Banking on the Periphery: The Cotton South, Systemic Seasonality, and the Limits of National Banking Reform

Abstract

Under the National Banking System from 1863 to 1913, the United States experienced a serious banking panic roughly every decade (Sprague 1910; Miron 1986). Yet, despite this anomalous record of financial and economic turbulence, the federal government did not take the decisive step toward comprehensive reform until the panic of 1907. Less than a year later, Congress adopted the Aldrich-Vreeland Act. Establishing the National Monetary Commission, the Act mobilized leading policy makers, bankers, and economists to propose Awhat changes are necessary or desirable in the monetary system@ (White 1911, App. A; Wicker 2005). Through a parallel private organization representing Athe general business public,@ J. Laurence Laughlin weighed in on the policy debate. 2 In his influential edited volume Banking Reform (1912), Laughlin elaborated the consensus view on the defects of the National Banking System, and emphasized its negative impact on Main, not just Wall, Street. Its artificial note-issue and reserve regulations, he argued, diminished the elasticity of currency but more importantly banks=

Furnishing an “Elastic Currency”: The Founding of the Fed and the Liquidity of the U.S. Banking System

“…According to Redenius and Weiman (2011), the dominance of a single crop-cotton-and the particularly important role of local banks (and by extension their correspondents) in financing the marketing of the cotton crop gave the South a "voracious appetite" for interbank loans and an outsized impact on the "systemic seasonality" of U.S. liquidity demand. Citing data from Kemmerer (1910), Redenius and Weiman (2011) note that southern banks, despite accounting for less than 4 percent of total U.S. bank assets in 1900, accounted for 25 percent of the outflow of cash from the New York money market in the fall and some 30 percent of the flow into New York in the late winter and early spring. By contrast, in the Midwest and other farming regions, greater diversity in the mix of crops and animal production smoothed seasonal demands somewhat, while a more efficient distribution system placed less demand on local banks for financing crop marketing.…”