Academic journal article Federal Reserve Bank of Minneapolis Quarterly Review

Interbank Payments Relationships in the Antebellum United States: Evidence from Pennsylvania

Academic journal article Federal Reserve Bank of Minneapolis Quarterly Review

Interbank Payments Relationships in the Antebellum United States: Evidence from Pennsylvania

Article excerpt


This article investigates U.S. interbank relationships before the Civil War using previously unknown data for Pennsylvania banks from 1851 to 1859 that disaggregate the amounts due from other banks by debtor bank. It finds that country banks, banks outside of Philadelphia and Pittsburgh, dealt almost exclusively with financial center banks. Most had a large, highly stable relationship with a single correspondent bank. The location of a country bank's correspondent was consistent with trade patterns, particularly railroad and canal linkages. Philadelphia banks, in contrast, did not establish correspondent-type banking relationships. Further, Philadelphia's correspondent banking market was not highly concentrated, and entry was easy. This study originally appeared in the Journal of Monetary Economics [C] 2003 by Elsevier Science B.V.

In the United States prior to the Civil War, banks played an important role in the country's payments system. They issued notes, which were the largest component of currency in circulation. They discounted promissory notes and bills of exchange that their customers acquired as payment for the provision of goods and services. They also guaranteed payments transactions.1 In these ways, banks provided for their customers' needs to make and receive payments and to settle debts.

Banks did not play their role in the country's payments system in isolation from each other, however. The desire of a bank's customers to make payments to people and businesses who were customers of other banks meant that banks had to deal with other banks in the normal course of business. This is shown in contemporary bank balance sheets. These balance sheets contain three items that pertain specifically to interbank relationships. Banks held "notes (bills) of other banks" and had amounts "due from (by) other banks" as assets. They had amounts "due to other banks" as liabilities.

Virtually every bank had positive amounts of at least one of these items on its balance sheet at all times; the vast majority of banks had positive amounts of all three. (See Weber 1999.) Further, the magnitudes of these interbank balance sheet items were large. The aggregate amounts of these three items for all U.S. banks, along with the total amount of bank assets and capital, are presented in Table 1 for selected years between 1840 and 1856. The table shows that in those years between 11 and 19.5 percent of the total note circulation of banks was held by other banks. Amounts due from other banks were, roughly, between 7 and 8.5 percent of total bank assets, roughly the same order of magnitude as banks' holdings of specie, making this the second or third largest item on the asset side of banks' balance sheets. Amounts due to other banks were, roughly, between 10 and 14.5 percent of banks' total liabilities and were banks' third largest liability after circulation and deposits. (2)

While qualitative discussions of U.S. interbank relationships exist in contemporary sources such as the work of Gibbons (1858), not much is known quantitatively about such relationships anywhere in the country during the antebellum period. (3) A major reason is that on most extant bank balance sheets for the antebellum period, only the total amounts of "notes of other banks," "due from other banks," and "due to other banks" are listed. These interbank balance sheet items are not disaggregated by the individual debtor or creditor bank. While the existence of these items on bank balance sheets documents the existence of interbank relationships, the balance sheets do not provide much quantitative information about the nature of such relationships.

I have discovered some disaggregated 19th century data on interbank balance sheet items for banks in one state, Pennsylvania. That state's contemporary legislative documents include, for a sample of Pennsylvania banks, the amounts "due from other banks" by individual debtor bank during the period from 1851 to 1859. …

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