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Federal Reserve Bank of Cleveland

Economic Review/Annual Report 1976

THE ORIGINS
OF
FOURTH
FEDERAL

COMMERCIAL
BANKING
RESERVE DISTRICT

IN

THE
5

Fourth District banks are today among the soundest in the
nation, offering a wide variety of services to industry, agriculture,
and consumers. But it was not always so. This year's Annual Report
traces the history of commercial banking in the District back to its
frontier origins, focusing on the interplay between the rising District
economy and the growth of banking resources to meet its financial
needs.
FINANCIAL

STATEMENTS

DIRECTORS

AND OFFICERS

COVER:
The main office building of the Federal Reserve Bank of Cleveland is one of the
finest examples of Italian Rennaissance architecture
in the nation. The design recalls the
fortresses of Florence and expresses the security and integrity which characterize
the
Bank. Shown on the cover is the lobby off the main entrance, also in the Italian
Rennaissance design to harmonize with the building exterior. The marble is from Sienna,
Italy, and the vaulted ceiling is made of ornamental plaster, decorated by hand in oil. The
emblems in the upper window grilles are those of the cities in which the 12 Federal
Reserve Banks in the United States are located. Member bankers, their employees, and
the public are encouraged to visit the Bank and examine its architecture.

The Economic Review is published
quarterly
by the Research
Department
of the Federal
Reserve Bank of Cleveland.
Free subscriptions
and additional
copies in reasonable
quantities
are
available to the public upon request to the publications
section of the Research Department.
Material
in the Economic Review may be reprinted
provided
the source is credited.
Please
provide the Bank's Research Department
with copies of reprinted
materials.

.34
36

To Member Banks in the Fourth Federal Reserve District:

We are pleased to present the 7976 Annual Report of the
Federal Reserve Bank of Cleveland. This year's report features a brief
history of the origins of commercial banking in the District.
The Bicentennial was a year when Americans remembered their
history and reviewed the basic principles on which the nation was
founded. 50 it seems appropriate that this year's Annual Report
should recall the history of commercial banking in the District and
trace its development back to its frontier roots. That development
from frontier territory to industrial society is the story of the
interplay between a rising District economy and the growth of
banking resources to meet its financial needs. The strength gained
from that experience helped the District through the turbulent
economic events of recent years. Today, Fourth District banks are
among the soundest in the nation, well prepared to respond to the
evolving financial needs of the District's economic activity.
The Annual Report offers us a special opportunity to thank the
member banks, the directors, officers, and staff of this Bank, and all
others who have helped us fulfill our responsibilities during 7976. We
ask for your continued support and assistance in the year ahead.

Horace A. Shepard
Chairman of the Board

Economic Review/Annual

Report 1976

Willis J. Winn
President

3

THE ORIGINS OF COMMERCIAL BANKING IN

Commerce in Cleveland - 1851

4

Federal

Reserve

Bank

of Cleveland

THE FOURTH FEDERAL RESERVEDISTRICT

Roger H. Hinderliter

Development
of commercial banking in the Fourth District closely
parallels the rise of the District economy from frontier territory to industrial
society. When the first settlers arrived in the territory now comprising
the
District, there were no banks to help them finance the infant agricultural
economy they established. As artisan manufacturing began and trade grew, a
merchant group arose that provided banking services. The first chartered
banks soon followed, and the fortunes of these banks, tied closely as they
were to the agricultural character of the District economy, rose and fell with
the prices of agricultural commodities
and land. In the mid-nineteenth
century,
improvements
to
the
transportation
system
and later
industrialization
drew the Fourth District into the mainstream of the
national economy. The broadened economic base and the growth of national
credit markets provided greater opportunities
for bank finance and
stimulated rapid expansion in the banking industry. The Great Depression
viciously interrupted this development,
but the banking system emerged
from it stronger and ready to finance post-war economic expansion. Today's
Fourth District banks are among the largest and soundest
in the nation,
well positioned to respond to the evolving financial needs of the District
economy.
Two hundred years ago, people were just arriving on the frontiers of western
Pennsylvania and Virginia, Kentucky and Ohio, and beginning economic activity in
agriculture,
trade and artisan manufacturing.
The early settlements
established
at
Pittsburgh, Wheeling, Marietta, Lexington and Cincinnati soon after the signing of the
Declaration of Independence were near the natural trade routes of the Ohio River and its
tributaries.
Before long, these settlements needed banking services to support a rising
commercial economy; and here the District's first banks were located.
Completion of an extensive system of canals opened the Great Lakes to commerce
and stimulated growth of the port cities of Erie, Cleveland and Toledo, and the inland
commercial
centers of Columbus and Dayton. Railroads extended the expansionary
impacts of canals on agricultural
markets and, with the introduction
of the factory
system, ushered in the industrial age. As the complexion of the Fourth District economy
Economic Review/Annual

