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Banking Structure and the National Capital Market, 1869–1914: A Reply

Published online by Cambridge University Press:  03 March 2009

Marie Elizabeth Sushka
Professor of Finance, College of Business, Arizona State University, Tempe, Arizona 85281
W. Brian Barrett
Assistant Professor of Finance, School of Business Administration, University of Miami, Coral Gables, Florida 33124.


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Notes and Discussion
Copyright © The Economic History Association 1985

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1 See Sushka, Marie Elizabeth and Barrett, W. Brian, “Banking Structure and the National Capital Market, 1869–1914,” this JOURNAL, 44 (06 1984), pp. 463–78;Google Scholar and Smiley, Gene, “Banking Structure and the National Capital Market, 1869–1914; Comment,” this JOURNAL, 45 (09 1985), pp. 653–59.Google Scholar

2 Sushka, Marie Elizabeth and Barrett, W. Brain, “Banking Structure and the National Capital Market, 1869–1914 (Working paper, 09 1983), pp. 163.Google Scholar

3 Davis, Lance E., “The Investment Market, 1870–1914: The Evolution of a National Market,” this JOURNAL, 25 (09 1965), pp. 355–99.Google Scholar

4 See Home, James Van, Financial Management and Policy (Englewood Cliffs, N.J., 1980) chap. 7, pp. 190209.Google Scholar

5 Smiley, “Comment,” emphasis added.Google Scholar

6 Smiley, “Comment,” Table 1.Google Scholar

7 One desirable adjustment to the data would be the removal of bond income from total income, but this is not possible given available data. As explained in footnote 6 of our article, we doubt that this is a significant problem. In any event, the use of net returns is a better proxy of the “long-term movements in the average interest rates earned.” Davis, “The Investment Market,” pp. 357, emphasis added.Google Scholar

8 As noted in our “Banking Structure,” p. 465, the concept of the development or evolution of a national market is composed of three issues: 1) the relation between short- and long-term capital markets, 2) the relation of regional markets of various types, and 3) the degree of integration or communication between markets over time. On the last point we established criteria that relationships must exist and must shift over time if evolution occurred. Our results indicated that relationships did exist and that there were no shifts except in the banking markets.Google Scholar

9 For a discussion of lags in banking behavior, see the classic work of Goldfeld, Stephen, Commercial Bank Behavior and Economic Activity (Amsterdam, 1966).Google Scholar

10 Almon, Shirley, “The Distributed Lag Between Capital Appropriations and Expenditures,” and Econometrica, (01 1960), pp. 178–96.Google Scholar

11 See Johnston, J., Econometric Methods (New York, 1973), p. 246.Google Scholar

12 See Sushka and Barrett, “Banking Structure,” Working paper, p. 43, emphasis added.Google Scholar

13 See Smiley, “Comment.”Google Scholar

14 A simple extension of the model to include endogenous deposit rate setting shows the additional first order condition for optimization obtained by differentiating equation 5 in Sushka and Barrett, “Banking Structure,” p. 470,Google Scholar with respect to deposit rates as . Given that the demand for deposits is a positive function of deposit rates, comparative statics results can be obtained for the effect of a change in market rates, r, on the deposit rate in a manner similar to equation 7. However, note that the bank can set both the loan and deposit rates and that these rates are independent of each other. That is, asset/liability management is dichotomized. Also, note that given that the bank sets the rates (price), quantity is determined by demand. This is how the amount of loanable funds available is determined. For the general model of deposit rate setting see Slovin, Myron B. and Sushka, Marie Elizabeth, “An Economic Model of the Market for Negotiable Certificates of Deposit,” Journal of Monetary Economics, 5 (1979), pp. 551–68.CrossRefGoogle Scholar

15 It should be noted that in the theoretical development in Sushka and Barrett, “Banking Structure,” pp. 470–471, we use r to refer collectively to the exogenous rate on “other assets.” This is theoretically correct because the rates on the other assets, such as those mentioned in Smiley's “Comment,” (U.S. government bonds, other stocks, bonds and securities, and bankers' balances) are market determined, that is, the bank is a price taker. However, in the empirical work, we disaggregate r into several different rates as tests of competing rates such as the commerical-paper rate, the New York City loan rate, the long-term bond rate, and the rate of return on stocks.Google Scholar

16 Sylla, Richard, “Federal Policy, Banking Market Structure, and Capital Mobilization in the United States, 1863–1913,” this JOURNAL, 29 (12, 1969), pp. 657–86;Google Scholar and James, John, “The Development of the National Money Market, 1893–1911,” this JOURNAL, 36 (12 1976), pp. 878–97.Google Scholar

17 In the early work on the stock market by Navin, Thomas and Sears, Marion, “The Rise of a Market for Industrial Securities, 1887–1902,” Business History Review, 29 (06 1955), p. 136, they argued that: “The years 1887–1902 produced a solution to one of the troublesome problems created by the industrial revolution, the problem of capital flexibility in the industrial segment of our economy.” Furthermore, they suggest that although in the 1890s a larger number of new issues appeared on the stock market, there was substantial activity from the mid-1880s to the end of the decade. We find empirical support for the hypotheses they put forth.CrossRefGoogle Scholar

18 In fact, one of the numerous interest-rate relationships, originally tested as part of our analysis of the integration between short-term markets and short- and long-term markets, was the call-loan rate as a function of other short-term rates such as the commercial-paper rate. Although not reported in our article, the results indicate a strong, positive relationship which was stable over the period.Google Scholar