choice votes from a total for the state of 702 votes; in Montana, 77 from a total of 148; in North Dakota, 249 from a total of 348; in South Dakota, 131 from a total of 261; in Wisconsin, 75 from a total of 245; and in Michigan, only 7 from a total of 200.144

The decision of the committee was to place the Ninth Federal Reserve Bank at Minneapolis, which was chosen rather than St. Paul because of its predominance, not only in number and size of financial institutions, but in the volume of business done, and in the variety of its relationships with the area included in the federal reserve district. This decision has added greatly, as it was expected to do, to the financial importance of the Twin Cities. The functions performed by the Federal Reserve bank, which give it this importance, cannot all be dealt with here, but those which serve best to bring the district into closer relation with the center may be at least suggested. The legal reserves of member banks are all kept in the Federal Reserve bank, which thus becomes a large concentrating agency for reserve funds. The reserve bank, through its par collection service, acts as a clearing agency for its district, and frequently balances between banks of different districts are cleared through the respective reserve banks. When borrowing has to be done from other districts, as at crop moving time particularly, it is done to an increasing extent, through the Federal Reserve bank.145

The most important single function of the bank, however, is the rediscounting which it does for member banks. By rediscounting commercial paper for its member banks, the reserve bank allows them to build up their legal reserves, and thus adds to their loaning power. In times of need, the reserve bank issues Federal Reserve notes, partially on the basis of rediscounted paper, and, through its control of the rediscount rate and of the amount of paper to be rediscounted, it may regulate, to a considerable extent, the amount of money loaned in the district. Through the performance of this one function more than any other, the Federal Reserve bank brings the center into prominence as the chief source of loanable funds for the district. When the Federal Reserve system was first established, this function was not so important as it has since become, but its rapid development is indicated by the fact that, while, in 1915, the amount of paper rediscounted by the Ninth Federal Reserve Bank was $5,817,899, this figure grew in 1917 to $80,154,717.17, and in 1920 to $953,391,769.146 Since then, due to the general depression in business, and to the activities of the War Finance Corporation, which loaned large sums to the banks, the figure has fallen off, amounting in 1922 to only $193,000,000.

144 Sixty-third Congress, Second Session, Senate Document No. 485, Location of Federal Reserve Districts, pp. 350, 353-56.

145 See the first Annual Report of the Ninth Federal Reserve Bank. Between October 1 and December 1, 1915, about $8,000,000 in Federal Reserve notes were issued, mainly to finance the crop movement.

148 See the first, third, and sixth Annual Reports of the Ninth Federal Reserve Bank. See also an article in the Commercial West, August 20, 1921, p. 11.

When the Ninth Federal Reserve District was organized, it consisted of Montana, North Dakota, South Dakota, Minnesota, the northern two thirds of Wisconsin, and the northern peninsula of Michigan.147 With regard to the part of the area west of the Twin Cities, there is no great question, the vote of the banks in that district indicating that their interests lay primarily with the Twin Cities. It must be noted, however, that western Montana showed some leaning toward Spokane,148 and that the mining industries in that state are financed, to a considerable extent, independently of the Twin Cities.149 Similarly, banks in South Dakota were somewhat scattered in their preference, some of them leaning toward Omaha and Sioux City.150 A study of the correspondent accounts maintained by South Dakota banks also shows much less concentration than is evident in North Dakota.151 It is with reference to the district east of the Twin Cities, however, that the only serious objection can be raised to the work of the Reserve Bank Organization Committee. In both Wisconsin and Michigan, the bankers complained that they looked, not to the Twin Cities, but to Chicago, more than to any other one center. In the case of Wisconsin, the complaints were strong enough to cause a change in the boundary of the Ninth Federal Reserve district, so that now considerably less than half of Wisconsin is in the Minneapolis area. In the case of the Michigan peninsula, there was no change in the boundary, although a study of the relations of the banks there shows that there is less concentration than in some districts, and that, so far as there is any marked concentration, it is in Chicago.152 Now that these banks have been put into the Twin City district, however, this situation has changed, and they are beginning to establish relations with Minneapolis and St. Paul banks.

