In December 1863, H. McCulloch, U.S. Comptroller of the Currency and later Secretary of the Treasury, wrote to all national banks. Here are some of the paragraphs:
“Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to encourage speculation. Give facilities only to legitimate and prudent transactions.
“Distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe. Large borrowers are apt to control the bank.
“If you doubt the propriety of discounting an offering, give the bank the benefit of the doubt and decline it. If you have reasons to distrust the integrity of a customer, close his account. Never deal with a rascal under the impression that you can prevent him from cheating you.
“Pay your officers such salaries as will enable them to live comfortably and respectably without stealing; and require of them their entire services. If an officer lives beyond his income, dismiss him; even if his excess of expenditures can be explained consistently with his integrity, still dismiss him. Extravagance, if not a crime, very naturally leads to crime.
“The capital of a bank should be reality, not a fiction; and it should be owned by those who have money to lend, and not by borrowers.
“Pursue a straightforward, upright, legitimate banking business. ‘Splendid financing’ is not legitimate banking, and ‘splendid financiers’ in banking are generally either humbugs or rascals.”
The McCulloch banking culture is as relevant today as it was in 1863. Taking society’s saving is a privilege and a responsibility given by the legislator to commercial banks alone under strict governmental controls.
To safeguard customers’ deposits, bankers are trained to be risk averse. They respect risk control structures. They are dedicated to long and steady banking relationships with depositors, borrowers, and trading partners. They make a relatively modest but comfortable living.
Business entities engaged in hedge funds, money management, securities trading, private-equity, stock brokerage, insurance, and other financial services are not banks. They cannot use the word bank in their name. Their employees are not bankers. At the core of their trade is speculation on the future movements of interest rates and currencies. They fund their businesses from the money markets. They are transactional operators. Driven by the promise of performance bonuses, they view risk control structures as impediment to profitable deals.
The Root Causes of the Banking Meltdown on September 15, 2008
The financial meltdown of 2008 resulted primarily from:
1. Eight years (1981-1989) of the Reagan Administration’s free market economics.
2. Repeal in 1999 of the Glass-Steagall Act of 1933.
3. Eight years (2001-2008) of G. W. Bush administration’s contempt of regulations.
Also, contributing to the debacle were negligent government supervisors, obsequious internal auditors, submissive external auditors, and rating agencies, always a step or two behind the events.
The repeal of Glass-Steagall Act contaminated the McCulloch banking culture. It removed the protective wall from gamblers that surrounded commercial banks for the previous 66 years. A blinding ambition by “Rascals” and “splendid financiers” to get rich quick engendered an era of go-go banking, irreparably damaging what once was respectable deposit-taking commercial banking institutions.
Of the 15 largest financial institutions in the US before the 2008 crisis, only nine survived. Had it not been for the hundreds of billions of dollars in taxpayers’ money, the bankruptcies of Lehman Brothers, Bear Stearns, Merrill Lynch, Washington Mutual, Wachovia, GMAC, Countrywide, and AIG could have collapsed the entire banking systems in the United States and beyond.
The 2008 financial meltdown caused millions of people to lose their homes, jobs and saving. It set off a recession that destroyed over $30 trillion of the world’s wealth.[1] These monumental losses made the obscene amounts of bonuses received by “rascals” and “splendid financiers” over the previous decade a travesty.
Commercial banks were cobbled together with non-bank financial companies. They created universal banks. Within five years from the financial meltdown, by 2013, the four largest behemoths were the result of thirty-seven banks merging thirty-three times.[2] In 1995, the six biggest US banks had assets equal to 18% of GDP.[3] In September 2024, the six biggest banks (JPMorgan Chace, Bank of America, Citigroup, Wells Fargo, US Bancorp, Goldman Sachs) had assets equal to 36% of GDP.[4]
In addition to commercial banking services (loans, deposits, import/export and related transactions, money transfer and clearing), the new Wall Street giants underwrite and trade spot, forward, futures, and options in bonds, equities, foreign currencies, interest rates, precious metals, commodities, and derivatives. They engage in mergers and acquisitions, brokerage, fund management, and insurance.
The Solution
To protect national saving, non-banking firms must be kept away from commercial banks. The protective wall around commercial banks should be rebuilt. Five former US Treasury secretaries, Republicans and Democrats, said in a letter to The Wall Street Journal in February 2010:
“Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in speculative trading activities unrelated to essential bank service.” They continued: “Hedge funds, private-equity firms and other organizations engaged in speculative trading should be “free to compete and innovate” but should not expect taxpayers to back up their endeavors.”[5]
To protect national saving, external auditors should perform one function only: Auditing. Shareholders should take to task banks that hand out excessive compensation packages.
If hedge funds, private-equity firms and other organizations engaged in speculative trading are hived off from universal banks, the services and products essential to bank service would allow the release of a sizeable proportion of the $1.2 trillion in expensive shareholders’ equity (in September 2024) from the six biggest American banks to benefit other sectors of the economy.
Regulators should ensure that senior bank executives and board members are fit to serve. Gamblers should be kept away from banks. If drunks must not drive cars, gamblers must not be near peoples’ bank deposits?
Footnotes
[1] “Why didn’t any Wall Street CEOs go to jail after the financial crisis?”, Market place.org,
https://features.marketplace.org/why-no-ceo-went-jail-after-financial-crisis
[2] Williwm Greider, “Break Up the Behemoth Banks. Sen. Sherrod Brown goes after the big banks”, Common Dreams, (March 15, 2013),
https://www.commondreams.org/views/2013/03/15/break-behemoth-banks
[3] Ibid.
[4] “Largest banks in the United States as of September 2024, by total assets”,
https://www.statista.com/statistics/799197/largest-banks-by-assets-usa
[5] “Ex-Treasury secretaries back Volcker rule”, Reuters, (February 22, 2010),