I wish to thank two anonymous referees for their useful comments.Google Scholar

¹ Sushka, Marie Elizabeth and Barrett, W. Brian, “Banking Structure and the National Capital Market, 1869–1914,” this JOURNAL, 44 (06 1984), pp. 463–78. The article was drawn from a much longer research paper of the same title which Professors Sushka and Barrett graciously made available.Google Scholar

² Sushka and Barrett, “Banking Structure,” p. 467,Google Scholar especially fn. 6. For the Davis rates see Davis, Lance E., “The Investment Market, 1870–1914: The Evolution of a National Market,” this JOURNAL., 25 (09 1965), pp. 355–99.Google Scholar Sushka and Barrett's justification for using the net rates of return concerned their understanding that the interest rate estimates of Smiley and James simply removed U.S. bond income from Davis's net-rate estimates. They are incorrect, however. Smiley's and James's estimates were reestimates of the gross rates of return that Davis developed. For the Smiley rates see Smiley, Gene, “Interest Rate Movement in the United States, 1888–1913,” this JOURNAL, 35 (September 1975), pp. 591–620, and Gene Smiley, “Revised Estimates of Short Term Interest Rates of National Banks for States and Reserve Cities, 1888–1913,” (Working Paper, Marquette University, October 1976).Google Scholar James's rates can be found in John James, A., “Banking Market Structure, Risk, and the Pattern of Local Interest Rates in the United States, 1893–1911,” Review of Economics and Statistics, 58 (11 1976), pp. 453–62,CrossRefGoogle Scholar and James, John A., “The Development of the National Money Market, 1893–1911,” this JOURNAL, 36 (12 1976), pp. 878–97.Google Scholar

³ Other studies have also incorrectly used Davis's net rates of return as estimates of interest rates. In particular, see Williamson, Jeffrey G., Late Nineteenth.Century American Development (New York, 1974), chap. 6.Google Scholar

⁴ See Smiley, “Interest Rate Movement,” particularly pp. 593–94 and 602.Google Scholar

⁵ Davis, “The Investment Market,” p. 357, emphasis added.Google Scholar

⁶ See Smiley, Gene, “The Evolution and Structure of the National Banking System, 1870–1913,” (Ph.D. diss., University of Iowa, 1973); and Smiley, “Revised Estimates.”Google Scholar

⁷ For correlation coefficients see Smiley, “Interest Rate Movement,” fn. 6, pp. 593–94.Google Scholar

⁸ For rate convergence using consistent sets of city and country rate estimates see Smiley, Gene, “Regional Variation in Bank Loan Rates in the Interwar Years,” this JOURNAL, 41 (12 1981), pp. 896–99.Google Scholar

⁹ The Smiley rates can be found in Smiley, “Interest Rate Movement,” where they are presented in regional averages, and in Smiley, “Revised Estimates.” In “Revised Estimates” the period over which the loans and non-U.S. government securities were averaged was lagged behind the earnings period by about six months. The James rates can be found in James, “Banking Market Structure,” and in James, “The Development of the National Money Market.” James's rates were developed for six-month periods, which required that his series end at 1911 rather than end at 1913 or 1914 (or beyond). He subtracted the estimated earnings of non-U.S. government securities to estimate bank-loan rates by using the rates of return on a set of railroad bonds. Since the non-U.S. government securities were generally a small fraction of the loans and non-U.S. government securities portfolio, the effect was rather small. In addition, banks owned the securities of state and local governments and private firms as well as railroads.Google Scholar

¹⁰ The Comptroller's rates for 1889, 1894, and 1899 are taken from The 1899 Report of the Comptroller of the Currency (Washington, D.C., 1899), pp. 484–97.Google Scholar The 1902 rates are derived from The 1902 Report of the Comptroller of the Currency (Washington, D.C., 1902), pp. 252–79Google Scholar. The 1910 rates are from The 1910 Report of the Comptroller ofthe Currency (Washington, D.C., 1910), pp. 766–76.Google Scholar The Comptroller did not indicate whether the average loan rate requested was an average for the particular day, month, or the whole year. Neither did he indicate how he constructed the state or city average loan rate, for example whether the rates were weighted by loans or whether equal weights were used. The 1889 and 1894 rates were estimated by bank officials when they responded to the survey in 1899. Thus, there is some doubt about the accuracy of the Comptroller's reported average bank-loan rates.