By way of final summary, something more may well be said of the financial relations between the Twin Cities and their tributary area. These relations at the present time take four main lines. There is first the financing done through the Twin Cities of the interests throughout the Northwest, chiefly the agricultural, which has already been dealt with. There are also relationships between Twin City financial institutions and the country banks of the territory. These banks began to keep correspondent accounts in the

147 See below, p. 177.

148 Sixty-third Congress, Second Session, Senate Document No. 485: Location of Federal Reserve Districts, p. 353.

140 See above, p. 136.

150 Ibid., p. 355.

151 An enlightening study was made of the Bank Directory of the Ninth Federal Reserve District, 1919-20, and a table compiled showing correspondent accounts of banks in that district. Thus the proportion of banks carrying accounts in the Twin Cities could be readily compared with those carrying accounts in other centers, particularly in the East.

162 While, in 1919, there were more than forty banks which had no correspondent accounts in the Twin Cities, there were not more than five which had no such accounts in Chicago.

Twin Cities a little before 1880,153 but this item in all the Twin City national banks amounted to less than $700,000 in that year. Since this date, it has increased rapidly, and almost steadily,154 passing $100,000,000 in 1918;155 and now, nearly all the banks in the Northwest keep their main correspondent accounts in the Twin Cities, carrying little more than working balances in other centers.156 This tendency has, of course, been furthered by the establishment of the Federal Reserve bank, which, while it cuts down balances of country banks in other Twin City banks, brings most of the outside banks to do this business through the Federal Reserve system.

A third phase of the relationship between the metropolitan center and the area is in the investment of surplus funds of country banks. Since about 1900, banks of the Northwest have come to the Twin Cities to an increasing extent to secure short-time investments.157 Evidence is ample in the Auerbach papers between 1895 and 1902 that the Union Bank of St. Paul was furnishing commercial paper, commonly, if not usually, to a number of country banks, including the Mankato National Bank, the First National Bank of Wabasha, the Merchants' National Bank of Crookston, and even the First National Bank of Miles City, Montana. The Houlton papers furnish similar evidence, for a somewhat later date, that Houlton's Bank in Elk River was purchasing commercial paper, sometimes from Twin City commercial paper houses, more commonly through the Security Bank of Minnesota (later the Security National Bank of Minneapolis) in the decade following 1900. At the present time, it is safe to say that the majority of

158 Minneapolis, Financial Center and Gateway of the Northwest, Table III. See also advertisements of the Northwestern National Bank on p. 19 of the Commercial West, June 12, May 22, July 10, September 18, 1920, and January 15, 1921.

164 The Commercial West of October 21, 1911, p. 11, comments on a very rapid increase in the deposits of North Dakota banks in the Twin Cities. In 1915, South Dakota attempted to change the practice of keeping reserves in Twin City banks by passing a ruling that they must be kept in reserve banks within the state. The attempt to establish independence was frustrated, however, as the State Supreme Court set aside the ruling. (See the Commercial West, October 2, 1915, p. 34, and January 8, 1916, p. 35.)

156 It has fallen off since 1918, probably due in part to the establishment of the Federal Reserve bank, which keeps the reserves of all member banks, and performs for its members many of the services formerly secured through the keeping of a correspondent account in a city bank. The decrease is also due in part, perhaps, to disturbed financial conditions since 1920.

156 A letter in the Houlton Papers, 1900-, from Charles Keith, of Princeton, Minnesota, country banker, dated March 23, 1909, says in reference to correspondent accounts: "Chicago is only valuable to your P.[ost] M.[aster], and to those deluded mortals who persist in patronizing Sears Roebuck et al........I would advise that you keep your Minneapolis correspondent, St. Paul if you think it does you any good and that you keep such an amount in New York as your experience dictates the needs of your business usually requires and keep it there interest or no interest." Conversations with Minneapolis bankers indicate that most correspondent accounts are carried in the Twin Cities; and the study of the Bank Directory of the Ninth Federal Reserve District, already referred to, indicated that the great majority of banks carry accounts in the Twin Cities, although many of them, of course, carry accounts in other cities as well.