Report 1976

5

changed,
a larger scope and variety of banking services were needed, and banking
resources grew and shifted in response.
Today, Fourth District banks are among the largest and soundest in the nation,
offering a wide variety of services to industry, agriculture and Consumers (Figure 1). But
it was not always so. To reach the current state, banking in the Fourth District passed
through several stages of development-when
ban king growth was sometimes strongly
expansionary,
sometimes volatile and full of failure and sometimes confused and
meandering. This is a history of that passage; a history of the growth and development of
banking resources as they interacted with the rise of the Fourth District economy from
frontier territory to industrial society.

Early Years
Attempts to push out from the colonies into the territory now comprising the
Fourth Federal Reserve District began before the Revolution. In those years, Virginia
claimed the lands along the Ohio River, including the western portion of Pennsylvania.
The Virginia Executive Council made grants to "take-up" and survey sizable tracts of land
before 1750. Settlement aims were specifically recognized in 1749, when a grant of
200,000 acres in the "vicinity of the forks of the Ohio" was made to the Ohio Company
of Virginia. The company was to trade with the Indians, develop the country and form
settlements. An additional grant of 300,000 acres was contingent on successfully settling
200 families'? Although land development and settlement became the primary concerns
of the Ohio Company, these land company activities met with the least success. The
company's
exploration
did, however, set the stage for the migration that began
immediately after the Revolution.
Settlement of Kentucky was well underway when Virginia ceded her western claims
to the United States, and Federal land policies were initiated by the Land Ordinances of
1784, 1785, and 1787. By 1790, Lexington had grown to a town of 834 people and was
the largest settlement in the District. Lexington retained its status as first city until after
the turn of the nineteenth century, when the more advantageous location along the Ohio
River trade route transferred that role first to Pittsburgh and later to Cincinnati.
Migration to Ohio began toward the end of the eighteenth century. Until passage of
the Harrison Land Act of 1800, Federal land policy favored large land purchases, and by
1790, three land companies had contracted for 7,000,000 acres along the Ohio River.
One of these companies, the Ohio Company of Associates, established the first Ohio
settlement at Marietta in 1788. After 1800, smaller tracts could be purchased and
payment made in four annual installments. Large land companies gave way to individual
settlers-the
farmers and artisans who formed the early society of the District.
The economy established by the early settlers in the District was based on
agriculture-a
hard and profit-poor agriculture at best. Clearing the heavily forested lands
along the rivers was a difficult and costly process. Once the farmer cleared the land, he
needed additional resources for livestock, seed and capital improvements if the farm were

1 Kenneth
P. Bailey,
The Ohio Company of Virginia and the Westward Movement (Glendale,
California,
1939),
pp. 30-31.
The Chronicles
of the early settlement
activities
of this company,
including
the orders of the Executive
Council, have been' preserved in Louis Mulkearn
(ed.}, George
Mercer Papers Relating to the Ohio Company of Virginia (Pittsburgh,
1954).

6

Federal

Reserve

Ban k of Cleveland

Figure 1
IN THE FOURTH

Location

DISTRICT:

National

4D TOTAL
Kentucky:

294

Canton
Cleveland
Cincinnati
Columbus
Dayton
Toledo
You ngstowr,
Country

327

1975

Total
Capitalb
$4,820.8

Capital
DensityC
$204.3

3
98

3
44

57.1
246.1

300.7'
196.3

0
2
2
3
0
0
2
1
115

3
1
4
1
3
1
1
1
136

2
2
4
2
4
4
1
2
191

139.2
65.7
846.9
323.3
220.9
118.5
125.3
69.1
1,128.2

260.1
171.4
528.0
357.2
255.0
201.4
261.1
225.1
104.9

0
1
5

2
3
24

0
4
52

30.0
777.8
600.5

389.8
512.7
163.6

2
1

2
11

4
8

40.2
32.0

658.6
158.6

Pennsylvania:
Erie
Pittsbu rgh
Country

West Virginia:
Wheeling
Cou ntry
aBranches

are consolidated.

bMillions of dollars.
cCapital/county
Source:
Economic

Review/Annual

population.

