banks could not rely exclusively on a market system for the protection of their rights. Unit Versus Branch Banking Over the past three-quarters of a century, the merits of unit versus branch banking have been volubly debated. Advocates of unit banks have insisted that, whether the units be small or large, banks without branches preserve a competitive environment and make banking services more readily accessible to small customers. Proponents of branch banking have taken the position that multi-office banks in the European tradition provide assurance of a safe, stable banking system, with little or no likelihood of failures and better service to customers because of greater mobility of funds. Branch-bank supporters have further insisted that because of this mobility of funds small communities are better served by branch systems than by unit banks. As is usually the case in such arguments, both sides can cite historical precedent to suggest that their method of organization has been the "traditional" one. If the appeal to history is confined to the antebellum period, branch-bank advocates have an edge over their unit-bank antagonists. There is plenty of evidence to support the view that throughout the period branch banks were widely accepted as a legitimate form of organization, and that at the very end of the period branch systems showed great vitality and strength almost everywhere outside the New England and Middle Atlantic states. During the latter part of the 18th century and the first decade of the 19th, the right of banks to have branches was not questioned. Typically, banks organized under the early charters had only one or two branches. But as years went on, banks in the Northeast tended to divest themselves of branches, not because of political opposition but because of a lack of economic impellent to keep them. In this early period branches were almost invariably intercity, there being no special advantage to maintaining intracity branches. In the long-settled regions of the United States, areas requiring a banking office were not without wealthy citizens who could provide the capital necessary to start a bank should there be a prospect of profitable operation. At the same time, no cost savings resulted from operating in two or more cities. The consequence was that in the late 1840s there were no branches of banks in any of the New England states, and only two for the State of New York. 6 6 In the 1850s a few small banks in Massachusetts, Connecticut, and Rhode Island began the practice of setting up part-time offices in nearby cities to increase their business. The banking commissioners of these states soon quenched such fiery entrepreneurial spirit, beginning a long history of interference with branching by administrative fiat. Both the first and second Banks of the United States operated branches to the considerable advantage of both institutions. Despite Alexander Hamilton's objections (possibly because he feared competition with his own Bank of New York), the first Bank's charter made it lawful for the directors to establish offices anywhere for the purpose of discount and deposit. Branches were quickly opened in Baltimore, Boston, Charleston, and New York; Norfolk, Savannah, Washington, and New Orleans soon benefited from similar branches. The second Bank had a total of 27 offices and agencies; and while there was complaint in the early years of this Bank's operation about the insubordination of branch managers and the tendency of the branches to become disproportionately large, branch operation of the second Bank was on the whole successful. Branches of the Bank carried on an extremely profitable business, and their competition was felt by state banks everywhere, even in Indiana and Illinois, which did not actually have branches within their boundaries. The two Banks of the United States set a pattern for the organization of branch systems that became typical in pre-1860 America. In a time of slow communication and transportation, it was impossible for a head office to exercise day-to-day supervision over a network of branches. In fact, each branch had its own board of directors; and though Nicholas Biddle gradually imposed a stronger discipline on his wide-reaching offices, local directorates never relinquished a certain autonomy. This same principle of organization was carried over into the great branch systems of the West. The structure of one of the best of them, the State Bank of Indiana (begun in 1834), was imitated by the state banks of Ohio and Iowa. The board of directors of the bank was resident in Indianapolis, the capital city. Yet each of the 17 branches was locally organized, had its own capital subscribed by its own stockholders, and paid its own dividends, subject only to the Indianapolis board's approval. Each branch was in effect autonomous, with a supervisory board of control. The Indiana, Ohio, and Iowa systems were held in high esteem and by any touchstone must be judged successful. Several other states, notably Illinois, Kentucky, Tennessee, Delaware, and Vermont adopted the same type of system. Branch systems of the kind in use today were not unknown, though with one exception they were confined to the South. The Bank of Missouri, a remarkable financial institution, was organized with a head office and five branches. This bank, so conservatively managed that its notes actually circulated at a premium over gold, was run by the head office, its branches having limited authority specifically delegated by the board of directors. But it was in the South that this type of branch banking became a common form of organization. In Virginia, North Carolina, and South Carolina, banks with several branches predominated. In Virginia, more than in any other state, a modern form of branch banking flourished. The Farmers