McFadden Act Perpetuates Banking Fragmentation, Prohibits Interstate Branching

President Calvin Coolidge signs the McFadden Act, one of the most contested pieces of banking legislation in U.S. history, which recharters the twelve Federal Reserve District Banks into perpetuity but prohibits interstate branch banking for national banks. Named after Representative Louis Thomas McFadden, Chairman of the House Banking Committee, the act was first introduced in 1924 and debated extensively for three years before passage. While ostensibly providing “competitive equality” by allowing national banks to open branches within their home states (to the extent state law permits), the act’s prohibition on interstate branching locks in a fragmented banking system of thousands of small, undercapitalized institutions vulnerable to local economic shocks.

The McFadden Act reflects the political power of small-town bankers and agricultural interests who fear that large banks with interstate branch networks would drain capital from rural areas to urban centers and industrial investments. Between 1924 and 1927, intense lobbying by competing banking factions—large money-center banks seeking expansion authority versus community banks defending territorial monopolies—produces legislative gridlock. The final compromise satisfies neither camp: national banks gain limited branching rights that still leave them disadvantaged compared to state banks in states with liberal branching laws, while the interstate prohibition prevents the emergence of stronger, more diversified institutions capable of surviving regional downturns.

The McFadden Act’s perpetuation of banking fragmentation contributes directly to the catastrophic bank failures of the Great Depression, when thousands of small, geographically concentrated banks collapse because they lack diversification across regions and industries. An increasing number of national banks abandon their federal charters before 1927 to escape branching restrictions, weakening the Federal Reserve System. The prohibition on interstate banking remains in force for 67 years until the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 finally permits nationwide branching. The McFadden Act demonstrates how regulatory capture by incumbent interests—in this case, small banks protecting local monopolies—can produce frameworks that protect competitors rather than competition, leaving the financial system fragile and consumers underserved.