¹¹ Sushka and Barrett, “Banking Structure,” p. 467. Also see their working paper, pp. 17–30. It should be reiterated that these conclusions cannot be considered valid because they utilize improper estimates of interest rates.Google Scholar

¹² For example, in 1900 capital requirements for national banks in communities of 2,500 or less were sharply reduced. This was enacted in response to continued demands to improve the financial services and lending conditions offered in small communities. Many had called for branch banking to improve the functioning of capital markets. R. M. Breckenridge's 1898 study was concerned with documenting and explaining why there were such large interest-rate differentials between regions. He contended that these were due to “transactions costs” (the modern-day term) and that branch banking would improve capital allocation and reduce the interest-rate differentials, see Breckenridge, R. M., “Discount Rates in the United States,” Political Science Quarterly, 13 (1898), pp. 119–42.CrossRefGoogle Scholar

¹³ Elsewhere I have also argued that the evidence does not support the Sylla-James monopoly power explanation for the decline of interest-rate differentials. See Smiley, Gene, “Interest Rate Convergence in the United States, 1888–1913,” The Mid-South Journal of Economics, 8 (09 1984), pp. 177–86.Google Scholar

¹⁴ Navin, Thomas R. and Sears, Marion V., “The Rise of a Market for Industrial Securities, 1887–1902,” Business History Review, 29 (06 1955), pp. 105–38;CrossRefGoogle Scholar see also Smiley, Gene, “The Expansion of the New York Securities Market at the Turn of the Century.” Business History Review, 55 (Spring 1981), pp. 75–85.CrossRefGoogle Scholar

¹⁵ Sushka and Barrett, “Banking Structure,” working paper, p. 43. The better fit with distributed lags may be due to the use of the Davis net rates of return. Since the net earnings were a residual, they have large short-term variations—much greater than those from gross earnings. As a result the distributed lags average the net rates so that they are smoother and less volatile, closer to the movement of more accurately estimated interest rates.Google Scholar

¹⁶ Sushka and Barrett, “Banking Structure,” working paper, p. 43. They did not indicate whether they used the weighted or the unweighted rates. It is most likely that they tried four rates (weighted and unweighted regional city and weighted and unweighted regional country rates) and used whichever yielded better t–statistics.Google Scholar

¹⁷ See Davis, “The Investment Market”; Sylla, Richard, “Federal Policy, Banking Market Structure, and Capital Mobilization in the United States, 1863–1913,” this JOURNAL, 29 (12 1969), pp. 657–86; Smiley, “Interest Rate Movement”; and Smiley, “Regional Variation in Bank Loan Rates.”Google Scholar

¹⁸ Sushka and Barrett, “Banking Structure,” Tables 1 and 2, p. 474.Google Scholar

¹⁹ pp. 469–73 and pp. 34–47 in the working paper.Google Scholar

²⁰ For a discussion of this see Davis, “The Investement Market,” pp. 370–71.Google Scholar

²¹ Smiley, “Interest Rate Convergence,” finds evidence of this characteristic. Prior to the depression of the 1890s and after 1900 there was no cross-sectional relationship by states between the share of securities in loans and securities and the country bank loan rate. During the depression and recovery from the 1890s depression there was a significantly positive relationship. Loan losses were relatively greater in the more southern and western areas. With the increase in loan risk in the higher-rate states, banks reduced lending and increased their purchase of lower-rate securities. With the completion of the recovery and declining loan risks banks in the higher-rate areas reduced their securities holdings and made more loans.Google Scholar