4

Country Bank Failures

The Office of the Indiana Bankers Association (IBA) was located in Indianapolis, and during my two years with the association I lived in Indianapolis although much of my time was of necessity spent in traveling throughout the state. I attended county and regional meetings of the members of the association and called on both members and nonmembers to stimulate their interest in the program of the association.¹

I had left the University of Wisconsin with the understanding that I would return after one or two years with the IBA. Dr. Kiekhofer agreed with me that the experience in the IBA would give me an excellent opportunity to gather material for my dissertation, which was to be concerned with country bank management and prevention of bank failure. It was appropriate, therefore, that I keep him advised of my activities in Indianapolis.

On March 13, 1929, I wrote in a letter to him:

My work has been very absorbing. Our Association has undertaken a campaign of self-improvement for the banks in the state of Indiana that is unique in the history of cooperative bank endeavor. Our Better-Banking Practices platform includes fifteen planks such as universal service charges, establishment of a credit bureau for the dissemination of credit information on duplicate borrowers in every county, secondary reserves, limitation of amount of money to be loaned to any one borrower, etc. It is being pushed by three key men in every county, with whom I attempt to keep in touch in order to keep them working and informed. I speak on different phases of this program of Better Banking as best suits the occasion, before county and group meetings of our membership frequently. At certain periods I speak several times per week.

Our work is carried on in nine divisions as follows: Better Banking Practices, Education, Banker-Farmer Cooperation, Protection, Taxation, Legislation, County Organization, Publications, Research, and Public Relations. The last two it may be seen are related to all of the others, so my work covers all of the fields.

In connection with Taxation I have had to cover in the past few months more material than I knew existed. We are not only involved in a tax fight ourselves but are attempting as well to give sympathetic support to various proposals now before the legislature to help clarify our antiquated present system of taxation on all forms of property. Those that have been advanced are a preferential rate on intangibles, a state income tax, and a tax on luxuries. I have spent the last six weeks at our present session of the Indiana legislature, pleading with legislators, drafting amendments and otherwise working for some progressive bank legislation. As a consequence, I am somewhat cynical about the fate of any meritorious measures. I do not mean to imply that we have lost our fight yet, but the path of the “righteous” is indeed thorny when there is a lobby full of politicians present who individually are indebted to their banks in amounts in excess of those permitted in one of our bills. A great deal of fundamental study went into our pending bank bills on cash reserves, loaning policies, methods of examination and problems of chartering. It seemed more like an advanced course in Banking to me, however, rather than a task.

Recently our educational committee has started a survey of all texts and courses of study used in the schools of the state from Primary thru the Universities in order to ascertain just what our educational activity should be. Luckily I have been given the supervision of the survey.

During the months that have passed I have also had the opportunity of visiting hundreds of banks and bankers of all varieties. All of this has turned out to be just the sort of background that I had hoped the job would afford. I have not had quite the time allowed me for thesis work that I had expected but I made some progress nevertheless. I spend every weekend in Bloomington and occasionally stay all week.

Fortunately for me the Indianapolis Chapter of the American Institute of Banking was short of teachers this fall and asked me to teach their class in Banking Fundamentals and their class in Advanced or Standard Banking. I meet each class ninety minutes each week. The students are all bank clerks or junior bank officers.

Interesting and satisfying tho my work is, it has not diminished my ambition to teach. I think with great regularity of the pleasant days of last winter. Never a Thursday noon goes by but that I am reminded of the Ia staff conference and wish that I could be with the group to receive its counsel and fellowship. I certainly am looking forward to the day when I can come back if you will let me.

In the spring of 1930, my second year with the IBA, I was invited by U. G. Weatherly, then head of Indiana University’s Department of Economics and Sociology, to come to Bloomington for Sunday noon dinner. It was customary in those days to use the Sunday noon dinner for entertaining. I remember the visit vividly. J. E. Moffat and his wife also were guests, Dr. Moffat then being the senior professor in the department next to Dr. Weatherly. The Moffats were good friends of mine, with whom I had often shared social occasions during both my undergraduate and my graduate days.

Mrs. Weatherly had an excellent dinner, a fine roast, and it was all beautifully served in the dining room with the best linen and china by help who had been brought in for that occasion. After dinner Dr. Weatherly asked the ladies if we might be excused, and Dr. Weatherly, Dr. Moffat, and I went into Dr. Weatherly’s study, where he began the laborious task of filling his pipe, a task that went on sporadically during the whole of any conference with him. He cleared his throat a time or two and then said that he and Dr. Moffat had been discussing their staff situation for the next fall and they had determined that there would probably be an instructorship open. He asked if I would be interested in accepting the position if the opening occurred. I was surprised, but after swallowing a couple of times I replied that I would be honored to accept. I did point out that I was engaged in some interesting research with the IBA at that particular time, and I raised the question of my possibly continuing some research for the association in addition to my teaching duties, thus maintaining a practical connection with the financial field. (This later proved to require my driving back and forth to Indianapolis two or three times a week.) They expressed approval of the idea and then said we would consider the matter settled and I would in due course receive a formal letter. There was no discussion of salary. In fact, I did not find out what my salary was to be until I received either the formal letter some weeks later or my first salary check, I do not recall which. I drove back to Indianapolis and then on Monday, enroute to Lafayette on my regular rounds, stopped to see Father and Mother to discuss the matter with them. Afterward I wrote Dr. Weatherly: “Monday I discussed with my Mother and Father the matter of accepting the position in your department in case the opening occurs as expected. They were enthusiastic over the idea. Consequently I now confirm the favorable decision I gave you Sunday.” I was greatly flattered by the offer and really tremendously excited by it. I realized from Dr. Weatherly’s reaction when I told him my present salary that I would be receiving a salary perhaps less than half my current rate, but, so long as I had enough money to live on, that salary reduction seemed a small matter compared to the prospect of being a member of the faculty and having the opportunity to teach full time. The very thought of being on the faculty was exhilarating to me.

When fall came I plunged into my teaching with great enthusiasm. I taught four sections, which kept me busy with class preparations and paper grading in addition to meeting the classes. Dr. Weatherly had undergone surgery in August at Johns Hopkins Hospital and was on leave during my first semester. After his surgery he spent time recuperating in Washington, D.C., and Atlantic City. In a letter dated October 15, 1930, I wrote to him expressing how happy I was and how much fun it was to be teaching:

I am delighted with my work. I do not believe that I have ever been happier in my life, and am looking forward to the day when increasing general culture and mastery of my own field will make it possible for me to make my class appearances as satisfactory as I wish them to be. When that day arrives I can think of no happier work in the world than teaching. . . .

I have so many reactions that I might write you that I hardly know where to begin. One of the things that has been keeping me busy has been trying to convince charming and solicitous faculty wives that I do not really play bridge. I suppose that they never will believe me and will always think that I am just trying to avoid their parties. For a few days I even contemplated learning to play, but since cards bore me terribly I know that I never shall. The round of faculty smokers, teas, and receptions, etc., that seem to accompany the opening of school, was another drain on my time that I did not anticipate. I suppose faculty members who have their lectures all prepared and rarely change them find all that sort of thing necessary to fill their days; not so with a young struggling instructor like myself.

On a more serious side, I wrote:

I had one severe jolt, however, a few days ago. I suggested to my classes in Political Economy that the work of the course should cause some change in their thinking. That is, if they began the course with strong socialistic or extremely liberal views, by the end of the two semesters they should be able to at least comprehend some of the conservative viewpoint; and, if they began the course with decidedly conservative and reactionary viewpoints, they should by the end of the course be able to appreciate some of the merit of the liberal point of view. I suggested that it seemed to me that in this course the reading of the liberal magazines of opinion would be proper and helpful in influencing this change. I suggested that they read, if they had time, such magazines as the New Republic, the Nation, the Outlook and Independent, Mercury, etc. Quite naively I suggested that all of these magazines would be available at the Varsity Pharmacy bookstand or at any other bookstand catering to an intelligent class of people. The same evening I walked by the Varsity newsstand to buy for myself a copy of the New Republic and was amazed to learn that they had to discontinue carrying it because they never sold any of the copies up until the past few months persistently carried. They informed me, however, that they quite regularly sold fifty copies of the American, enormous copies of Liberty, True Romances, etc. The thing so aroused me that I resolved that I would require every member of my classes to subscribe to the New Republic and in that method distribute two hundred copies over the campus. Fortunately, I had a pleasant night’s rest and got up the next morning realizing that after all I was at Indiana and so they did not have to subscribe.

On the whole I had a happy first year in teaching. My major effort, of course, was directed to collecting and organizing the material for my classes and carrying out my duties such as counseling students and participating in committee work, but I did make regular trips to Indianapolis and continued to carry on certain work for the IBA, including statistical studies, which were needed. This served as well to satisfy the research and public service contribution expected of every member of the faculty.

The unsettled banking conditions of the period made my IBA work increasingly important and justified the request I had made of Dr. Weatherly and Dr. Moffat that I be allowed to keep close personal contact with the IBA and the banking field. When I made the request, little did I realize that events would lead to far greater research responsibilities than I had ever imagined. In fact, the responsibilities became so heavy and important that they occupied as much as or more of my time than teaching did. To understand how this came about, it is necessary to know what was happening to the economic life of the state in general and to banking in particular. In the popular mind the stock market crash of 1929 and the Bank Holiday declared by President Roosevelt on March 6, 1933, were the focal points of the Great Depression. For the country banker in Indiana, however, the Great Depression had begun early in the decade the 1920s. The cause was to be found in the prices of agricultural products during World War I and immediately following.

A worldwide shortage of food caused a great inflation of the prices of farm products in the United States. There was a shortage of manpower also. Many of the young men were away in the army, yet factories needed more workers. Even prior to the war, Indiana was in the throes of rapid industrialization that in itself drained men from the farms. As a result there was pressure to mechanize farming, and the expense of the machinery increased the need for farm credit. Mechanization in turn called for larger farm units, that is, for consolidation of farms, a phenomenon that has been progressing ever since. Between 1916 and 1920 the average price of farmland rose 50 percent. The result was a heavy demand on our Indiana banks, especially the country banks, for loans to finance the purchase of farmland and to pay for the new machinery and equipment. It was a boom period in Indiana and many new banks were chartered, sometimes without sufficient investigation of their financial strength and of the communities’ need for the institutions. (It is doubtful, for example, that two banks were needed in towns with a population of five hundred or less such as Whitestown.)

At the end of the war farm prices collapsed, and many farmers found themselves loaded with an impossible debt. By May, 1920, wheat had risen to $2.16 a bushel from a prewar price of 90¢, and corn from about 65¢ to $1.52. The next year corn dropped to 52¢ a bushel, and wheat to $1.03. Naturally, land prices began to drift downward, returning in 1924 to their 1916 level. But the drift continued until 1934-35, when the index for farmland prices reached a low of 50 percent of the 1916 level.

Few rural banks were untouched by the value erosion and, starting with the recession of 1921 and continuing through the decade, the typical country bank in Indiana was highly vulnerable to a run engendered by loss of public confidence. This situation existed prior to the great nationwide collapse of the financial system and to Roosevelt’s famous declaration of the Bank Holiday. Contrary to popular belief, between 1921 and 1929 more banks failed or folded (5,712) than in the three climactic years following (5,096).

The savings and loan associations in rural states suffered a similar erosion of their assets. They were not, however, as vulnerable to runs because legally they did not accept demand deposits. Instead they sold shares without guaranteeing immediate payout on demand (although they sometimes pretended otherwise). As a result shareholders in these associations frequently found themselves unable to draw out their money and had to await their turn until cash became available. That process did not, of course, allow runs that could close the institutions, but it was no less calamitous for the individual.

It is now difficult to recapture the economic distress of this era in Indiana. From 1925 to June 30, 1932, 429 state-chartered and supervised banks out of an average of 760 in operation closed. Of these, 182 were sold, merged, or reopened after reorganization and the infusion of new capital. The remaining 247 had to be liquidated, and they held 25.2 percent of the average resources of all state-supervised banks during the period. Frequently these institutions could pay only a small percentage on the dollar to their depositors. Moreover, in those days shareholders were subject to double liability. Thus shareholders invariably both lost their investment in the bank and became legally liable for an amount equal to the par value of their stock. Double liability for shareholders was once thought to be an essential safeguard for depositors, but in practice it proved to be inadequate, and it typically helped to bankrupt, hence to destroy, the influence and service of the financial leadership of the community.

Out of the chaos arose a public demand for better and more objective criteria in the chartering of financial institutions and for close supervision and regulation of their operation as a protection for depositors and shareholders. The IBA and the Indiana Savings and Loan League, each with different motives, took the initiative of asking the 1931 General Assembly to pass a concurrent resolution that called for the creation of the Study Commission for Indiana Financial Institutions.

The resolution was passed, and in the spring of 1931 I was asked by Governor Harry Leslie to become secretary and research director of the Study Commission. The commission was to study bank and building and loan failures in Indiana and make recommendations for remedial legislation. The large number of failures then occurring made the subject one of urgent public concern. The mandate of the General Assembly authorized the Study Commission to investigate the organization, operation, activities, and control of financial institutions in Indiana, and also to look into the laws of other states and countries concerning similar corporations to ascertain how well their laws operated. This was to be done with a view to standardizing and improving the body of Indiana laws governing financial functions within the state.

Governor Leslie appointed the members of the Study Commission. The effectiveness of the commission depended upon the quality of its members, and fortunately the governor selected a distinguished group of citizens who had a statewide reputation for integrity and competence and who had served in many civic leadership posts. The commission was chaired by Walter S. Greenough of Indianapolis, banker and former newspaperman. A very talented man with a keen sense of civic responsibility, Greenough was the catalyst and entrepreneur for the study, and without his initiative and leadership I doubt that such a thorough and far-reaching effort would have been made. The vice chairman was Willis S. Ellis of Anderson, a savings and loan executive. The treasurer, Curtis H. Rottger, was then a retired head of Indiana Bell Telephone Company. Other members were Paul N. Bogart, a banker of Terre Haute; Franklin M. Boone, savings and loan executive of South Bend; Myron H. Gray of Muncie, an attorney specializing in bank matters; Charles Kettleborough, the director of the Indiana Legislative Reference Bureau; William G. Irwin, industrialist and banker of Columbus; Hugo Melchior, banker of Jasper; William F. Morris, banker of Pendleton; and George Weymouth, an editor of the Indiana Farmers Guide, one of the leading farm journals of the day, published in Huntington.

As I have stated previously, during the course of my work as field secretary with the IBA, I had visited each of the nearly 1,100 banks in the state, both state-chartered and federally-chartered banks being members of the IBA. Therefore, I had a speaking acquaintance with all the bankers in the state, had frequently also met with the boards of directors, and had some understanding of the strength of the leadership of these institutions and their role in the community. Moreover, in doing the work for my master’s degree, I had studied country bank earnings and had published some articles, which had received favorable attention, suggesting certain steps to increase bank earnings—a move I held to be essential if the banks were to remain solvent and able to serve their communities. The bankers, apparently thinking my background appropriate, sponsored my appointment as secretary and research director of the commission.

The IBA and the Indiana Savings and Loan League, despite the fact that they were hard-pressed then, financed the Study Commission. Indiana University agreed to provide working space in the basement of its library, and the research was performed by my small staff under the direction of the Study Commission and with the participation of some of its members. In 1931 our enterprise was unusual enough to attract considerable campus attention. In an earlier day Carl H. Eigenmann and David Starr Jordan had been able to secure some outside support for their work in biology, and Lionel D. Edie was well known as an economic and financial consultant, but on a private basis. So far as I can discover, our little research unit in the basement of the old library building was perhaps one of the earliest, if not the earliest, example of sponsored or contract research at Indiana University in the social science field. Today, sponsored and contract research projects are commonplace, and a substantial portion of the university’s resources and manpower is devoted to that type of research activity.

Our staff, which conducted all the research into the history of the development of financial institutions in the state, their numbers, their regulation, their causes of failure, and possible remedies, consisted, besides myself, of three part-time students and a couple of part-time secretaries. I was fortunate indeed in the choice of the three young men who carried the principal load of the research: Paul DeVault, Lyman D. Eaton, and Charles M. Cooley.

DeVault was at that time a law student and member of Phi Beta Kappa engaged in completing his A.B. and J.D. degrees. He made a comparative study of the banking statutes of the other states and showed a remarkable aptitude for that kind of work. Lyman Eaton was an accounting and statistics major, working toward a master’s degree. He was an industrious and productive member of the staff. Charles Cooley was a candidate for a master’s degree in economics. He had a skeptical, analytical mind that caused him to ask the right questions to save us from falling into obvious traps. Our secretaries were Elizabeth Chapman (Parrish), an undergraduate student, and Evelyn McFadden (Cummins), who had just completed her A.B. degree and who was working in the history department’s placement office. They were highly competent, both as secretaries and as researchers.

We made the required investigation and, based on our findings, we developed reform proposals for consideration by the members of the Study Commission. The commission met frequently, sometimes accepting and occasionally modifying our recommendations. The chairman and several members of the commission were helpful participants in our work, assisting with criticisms and suggestions. Throughout we had the wise counsel of Donald S. Morris, Indianapolis banker and lawyer. That small, part-time staff in the course of an eighteen-month period turned out a 174-page report of closely printed text and tables. Now, when I read it, I am awed that so much could have been done with so small a staff and I am astonished by the quality of it. Providence and Walter Greenough had certainly taken us by the hand.

In addition to our general historical and comparative studies, we made a detailed study of the causes of failures in the closed banks and savings and loan associations. Taking into consideration the impact of the desperate rural economic conditions, the members of the research staff and the members of the Study Commission nevertheless came to the unanimous conclusion that these failures could in large measure be eliminated by a more adequate system of state supervision and control. (For the reader who may become entangled in the titles of entities proposed by the Study Commission, I should explain that the old state banking department that had supervised banks and similar institutions in Indiana from 1920 on was to be reorganized as the Indiana Department of Financial Institutions and was to have a lay governing body entitled the Commission for Financial Institutions.) We believed that such a system could be achieved by removing chartering powers and state supervision from partisan political control; giving the chief executive of the supervisory division and the personnel of a proposed department of financial institutions greater job security in order to attract capable persons to the field; enlarging the authority of that department of financial institutions in the examination and guidance of financial institutions and in the granting of new charters; placing responsibility for liquidation of failed financial institutions in the hands of the supervisory department instead of court-appointed receivers; and making the banking industry aware of the need for it to police itself, subject to the direction of the state.

We recommended that the two principal trade associations, representing banks and building and loans, should submit to the governor a list of persons for appointment to a commission for financial institutions, thereby assuming some responsibility for adequate operation of the new department of financial institutions. Another factor involved was the limited number of examiners in the 1920s; a state statute passed in 1919 had fixed the number of bank examiners at ten and the number of building and loan examiners at three. Although the number of state-chartered banks had grown rapidly during the years following and although there were more than four hundred building and loan associations by 1930, the number of examiners for each type of institution had remained the same. The Savings and Loan League had protested this situation for years because of its patent inadequacy.

At the time of our study 350 institutions were under the jurisdiction of the small-loan division of the old banking department, and that division was limited to one examiner with the entire state to cover. For the most part it was impossible for him to do more than simply look at whatever reports were submitted. Salaries were hopelessly inadequate, having been fixed long before by statute. As a workable corrective we recommended that banks and other financial institutions pay for the whole cost of supervision, thereby making the revenues susceptible to the changing needs of the new department of financial institutions.

We found no evidence to indicate that branching beyond county limits would in itself prevent bank failures; hence an extension was not necessary for future stability. Our report therefore recommended the continuation of the statute passed two years before by the General Assembly permitting countywide branch banking and suggested that, if this provision were continued for the time being, it would allow banks to gain the experience necessary to manage a more extended branch-banking structure later. We did not deal with the need for wider-spread systems to serve the economic needs of the state. In fact, neither statewide branch banking nor even regional branch banking was then considered necessary for the economic development of the state.

Now, more than forty years later, the situation has changed radically. As the economy has grown, the need for larger banking units to serve the state is apparent. In my judgment it would be desirable now to allow branch banking beyond county lines, either regionally or statewide. It is unfortunate that the provisions of the reform statute of 1933 should have achieved such an acceptance that our findings are now quoted as gospel long after the conditions we were correcting have changed.

Although insurance of deposits was then a very lively issue, we recommended against a state system of deposit insurance because of the dismal record that had been made in state or smaller-scale trials elsewhere. We did not address ourselves to a national insurance-of-deposits system, except to note that such a system without strict supervision could stimulate poor practices. Little did we foresee the great success of the Federal Deposit Insurance Corporation (FDIC); however, it succeeded only because it met the problems we had anticipated. Fortunately, we did recommend giving to the proposed state department of financial institutions the authority to allow banks under its jurisdiction to participate in any future national plan that the federal government might launch if the department felt that participation served the best interests of the public and the institutions.

With the study largely completed, a mountain of policy decisions by the Study Commission had been amassed and numerous parameters developed for a new financial institutions code. The Study Commission chairman and I early had agreed that the commission’s recommendations must be put into legislative form for introduction as a bill in the 1933 General Assembly or the work would perish. We assembled a drafting team of three: two members of the commission, Myron Gray, the commission’s lawyer, and Charles Kettleborough, widely recognized as a master draftsman; and Leo M. Gardner, a brilliant young lawyer recently graduated from the University of Illinois Law School.

The drafting team had individual assignments: Kettleborough’s was the structure of the proposed department of financial institutions in consonance with existing state statutes; Gardner’s was the sections governing banks; and Gray’s was the sections for building and loans. All other parts of the bill as ultimately presented to the governor and to the leaders of the 1933 General Assembly were essentially the work of these draftsmen as a team. All draftsmen and I worked on the language vesting in the new department the power to examine, supervise, and discipline financial institutions within departmental jurisdiction. I also had the responsibility for monitoring all the provisions to see that they were in accordance with the recommendations of the Study Commission.

During the fall Walter Greenough led a campaign to present our recommendations to the public in the hope that the General Assembly in its next session might be persuaded to enact the financial institutions code. I was active with Greenough in making presentations, not only to financial and legislative leaders, but also to the officers of the Farm Bureau, the Indiana Manufacturers Association, the State Chamber of Commerce, labor organizations, and representatives of the entire economic spectrum of Hoosier life. Walter Greenough was a genius at that type of interpretation, and I learned from him a great deal about the techniques of presenting complicated material to a wide audience and the necessity of preparing thoroughly, maintaining complete integrity, and touching all bases. Although we won many converts in other fields, quite a few members of the banking and building and loan industry were skeptical or opposed. I have no doubt that there were those who felt that the members of the Study Commission and I had betrayed them. One of the most important of our specific reforms called for the transfer of the duties of the old banking department to the new department of financial institutions with flexible rule-making powers for the examination and control of banks, trust companies, savings and loan associations, small loan companies, and other related financial entities chartered by the state. We also recommended a much more conservative policy for chartering banks, departmental control of all liquidations, general strengthening of the supervisory statutes, readily understandable published statements of financial conditions, more adequate requirements for invested capital and surplus, and many other, similar steps designed to protect depositors, shareholders, and the public. In general the same kinds of recommendations were made concerning savings and loan associations.

That was a large order for the financial institutions to accept, and we had not won their universal support before the opening of the General Assembly in January, 1933. However, we were helped by an unexpected and very dramatic national development, namely, the acceleration of the runs on financial institutions by depositors during January and February, prior to President Roosevelt’s order declaring a Bank Holiday as of March 6, 1933. From the day of the opening session onward, public pressure mounted steadily for the General Assembly to take action.

The code we were sponsoring made provision for the governance of the new department of financial institutions by a bipartisan commission that would have flexible rule-making power having the force and effect of law. This was the period when it began to be popular to give governmental agencies such power. Faced with the unexpected and complicated problems of reopening the banks, which could not be handled under existing statutes, state leaders, too, concluded that it would be necessary to have flexible rule-making authority in the state machinery dealing with banks. Fortunately, we had exactly what was needed.

Paul V. McNutt had been elected governor of Indiana in the Roosevelt landslide of November, 1932, and he had carried with him heavy majorities in both houses of the General Assembly. Because he had an effective organization he was able to get almost anything passed that he wished. His legislative team, having found in the rule-making power of the proposed commission a solution to the state’s emergency needs, adopted our code as its own. Leo Gardner was elected a member of the Indiana House of Representatives in 1932, and, with approval of the governor, was appointed chairman of the House Banking Committee by Speaker Crawford, hence was in a strategic position to push the passage of the bill.

But even with the strength of the governor’s office behind it, there were difficulties. I was helping Walter Greenough and the Study Commission members on an informal basis at that time, going up to the State House each day after I had met my classes in Bloomington. We had some dramatic moments in the Assembly. I remember one in particular involving a private banker from northern Indiana who was a man of great political power and skill in legislative maneuvering. He sent word to us that he would use his influence to kill the bill containing the new code unless the provision limiting loans to 10 percent of the capital and surplus to a single borrower were eliminated. This provision was a key reform and we could not yield. His opposition aroused our suspicion that he might have a personal conflict of interest, and indeed there was a rumor that he had made a very large loan on certain farmland to some members of his family. To check the rumor I telephoned a friend of mine, the publisher of the local newspaper in that county, and asked him to go to the courthouse to find out the nature and size of the recorded mortgages held by the banker’s own bank. He called back the next day with the news that the bank had loaned $800,000 on a large acreage to a member of the banker’s family. Since the bank had assets of only about $1,000,000, this loan so froze the condition of the bank that it would have been unable to pay its depositors upon demand. Armed with this information, we sent word to the gentleman that we had learned from courthouse records of a certain family loan and knew it to be the reason for his lobbying against the bill. He realized that a leak of this story to the newspapers would undoubtedly result in a run on his bank, soon closing it. Not surprisingly, he decided to drop his opposition to the bill, which was reported to the floor and overwhelmingly passed. This was only one of several dramatic incidents that occurred in the bill’s course, and it gave me some insight into the extent of effort that sometimes has to be made to secure passage of important reform legislation.

When the bill passed and was signed by the governor, my relief was immense, as I wrote to my parents:

Feb. 25, 1933

6:30 P.M.

Dear Folks:

The Gov. signed the bill yesterday morning in the presence of Mr. Gardner, Mr. Greenough and myself. We had been up all the night before checking the enrolled bill to see that it was right. I came to the room here last night to work before dinner and dropped down on the bed for a little rest. It was midnight when I roused and then I slipped out of my clothes and went back to bed and did not awaken until 10:30 this morning.

You can’t realize how I feel. I feel like a boy again with all of the responsibility and strain of the last two years over. I will go to Bloomington with nothing in the world to do but teach school except a few odds and ends such as correspondence, etc., which seem like nothing compared with what I have been accustomed to and I would come out home for the weekend so that we might celebrate together if it were not for the fact that I wish to get even the odds and ends over before Monday so that I may start the week right.

Lots of Love,

Herman

With the bill passed and signed, and with an outstanding Commission for Financial Institutions² appointed to chart the course of the new Department of Financial Institutions, my thoughts turned back to Indiana University. At that time in my life, I was eager to visit Europe, not only to see other cultures, but also to gain background for my teaching. One of my teaching subjects was the economic history of Europe, and I felt that a trip to Europe would provide me with visual images and perspectives that would help me teach the subject more effectively. During the previous semesters I had had a teaching load averaging nine hours a semester. My basic preparation for teaching had been scanty at best, and the pressure of deadlines and the volume of work involved in the Study Commission were such that they left me dissatisfied with the amount of my preparation for class and with the material I was able to present to the students. Moreover, I had been looking forward to the time when the Study Commission’s work was over so that I could concentrate on my teaching duties. My father had had the reputation of being an excellent teacher, and I hoped to discover whether I had the ability to follow in his footsteps.

The new Financial Institutions Act creating the Commission for Financial Institutions did not become effective until July 1, 1933, but all during the troubled months from the bank closings on, the old banking department had been swamped with work. A longtime friend of mine, Richard McKinley, a country banker from Jeffersonville, had been made the state bank commissioner with the understanding that he would become director of the new department when it came into being. He had the difficult task of administering the department under the old statute in the interim until the new act fully took effect. Consequently, McKinley frequently called on me for interpretations of the new statutes, and then, as the problems of reopening the banks increased, he requested that I come to Indianapolis as many afternoons each week as I could to advise and help him. Since hundreds of banks were still closed and had to be reopened on a selective basis, the old banking department staff was simply not large enough to handle the work. Moreover, all of the troubled banks had to be assisted in selling preferred stock or notes to the Reconstruction Finance Corporation and in qualifying themselves for membership in the FDIC.

It had been agreed previously that when the new Commission for Financial Institutions assumed office I would become its secretary. This was to be a part-time job in which I would function only at the times of the meetings of the commission. The commissioners were all busy men of affairs who accepted this assignment in addition to carrying on their own professions. A preliminary meeting of the commission took place on May 25 in preparation for the official takeover in July. At the meeting I was elected secretary of the commission. On June 1, at a follow-up meeting it was agreed that I would be made the part-time supervisor of the newly created Division of Research and Statistics in the new Department of Financial Institutions. The expectation was that the division’s work would be done on the Indiana University campus, the staff functioning more or less as had the Study Commission staff, and that we would continue working on some items that time had prevented us from finishing before. Aware of my intention to leave for Europe, McKinley had begun pressuring me instead to spend the summer working full time with him. I felt some sense of obligation to our recommendations and knew that knowledgeable administration was required to make them work. I changed my plans and spent the summer of 1933 in the Indiana State House.

Those were hectic days. There was not even adequate space in which to work, and in the beginning I found myself for the most part working on a window ledge as I dealt with problems of reopening the banks, classifying their assets—millions of dollars’ worth of assets—and making decisions that were of vital importance, not only to the owners of the institutions but also to the economic welfare of the communities they served.

Then by midsummer, because McKinley and the Commission for Financial Institutions had decided that my interim assistance needed to be retained full time after September 1, it was proposed that I serve in three capacities: as Secretary, Commission for Financial Institutions, and as both Bank Supervisor and Supervisor of the Division of Research and Statistics, Department of Financial Institutions. The proposal was acted upon in a meeting of August 3, 1933, and Governor McNutt, who had been a friend of mine on the faculty of Indiana University, later accepted the commissioners’ recommendation. Control of the Research Division was crucial because it provided the machinery to continue our studies of needed additional regulatory procedures. Thus my new triple role was especially attractive: it gave me great authority and power in the Department of Financial Institutions as well as a substantial salary. I had to request and was granted leave from my university duties. Too, I had had to forego my trip to Europe, and I did not get a chance to see Europe until after the destruction caused by World War II.

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1. My work was facilitated by efficient and skilled office colleagues: Forba McDaniel, Mae Dennis, and Zona Coiner.

2. Members were Robert Batton, lawyer of Marion, chairman; Harvey B. Hartsock, Indianapolis lawyer; Myron Gray of Muncie; Oscar P. Welborn, financier of Indianapolis; and C. M. Setser, Columbus banker.