Interstate banking -- a colonial debate heats up again

Frank Morris believes the nation must soon renew a debate that occurred early in its history between Alexander Hamilton and Thomas Jefferson over the nature of the banking system in the United States.

Mr. Morris, president of the Federal Reserve Bank of Boston, notes that Hamilton believed the country needed a strong national banking system to mobilize capital for a strong manufacturing system. Jefferson held that a state-oriented banking system that would better serve the farmer and frontiersman was more suitable.

Jefferson won, of course. The nation today has some 14,500 commercial banks, almost all of them confined by the McFadden Act to taking deposits in only one state.

The line drawn by Jefferson, said Mr. Morris in an interview, ''produced a needlessly diffused banking system.''

That's changing rapidly. There is a ''tremendous momentum'' behind the growth of banking across state lines, the central banker said.

There are three sources of this momentum:

1. Action by state governments.

Maine and New York, for example, have passed ''reciprocal'' banking laws, permitting banks from other states to do banking in their statesif the other state does the same. Already the Bank of Boston has bought the Casco Bank & Trust Company in Portland, Maine, and Citibank of New York is starting a new bank there. Massachusetts has passed a law permitting reciprocal banking in New England only. Alaska allows banks from other states to enter, with Rainier Bank in Seattle just announcing a move into Alaska.

New Hampshire's legislature has been considering a nationwide reciprocal banking law. And reciprocal banking laws are being considered in the remaining New England states.

2. ''Non-bank banks'' are pushing across state lines. These include such institutions as Sears, Roebuck, the department store chain, and the Dreyfus Corporation, a money managing firm.

Under the Bank Holding Company Act, a bank is defined as an institution that takes both deposits and makes commercial loans. This definition was approved in 1970 amendments to the act. The provision was intended for the benefit of one institution, the Boston Safe Deposit & Trust Company. But it has become a general loophole. Non-banks buy a bank, sell off its commercial loans, and then do any other banking business anywhere in the United States.

''Here is a classic example of a provision put into an act for a specific and narrow purpose, which is being used to permit all sorts of institutions to get into banking which would otherwise be prohibited from this field,'' Mr. Morris said.

3. The Federal Home Loan Bank Board has taken ''quite a liberal attitude'' on interstate acquisitions of troubled savings-and-loan associations. Since S&Ls have many of the same banking powers as commercial banks nowadays, this is also increasing pressure for interstate commercial banking.

Richard D. Hill, chairman of the executive committee of the Bank of Boston, the largest bank in New England, believes the nation is moving toward at least regional interstate banking.

''The marketplace,'' he said, ''is finding a way to accomplish interstate banking without Congress passing a law. It is only a matter of time before we will have the ability to move across state lines in all of New England.''

Other restrictions on banking are breaking down. Regulation Q, which put ceilings on bank interest rates, is rapidly being lifted. The dividing line between banking and nonbanking activities, such as investment or even nonfinancial activities, is becoming more shaky. Paul A. Volcker, chairman of the Federal Reserve Board, thought it necessary to ask recently for a moratorium on such cross-business activities until Congress has time to consider the issue.

Congress never likes to legislate banking changes, since its members find they make as many enemies as friends doing so, noted the Boston Fed's Mr. Morris.

Nonetheless, he holds that financial crises - in which banks need to be rescued from failure - and pressures in the banking markets will force the hand of Congress. It will have to act. And so will the Justice Department, which considers banking antitrust matters.

Mr. Morris points out that most industrial nations have highly concentrated banking industries. Five or six banks control perhaps 90 percent or more of bank deposits. That is the case in West Germany, the United Kingdom, Canada, France, Japan, Belgium, Switzerland, the Netherlands, Italy, etc.

Morris expects to see rapid consolidation of banking in the US as interstate banking spreads. In many cases this will be ''pro-competitive.'' He's in favor of regional banking in the New England area, ''to clarify the issue and sort out the things Congress will have to deal with.'' In general, he sees economic justification for some consolidation in the industry.

But he adds: ''There is no real sentiment in this country to move to the European model. I don't think there would be political support for a concentrated banking system. Sooner or later the Congress and the Justice Department have got to think about this.''