The Federal Reserve earned acclaim for America’s economic performance during the Roaring Twenties. The Federal Reserve’s success led to the McFadden Act, which President Calvin Coolidge signed on February 25, 1927.
By the mid-1920s, bankers, businessmen, and politicians concurred that the Federal Reserve had accomplished the goals set forth at its founding. Since the System began operations, economic growth had been rapid. Interest rates had been stable. Financial crises had been contained. Recessions had been short. Recoveries had been rapid. Gold reserves had risen. The Federal Reserve Note (what we now call the dollar, but which in 1914 was one of many different dollars) had become one of the world’s leading currencies. Banks in the United States had become increasingly profitable and internationally prominent. The world economy, in contrast, had experienced a decade of doldrums following the First World War.
The McFadden Act tackled three broad issues.
The first issue involved the Federal Reserve’s longevity. The original charters of the twelve Federal Reserve District Banks were set to expire in 1934, twenty years after the banks began operations. This twenty-year limit mirrored the twenty-year charters given to the First and Second Banks of the United States, the Fed’s nineteenth-century forerunners. Congress refused to recharter those institutions. Everyone knew this fact. The precedent threatened the Fed. To alleviate uncertainty, Congress not only rechartered the Federal Reserve Banks seven years early, but it also rechartered them into perpetuity.
As it turned out, if Congress had waited to renew the Federal Reserve’s charters, the debate over renewal would have occurred during the Great Depression. The decision may have been different, and the Federal Reserve as we know it today may not exist.
The second issue involved branch banking.
From 1863 through 1927, banks operating under corporate charters granted by the federal government (known as national banks) had to operate within a single building. Banks operating under corporate charters granted by state governments (called state banks) could, in some states, operate out of multiple locations, called branches. Laws concerning branching varied from state to state. The McFadden Act allowed a national bank to operate branches to the extent permitted by state governments for state banks in each state. In a state that prohibited branch banking, for example, national banks could not open branches. In a state that allowed state-chartered banks to operate branches in the same city as their headquarters, a national bank could operate branches in the same city as their headquarters.
Gary Richardson is the historian of the Federal Reserve System in the research department of the Federal Reserve Bank of Richmond. Daniel Park is an undergraduate at Duke University. Alejandro Komai is a PhD candidate in economics at the University of California, Irvine. Michael Gou is a PhD student in economics at the University of California, Irvine.
For a concise summary of these changes, see the report “Dual Banking in the United States."
Blinder, Alan. After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead. New York: Penguin Press, 2013.
Carlson, Mark, and Kris James Mitchener ""Branch Banking as a Device for Discipline: Competition and Bank Survivorship during the Great Depression." Journal of Political Economy 117, no. 2 (April 2009): 165-210.
Federal Reserve Bank of St. Louis. “Dual Banking System in the United States.” 1932, https://fraser.stlouisfed.org/title/?id=808.
Federal Reserve Bank of St. Louis. “Federal Reserve Bulletin.” March 1927, https://fraser.stlouisfed.org/scribd/?item_id=20663&filepath=/docs/publications/FRB/1920s/frb_031927.pdf.
Kroszner, Randall S. “The Effect of Removing Geographic Restrictions on Banking in the United States: Lessons for Europe.” Speech at the Conference on the Future of Financial Regulation, London School of Economics, London, April 6, 2006.
Preston, H. H. ""The McFadden Banking Act.” American Economic Review 17, no. 2 (June 1927): 201-18.
Rajan, Raghuram G., and Rodney Ramcharan. “Constituencies and Legislation: The Fight Over the McFadden Act of 1927." Finance and Economics Discussion Series 2012-61, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, DC, 2012.
Written as of November 22, 2013. See disclaimer.