Were Banks Special Intermediaries in Late Nineteenth Century America? / Commentary

By White, Eugene N.; Lamoreaux, Naomi R. | Review - Federal Reserve Bank of St. Louis, May/June 1998 | Go to article overview

Were Banks Special Intermediaries in Late Nineteenth Century America? / Commentary


White, Eugene N., Lamoreaux, Naomi R., Review - Federal Reserve Bank of St. Louis


The financial crises and vastly increased competition of the last two decades have radically reshaped the American financial system. One key feature of this transformation has been the declining importance of banks' traditional activities. Weakened by crises and regulatory disadvantages, banks' share of intermediation has shrunk while the shares of other financial intermediaries and markets have expanded. The shrinking banking; sector has raised concerns because banks are important "special" lenders to small firms and other borrowers, they operate the payments system and provide liquidity, and monetary policy is carried out by altering their balance sheets. To put in historical perspective the issue of banks' declining role in lending, this article examines the nature of bank lending in the late nineteenth century and why banks remained the dominant intermediaries, ever. when disadvantaged by regulation and challenged by competitors.

In banking history, the late nineteenth century is termed the National Banking Era. Beginning in 1864 with the passage of the National Banking Act and ending with the founding of the 1 ederal Reserve System in 1913, the National Banking Era was a period of rapid economic growth and price stability. Growth was accompanied by the spread of financial intermediation and innovation. Given the virtual prohibition of branch banking and low capital requirements, the demand for banking services drove up the number of commercial banks that were chartered under the National Banking Act and state laws from 467 in 1864 to 21,478 in 1913. Commercial banks' portfolios were shaped by regulations that prohibited investment in equities, limited mortgages, and encouraged short-term loans. Their liabilities were predominantly demand deposits, and although there had been experiments with insurance of bank liabilities before the Civil War, there was no insurance until very late in the period, when seven states created deposit guarantee funds after the Panic of 1907 (White 1983; Calomiris 1993).

As they do today, commercial banks felt competitive pressures from other regulated financial markets and intermediaries, including trust companies, investment banks, insurance companies, and thrifts. Combining deposit and loan banking with other financial activities, trust companies competed vigorously in the Northeast and Midwest. Commercial banks could not easily meet the demand for longer-term finance by the newly emergent modern corporations. Instead, investment banks created the large bond and equity markets to finance big business. These new financial instruments were absorbed by life insurance companies, often allied with investment banks, which had a steadily rising flow of policy premiums to invest. Banks also faced competition from the money markets. Improvements in transportation and communications enabled commercial paper houses to intrude on banks' territory, offering access to a national market for short-term credit. Mutual savings banks catered to small depositors and the mortgage market, although mortgage companies and savings and loan associations became increasingly important competitors late in the century.

In spite of these fast-growing challengers, commercial banks retained their preeminent position in the National Banking Era. Table 1 reports the shares of all financial intermediaries' assets. Although it is difficult to reconstruct a complete picture of the financial system before 1900, the table demonstrates that commercial banks retained their dominant position among intermediaries well into the early twentieth century. There was little change between 1880 and 1922, when commercial banks steadily held approximately 63 percent of assets. The twentieth-century decline is evident in 1950; by 1990, commercial banks held only 27 percent of all financial intermediaries' assets.1 The sources of this recent decline have been studied intensively (Boyd and Gertler 1993; Wheelock 1993; and Berger, Kashyap, and Scalise 1995). …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Were Banks Special Intermediaries in Late Nineteenth Century America? / Commentary
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.