Fe dcral Reserve Bank of Cleveland.
Report

1976

7

to produce a marketable surplus) Once the land was producing a surplus, the produce
had to be brought to market, a process itself round-about
and costly. The financial
resources needed by the infant agricultural economy were in short supply. Without banks
or other financial institutions
money was scarce and credit scarcer still. Early settlers
carried out their transactions
mainly by barter. The barter system was a difficult and
cu mbersome
method of organ izing economic
activity
and
presented
a serious
impediment to economic progress.

"FOR CASH OR COUNTRY PRODUCE"
Initially, the chief crop of the frontier farmer was grain, but grain was bulky and
difficult to ship to market. A method of solving this problem, especially favored by
farmers in western Pennsylvania, was to distill the grain into whiskey. One account
reckons that the amount of grain brought to market overland, at no increase in costs
sextupled if shipped in liquid form)
Kentucky farmers milled their wheat into flour,
which commanded
good prices around 1800. As trade advanced, farmers introduced
alternative agricultural commodities. In Kentucky, hemp was grown early in rotation with
wheat and with greater demand for hempen products, particularly for bailing southern
cotton, production increased. In Ohio, raising livestock became an important alternative
to growing grain.
Artisans
followed
the farmers
into the District.
At first, these artisans
worked in support of the pioneer farmer. In 1792, Pittsburgh numbered four cabinet
makers, five shoemakers, three wheelwrights and a ropemaker among her craftsrnen.?
Later, manufacturers
expanded and produced for the market. Before the War of 1812,
weaving thrived in Pittsburgh; bagging and other hempen products manufacturing
was
underway in Lexington; shipbuilding sustained Marietta; and Cincinnati probably had
taken the first steps toward becoming, by the 1830's, the pork packing center of the
nation. Heavier industry also began. Blast furnaces and forges had been built in several
places in western Pennsylvania and the Mahoning Valley by 1805.
The commerce in agriculture and artisan manufacturing
that developed on the
frontier involved an overland trade between Philadelphia and Pittsburgh and with the
completion of the Cumberland Road in 1817, between Baltimore and Wheeling. For the
most part, the overland traffic in merchandise flowed from east to west. From Pittsburgh
and Wheeling the key to the frontier commerce was the river route to Cincinnati and
finally to New Orleans.
Merchants were the driving force behind the early trade. Before mercantile interests
brought the first local banks into existence, individual merchants performed many
banking functions,
including provision of .safetv deposit facilities, paying cash on a
customer's written order and loaning money.5 In the absence of banks and an abundant

2The capital costs of
frontier of a later date
than initial land costs
Clarence H. Danhoff,
1941), p. 327.
3"The Whiskey

frontier farming may have been seriously underestimated
by settlers. On the
these costs, reported by contemporary
observers, ranged up to ten times larger
and for oneState,
Illinois, averaged 1.65 times larger on a per acre basis. See
"Farm-Making
Costs and the Safety Valve: 1850-1860,"/.
Pol. Econ. (June

Insurrection,"

in Pennsylvania Cavalcade (Philadelphia,

4Neville B. Craig, History of Pittsburgh (Pittsburgh,

1942), p. 170.

1917), p. 200.

