From Drafts to Checks: The Evolution of Correspondent Banking Networks and the Formation of the Modern U.S. Payments System, 1850–1914

Abstract

Checks remained local payments instruments throughout virtually the entire nineteenth century. Their significant use in interregional transactions dates only to the 1890s. We explain their lagged spatial diffusion by the evolution of centralized payments institutions to coordinate transactions among myriad banks, not real technological changes to "annihilate" distance. The pivotal institutions were large correspondent banks, especially in New York. After the Civil War, New York funds constituted a national settlement medium, and the concentration of bankers' balances in New York yielded liquidity and other externalities smoothing the flow of check payments. Copyright (c) 2010 The Ohio State University.

Bank Regulation, Network Topology, and Systemic Risk: Evidence from the Great Depression

“…As the nation grew and population moved westward, banks located in smaller towns and cities sought correspondent linkages with financial centers to carry out business on behalf of their customers as well as on their own account. Further, the National Banking Act of 1864 led to increased circulation of bank drafts as a national payments instrument (James and Weiman, 2010). It had the effect of solidifying the importance of New York correspondent banks at the apex of an emerging pyramid-shaped correspondent network as these centrally-located banks could mediate payments of bank drafts between parties regardless of their location (Redenius, 2007;James and Weiman, 2011).…”

Banker preferences, interbank connections, and the enduring structure of the Federal Reserve System

“…Reflecting the importance of agriculture in many areas of the country, the demands for money and credit were highly seasonal and somewhat varied across regions. The interbank network allowed banks throughout the country to hold surplus funds on deposit with correspondents in the larger cities and draw down their balances or borrow from their correspondents when local demands for money and credit were high (e.g., James, 1978;James and Weiman, 2010). Although the timing of the harvest varied somewhat across regions, "seasonal stringency" in money markets was a perennial challenge.…”

Financial Market History: Reflections on the Past for Investors Today

“…An older literature on correspondent banking in the United States-in which country banks held balances with reserve city banks, which held balances with central reserve city banks-considers similar questions. James and Weiman (2010) have made a start by revisiting these issues during the National Banking era prior to 1913. Richardson (2007) extends the literature on the United States under the National Banking Acts of 1863 and 1864 with a study of the impact of the Federal Reserve Act of 1913 and the role of correspondent banking in the Great Depression.…”