Bank Test

Wall Street wisecrackers had a merry time last week, chortling over some wag's remark that "next we will hear of the failure of the Gloucester fishing bank." But in seaside Gloucester, where an ill wind is one which comes from the big Le Pages glue factory, nobody saw anything comical in that remark last week. For Gloucester's oldest bank, the Gloucester National, failed to open its doors, freezing fast more than $1,000,000 of good Gloucester cash. Even in old New England Gloucester National was a hoary insitution in its own right. When it was formed John Adams was being boomed for the second U. S. President; the Fourth of July was the 20th anniversary of independence. President of the bank was Thomas James Carroll, 64, also president and general manager of Gorton-Pew Fisheries, wholesalers of salted and canned fish. He left grammar school when his fisherman father was lost at sea.

Immediate cause of the Gloucester trouble was that Gloucester National was one of eight Massachusetts institutions affiliated with Boston's Federal National Bank. When Federal was forced to the wall last week the affiliated banks in Gloucester, Lynn, Salem, Brockton. Lowell, Worcester, Cambridge and Lawrence followed. Total deposits involved were around $60,000,000.

Thus, New England's banking structure met its greatest test of this Depression. Boston-Continental National Bank, with $7,000,000 in deposits, closed. To another bank went special aid. A run began on world-famed Five Cents Savings Bank, an institution with $102,000,000 in deposits and a reputation for great, solid conservatism. In Bridgeport, Conn., four banks became two banks. In New Haven support was thrown to Broadway National Bank. Whereas in the first nine months of 1931 only two banks failed in all New England, last week's damage brought the total to 22, Massachusetts accounting for most.

Sad Totals. New England, centre of banking excitement last week, was not the only section of the country where rich and poor stood mutely to gaze at closed banking portals. The year, a disastrous one to the banking structure, has been marked by two types of troubles. There have been the major financial disturbances which have suddenly overcome great financial centres. There has been the steady stream of isolated failures. Last week this stream continued, much less torrential than during late summer, but still muddy. The week's tally of bank closings (suspensions and failures and voluntary liquidations) as kept by the American Banker showed that the country's banks were being diminished at a rate of more than ten a day. Citizens Bank of Hickory Ridge, Ark., with $29,000 deposits, shared the same fate as Standard Trust Bank of Cleveland, first and greatest of the Brotherhood Banks, placed under independent management in 1930. Of Standard's $22,000,000 in assets at least $2,000,000 represented the engineering Brotherhood's "war chest," accumulated to finance possible strikes. Significant was the fact that last week's bank-closings brought the 1931 total to 2,044.

Reporting only actual bank insolvencies, R. G. Dun & Co. shows that during the first three quarters of the year. 823 banks with liabilities of $703,000,000 were involved, against 360 banks and $270,168,000 during the same time last year. Regionally, the failures up to Oct. 1 were:

No. Liabilities New England 2 $ 2,745,000 Middle Atlantic 68 151,210,246 South Atlantic 86 66,970,492 South Central 97 43,549,499 Central East (Ohio, 213 Ind, Ill., Mich., Wis.) 213 296,453,467 Central West (Minn., Iowa, Mo., N. Dak., S. Dak., Neb. and Kans.) 505 92,653,686 Western 25 13,636,409 Pacific 27 31,107,483

By no means do all of these liabilities represent money lost forever. Slowly throughout the land liquidation of frozen assets is going on, payments are being made to depositors. In Manhattan, depositors of Bank of United States received last week a 15% distribution. This payment, the second, brings total disbursements to date to 45%. In Philadelphia, where 39 banks failed during a mighty financial storm, seven have paid liquidating dividends. A few, including big Bankers Trust Co., have paid 20%, the others from 10% to 15%. Bank of Pittsburgh last week made a 50% disbursement. In Toledo, where four out of five big banks failed (TIME, Aug. 24), depositors were receiving their first liquidation checks last week: 30% from one bank, 15%, and two of 10% from the others. "I am through with banking and from now on I will confine my efforts to manufacturing," said Clement O. Miniger, robust but lately pale president of Electric Auto-Lite Co. A hard-working businessman, Mr. Miniger was caught in the swirl of real estate and banking developments by the boom, found himself a round $5,000,000 poorer when Toledo was forced to take stock of itself. Now, to recoup losses, he is working harder than ever. Automobile accessory business curtailed. Auto-Lite is making $1 electric clocks, selling them in large lots to chainstores. All the money "lost" in all failed banks in the U. S. in 1931 will be less than the resources of any one of the biggest U. S. banks.

Branch Banking. Yet even though a bank should pay 100% after it closes, the closing cannot help but cause stress to both depositors and borrowers. Hence the year has been one that has made all serious bankers ponder remedies carefully. John William Pole, Comptroller of the Currency, has tirelessly reiterated his arguments in favor of larger banks, many branches. Last week he gloomily contemplated the ravages of Depression upon the banking system, and again pleaded with slow-to-change bankers and suspicious Congressmen for the development of branch-banking. Said he: "In brief, the purpose of the legislation recommended is to supplement our system of unit banking by permitting the stronger and better managed city banks to carry on banking operations in the surrounding rural communities by means of branch offices. . . . Our present banking problem is one that concerns primarily and fundamentally the rural communities and which cannot be automatically solved by the return of general prosperity."

