Wriston, Walter B.
You may recall that astute philosopher Robert Benchley once wrote about a college examination he had taken, which called on him to discuss the North Atlantic fishing rights controversy first from the point of view of Great Britain, and then from the viewpoint of the United States. Remembering nothing at all about the controversy, he took the only logical alternative, and discussed the dispute from the point of view of the fish.
If we apply the Benchley principle and ignore the views of both the investment community, and of the commercial banks, and look at this debate solely from the point of view of the public interest, a lot of things come into focus. What great public principles should govern our society insofar as financial markets are concerned? How will the public be best served?
Surely we can all agree on broad public policy objectives. One way to state these might be as follows: our national policy should be to promote maximum efficiency in the capital markets; to enable and encourage financial institutions to meet the rapidly changing demands of our economy; to foster public trust in intermediating institutions; to encourage widespread direct public ownership of American industry; to promote fair competition; to limit the economic and political power of any one sector, and to protect investors and depositors against improper practices.
The reason I say that we can agree on these goals is because they were in fact drafted by the Securities Industry Association and I know of no disagreement with these goals among commercial bankers. Having stated these points with great clarity, the SIA study then goes on to make some novel suggestions on how to achieve the agreed-upon public policy goals. The suggestions stand logic on its head. In order to maximize the felt need to assist capital formation, the number of institutions permitted to assist in the raising of capital should be curtailed. Competition is to be preserved and enhanced by eliminating possible competitors. Financial institutions are to be made more responsive to rapidly changing demands, by trying to prevent those financial institutions which are banks from responding to these changes. You just can't get there from here. The public policy objectives we all agree on would in fact be subverted by the very means they suggest be used to attain them.
The arguments advanced by the SIA rest ultimately on the premise that what Messrs. Glass and Steagall tried to do was to erect a wall to separate bank activities from the activities of the securities industry, and to keep each out of what is now perceived by some in the securities industry to be the other's market. This revisionist history must have Carter Glass and Henry Steagall revolving in their graves. The distinguished Senator Glass of Virginia, a one-time Secretary of the Treasury and the Father of the Federal Reserve Act, was a fiscal conservative and believer in competition. He wrote, for example: "There is entirely too much running to Washington by business, by agriculture and by labor. That way lies paternalism, with socialism just beyond.
"There are certain things necessary to be done, of course, which the people in their private capacities lack the power to do, and in such cases the public must operate through the government ... and it is the proper function of government to prevent the erection of any unnatural barriers to the equality of opportunity."
Henry Steagall from Alabama, who combined his talents with Glass to pass the bill which bears their names, was a member of the farm bloc. The Act which bears their names is not now and never was intended to separate or insulate these industries from competition. Some of the restrictions it placed on banks indeed protected others from competition, but this result was an incidental side-effect of an act designed primarily to protect bank depositors and stimulate business.
The Banking Act of 1933 was passed in the wake of the failure of thousands of banks and the revelation of shocking and criminal conflicts of interest. It followed widespread losses by depositors, who are not supposed to be risk-takers, and by shareholders, who are supposed to take risks, but not the risk of dishonest management.
The purpose of the Banking Act of 1933, commonly called the Glass-Steagall Act, was to restore the solvency and strength of banks and the confidence of depositors, and had nothing whatsoever to do with the division of markets. At the risk of shocking you with the facts, let me read you its descriptive title: "An Act to provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent undue diversion of funds into speculative operations, and for other purposes." You will note that the purposes of the Act do not include limiting competition, or protecting the securities industry; but concern keeping bank assets safe from speculation.
Let's look at how this legislation went about accomplishing this purpose. It created the Federal Deposit Insurance Corporation. It banned payment of interest on demand deposits with the apparent purpose of using the money thus saved to pay the insurance premiums of the FDIC. It placed limitations on loans to inside executives or affiliated companies. It increased reporting and examination requirements. It prohibited risking depositors' funds in underwriting corporate securities and in related activities. It dealt with other matters affecting banks--all with the objective of protecting their solvency and their depositors' and shareholders' funds.
