The Birth of the American Bankers Association: Born into the 'Common Sorrow' of Recession, ABA Laid a Foundation for Future Growth, Prosperity and Financial Stability

By Sparks, Evan | ABA Banking Journal, May-June 2015 | Go to article overview

The Birth of the American Bankers Association: Born into the 'Common Sorrow' of Recession, ABA Laid a Foundation for Future Growth, Prosperity and Financial Stability


Sparks, Evan, ABA Banking Journal


A MASSIVE construction bubble, driven both by speculative investments and government subsidies. Investment houses with excessive leverage in that very same construction bubble. A stock market crash, a spike in unemployment, global panic, a wave of domestic bank failures and resounding political consequences.

If this scenario recalls to you the past several years, then you'll well understand the drama into which the American Bankers Association was born in 1875.

The construction bubble had been in railroads, whose growth had been jumpstarted by the completion of the first transcontinental line in 1863 and the need for rebuilding after the Civil War. From 1868 to 1873, more than 30,000 miles of new track were laid, and speculators piled into railroad stocks.

At the same time, the U.S. government--following the lead of European powers--moved the dollar to the gold standard. Dropping silver backing for the currency contributed to a tighter money supply and choked off funds for speculative investments. In September of 1873, the investment house of Jay Cooke, the heavily leveraged financier behind the Northern Pacific railway, failed to find buyers for its bonds and collapsed.

The economy crashed with Cooke's firm and the railroads, triggering one of the deepest and longest recessions in American history. The New York Stock Exchange closed for two weeks. Wages fell by a quarter. Unemployment spiked to double digits. Ninety percent of railroad concerns collapsed. More than 300 banks failed in the years of the panic.

The effects of the panic were felt far and wide. In St. Louis, a 31-yearold bank cashier named James Howenstein watched and worried as his liquidity dwindled. One afternoon at closing time, he found himself with just a few hundred dollars left--and millions in deposits remaining to pay.

He cut it close, but Howenstein made it. That very night, his clearing house provided the necessary funds. As a correspondent banker for smaller banks in the surrounding countryside and a former examiner with the nascent Comptroller of the Currency, Howenstein kept up an active correspondence with his peers across the country, sharing news of the panic and how it was playing out in their towns. Howenstein was a bit embarrassed, though, to share news of surviving his tight squeeze with his colleagues--many of whom were not so lucky as he.

"A common sorrow makes friends of us all," Howenstein recalled wistfully. As the money crunch eased, he received fewer frantic missives and more reflective letters, a sign of a young industry moving beyond a crisis and looking ahead once again to its future. "We were acquaintances before we had seen more of each other than handwriting; we were friends before we knew it. But the time had now come for something better," he later reflected. "We wanted to meet each other."

The concept took clearer shape for Howenstein one day early in 1875, when, after closing up shop, he and fellow banker Edward Breck were walking down Olive Street in St. …

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