pujo Committee in 1912.

President-elect Woodrow Wilson was obliged to formulate an alternative to the Aldrich Bill. Silent during the campaign on the issue of monetary reform, Wilson in his own thinking had not gone beyond general objectives and was unfamiliar with the details of alternative proposals. Bankers, who supported the Aldrich Plan, asked James B. Forgan, president of the First National Bank of Chicago and member of the American Bankers Association's Currency Commission, to intercede with the President. An agitated colleague sent Forgan the views of the banking community:

...

It is understood here that the President-elect is studying the whole currency question with an open mind, but that he has certain tempermental [sic] peculiarities which incline him, once he has made up his mind that he understands a thing, so that he obstinately will refuse to open his mind to any arguments to the contrary. It is known of course that he has been taking advice chiefly from the radical element of the Democratic party represented by Bryan. . . . It is said to be highly important that while the President is seeking light that he should get the real truth from some such competent authority as yourself. . . . I think you can present certain fundamentals that must be embraced in any plan and can make it so clear to him that his mind will become fixed when he grasps the real rudiments. . . . In other words, the plan is, while he is making up his mind, to seize the opportunity to make it up for him in the right way rather than let the radicals convince him wrongly to the detriment of any possibility of sound legislation.2

Meanwhile, the House Banking and Currency Committee, chaired by Virginia's Representative Carter Glass, decided that it must obtain the President's views on the matter. During the spring and autumn of 1912 the Committee had worked on a proposed banking bill drafted by its economic adviser, H. Parker Willis. Glass and Willis wished to discuss this bill with Wilson and met with the President-elect at his home in Princeton. Willis' draft called for a reserve system privately and locally controlled, with 20 or more independent reserve banks. In order to bring the national banks into the system, Willis further proposed to broaden their lending powers and to allow them to distinguish between demand and time deposits for reserve purposes. Both Glass and Willis stressed the importance of decentralizing the system and breaking the concentration of power in Wall Street. Wilson tentatively agreed to the plan but questioned a provision giving the Comptroller of the Currency general supervision over the reserve system on the grounds that it did not provide sufficient coordination and control. Wilson realized that a central bank in the traditional European mold would be politically impossible, even if economically desirable, but he wanted a "capstone to be placed upon the structure”'-a central board to control, coordinate, and perform the functions of a central bank. It was

2 Joseph T. Talbert to James B. Forgan, February 26, 1913, James B. Forgan Papers, The First National Bank of Chicago.