5For a brief discussion of the banking activities of early Kentucky
merchants see, R. T. Durrett,
"Early Banking in Kentucky,"
reprinted in Kentucky Banker (September
1976), p, 9. As late as 1832,
a Cleveland merchant lent money to his customers.
(See, Mss. No. 565, account books of George B.
Ogden & Co., Western Reserve Historical Society, Cleveland, Ohio.)
8

Federal

Reserve Bank of Cleveland

circulating
currency,
merchants
performed
the primary function of providing the
workable system of barter exchange. To announce arrivals of new stocks of goods from
the east, merchants from Lexington to Cleveland would post them for sale "for cash or
country produce."6
Within the barter system some
Barter Exchange in the Early Years
products
achieved
prominence.
In
western
Pennsylvania,
where
"whiskey-stills
[were} more plentiful
I rode an excellent horse to the head
than grain mills in New England ... ,
of the waters; and finding him of no
what a bank-bill was at Philadelphia or
further use from my having to take
a shilling-piece at Lancaster, that was
boat there, I proposed selling him to
whiskey in the towns and villages that
the best bidder.
I was offered in
lay
along
the
ban ks
of
the
exchange for him salt, flour, hogs,
Monongahela River. It was the money,
land, cast-iron salt pans, Indian corn,
the
circulating
medium
of the
whiskey,-in
short,
everything
but
country."?
In
Kentucky,
land
what I wanted, which was money. The
warrants and warehouse recei pts for
highest offer made, was cast-iron salt
tobacco
commonly
circulated
as
pans to the amount of a hundred and
money.
thirty dollars. I asked the proprietor of
Many variations
of the basic
this heavy commodity, how much cash
trading
pattern
arose
involving
he would allow me instead of such an
relatively large merchants in Pittsburgh
incumbrance; his answer was, without
and Cincinnati,
river boatmen
who
any shame or hesitation, forty dollars
plied the Ohio and Mississippi rivers
at most. I preferred the pans; though
and local merchants,
farmers
and
they are to be exchanged again for
artisans in the settlements along the
glass bottles at Pittsburg, tobacco or
Ohio. Sometimes roles were combined
hemp in Kentucky, and dollars in New
as, for example, when merchant and
Orleans.
boatman were one or a farmer would
build a boat to transport his produce
Thomas Ashe,* Travels in America,
to market. As the volume of trade
Performed in 1806 (London, 1808)
grew and prospects
for continuing
bus i n e s ses
developed,
separate
* Ashe was a severe critic of all facets of
functions
evolved.
The Pittsburgh
western life and may have embellished
his
merchant arranged for merchandise to
account with overdrawn examples to give a
stronger
negative
impression.
His basic
be
transported
overland
from
observations
on the difficulty
of barter
Philadelphia, financing his inventories
exchange, however, capture the realities of
mainly through
Philadelphia
banks.
early economic activity along the Ohio.
He, in turn, financed the river traders
who stopped at the settlements along
the river, bartering with settlers for produce or manufactured
articles. The boatman or
another agent sold the produce in New Orleans and sent the money by sea to Philadelphia
where the merchant paid his debts and arranged deliveries of new stocks.
By 1810-1812, when receipts from the interior were first recorded at New Orleans,
the trade was sizable. It involved, for example, a large portion of nearly 1 million pounds
of pork and bacon, 82.5 thousand barrels of flour and 7 thousand barrels of whiskey.8

6William Elsey Connelley and E. M. Coulter, History
Orth,A History of Cleveland, Ohio, Vol. I (Cleveland,
7John

Bach McMaster,

War, Vol. II (New York,

8Thomas
Economic

A History

1896),

1910),

p. 614.

of the People of the United

States,

Report

(Chicago,

From

1922),

p. 511; Samuel

the Revolution

P.

to the Civil

pp. 41, 189.

Senior Berry, Western Prices Before
Review/Annual

of Kentucky

1976

7867 (Cambridge,

Mass., 1943),

p, 4.

9

Commerce quickly outgrew the barter system. With the steamboat on the horizon and the
canal system not far behind, merchants sought new sources of finance and all participants
needed a circulating currency.

