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Banking Struture and the National Capital Market, 1869–1914

Published online by Cambridge University Press:  03 March 2009

Marie Elizabeth Sushka
Professor of Finance, Arizona State University, Tempe, Arizona
W. Brian Barrett
Professor of Finance, Arizona State University, Tempe, Arizona


We examine (1) why, when a national capital market developed in the United States, regional interest rate differentials existed and seemed to narrow toward 1900, and (2) the changing patterns of banking behavior in the post-Civil War period. We show that a national capital market was established early (1870s), and regional rate differentials were a response to variations and changes in the interest sensitivity of business loan demand. Bank structure was characterized by monopoly, but it declined because of increasing sophistication of business financing decisions, which became more sensitive to open market rates (in particular the stock market) and to loan rates themselves.

Papers Presented at the Forty-Third Annual Meeting of the Economic History Association
Copyright © The Economic History Association 1984

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1 In the area of the impact of financial intermediaries on economic development, see, for example, the work of Goldsmith, R., Financial Intermediaries in the American Economy Since 1900 (Princeton, 1958);Google ScholarGoldsmith, R., Financial Structure and Development (New Haven, 1969);Google Scholar and Gurley, J. and Shaw, E., “Financial Intermediaries and the Savings Investment Process,” Journal of Finance, 11 (03 1956).Google Scholar

2 Davis, L., “The Investment Market, 1870–1914: The Evolution of a National Market,” this Journal, 25 (09 1965), 355–99;Google ScholarSylla, R., “Federal Policy, Banking Market Structure, and Capital Mobilization in the United States, 1863–1913,” this JOURNAL, 29 (12 1969), 657–86;Google Scholar and James, J., “Banking Market Structure, Risk, and the Pattern of Local Interest Rates in the United States, 1893–1911,” Review of Economics and Statistics (Nov. 1976), 453–62;Google ScholarJames, J., “The Development of the National Money Market, 1893–1911,” this JOURNAL, 36 (12 1976), 878–97;Google Scholar and James, J., “Portfolio Selection with an Imperfectly Competitive Asset Market,” Journal of Financial and Quantitative Analysis (Dec. 1976).Google Scholar Other well known work in this area is Keehn, R., “Federal Bank Policy, Bank Market Structure, and Bank Performance: Wisconsin, 1863–1914,” Business History Review, 15 (03. 1980);Google ScholarKeehn, R., “Market Power and Bank Lending: Some Evidence from Wisconsin, 1870–1900,” this JOURNAL, 15 (03. 1980);Google ScholarSmiley, G., “Interest Rate Movements in the United States, 1888–1913,” this JOURNAL, 35 (09. 1975), 591620;Google ScholarWilliamson, J., Late Nineteenth-Century American Development (Cambridge, Massachusetts, 1975);Google Scholar and Sylla, R., “American Banking and Growth in the Nineteenth Century: A Partial View of the Terrain,” Explorations in Economic History, 9 (Winter 19711972).CrossRefGoogle Scholar

3 The classic work on the rationality of price dispersion is Stigler, G., “Imperfections in the Capital Market,” Journal of Political Economy, 75 (06 1967), 287–92.CrossRefGoogle Scholar

4 Joskow, P., “Firm Decision Making Processes and Oligopoly Theory,” American Economic Review (May 1975), 270–79.Google Scholar

5 Nelson, C., “The Term Structure of Interest Rates: Theories and Evidence,” in Bicksler, J. (ed.), Handbook of Financial Economics (Amsterdam, 1979), pp. 123–38.Google Scholar