Bank of Virginia was perhaps the largest branch organization in the country in pre-Civil War years. Its head office and 12 branches were managed as well as any of its contemporary financial institutions. Branch banking took a different form in the South for purely economic reasons. Southern capital was largely committed to the plantation system and was not available for a unit bank in every community able to support one. Head offices of banks tended to be in urban centers; therefore, their branches, without local capital contributions in the areas they served, had to be directed from the top. It is foolish to attribute the special organizational characteristics of this kind of system to either European heritage or sociological environment in the South. As elsewhere, availability of resources and the prospect of profitable operations determined the varieties of financial institutions. Banks and the Money Supply Despite the banking troubles that beset certain areas, notably those without sufficient resources to support commercial banks, the various kinds of organization served well the communities in which they emerged. A mass of flamboyant prose to the contrary, American banking in antebellum days was of remarkably high quality, episodes of dishonest or bad banking being aberrations from a norm. Some of these episodes have been recounted with gusto, particularly those describing the activities of wildcatters, who placed their banks far out in the woods to make redemption of notes difficult. Michigan's experience after the passage of the free-banking law of 1837 provided the classic example of wildcatting at its worst. On the frontier shaky banks frequently used operating methods that were scandalous to Boston bankers; and even in the State of New York, where banking was possibly the best in America, country banks would set up redemption offices in Albany and New York, "shaving" a discount of one-half of 1 percent or more in the process of redeeming their notes. There is of course no blinking the fact that the chartering of banks by the several states resulted in difficulties that 20th-century Americans would find intolerable. By 1860 nearly all of the more than 1,500 state banks had outstanding, on an average, six denominations of notes, so that some 9,000 different kinds of paper bills were in circulation. Some were as good as gold; others, as we have seen, passed at varying discounts. Notes of failed and voluntarily liquidated banks stayed in circulation long after the doors of the issuing institutions had closed forever. And with such a variety of designs to choose from, counter In antebellum days several firms provided an inexpensive "reporter" service to provide information to businessmen about the heterogeneous currency. Best known of the services was Thompson's Bank Note and Commercial Reporter, a weekly. feiters practiced a profitable trade that bankers combatted with anticounterfeiting associations, which in turn hired specialists called “snaggers" to ferret out makers of spurious bills. The problem of judging the authenticity of a bill continued and was complicated by the difficulty of determining the discount at which valid notes should be accepted. The presumption was that well-worn notes or those perforated many times by the teller's staple were genuine. But businessmen needed more technical assistance, and they invariably relied on a "bank-note reporter" or "counterfeit detector." The best of these publications, like Thompson's Bank Note and Commercial Reporter, each week provided alphabetical listings, by states, of the notes of banks and the discounts at which they should pass, along with descriptions of known counterfeit bills. Bicknall's Counterfeit Detector and Bank Note List specialized in the identification of bogus bills, whereas Hodge's Bank Note Safeguard furnished 300 pages of facsimile reproductions of genuine notes. However helpful these lists and periodicals may have been, they suggest the plight of the businessman who many times a day had to take his reporter from the hook to see what a particular bill was worth—if, indeed, it was worth anything. The pre-Civil War banking system had faults; but it worked, and it was anything but "chaotic," as many of the old historians alleged. A lack of any federal coordination of the banking system unquestionably meant increasing costs to businesses and households from fees and charges. There was, moreover, the unfortunate possibility of being stuck with a counterfeit note or the bill of a broken bank. But those who managed banks showed a remarkable sense of responsibility, ethical standards on the whole being at least as high as those of their contemporaries in the business world. Working with new and untried institutions, feeling their way along to generally accepted principles of operations, 19th-century bankers probably did not understand all the social implications of their business acts. They nonetheless understood some of them. The settled fact remains that early banks encouraged a rapid development of the American economy that would have been impossible without them. Whatever the hardships and costs imposed upon firms and households, the net effect of early commercial bank activity was to reduce the cost of finance. Moreover, the system assured the most aggressive entrepreneurs of a source of steady funds. No better way of guaranteeing creation of new money to finance new circuits of production could have been devised than this one, which allowed one group of enterprisers to set themselves up in business as dispensers of loans to another group of enterprisers who would take risks with the proceeds. Banks met the new 7 Many of the alleged weaknesses of the banking system should not be attributed so much to banks as to an unstable economy with its pronounced cyclical swings. |