Metropolitan Development, Regional Financial Centers, and the Founding of the Fed in the Lower South

Abstract

The Lower South remained a financial outlier in postbellum America, partly because it lacked developed metropolises. As focal points of regional economic networks, metropolises spawn externalities necessary for financial intermediaries. This cumulative process was constrained in the Lower South by the plantation system and staple monoculture. Only after 1880 did metropolitan networks form around new wholesale distribution centers, notably Atlanta and Dallas. Unlike coastal ports, these cities mediated more diverse commercial and financial transactions and attracted more correspondent banks. Consequently, Atlanta and Dallas were the most likely Federal Reserve cities in their districts, a view shared by local banks.

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

“…Chicago banks covered a wider market area from the Midwest into the plains states. Strikingly, these maps bear a close correspondence to the geography of the Federal Reserve System (Odell and Weiman 1998, McAvoy 2006).…”

“…9 9 Prior studies only document the concentration of bankers’ balances in the largest correspondent banks and banking centers (Watkins 1929, James 1978) or the spatial patterns of correspondent relations (Conzen 1977, Odell and Weiman 1998). …”

Banker Preferences, Interbank Connections, and the Enduring Structure of the Federal Reserve System

“…However, because the number of second-choice votes is highly correlated with the number of first-choice votes, only the coefficient on first-place votes is statistically significant when both variables are included in a model of the selection of cities for Reserve Banks. While second place votes may not have made a difference for the average Reserve Bank city decision, they still could have influenced outcomes of marginal cases, as discussed by Odell and Weiman (1998). County-level tallies of second-choice votes are not available.…”

“…4 preferences. However, in a study about the establishment of Federal Reserve Banks in Atlanta and Dallas, Odell and Weiman (1998) note that leading banks in those cities had developed substantial correspondent banking businesses by the early 20 th Century, holding deposits and providing services for banks located in their respective regions. Further, both Atlanta and Dallas were top choices for Reserve Banks among national banks in their regions, suggesting that correspondent ties may have helped garner support from national banks already accustomed to doing business with financial institutions in those cities.…”

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

“…For example, during the Great Depression, the Federal Reserve Bank of Atlanta's liberal lending policy resulted in superior economic performance in the portion of Mississippi served by the Atlanta Fed than in the portion served by the Federal Reserve Bank of St. Louis, which had a more conservative policy (Richardson and Troost, 2009;Ziebarth, 2013). Further, the establishment of a Reserve Bank appears to have conveyed long-term economic benefits on at least some of the cities where they were located (Odell and Weiman, 1998).…”