6 These data are not adjusted as in Smiley, “Interest Rate Movements,” and James, “Banking Market Structure, 1893–1911,” and “National Money Market,” for two major reasons: first, it allows us a longer sample period and thus more information. Second, the James adjustment is to remove bond income from total income to obtain cleaner loan rate data. An examination of bond volume in bank portfolios by region or state indicates, however, that bonds constituted a low percentage of total bank asset portfolios that decreased over time from about 25 percent to 10 percent of assets. In addition, the mean value of the government bond rate from 1869 to 1900 is approximately 2.9 percent with a small variance. Furthermore, this rate did not tend to rise over time. Thus, interest income for bonds in bank portfolios basically declined over the period. Other data come from Homer, S., A History of Interest Rates, 2nd ed. (New Brunswick, 1977),Google Scholar U. S. Comptroller of the Currency, Annual Report (Washington, D.C.: 1900 and 1914),Google Scholar and Historical Statistics of the United States, Vols. 1 and 2 (Washington, D.C., 1971). Data symbols are explained in the glossary.Google Scholar

7 We tested reserve city as well as nonreserve city interest rates and the results were similar.Google Scholar

8 North, Douglass, “Capital Formation and the Industrialization of the United States,” paper presented at the Second International Economic History Conference, Aix-en-Provence, France, 1962.Google Scholar

9 See also Keehn, “Bank Market Structure: Wisconsin,” and “Market Power: Wisconsin.”Google Scholar

10 The issue in this paper is the sensitivity of the loan demand by firms to interest rates on alternative forms of financing. This is a separate issue from the interest elasticity of aggregate regional savings raised in Williamson (Late 19th Century American Development), who evaluates the impact of alternative assumptions about the elasticity of savings for the total quantity of savings. This could have an impact on the demand for deposits but would be unlikely to affect interest sensitivity of the demand for loans.Google Scholar

11 Such models include the work of Klein, M., “A Theory of the Banking Firm,” Journal of Money, Credit and Banking, 2 (1971), 205–18;CrossRefGoogle ScholarMonti, M., “Deposit, Credit, and Interest Rate Determination Under Alternative Bank Objective Functions,” in Szego, G. and Shell, K. (eds.), Mathematical Methods in Investment and Finance (Amsterdam, 1972),Google ScholarGoldfeld, S. and Jaffee, D., “The Determinants of Deposit Rate Setting by Savings and Loan Associations,” Journal of Finance (June 1970), 615–32;Google Scholar and Slovin, M. and Sushka, M., “A Model of the Commercial Loan Rate,” Journal of Finance (Dec. 1983).Google Scholar See Baltensperger, E., “Alternative Approaches to the Theory of the Banking Firm,” Journal of Monetary Economics, 6 (1980) for a good summary of such models.CrossRefGoogle Scholar

12 Such a situation might have been particularly characteristic of some firms in the 1800s.

13 The most extensive empirical work that uses such an approach is that of Goldfeld, S., Commercial Bank Behavior and Economic Activity (Amsterdam, 1966).Google Scholar

14 Variance and covariance terms are not usually explicitly specified but are assumed to be constant over time so that effectively the constant term, bo, will capture these effects.Google Scholar

15 The Almon lag technique is used on RNYC and the loan rates. Almon, S., “The Distributed Lag between Capital Appropriations and Expenditures, Econometrica (Jan. 1965), 178–96. In Table I the sum of the estimated Almon lag coefficients is reported as σRNYC and σRo where Ro indicates the relevant regional own rate.Google Scholar

16 For Regions I through 4 the relevant calculated values for F are 7.35, 9.36, 7.18, and 4.74, respectively, and for Regions 5 and 6 the calculated F values are 1.90 and 2.08, respectively. The relevant tabular value for F is 2.53 at the 5 percent level. See Chow, G., “Tests of Equality between Sets of Coefficients in Two Linear Regressions,” Econometrica, 28 (01, 1960).CrossRefGoogle Scholar

17 It was in 1885 that the New York Stock Exchange broadened its activities beyond government, transport, and utility financing by organizing a department of unlisted securities that allowed issues of industrial firms far from New York to reach the stock exchange.Google Scholar

18 Both level and level log froms were tested. Since the results were similar, only the level form is reported in Table 4.Google Scholar

19 As reported in James, “Banking Market Structure, 1893–1911,” there is no consistent data series on this variable over the later 1800s. Therefore, there are two data series; one ends in 1896 and one begins in 1896.Google Scholar