157 See the Commercial West, March 28, 1903, p. 17; April 20, 1907, p. 15; and July 27, 1918, pp. 7-8. See also the evidence cited above from the Houlton and Auerbach papers.

banks in the Northwest secure short-time investments for their funds through Twin City agencies.

On the other hand, in times of need, it is the Twin City banks which are called upon to supply funds to the tributary area. The Houlton and Auerbach papers show that this was coming to be done, both for banks and for individuals, at the same time that the other type of service was assuming importance. In 1902, it was noted that even Iowa banks were borrowing for short periods from the Twin Cities, although this was exceptional.15 Before 1915, a good deal of rediscounting for country banks was done in the Twin Cities; now much of this business is handed on to the Federal Reserve bank. The intimacy of the relations between the Twin Cities and their tributary area has been increased since 1900 by the development of chains of banks, which, operating usually from the Twin Cities as headquarters, increase the importance of the part played by that center as the financial nucleus of the district.159

A general survey of the situation indicates that the Twin Cities have just passed into the financial phase of their metropolitan development, and that the area for which they perform financial services is substantially the same as that from which they concentrate the grain and livestock, and for which they are the jobbing center. Their financial control is less dominant, however, than their control in the other branches of exchange, for it is of more recent development. Moreover, the Twin Cities themselves do not constitute a financial center that is independent in the sense of isolation. No city does, at the present time, for capital and credit facilities are too highly fluid. In our financial life we more nearly approach national economy than in any other aspect of our economic life, New York of course being the national center. Yet New York itself is by no means an independent center in this sense. The Twin Cities are dependent in an important degree upon other parts of the country, but their chief function-and it is a highly essential one-is to act as a nucleus where both demand and supply are concentrated, where the capital which comes in from other districts may be concentrated for distribution, and to which the rest of the district may look for satisfaction of its financial needs.

158 Commercial West, October 11, 1902, p. 37.

150 See below, Chapter VII.

CHAPTER VII

CHAIN BANKING1

It was noted in the preceding chapter that concentration among banking institutions has been a feature of financial development in the Northwest since about 1900. Illustrations of this tendency are to be found, not only within the Twin Cities themselves, but throughout their tributary area as well, the concentration having taken two main lines. One, already referred to,2 is the consolidation of established banks, which proceeds either by complete amalgamation, or by the establishment of branches by some of the larger institutions. Such consolidations have taken place until, in the Twin Cities as in most large centers, the financial situation is to a considerable extent controlled by a small number of powerful banks. The other method of concentration, common chiefly in the tributary area, is the establishment of chain banking. The development of this practice leads to the same general result of concentration of control of financial power, but its methods are somewhat different from those of consolidation. The chain bank as an institution is to be associated with the chain store, the line elevator, and the line lumber yard, all of them in accordance with the same tendency toward concentration of control that is one of the marked features of our industrial life today.

Chain banking is established where an individual or a group organizes or buys an interest in a number of banks in different communities, with the idea of controlling, in greater or less degree, the policies of all. Frequently the controlling interest is a holding company; probably never is it a bank, as in the case of the branch banking system. In the branch bank, too, the subsidiary corporation loses its identity, becomes merged into the larger unit, all joining together in a common capital and a common profit and loss account. The individual bank in the chain, on the other hand, remains a separate corporation, with its own capital and its own organization; indeed, the bond of union between members is sometimes quite invisible to outsiders, consisting merely in the united ownership of blocks of stock from each of the different banks.

1 The materials on which this chapter is based were secured largely through the medium of the personal interview; much of the data the writer now finds it impossible to ascribe to any single source. The facts presented have been chosen judiciously, however, and the compilation of material has been made with care.

2 See above, p. 124.

The maintenance of branches by national banks was made possible only in 1922, through a new interpretation by the comptroller of the currency of the national banking act. It is still only a limited right, and is frowned on by many bankers.