McFadden Act of 1927
The McFadden Act of 1927 was a significant piece of legislation that restricted national banks from opening branch offices across state lines, thereby limiting their operations to the states where they were chartered. Named after Representative Louis Thomas McFadden, the act aimed to address concerns about competition from larger out-of-state banks, as well as the regulatory landscape established by the National Banking Act of 1864, which did not explicitly permit branching. While the act allowed national banks to make real estate loans with terms of up to five years and engage in buying and selling investment securities, its primary focus was on maintaining state boundaries in banking operations.
This prohibition on interstate branching persisted for nearly seventy years, raising discussions about its implications for the banking industry, particularly during the Great Depression, when many attributed the banking collapse to these restrictions. In contrast, Canada’s banking system, which allowed for nationwide branching, reportedly experienced no bank failures during that period. Ultimately, the McFadden Act was designed to protect smaller banks, but it also led to the formation of bank holding companies as a workaround for the interstate branching ban. The act was eventually repealed in 1994, reflecting a significant shift in banking policy and regulatory practices in the United States.
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Subject Terms
McFadden Act of 1927
The Law: Federal law prohibiting national banks from branching across state lines
Date: Enacted on February 25, 1927
The McFadden Act of 1927 prohibited national banks from opening branch offices across state lines, instead confining their operations to the states where they were headquartered. The act was named after Pennsylvania representative Louis Thomas McFadden, a Republican who also served as the chair of the House Committee on Banking and Currency.
The McFadden Act permitted national banks (that is, banks chartered by the federal government) to make real estate loans with terms of up to five years, and it also codified the authority of national banks to buy and sell investment securities as defined by the Comptroller of the Currency. Its major provision, however, involved prohibiting national banks from branching across state lines, a ban that lasted until 1994. Prior to the passage of the McFadden Act, some type of interstate branching by commercial banks was allowed in eighteen states. Smaller banks were fearful of the competitive advantage this provided to larger, out-of-state banks. National banks were also dissatisfied with the status quo, particularly since the National Banking Act of 1864, which created the national bank system, made no mention of branching, implying that branching was not allowed at all. The McFadden Act was introduced to address all of these concerns.
Specifically, the act forbade national banks from operating outside of their home state, yet they could branch within their home state in accordance with state branching regulations. Earlier in the decade, McFadden had introduced legislation that permitted branching by national banks, but the concept was opposed by state banks that did not welcome the competition and by the Federal Reserve Board, which wanted to prohibit both national and state banks from branching. In 1923 and 1924, Comptroller of the Currency Henry May Dawes, long opposed to branching in general, collaborated with a committee of national bankers to support removing branching restrictions for national banks. Their recommendations, along with the need for some kind of reform following extensive bank failures in 1926, proved to be the impetus for McFadden’s bill. It passed both houses of Congress and was signed into law by President Calvin Coolidge in February of 1927.
Impact
While the branching restrictions of the McFadden Act lasted for nearly seventy years, many economists and historians blame these provisions for the harshness of the banking collapse during the Great Depression, pointing to Canada’s system—which allowed nationwide branching and had no bank failures during that time—to prove their point. Later, large banks would get around the interstate branching ban by forming bank holding companies that controlled separate banks in more than one state. Despite an initial explosion in the number of national banks, the total number of banks dropped from roughly thirty thousand in 1920 to around eleven thousand in 1995, one year after the McFadden Act ended.
Bibliography
Burton, Maureen, and Bruce Brown. The Financial System and the Economy: Principles of Money and Banking. 5th ed. Armonk, N.Y.: M. E. Sharpe, 2009.
Markham, Jerry W. From J. P. Morgan to the Institutional Investor. Vol. 2 in A Financial History of the United States. Armonk, N.Y.: M. E. Sharpe, 2002.