Last month the cause of branch-banking was advanced by the first out-and-out endorsement from the U. S. Treasury. In his annual report, Andrew William Mellon said: "The essential question involved is the inability of a large number of small banks to survive in the face of changing economic conditions. ... I can see no justification in the argument that banking should be confined to political or other existing artificial boundaries rather than to its natural economic lines."

Greatest argument in favor of branch-banking is the success of England's banking system. A Depression far more acute than that in the U. S. has not caused a single failure. Stock example of branch-banking under conditions more comparable to those in the U. S. is in Canada. Advocates of branch-banking delight in quoting the fact that there have been but twelve bank failures in Canada since 1893, that between 1914 and the present there was only the shocking collapse of the Home Bank in 1923. Their opponents however, take the Home Bank failure as proof that even big branch-banking systems can fail. They also point to the recent branch and group banking troubles in the U. S. Yet the recent failures among banks with many branches or groups of banks have almost all been due to flush promotion methods or gross mismanagement. Such fiascos as BancoKentucky, the Bain Banks in Chicago and the A. B. Banks group in Arkansas cannot be held as an indictment of the principle of group-banking and likewise cannot be called a result of branch-banking since a group of banks is an entirely different thing from one bank with branches. Bank of United States had many branches but they were all in one city and the conduct of the bank's business was such as to make it useless j as an example of any banking theories. Arguing by experience, advocates will ! point to California, one of the few genuine branch-banking States. In 1931 none of j the California branch-banking banks has | failed, and the only failures in the State were a dozen tiny affairs.

National Credit Corp. While the great branch-banking argument last week was growing louder and louder, a more immediate solution of the difficulties was getting underway. The National Credit Corp. was not intended as a permanent banking cure-all but as a support during the present crisis (TIME, Oct. 19 et seq.). Continued bank failures might indicate that this body has not accomplished its purpose, but the saving of a nation's financial structure cannot be done in a night or a week.

Up until last week National Credit had not called for payments on the $500,000,000 worth of debentures to which banks have subscribed. Chief reason was thought to be that these debentures must pay 6%. that until definite need of the money is felt National Credit can obtain funds more cheaply from a few large banks with ample cash. Last week it was thought that National Credit had lent about $10,000,000. It was said that pending applications for loans come to between $10,000,000 and $15,000,000. Loans thought to have been made by last week included: $1,500,000 to Virginia banks; $3,000,000 to closed American Savings Bank & Trust Co. Davenport, Iowa; $650,000 to banks in Des Moines.

Many a banker last week was wondering why National Credit did not step in and help Federal National of Boston. Senator Carter Glass, opposed to the plan from the first, proposed to call National Credit officials before the sub-committee of the Senate Banking and Currency Committee to find out "why it has not averted bank failures at its own back door." Many bankers thought that National Credit had considered helping the Boston situation, had found upon investigation that the banks involved did not merit aid. Upholding this belief was the widespread report in Boston that when the run began on Exchange Trust Co. National Credit quickly put a welcome $1,000,000 in the bank and stopped the run.

Undisputed good effect of National Credit Corp.'s formation was the resultant improvement in the nation's confidence, the return of much hoarded money to banks. Although bonds were still depressed last week from recent selling, the cause was thought to be in year-end "window-dressing" by banks rather than in forced selling. Of great aid to banks which must dress their statements was Comptroller Pole's decision last week to take a liberal view upon the value of bonds held by banks so long as the bonds are not in default.

Gold. In Europe rumors were revived to the effect that the U. S. will go off the gold standard. Many a Wall Streeter with little to do except swap stories was rumoring that Lloyd's of London has wagered one to three that within six months the U. S. would abandon the gold basis. Few read the London dispatch which said that only one small wager had been placed--at odds of one to 20.

Then up popped the Philadelphia Record, vigorous and temperamental paper owned by Julius David Stern. "The nation will be forced off the gold standard eventually when it will do us little good," said a front-page editorial, "so Congress should take the United States off the present gold standard immediately. . . . Gold is valuable today for the emotion it produces. . . . Abandoning that money standard might wipe out three billion of gold value but restore a major part of three billion dollars in property and security values. The smartest thing Uncle Sam can do now is to let his debtors in the rest of the world get the best of him; sometimes it's smart to be dumb."*

Safe. Thus beset by problems, pounded daily by bad news, the banking world has been dismal. Fortnight ago the very nadir seemed to have been reached; many a loose rumor was bruited about, shares of leading banks sold at less than book value even after many known losses were deducted. Last week when no bad events occurred except in Boston, when it became known that the New York City banks are not as heavily committed in Germany as previously thought (see p. 6), a great rally in bank shares began, more pleasing to bankers and brokers than even the welcome rise in stock prices.

* In Johannesburg, South Africa, famed general Jan Christiaan Smuts, former premier of the gold producing Dominion, thought it would be smart to take South Africa's pound off the gold standard. "If there is one lesson more than any other to be learned from the present crisis," said he last week, "it is that South Africa is not economically independent and that our lot economically is with the British market."

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