World War I Bank Charters: When Pushes Became Shoves in Bank Supervision

In 1918, the OCC revoked a national bank charter it had just granted because the wealthy would-be bankers hadn't bought enough Liberty Bonds.

What does a bank charter require?

There is a big debate underway about what, precisely, the bank charter should require. There is no doubt that, as a factual matter, the bank charter is a very different animal than a regular corporate charter. For $125 and about 20 minutes you can incorporate in the Commonwealth of Pennsylvania.

If you want to open a bank, on the other hand, good luck: new federal bank charters are barely existent and cost millions of dollars in banker, lawyer, and other adviser fees.

Some view that difference as egregious. Others, such as Morgan Ricks and Lev Menand, view that charter and the responsibilities associated with it as akin to a public utility. I’ll leave that debate for another day – banks are of course not public utilities at present; I am mostly unpersuaded that they should be.

There is no doubt, however, that history does support the view that banks and their supervisors viewed banks’ responsibilities as part of the commonwealth and not (merely) to their shareholders. Consider, for example, the experiences of would-be national bankers at the height of World War I.

World War I Patriotism

Woodrow Wilson won his campaign in 1916 to become the first Democrat reelected to a second consecutive term since Andrew Jackson. The world was in shambles as the Great War raged in Europe. His campaign was simple: “he kept us out of war.”

Shortly after his inauguration, Wilson asked Congress to declare war.

The patriotism that swept the nation was intense, despite the ambivalence that Americans felt about the entire debacle. Soon, the banking sector was as deeply involved as any other in ensuring the deployment of the unique resources that they alone controlled. Even the Federal Reserve, the nation’s brand new system of central banks, got involved, doing more than perhaps any other organization to encourage participation in the Liberty Bond fundraising drives.

The Office of the Comptroller of the Currency, the US supervisor of national banks then as now, watched the war closely. Initially, the OCC was somewhat lukewarm on the idea of banks intervening to support this cause. “National banks have no authority under existing laws to subscribe for humane, benevolent, or philanthropic purposes,” the Comptroller, John Skelton Williams wrote in 1917. If the bankers wanted to donate to worthy causes such as the American Red Cross, it needed “unanimous consent” from all its shareholders. It recommended instead a “special dividend” that included with the check to shareholders “a circular letter suggesting, but not requiring, that those shareholders who are willing or desire to do so” should simply indorse the checks on to the Red Cross themselves.  

Declaring a dividend during war in the hopes that bank shareholders would donate to worthy causes was not, perhaps, the endorsement of war aims that some hoped to see. There was more happening behind the scenes, however. In November 1917, at roughly the same time as the annual report, Comptroller Williams engaged in a name-and-shame strategy sending to the Treasury and to the Federal Reserve Governors a list of “delinquent or derelict banks” that had failed to subscribe to the Liberty Loan Drive¹. Many banks reacted with some alarm at the accusation, which they regarded as false. One small bank in Ely, Nevada regretted that it failed to send report of subscription, citing that it had been “too busy” generating precisely those subscriptions. “This little country will subscribe for close to one million [dollars]” in Liberty bonds. “Nevada has no slackers.”

In 1918, that tone started to shift. That year, Williams wrote to Congress of “the commendable patriotism and zeal” to which national bankers responded to especially the nation’s financing needs. “In numerous cases where local investors have hesitated to subscribe the amount allotted to their communities,” Williams continued, “the banks freely and ungrudgingly have assumed the burdens themselves and have taken up and paid for the full allotments of each issue.” Hardly the probity of a shareholder-first orientation, since the banks’ shareholders and the community members described were often one and the same.

Of course, there’s a big difference between buying government bonds, even at potential losses, and donating money to the Red Cross. Buying government bonds was the sine qua non of the Civil War-era national banks. But the transition away from the strictly correct “special dividend” OCC and the more enthusiastic war boosterism was quite real. The OCC’s tone, and perhaps its very instruction, moved not just toward supporting the Liberty Loan drives but also to…supporting the Red Cross with bank shareholder money.

I have not found the original instruction from the “Acting Chief National Bank Examiner” countermanding the instruction, but I did find a telegram from the Utah State National Bank to the Comptroller explaining that its “executive committee [had] approved a contribution of one thousand dollars to American Red Cross.” There was no mention of a shareholder vote.²

As armistice got closer, the Comptroller also got more serious about ensuring that the bank charter served the interests of the nation at war and not just the banks themselves. It kept lists of banks that answered the call to participate and those that did not. It squabbled with the Treasury and the Federal Reserve about how to use their supervisory authority toward those ends while maintaining the semblance that banks should be able to make their own choices. It was a time when the shared risk management outlook that the OCC and national banks took was under some strain. Private finance, yes, but with the public power of the government behind it.

This all came to a head in April 1918, just after Germany’s final offensive in the war and just before the US victory at the Battle of Cantigny, the first independent American operation. In a decision that ricocheted through the newspapers - I have found about a dozen of them - the OCC revoked a charter that it had recently given to new bankers because, upon investigation, the six wealthy bankers who sought to organize a new bank had, between them, subscribed to only $200 in Liberty Bonds. Comptroller Williams concluded (and sent to every national banker in America the conclusion) that “men of means in these times who show so little patriotism and so little public spirit in the matter of making subscriptions to Liberty bonds and to the Red Cross are unfit to be placed in charge of any national bank.”

National bankers who received this telegram were mostly the source of it to the press. A Utah banker told his newspaper that the Comptroller’s “sentiment is mine exactly, and those would-be bankers got just what was coming to them. Any bank whose officers and directors have so little patriotic spirit as have these men referred to are deserving of no consideration whatsoever. The matter can not be put too strongly.”

A bank charter is a special thing. Private finance stands in front of it. What the charter revocation in 1918 shows is the sheer public power that stands behind it.

[Note: this post was a cutting-room-floor anecdote from Private Finance, Public Power: A History of Bank Supervision in America, with Sean Vanatta. You should see what didn’t get cut! Pre-order your copy now.]

1. National Archives, Records of the Bureau of the Comptroller of the Currency, Box 1, War Loans Org., Federal Reserve Board, letter from Comptroller J.S. Williams to Adolph Miller, November 17, 1917.

2. National Archives, Bank Examination Reports 1864-1939, Box 115, no folder, Telegram from Utah State Bank to Comptroller of the Currency, May 22, 1918.