THE FIRST BANKS
As the needs of trade demanded more money and banking services, unchartered
banking businesses sprang up, usually as an outgrowth of trading activities. A number of
banks which later obtained State charters began operations as unchartered institutions.
Some banks continued to operate for many years as private banking houses in the
tradition of "merchant banking. "9
The first chartered banks were also directly related to the river trade. The Bank of
Pennsylvania in Philadelphia appealed to local merchants and easily obtained their
support for establishing a branch in Pittsburgh in 1803. The first chartered banks in
Kentucky and Ohio came into being accidentally as the result of attempts to foster trade.
The Kentucky Insurance Company, established in Lexington in 1802 to insure river
cargoes, and the Miami Exporting Company of Cincinnati, founded in 1803 to engage in
commerce, were not intended by the legislatures to be banks. But scarcely noticed
provisions of their charters empowered these two institutions to issue notes.
When the Kentucky Insurance Company began issuing notes, it provoked an
anti-banking sentiment that resulted in a public and political response in Kentucky little
short of outrage. Henry Clay wanted the charter (and an amendment to it wh ich specified
restrictions on note issue) repealed. Newspaper stories accused the company of various
underhanded
dealings, such as financing Arron Burr's activities in the west.70 No
comparable outcry arose in Ohio, but there must have been considerable surprise in 1807
when the Miami Exporting Company abandoned its commercial activities in favor of
banking.
State legislatures paid more careful attention to the details of charter applications
afterwards. By 1815, settlers in the District enjoyed the services of 21 banks or branches
with a total authorized capital of about $4.5 million (Figure 2). The first banks did well.
By all accounts the early years were stable and profitable. Even the much maligned
Kentucky Insurance Company could boast that its notes exchanged at a premium in New
Orleans'! 7

Commercial Banking on the Frontier
The business of banking was at once closely linked to the economic activities of the
frontier society. For the most part, banking involved issuing notes redeemable in specie
(gold and silver) by discounting bills of exchange (payable at New Orleans or an eastern

9Charies Clifford Huntington,
A History of Banking and Currency in Ohio Before the Civil War
(Columbus, Ohio, 1915), pp. 37-38;
John Thom Holdsworth,
Financing an Empire, Vol. I (Chicago,
1928), pp. 290-294.
Although one objective of early bank legislation, for example, the Kentucky Act
of 1812 and the Ohio Law of 1816, was to outlaw unchartered
banking, unchartered
banking
continued
to be fairly commonplace
throughout
the 1800's. There were probably more than 300
unchartered
banks doing business in the District in 1900.
10Details of the controversy
over the Kentucky Insurance Company are discussed in several sources.
See, especially, Elmer C. Griffith, "Early Banking in Kentucky,"
Proceedings of the Mississippi Valley
Historical Association, 1908-1909,
Vol. II, pp. 170-175.
11The premium
10

was 1.5 to 2.0 percent.

Ibid., p. 173.
Federal

Reserve Bank of Cleveland

t
i

,,

I

I

\

i

i
I

l1

l~

(

•

\

l l,_-----

,I

.,

•
Figure 2
1815
No. of
Banks+

Authorized
Capital'?

4D TOTAL
Kentucky:

21

4,546.0

15.8

Lexington
Country

2
3

261.5
484.5

11.7
10.9

2
1
5

700.0
100.0
900.0

29.8
8.4
12.8

2
6

450.0
1,650.0

14.9
19.4

Location

Capital
Density-

Ohio:
Ci ncin nati
Dayton
Country

Pennsylvania:
Pittsburgh
Country

aBranches of (first) Bank of Kentucky

are treated as separate banks.

bThousands of dollars.
cCapital/county
Sources:

Economic

population.

R.T. Durrett, "Early Banking in Kentucky,"
Kentucky
Fenstermaker, Development
of American
Commercial
Review/Annual

Report 1976

Banker
Banking

(September,
(7965).

1976);

J.

