Evening star. [volume] (Washington, D.C.) 1854-1972, 1931-11-01
BRANCH BANK PLAN
| URGED AS METHOD
| OF FREEING CREDIT
Noted Economist Advocates
Suggestion Recently Made
by Controller Pole.
URGES CLOSER SCRUTINY
IN GRANTING OF LOANS
Believes More Expert Advice
Would Prove Helpful to Many
Small Institutions.

By DIR. MAX wrNKLER.
Special Dispatch to The star.

Special Dispatch to The Star.
NEW YORK, October SIN view OF
the many complex problems which con-
tinue to confront the banking institu-
tons in the United States, DR.. George
w. Edwards, an authority on banking
and finance, was requested to express
his views on these very vital questions
DR.. Edwards was formerly economist OF
the Bank Of America. and Is at present
economic adviser to the banking house
of Stone g. Webster &c Blodget, Inc
and dean Of the School of Business and
Civic Administration Of the College OF
the City of New York.
The banking problem in the United
States still requires close scrutiny" said
DR.. Edwards, land we are likely to over
look this situation because of the much
more numerous and infinitely more COM
pick economic and financial problems
abroad
Take Great Britain, for example.
This classic center of international
banking has been forced OF the gold
standard, The Scandinavian countries
and the entire Central and South East
ern sections have been and continue to
be faced by difficult problems which
have not as yet been satisfactorily
solved.
Extent of Failures.
an regard to the difficulties experi-
enced by financial institutions in the
United States during the past two years,
those who have followed the banking
situation have not been surprised. TO
begin with, the commercial banking sys-
tenn Of the country underwent a severe
strain during the past decade through
the failure of several thousand banks,
some of which were located in New
York City, the stronghold of American
finance, and now the international
banking center.
The Federal Reserve System has re-
ported, for $780, the failure of over l. 800
institutions, with liabilities in excess Of
5000 100000. During the nine-year pc
Rod from July /, 1920, to June 80, 1929,
about 5000 banks, nearly all in agricul-
tural communities, closed their doors
and tied up deposits Of approximately
$500, DOC, 600. 1t has been estimated
that 1881 viii witness the closing of up
ward of 500 more banks. The atten-
ton of the banking fraternity has been
focused as never before on this all
important financial problem"
To the question, why have so many
commercial banks been forced to sus-
pend operations?" DR.. Edwards adj
NduCcQ SCVcIdl IEdSDIlSs
In the first place, it IS important to
remember that by far the bulk Of these
failures has occurred in the rural Sec
tons of the country. It Is a common
place remark to say that the United
States has experienced an agricultural
depression during the last several years,
setting in appreciably before the present
international business crisis occurred.
1T Is also well to recall that i'm
mediately following the World War
there occurred an agricultural boom ac-
companied by inflated land values and
large mounting Indebtedness to banks
Consequently, with defiation thousands
of rural banks found themselves with
frozen assets which, when sold, could
not provide sufficient funds to repay the
full value Of the loans. AS result,
the banks were forced to retain these
tlliquid assets which, in reality, be-
came long-term loans.
Frozen Rural Loans.
THE plan now being advocated by
well meaning people to have the COM
mercial banks extend fairly long-term
credit to finance the export of our farm
surplus is. therefore, unsound and
dangerous. The recent sharp decline Of
commodity prices, Notwithstanding the
Stabillzing efforts of the Farm Board,
has further served to accentuate the
already difficult country bank problem.
Loans made on the basis of farm prod
ucts have become frozen. The illiquid
assets Of these institutions have forced
their suspension, with consequent loss
70 depoSitors, business and the COM
munity as whole.
Several other factors in addition to
the agricultural defiation have served
70 aggravate the banking situation.
There has often been lack of sound
bank administration In the United
states. Particularly does this amply to
the management of two types Of earn
ing assets namely, loans and discounts
and investments. Inadequate and i'm
proper diversification of a banks leans
and investments have brought disaster
to many banking institutions.
While bank may experience diffi-
Guilty in diversifying its loans and dis
counts due to the type of clients IL
serves, nevertheless the insistence upon
adequate security would help in miti-
eating this difficulty Furthermore
there Is no justification for the existence
OF low-grade portfolio of bond hold
ings, which are either in default or
have suffered a sharp price decline.
However. the blame here must be
placed not only on the commercial
OdA1Acr, WHO frequently was u0aGQua1Nt-
ed with bond values. or who failed to
study security values, but also on the
investment banker, who frequently I'M
derwrote and sold issues without dis
elimination.
Particularly is this true of invest
'nent houses which sold South Ameri-
can bond issues, whose proceeds fire.
quently were diverted to unproductive
channels. Not only were these loans
unproductive, but the Latin American
borrowers increased their indebtedness
so tremendously that it became obyiols
that as soon as the how Of capital from
New York should cease or be decreased
In volume, it would become very diffI-
cult, IL not impossible, for our Southern
neighbors to pay the interest and amor
tizatton charges.
Issues In Default.
'The stagnation Of the New York
capital market actually has brought
about the latter condition, with the re-
suit that several South American bond
issues are already in default. The Ell
feet on the bond holdings Of Commercial
banks has been decidedly adverse. and
the impairment Of this type Of asset
has created serious difficulties for COM
mercial banks"
Is there any possible remedy for this
unhappy condition of the domestic
banking structure?" DR.. Edwards was
asked, to which he replied as follows: