5

Reopening, Reconstruction,
and Reform

Two very busy years followed my appointment in 1933 as secretary of the Commission for Financial Institutions and head of two divisions in the Department of Financial Institutions. The pace was terrific, from about nine o’clock in the morning frequently to about midnight, seven days a week, with most meals taken at the desk or conference table. In our dealings with bank officers and directors, my staff and I were guided by the conviction that, with the return of prosperity, assets that appeared to be worthless would again be valuable. Time proved this assumption to be correct as we lessened the economic impact of the bank and building and loan closings in many Indiana communities, and I made a host of lasting friends.

The case of each closed institution had to be studied. Its assets and liabilities, the strength of its leadership, the need for it in the community, and its prospects for success if reopened—all had to be analyzed. Since depositors’ funds were frozen, rapid decisions were desirable, but the labor involved was enormous. We worked under intense pressure. Believing that reform could come after recovery with less social cost, we took the position that our mission was to help speed recovery rather than to achieve immediate reform by liquidation of marginal units. In some departments in other states and among some federal bureaucrats, the attitude was almost the reverse. Reflecting the national anger against the banks and disillusion with all financial institutions, they took a punitive point of view and were eager to find ways to liquidate rather than to reopen banks.

In that period it was difficult to be optimistic about the future. In order for banks to reopen, additional capital was usually needed to offset the apparent losses. As much of this capital as possible had to be raised locally and, when the local source was exhausted, the rest typically had to be obtained from federal agencies. Board directors were often so depressed and discouraged that they had little will to attempt to raise the funds required for reopening. In some cases it became clear that the banks could not be reopened, but in most cases, with sacrifice and effort on the part of the owners and management, reopening was possible.

When we talked with the boards and officers, while making firm conditions for reopening, we encouraged them to do better rather than criticized them for past mistakes, and we tried to create a sympathetic climate for innovative solutions to their problems. We stressed the point that their assets were far more valuable in operation than in liquidation. Once the package for reopening a closed bank was determined—the value of its assets, the amount of new local funds it could raise, and the amount to be sought else-where—the next steps involved seeking a loan from the Reconstruction Finance Corporation or refinancing frozen loans with the Federal Land Bank, the Farm Credit Administration, or other agencies. The final step was to win approval of the refinancing plan from the Federal Deposit Insurance Corporation (FDIC) in order for the deposits of the reopened bank to be insured. A similar procedure had to be followed in many instances for banks that had already reopened following the Bank Holiday, in order for them to be qualified for membership in the FDIC.

This was a heady experience for me. I was only thirty-one when I became bank supervisor and, due to the particular circumstances of that era, of course, the bank supervisor had greater authority and weight and had to make more important decisions than ever before or ever since. I traveled regularly to Washington, D.C., taking with me individual cases to be presented to Jesse Jones, the chairman of the Reconstruction Finance Corporation, and to Leo Crowley, the chairman of the FDIC, and hoping for the approval of our proposals. I likewise journeyed regularly to New York, where were tied up some important assets that meant the life or death of certain Indiana banks. I spent a great many nights on Pullman sleeping cars, going east one night and coming back the next.

I had been lucky enough to persuade Edward “Eddie” Edwards to join the Department of Financial Institutions and to take charge of the Division of Research and Statistics. He had met some of my classes in Bloomington for me the previous year, and I had come to have a very high regard for his analytical ability. During the years 1933–35 he and his staff were busy studying the problems that had arisen out of the administration of the financial institutions code, seeking ways to correct errors and overcome inadequacies. They also did much of the analysis of the assets of frozen banks.

One of our first tasks in which Eddie had a very important part was to draft a qualifying test for all bank examiners. The Study Commission had included among its recommendations the upgrading of the examining staff in the Department of Financial Institutions by selection on a merit, rather than a political, basis. Before that time there had been many good examiners, but among their ranks had also been some political hacks who had little idea of the professional nature of their work. Numerous young college graduates took our first and subsequent examinations and passed them with flying colors. It was a time of few job opportunities for college graduates, and some took the examination no doubt simply to qualify for a job. Others, however, were excited by the idealism of our enterprise, which by that time had received much favorable publicity. A talented group attempted the test. Several qualified for examining posts, where they gained their first experience either in our own department or in the field. Others used the results of the examination to secure positions in the banking or the savings and loan field, where they invariably became successful.

Eddie Edwards made a brilliant record as the operating head of the Division of Research and Statistics. Probably its most important recommendations resulted from its study of the small-loan field, the operations of consumer credit agencies not under the supervision of the Department of Financial Institutions, the dealings of pawnbrokers, and the retail installment selling area. The Study Commission did not have enough time, sufficient staff, or available records to make a full report. The 1933 General Assembly, however, passed an amendment to the Indiana Small Loan Law that provided for a small initial cut in the maximum interest rate and that granted to the new Commission for Financial Institutions the power to set maximum rates and to require necessary financial data on which such maximum rates could be set. This action opened the opportunity to study the field, and Eddie and his colleagues gave priority to this study.

They made some amazing discoveries of practices that were reprehensible and that violated all canons of public interest. A number of small-loan companies were abusing the high rates they were permitted to charge on small loans by allowing the loans to stand year after year without reduction in principal. The worst case uncovered was of a farmer who had borrowed three hundred dollars in 1920 or 1921 and still owed that amount in 1933 although he had paid well over one thousand dollars in interest. We called these loan companies “country clubs” because it seemed to us that the borrowers were just paying dues and getting nothing much from them. Based on the results of these studies, regulations were promulgated to lower the maximum rate of interest and to place a limit on the amount of interest a lender could collect in excess of the Indiana usury law.

Another group of lenders, some of whom were regulated because they held small-loan licenses, were the pawnbrokers. A model pawnbroking act that had been drafted years earlier proved readily adaptable to the Indiana situation, and there was no particular trouble getting the Pawnbroking Bill through the 1935 legislature.

The largest and most interesting of these investigations was in the field of retail installment selling, which was widely rumored to have many, many undesirable practices. Not only were finance charges often excessive, but there were other serious abuses: sellers sometimes failed to give buyers written contracts or to state the finance charge when they did give contracts; particularly in the automobile business, sellers would neglect to furnish an insurance policy or certificate of insurance to the customer, even though an insurance charge was included, or to disclose the amount of the insurance premium, usually buried in the finance charge. To control these and other abuses the Division of Research and Statistics proposed a comprehensive package of new legislation. A very important feature of the entire proposal was that installment sellers would have to give a buyer a copy of a written contract signed by the buyer and that the contract would have to include the cash price of the merchandise, the finance charge (if any), the amount of any insurance included in the package, the amount of the down payment, the amount of the unpaid balance for which the purchaser was liable, and the size and number of the monthly or periodic payments. Equally important were the provisions for licensing and subsequent periodic examination of sales finance companies; for authorizing the Department of Financial Institutions to set maximum finance charges (and minimum rebates in case of prepayment) for various types of contracts; and especially for requiring that dealers who plan to sell their contracts limit the finance charge to the amount being charged to the bank or to the finance company, thus eliminating the “bonus” or “pack” that had come to be a serious abuse. Most important of all, perhaps, was the definition of the cash price as the difference between the time price and the finance charge rather than as the price the dealer would sell for cash. This definition made it possible for the courts to hold that there was no fixing of prices of merchandise, but only of finance charges, thus overcoming constitutional difficulties that had long kept the business from being regulated.

When it came time to put the proposed legislation into bill form, again the brilliant Leo Gardner was the draftsman, and he performed the difficult task with such remarkable skill that it stood court tests in those days when lower tribunals were unfriendly to regulations. This bill, when it finally was enacted by the 1935 General Assembly, was an entirely new approach to the regulation of consumer credit and to the control of finance charges in retail installment contracts. It was a pioneering achievement of national significance. The bill withstood legal attacks by those affected and became the basis for legislation in all other states and, finally, in the federal government. Indeed, the Indiana Retail Installment Sales Act of 1935 was the first comprehensive legislative regulation of time-sales financing in the nation, and it resulted entirely from the work of our Division of Research and Statistics.

But I have jumped ahead of my story. Knowing that consumer credit was a hot issue and that Governor McNutt controlled the 1935 legislature, I went alone to see him. As I remember the conversation, I said, “Governor, I’ve read in the newspapers that you are ambitious to be president of the United States. I don’t ask you to comment, but I think I should tell you that we have developed in our Research Division a piece of legislation that is explosive and I want to tell you about it.” Then I described it to him in some detail, starting with our findings that had served as a basis for the proposed legislation. I then said, “I know that the automobile industry, the appliance industry, and the big financial concerns like General Motors Acceptance Corporation, CIT, and Associates Investment, which buy finance contracts on appliances and autos, will be bitterly opposed to it. I’m also realistic enough to know that if you want to run for president you probably are going to have to look to these interests for campaign funds. I thought you should hear this story and I want to know whether you can support this legislation. If we have the bill introduced and you oppose it, we are going to get whipped and there’s no point in going through such an exercise. You and I are alone and if you wish me to scuttle it, I will do so and keep the reason confidential.” He asked many probing, substantive questions, for he was a man of quick intelligence. Finally he said, “Is this right? Is it in the public interest?” And I replied, “Yes, it certainly is.” After a moment or so he said, “Very well, I’ll tell the boys to put it through.” In due course he instructed his legislative leaders and other members of his legislative floor team to support and, if possible, to pass the bill.

Indeed, Governor McNutt went further than that. During the weeks preceding the fall election in 1934, he made a number of speeches throughout the state, promising the electorate that he would recommend to the 1935 General Assembly corrective legislation regarding finance companies, including control of finance charges. His statements, of course, were widely publicized and were influential in the final successful battle fought in the 1935 General Assembly. Even with the governor’s influence, securing passage of the bill was not easy because of the forces lined up against it. But it did pass, and with that action the second peak of this four-year period of financial reform, 1931–35, was reached.

The creation of an effective, modern system of supervision and control for financial institutions in Indiana was not the only important result of those years. One of the happy by-products of the Study Commission’s work and of the two years invested in the reorganization of the old banking department and the rehabilitation of the financial institutions in the state was the opportunity that they provided for a group of very capable young men to get started in the field of financial institutions and later to achieve considerable success in it.

Of the three students who first worked with me in the basement of the old Indiana University library on the research for our recommendations to the Study Commission, two followed careers in which that preparation proved useful. Paul DeVault entered an Indianapolis law firm that specialized in the financial area. In time he became one of the preeminent figures in financial legal work. He has been the general counsel of the Federal Home Loan Bank of Indianapolis for many years and, since I served on its board for thirty-five years and as its chairman for thirty of those years, I had the pleasant privilege of continuing my relationship with him through a significant part of our productive lifetimes.

Lyman Eaton taught and practiced accounting briefly before yielding to a desire to become a physician. He has long been a highly successful practitioner in Indianapolis with the additional distinction of serving for an extensive period as chief medical counsel for the Indiana Farm Bureau Insurance Company.

Charles Cooley found his career first in the armed forces and then, for twenty years, as a teacher in the California school system. Many of my young colleagues in the Department of Financial Institutions also turned to careers associated with the financial field. For example, Edward Edwards returned to Indiana University after his stint in the State House and played an important role in the life of the university as a distinguished professor of finance. He became widely recognized as an inspiring, imaginative thinker whose innovative ideas, though sometimes ridiculed at first, were later embraced by the financial fraternity. Through his presence on numerous key boards, commissions, and committees, he has rendered service to the nation as well as to the university. In addition and parenthetically, I would mention that, by his straightforward evaluations of my programs and policies, he gave me invaluable aid as assistant to the president in the early years of my presidency.

Another colleague, Edward Schrader, recently deceased, retired a few years ago as a senior partner in Goldman Sachs, America’s largest investment corporation. Croan Greenough, who spent two summers in the Division of Research and Statistics, has just retired from the position of chairman and chief executive officer of TIAA-CREF. Leo Gardner carried on a very successful practice until his recent retirement, continuing to represent various segments of the financial community as a recognized authority in the field. Edward DeHority came into the Department of Financial Institutions as special representative in the liquidation division but later became bank supervisor and, following that assignment, had a long career as chief of the examinations division for the FDIC in Washington, D.C.

Among the young men who became examiners after passing the qualification test, Blaine Wiseman entered his family’s bank at Corydon and proved so able that he was elected to the presidency of the Indiana Bankers Association not many years ago. Floyd Call distinguished himself as the exceptionally competent secretary of the State Bankers Association in Florida. Hal Kitchen had a highly successful savings and loan career. Milton Martin qualified as a bank examiner but then was transferred to the building and loan division and later became president and board chairman of the Union Federal Savings and Loan Association in Indianapolis, one of the largest.

In retrospect it appears that the work of the Study Commission, including the struggle to establish a new, regulatory department for financial institutions, not only achieved most of its objectives for the state of Indiana but also perhaps made a modest contribution to the science and art of the social control of financial institutions. In part this is true because of the timing of our enterprise. Ours was the first independent, comprehensive study of state regulatory machinery to be completed and to have its recommendations adopted in the post-Bank Holiday period. In our new code we tried to incorporate all that was best of what was then known about safe bank operation. Hence it was a statement of proper bank practice.

It was inevitable, therefore, that in much of the reform legislat ion throughout the United States that rapidly followed the Bank Holiday at both the state and federal levels, many provisions similar to ours were to be found. Whether they were borrowed from our statute, as was frequently asserted in meetings around the country, or resulted from similar conclusions from other sources is difficult to determine. In any event, our Indiana enterprise received widespread and favorable attention for its progressive features and was often cited as a source of important information for those working in the field.

Certainly our study and statute must have reinforced those preaching the importance of need as a prerequisite for granting new charters, capital adequacy, stricter supervision by well-trained professional examiners, flexible rule-making power to meet unanticipated emergencies, closing and liquidation controlled by the supervisory departments rather than by receivership proceedings through the courts, and, finally, fairness in lending to consumers and in financing retail installment sales. The consumer-credit studies and statutes were truly a pioneer breakthrough, for those in this business had been able to convince both state and federal legislative bodies up to then that regulation of this kind would be held unconstitutional because neither the business of finance companies nor the time price of goods sold was subject to constitutional regulation and control.

In the spring of 1935, after I had been on leave from Indiana University for two years, some of my friends from Bloomington called on me to see whether I was willing to be considered as a successor to William A. Rawles, dean of the School of Business Administration, who was retiring at the end of the academic year. We talked for an hour or more in the library lounge of the Athletic Club in Indianapolis, where I was then living. It seemed to me a fanciful idea. I finally concluded that, if it were the wish of the faculty, the president, and the trustees, I would assume the post, foolhardy as that decision now might seem. (I also remember a conversation with Professor Clare Barker, then one of the senior members of the business faculty, who was active in supporting me for the deanship.)

President Bryan privately offered me the position. I then called on Governor McNutt to tell him of this offer and of my intention to accept it, which would necessitate my resignation from my position in the State House. He tried to discourage me, saying that I was needed in the State House and that the business school was in a moribund state, as he saw it, and would be difficult to revive. These reasons, of course, were a part of the challenge that had attracted me to the deanship and, having failed to persuade me, he finally gave the move his blessing.

I became dean of the Indiana University School of Business Administration on July 1, 1935.

After I assumed the deanship I remained secretary of the Commission for Financial Institutions for an additional year, and Edward Edwards was nominally director of the Bureau of Research and Statistics although he took a leave in order to head the National Youth Administration of the state. Thus we were able to continue a close contact with the commission. It enabled us to arrange for a grant from the commission to the business school to provide for an analysis of the bond and security portfolios of the state banks, a task beyond the time and competence of the Department of Financial Institutions.

At about this time, too, I was appointed a member of the executive council of the American Bankers Association (ABA), with membership on its research and economic analysis committee. I continued to be reappointed for approximately a quarter of a century. The ABA executive council was made up of three or four hundred bankers in the commercial banking field, financial writers, a few scholars, the executives of the state bankers associations, the supervisors of the state banks and of the federal banks. They met each spring at the Greenbriar Hotel in West Virginia. Leading figures in the commercial banking field, the controllers of the currency, officers of the FDIC, and members of the Federal Reserve Board regularly attended the meetings. The assemblage attempted to adopt a set of policies and positions to guide the commercial banking industry for the year ahead.

This was a very useful association for me. It enabled me to keep in contact with the state and federal supervisory personnel, including those of the FOIC, with the top officers of the American Bankers Association, and with leading bankers, many of whom were also trustees of universities. Since I was the only active university president who attended the annual meetings regularly, they frequently sought me out to discuss university policies. Because of this relationship, when I needed to know something about other institutions, I could telephone a banker friend and get a firsthand, confidential appraisal.

I kept in contact with the Savings and Loan Association through my long membership on the board of the Federal Home Loan Bank of Indianapolis. It gave me topside contact with that industry, particularly in Washington, D.C. and throughout the states of Indiana and Michigan.