Van

II

city) or commercial bills (payable at point of issue) in connection with the river trade.
Because of the lack of a plentiful currency, deposits found less acceptability
and
remained a smaller portion of bank liabilities than notes until well into the nineteenth
century. Besides making commercial loans, banks lent to farmers on the security of land
and, though probably not as commonplace as once believed, banks involved themselves in
land speculation. So long as economic conditions remained fairly stable, the notes banks
issued circulated as hand-to-hand currency. Consequently, banks provided a larger volume
of notes, and fi nance, than they had specie in reserve. They operated on· fractional reserve
principles.
Fractional reserve banking before the Civil War faced two problems. On the one
hand, asset portfolios were undiversified and illiquid. Around 1820, loans and discounts
related in one way or another to the production
or distribution
of agricultural
commodities amounted to more than 75 percent of District banks' assets, and although
dependence on loans decreased somewhat in later years, they probably remained in the
neighborhood
of 70 percent of assets for most of the frontier era. The notion that
mercantile credit was self-liquidating
in a short time did not apply to the western
commerce. Merchants could not be pressed for payment wh ile goods traveled down rivers.
Until improvements in the means of transportation
reduced the traveling time between
production centers and markets, trade required relatively long-term credit. Collection of
loans secured directly by land depended on the buoyancy of land values, wh ich generally
moved in the same direction as prices of agricultural produce. No national money market
existed for selling assets at short notice and bankers had little opportunity
for risk
diversification
through purchase of government
or industrial securities prior to the
1850's.
On the other hand, the frontier society of the early 1800's viewed the use of credit
with distrust. This distrust focused directly on chartered banks of note issue. While the
"craving for credit [to support commerce [increased, the aversion to it [on the part of
the farming majority j increased still more. "72 The outrage against the note issuing
activities of the Kentucky
Insurance Company was but one expression of agrarian
distrust. Throughout
the District the undercurrent
of anti-banking sentiment surfaced
often during the frontier years.

YEARS OF GROWTH

AND FAILURE

For a short time after 1815, the frontier continued to prosper and banking with it.
The end of war with England allowed an expansion of international markets, and United
States merchandise exports multiplied more than 11 times between 1814 and 1817.
Expanding markets brought rising prices for commodities produced in the west. By 1817,
the wholesale price of wheat flour stood 44 percent higher than its wartime low in 1814.
In 1816 alone, the wholesale price index of commodities received at New Orleans (other
than Louisiana products) jumped 30 percent.

12Bray Hammond, "Banking
Hist. (May 1948), p, 1.
12

in the Early West: Monopoly,

Prohibition

and Laissez Faire,"

J.

Econ.

Federal Reserve Bank of Cleveland

Good times brought rapid population growth, record land sales and rising land
values. Banks, too, multiplied. The Ohio Law of 1816 more than doubled the number of
banks in the State and quintupled authorized capital by 1818. The Virginia branch
banking system reached the west with the founding of the Northwestern Bank of Virginia
at Wheeling in 1817. The Kentucky legislature chartered some 40 independent banks in
1818.13
Before 1820, two events abruptly ended the expansion of banking in the District.
The first was an attempt by the Second Bank of the United States to reinforce its specie
reserves.
The Second Bank, chartered by Congress in 1816, extablished branches at
Pittsburgh, Chillicothe, Cincinnati and Lexington in 1817. These branches discounted
trade bills extensively.
In the summer of 1818, the Second Bank began to contract its
credit by calling for specie settlement of balances due from State banks. Among the most
severely pressed were the Cincinnati banks, from which the Second Bank demanded
remittance of 20 percent of outstanding balances every 30 days.74 In November 1818,
Cincinnati banks suspended specie redemption; and by the end of the year, most banks in
the District had followed.
If no problems other than the collection policy of the Second Bank of the United
States had confronted District banks, most might have worked out of difficulty. But the
market expansion also ended. In 1819, the wholesale price index at New Orleans fell 15
percent below the 1817 peak and declined 30 percent more by 1821. Land values also fell
and illiquid loan portfolios, which were troublesome in the face of larger than expected
demands for redemption,
became uncollectable
when the activities banks financed
collapsed.
Twelve banks, half of those chartered, failed, closed or lost their charters in Ohio
by 1825. Six of nine banks in western Pennsylvania went out of business. In 1820, the
Kentucky legislature repealed the charters of all independent banks established in 1818.
The Wheeling bank weathered the storm but it reported substantial losses from falling
iand values.15
Anti-banking sentiment once again arose, and the blame for the hardships of the
depression fell on the banks. Banks were accused of reckless over-issue of notes. The
ill-fated Kentucky banks bore especially severe criticism. In their short existence, it was
said, they "rashly extended credit," "flooded the country with their paper" and were
guided by managers "destitute of common honesty."76

13Various
authorities
place the number
of Kentucky
banks at forty, forty-six
or forty-seven.
Apparently,
chartering
the banks was connected
with the passage of debtor protection
legislation
("stay laws") in Kentucky.
(John Jay Knox, A History of Banking in the United States (New York,
1900), pp, 631-632).
An ancillary motive may have been to obtain for the State a greater share of the
profits of banking. (Durrett, op. cit., p, 15). Seen as an attempt to protect the citizenry from the
supposed evils of banking, the action was quite different from an alternative coming out of Kentucky
one year later which would have prohibited
chartered banking, not only in Kentucky but throughout
the United States. (Hammond,
op. cit., p. 3). It has been regarded,
in fact, as an experiment
of the
opposite extreme; an attempt "[to make) money valuable by making it abundant."
(Knox, op. cit.)

