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AMERICAN BANKS "IN THE JUNGLE"
Eight Failures A Day EGGS IN SMALL BASKETS
By A. C. DAVIDSON (General Manager, Bank of New Wales).
The banking crisis in America has demonstrated once more, not only the extreme dangers of a banking system lacking cohesion and
centralised direction, but the contrast between American and British methods. In Great Britain five banks cater for practically the whole of the needs of the business community. In Aus tralia, there are only nine trading banks; in Canada, ten. The United States has no less than 19,000 banks. In 1925 the total number exceeded 28.000. The reduction has been due in large measure to failures. Of those now in existence less than 7,000 be long to the Federal Reserve System; over the rest the central banking system has no control. The Federal Reserve system was in augurated in 1913, more or less directly as a result of just such a crisis as that which has shaken America dur ing the past few weeks. This was the so-called Knickerbocker crisis in 1907, when the failure of the Knickerbocker Trust Company brought the whole banking structure to the point of col lapse. This crisis brought the United States to realise that something had to be done, but six years of investiga tion passed before the Federal Reserve system took shape. The system con sists of 12 Federal Reserve banks, each operating in its allotted district. under the general direction of the Federal Reserve Board. Each of these banks has its own board of directors, and although the Reserve Board exer cises general control, it is difficult to see how it can be as effective as the highly centralised control of the Bank of England. But there is a far greater weakness than this. The trading banks in the United States are divided into two classes. National banks and State banks, according to whether they work under Federal or State lews. National banks are compelled to be members of the Federal Reserve sys tem, but State banks may keep out of the system if they choose, and the Reserve banks have little control over them. Professor Irving Fisher, of the Yale University, makes this rather scath ing statement in a book recently pub lished:—''Before the organisation of the Federal Reserve System, Ameri can banking was little better than c jungle; and outside of the system the jungle is still very incompletely re claimed." Inconsistent Laws One of the chief sources of danger is that the banking laws vary con siderably from State to State, and are in most cases fairly loose. It is still open to almost any inexpert person who can secure a small amount of capital to call.himself a banker "and try his luck in the art of surviving or perishing—along with his clients " The amount of capital required to found a bank In the important State of New York is as low as 25,000 dol lars. Consequently even small busi ness men at times find it to their ad vantage to set up a bank and collect deposits for use almost entirely in their own businesses. Under these cir cumstances, the safety of the deposi tors' money becomes entirely depen dent on the soundness or otherwise lof a single industrial unit. Such small individual banks ere necessarily re -1 stricted to one country district, one small country town, or to one small section of a larger town or city. To produce the same conditions in Aus tralia, It would be necessary to make every branch offlce a separate insti tution. Such restricted areas are generally dependent for their welfare upon the prosperity of one or only a very few industries. For example, a country district or a country town might be entirely dependent upon : wheat growing. These small banks . have no chance of surviving whenever the industries of their particular local district receive a substantial setback. While the Federal Reserve system can to some degree control the total volume of credit, if it chooses to -take the necessary steps, it has no means of strengthening itself against _heer failures among these frail institutions, despite the fact that once those failures become common the system itself is endangered. Bank failures are indeed common in the United States of America even in good times. The average number of suspensions per annum in the ten years 1921-30 was 700, or more than two per work ing day; and in 1931 the number reached 2.550, or eight daily. In con trast to this, France, Germany, and Austria had only one failure each in the three years 1929-31, while in Bri tain, Canada, end Australia no recog nised trading bank failed. Equalisation Under tbe British system of large banks having numerous branches spread over a wide area, any setback in. any one district or industry is mini mised by its smallness compared with tbe business of the bank as a whole, and by the continued soundness or prosperity of other districts and other industries. It is only necessary for a large bank to draw to c small extent on its resources in other districts to maintain and cany such afflicted dis tricts or industries successfully until prosperity returns to them again. The greatest advantage, however, of the British system as compared with the American is that the large banks throughout the British Empire provide a suitable field into which men of ability are attracted, and in which they may be trained for the executive positions of the banking world, in a manner beyond the capacity of the American one-branch bank. Such highly specialised training and experi ence gives the public a greater guaran tee of integrity and good manage ment. The present debacle is only an in tensification of a process constantly going on in the United States due solely to a faulty system. One could not even imagine such a position in Great Britain, Canada, or Australia, except under stress of some political calamity. The banking systems in Britain and the Dominions are sys tems in the true sense of the word, and not a collection of heterogeneous institutions. There is proper co ordination, in most cases by central banks; and even where these do not as yet exist, there is mutual co-opera tion between a relatively small num ber of large and well-managed banks.