Readings in Money and Banking / Selected and Adapted

by Chester Arthur Phillips

Now it is a well-known fact that an individual or corporation with large resources and large business exerts an influence in his particular field far in excess of his actual mathematical percentage of the total resources or business. Thus the dominating position of the big banks is even greater than mere figures indicate. But there is still another fact which centralises and cements their power. The only banks which are really large are in a few cities, and the larger they are, the more they tend to the very greatest centres of population. Thus toward the end of 1911, there were 183 banking institutions with deposits of $10,000,000 or more, of which sixty-two were in New York City. There were thirty-six institutions with deposits of $25,000,000 or more. Sixteen of these were in New York City and four in Chicago. There were ten with deposits of $75,000,000 or more, and of these, seven were in New York and two in Chicago. Of the ten largest trust companies six were in New York, three in Chicago, and one in Boston.

These great banks and trust companies are of very recent growth. Twenty years ago the deposits of our largest bank were one-twentieth of what they are to-day. At the first inauguration of President McKinley, which was really not so far back as the Dark Ages, there was no bank in New York with more than $30,000,000 of deposits. Now there are six banks each with more than $100,000,000 of deposits. A trust company in New York City, which had deposits of $20,000,000 five years ago, now has deposits of $166,000,000 and its twenty-eight directors sit [1912] in boards of other banking institutions with resources of $1,250,000,000. When it comes to actual cash we find the position of the New York and Chicago banks even more dominant....

CONSOLIDATION—A STEADY PROCESS

Despite the disproportionate size of New York and Chicago banks their number is steadily decreasing. This is because the process of consolidation proceeds just as steadily. In 1853 there were fifty-three banks in the New York Clearing House Association, and in 1911 there were fifty, although in the meantime the amount of business had increased twenty times. There are now less than 130 banks in New York, or ten less than ten years ago, although in that time cash holdings have doubled and deposits have increased a third. In ten years no less than 103 banks have gone out of existence, generally through absorption into larger institutions.... In Chicago the same process of consolidation has gone on. One Chicago trust company has absorbed six others in eight years.

New York and Chicago are by no means the only cities in which the obvious tendency is to have fewer but larger banks. Look about at random. Akron, Ohio, where the rubber industry has recently become of more than local importance, has felt the necessity of banks large enough to carry on its trade, and consolidation has resulted. In Detroit, where the automobile trade has set in motion a great industrial development, the Old Detroit National has absorbed the American Exchange National. In Seattle, Nashville, Wilmington, Portland, Philadelphia, Baltimore, San Francisco, and Louisville there have been many recent mergers and absorptions. In Cincinnati one of the largest institutions in the Ohio Valley has been formed by the absorption of the Merchants' National by the First National. As for Boston the desire of her capitalists to make New England more powerful in the business life of the country has led to the recent absorption of the City Trust Company by the Old Colony and the steady growth of three financial institutions, the Shawmut National Bank, the First National Bank, and the Old Colony Trust Company, these three far exceeding all others in size....

HOW THE LAW HAS FOSTERED AFFILIATION

... One great cause of the concentration of banking and financial power into a few hands has been the consolidation of banking resources into a few great units and the friendly affiliations of these units. But these units have not grown big merely because their managers or owners willed it so. The banking and currency laws of the country have forced money into a few centres. The banks of New York City employ—mainly in financial or stock market loans—about $600,000,000 which belongs to banks in other parts of the country. Naturally this concentration of money in a few banks "places these banks in a position to control the issuing or granting of credit"—to use the exact words of the president of one of them—"thereby placing the money power in the hands of a comparatively small number of men."

But this gravitation of money to New York is because the money is idle and is hunting a job, and not because of any process of usurpation, manipulation, or combination. It naturally arises under and by virtue of the reserve requirements of our National Banking Act.... The bulk of idle country bank cash which finds employment in New York comes here because of the existing reserve system, and there are several great banks in both New York and Chicago which have few customers other than the thousands of country banks whose "correspondents" they are.

THE CORPORATION AND THE BANK

Thus banking and financial power is concentrated in a few hands not only by the growth of great banks and by the laws of the country, but also by the legitimate business practices which have grown up under these laws. But the massing of this power in a few vast, centralised units has been a development of the last ten or fifteen years only. That is, it has been coincident with the development of trusts and combinations. Big Business and Big Banking have gone hand in hand. Each has made the other possible. By law a bank cannot loan more than one-tenth of its capital and surplus to any one customer. But the customers have grown into behemoths. How then could the banks fail to grow?