14Ralph
15George
490-491.

C. H. Catterall,

T. Starnes,

The Second Bank of the United

"Sixty

Years of Branch

Banking

16Basil W. Duke, History
632.

of the Bank of Kentucky

Economic

Report

Review/Annual

1976

States (Chicago,

in Virginia,"}.

(Louisville,

1895),

1903),

pp. 34,51-52.

Pol. Econ.

pp. 17-18;

(August

1928),

pp.

Knox, op, cit., p.

13

Coping with the Variety of Bank Notes
on the Frontier *
Started
from
Virginia
with
Virginia
money-reached
the Ohio
River-exchanged
$20 Virginia note
for shin-plasters and a $3 note of the
Bank of West Union-paid
away the
$3 note for a breakfast-reached
Tennessee-received
a $100 Tennessee
note-went
back to Kentucky-forced
there to exchange the Tennessee note
for $88 of Kentucky money-started
home with the Kentucky money. At
Maysville, wanted Virginia moneycouldn't
get it. At Wheeling, exchanged $50 note, Kentucky money,
for notes of the North Western Bank
of Virginia-reached
Fredericktownthere neither Virginia nor Kentucky
money current-paid
a $5 Wheeling
note
for breakfast
and dinnerreceived in change two one-dollar
notes of some Pennsylvania bank, one
dollar Baltimore and Ohio Rail Road
and balance in Good Intent shin:
plasters-one
hundred yards from the
tavern door, all the notes refused
except the Baltimore and Ohio Rail
Road-reached
Harper's Ferry-notes
of North Western Bank in worse
repute
there
than in Marylanddeposited $10 in hands of agent-in
this way reached Winchester-detained
there two days in getting shavedKentucky money at 12 per cent, and
North Western Bank at 10.
The Letters of Lowndes Addressed
to the Honorable john C. Calhoun

(New York, 1843)

*Because of the wide variety of notes issued
by ban ks and other insti tutions, financing
travel or goods in transit frequently required
several conversions of notes. Uncertainties
surrounding the soundness of unfamiliar
notes resulted
in discounts on these
conversions that could be troublesome and
costly.
"Shin·plasters"
were fractional
currency.

14

A factor taken as a signal that
ban ks imprudently
issued notes was
the wide variety of notes circulating in
the District by 1818. This condition
posed problems of exchange similar in
some respects to the earlier problems
of barter, but the banking system dealt
with these through discounts and bank
charges
for
exchange.
Upward
movement
in
discounts
meant
mounting concern over a bank's ability
to redeem but not, necessarily, that it
over-expanded
notes to the point of
insolvency.
Many perfectly
sound
bank notes were discounted heavily,
especially
in
sections
where
anti-ban ki ng senti ment was strong.
Discounts on Kentucky bank notes at
Philadelphia grew steadily from 1817
on, but did not reach panic levels until
1821-1823,
after the charters were
revoked.
Available evidence suggests that
District banks did not abuse accepted
practi ces of fracti onal reserve ban king
(Table 1). MUltiples of notes in
circulation to specie were not widely
out of line with the national average or
the banks in the New England States
(perhaps the most conservative in the
country at this time). In particular, the
surviving reports of the Kentucky
banks cast doubt on the consensus
that
they
expanded
circu lation
without regard for redemption. That
ban ks were properly engaged in the
support of local economic activity is
enough to accou nt for wi despread
bank failures. The nature of this
activity
and the basically
hosti Ie
banking environment
rendered banks
vulnerable to failure on any fractional
reserve basis.
Banking in the Fourth District
did not recover from the failures
suffered in the depression brought on
by the Panic of 1818 for nearly a
decade. Toward the end of the 1820's
ban king growth resumed and the pace
increased in the early 1830's. In part,
banking recovered because of an easing
of social and political
constraints
which was the corollary of western
involvement in President Jackson's war
with
the Second
Bank of the