The Act actually deals with securities activities in only four of its 34 sections, and then refers to them only in the context of the total integrated package designed to protect the domestic depositors of banks. The broker never entered this particular legislative picture. His turn came when in a different framework the Congress enacted the federal securities laws in 1933 and in 1934.
Since the premise underlying the Glass-Steagall Act is not to protect one sector of the financial industry against competition from another, but rather to protect depositors and shareholders of banks, the criterion for judging activities is not in the words of Justice Harlan, in light of "any Congressional concern for the interests of the financial industry in freedom from competition," but rather whether they risk the depositors' deposits, or illegally jeopardize the shareholders' equity.
Nothing that the banks are now doing puts their depositors' money at undue risk. Nothing they are doing in any way could be considered an unsound practice.
Let's take them one by one. First, what about banks acting as retail public brokers? A broker, of course, simply buys securities for and upon the order of a customer. The customer pays with his own money, assumes all the risk and expense, and enjoys whatever benefit or suffers any loss which may accrue. A bank effecting unsolicited transactions as a broker risks neither its depositors' money nor its shareholders' equity. So there would seem to be no inhibition in Glass-Steagall against banks being brokers. Indeed, Section 16 specifically says that a national bank may engage in "purchasing ... securities and stock without recourse solely upon the order, and for the account of customers ..." This is about as clear as you can get, and indeed is about the same as the definition of a non-bank "broker" as it appears in the Securities Exchange Act of 1934.
As a practical matter, rarely has so much noise been made about so little substance. Although a few banks have expressed interest in brokerage, there is surely no overwhelming groundswell among banks to become brokers. The reasons are not legal, but practical. Just this month the S.E.C. published a description of the business enjoyed by banks in those areas where they can and do engage in brokerage. The business has not exactly been a bonanza.
Dividend reinvestment services, where banks have the advantage of generally charging less than brokers, is the most lucrative of banks' brokerage services. This business accounted for 3 one-thousandths of 1 percent of banks' revenues.
In employee stock purchase plans, another brokerage service of banking, all of the 255 banks in the survey put together administer fewer accounts than Merrill Lynch alone. Our competitive muscle is unfortunately weak. All in all, while the urge of banks to become brokers is not irresistible, neither is it illegal.
Another security activity in this discussion involves government revenue bonds. The Act, as you know, expressly permitted some activities, expressly forbade others, and neglected to mention others yet unborn. It specified that its restrictions on underwriting "shall not apply to obligations of the United States, or general obligations of any State or of any political subdivision thereof ... " but it didn't mention revenue bonds, which is not surprising, because they hadn't been invented yet. This was the same reason that the Post Office Act of 1794 did not mention airmail. Let's examine this question from the point of view of risk to depositors, because bonds are not risk-free. We have to presume that Congress considered the bonds of federal, state and municipal governments of such low risk as to pose no substantial threat to depositors--a presumption being sorely tested today. Following this train of logic, it seems reasonable to expect that if government revenue bonds had been invented when the Act was passed, they might well have fallen into the same category as state and municipal general obligation bonds, and thus be among the permissible activities. Certainly the risk is not all that different, and therefore this would be a reasonable supposition.
From the point of view of the public interest, the question might best be summed up in these words: "The availability of bank underwriting has enabled municipalities to secure the most favorable rate on their general obligation borrowing ...(but) by excluding commercial banks from revenue bond underwriting, the Glass-Steagall Act stifles competition in this market and causes municipalities to pay a higher rate of interest on their revenue bond issues." When Senator Proxmire wrote these words, he went on to reinforce Justice Harlan's focus by saying, "Congress must give primary consideration to the public benefits resulting from increased competition."
Another issue which has been raised concerns financial advisory services, particularly those relating to private placements. Let's examine this banking service from the point of view of the protection of our depositors.
A customer comes into your bank and says to you, I need $10 million to expand my business. You look over his plans and say, what you really need is a $2 million line of credit and an $8 million 25-year loan. You have just entered the field of financial advisory services. In short, you just did what bankers have always done. What happens next? Since commercial banks as a matter of policy don't make 25-year loans, you suggest he might try some insurance companies, and he says, how do you do that? You say, well, you should have five years of financial statements, cash-flow projections, a written description of your business and of your competition, and a set of suggested terms. Then, you ought to shop around among a few insurance companies for the best deal. Your customer says he is good at manufacturing widgets, but all this sounds pretty complicated, can you help me? And you say sure, we can help you get the material together, and maybe even put you in touch with some insurance companies and help you explain your needs to them. Bankers have been doing this for years--it is part of our business. Since you have spent a lot of man-hours and have performed a real service, you charge a fee. The completed process has now been given a name: private placement. Despite the name, it is just old wine in new bottles.
The SIA contends that this activity is forbidden by the Glass-Steagall Act, which raises an interesting question. If it is illegal, at what point did it become illegal? When you charged a fee? When you talked to the insurance companies to introduce the corporation? When you suggested to the corporation where to look for the money? Or did you take your first step into crime when you gave your customer some advice?
Financial advisory services, including private placements, are not an issue that involves only relatively few large banks; it involves all banks, and stands close to the core of banking. Carter Glass and Henry Steagall would have asked none of the questions I have just posed, but rather their question would have been, at what point in this procedure did you risk any of your depositors' money? The answer, obviously, is at no point. None of your depositors' money was ever at risk. And at no point do you transgress the spirit of Glass-Steagall.
The SIA has built an elaborate case against banks on the sandy premise that Glass-Steagall is a shield against competition. Even without respect to this fundamental flaw, however, their arguments place nearly all their weight on one element: speculation. The speculation runs that if banks were permitted certain freedoms, they might use them unfairly, they might take over the world, they might cause hives. Speculation aside, the fact is that the risk of conflict of interest and even dishonesty has always been and will always be with us. By "us", I mean all human beings including those who work for the securities industry, the government, banks, farmers, and blackjack dealers.
The protection against this risk is two-fold. One is that most people in all these fields still cling to honesty, ethics, and principles. The other protection lies in our ability to pass laws and hire policemen to control those who are tempted to rise above their principles. Indeed, until the revisionist historians got their hands on it, that's exactly what the Glass Steagall Act was designed to do.
It's also a fact, and a fact I'm surprised to find myself arguing to the very custodians of capitalism, that the United States has a tradition of free enterprise and competition that is not only historic, but also widely considered to be related to our national strength and well being.
The concept is firmly rooted both in tradition and in law. We see it in the Sherman Act, the Clayton Act, the Federal Trade Commission Act, the Robinson-Patman Act, in hosts of state laws all reaffirming the principle of competition. We see it in the fact that today the Interstate Commerce Commission and Civil Aeronautics Board are on the endangered species list. We see it confirmed in the strength of our economic performance domestically and in the world.
The American principle, which has been tested and proved, is that competition most efficiently produces the best ultimate well-being for the greatest number of people and best meets their needs.
There is no need to belabor the needs of today. The worry about a so-called capital shortage remains. People wonder whether we have enough to do the things we want to do--or even just those we need to do. The extent of the capital problem was gauged a couple of years ago by the New York Stock Exchange, which estimated that by 1985 the United States would experience a capital shortage of $650 billion. I personally do not believe that's true, but be that as it may, no doubt exists that many businesses and governments will have to raise a great deal of capital.
Today the problem of capital expresses itself in one of its most cruel shapes: unemployment. Jobs are needed, jobs are demanded, and jobs mean production, which requires investment, and capital formation. The relation between capital formation and jobs is clear, so you would normally expect banks to be exhorted to expand the scope of their capital raising functions, instead of being pressured by competitors to contract their present efforts. The national interest clearly demands it.
Insofar as Glass Steagall is a law which may incidentally result in a limited isolation of markets from competition, it flies in the fact of today's public mandate; but insofar as it's a law to protect the banking system, its depositors and shareholders, it might have been passed yesterday.
We do not seek to expand our scope beyond that defined by Glass-Steagall. We believe if the Act is administered as it was intended it can promote both efficiency and our most advanced aspirations.