Federal Reserve Bank of Cleveland

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United States'! 7 More significantly, in the 1830's, the western economy at last broke free
from the depression, and the first wave of transportation/improvements
made possible an
expansion of commerce into areas essentially by-passed in earlier good times.
United States' exports, which grew slowly and irregularly in the 1820's, expanded
rapidly between 1830 and 1836. Receipts of merchandise from the interior at New
Orleans also surged, and products important in the District led the way. Pork product
receipts increased over four times and receipts of wheat flour nearly doubled. Wholesale
prices also advanced. The price index at New Orleans rose more than 55 percent between
1830 and 1836.
Commerce was on a firmer footing by the 1830's. The steamboat had proved itself
a superior means of transporting merchandise on the Ohio and Mississippi rivers. Average
monthly steamboat arrivals at Pittsburgh were nearly three times as numerous as keelboat
arrivals by 1836, a 15-fold increase in 10 years. Shipping costs declined substantially, and
steamboats delivered the goods in about 8 days, three times faster than older means of
transport. 78
The Erie Canal, opened in 1825, provided a direct line of commerce between the
lake settlements and the east. The Ohio Canal (Cleveland to Portsmouth, completed in
1833) linked these settlements to the river traffic and provided an improved route to the
east for Ohio valley produce. In 1833, Cleveland handled nearly 100,000 barrels of flour
and 23,000 barrels of pork products, small in comparison to the river centers, but a
considerable advance over the days when only overland routes connected the northern
settlements with eastern markets.
New banks chartered or revived in the District by 1836 reflected the growth and
development of trade (Figure 3). Continued expansion of the river commerce gave rise to
new banks in Lexington, Cincinnati and Pittsburgh.
In Wheeling, seeking to rival
Pittsburgh as the lead city at the head of the Ohio River, a second bank was chartered in
1834. The opening of the north brought banking to Erie, and of 18 new banks in Ohio, 7
were located in lake commu nities or along the route of the Ohio Canal.
The prosperity of the early 1830's was short-lived. First rumblings of new distress
were heard in 1834, and a major panic in 1837 was followed by depression. The
disturbances began with a rash of business failures, principally in New York. Amplified by
crop failures in 1837, panic and depression quickly spread to the west. Prices of western
commodities plunged once again. As before, banks shared the troubles of merchants and
farmers. Although internal improvements enhanced the distribution of produce, the basic
dependence of banks on the agricultural economy remained intact. Many District banks
suspended specie redemption in 1837, tried to resume in 1838, and suspended again in
1839. Ohio banks experienced the greatest difficulty. Nine banks failed by 1842 and 15
more did not have their charters renewed in 1843-1844.
By 1844, only eight survivors
remained in a State which, in 1836, possessed the sixth most populous banking system in
the nation.
Banking problems arising after 1837 paralleled in many respects those which
followed the Panic of 1818. In both instances, government policies relating to a United
States bank were involved. In the latter episode these were a series of actions surrounding
l7lf agrarian sentiment in the District was opposed to State banks of note issue, so much greater was
the opposition
to the Federal Bank, especially after the unpopular
contraction
in 1818. Early
opposition
in the District took several forms, from outright
refusal by State banks to redeem
obligations
presented
by the Second Bank to attempts by State legislatures to tax the Bank out of
existence. Although opposition
cooled somewhat
later, the Bank never obtained
popularity
in the
west. (Bray Hammond, Banks and Politics in America (Princeton,
N. J., 1957). pp. 264-285).
When
the Federal government withdrew its deposits from the Bank beginning in 1833, State banks benefited
directly by becoming Federal depositories.
"Pet banks" were located in several District cities. (Harry
N. Scheiber, "The Pet Banks in Jacksonian Politics and Finance," J. Econ. Hist. (June 1963), pp. 199,
204). Mainly, however,
State banking
interests
were forwarded
by transferring
the force of
anti-banking
sentiment
in the 1820's away from local banking activities and thereby establishing an
environment
receptive to renewed growth.
18Louis C. Hunter,
op. cit., pp. 45-46.
16

Steamboats

on the Western

Rivers (Cambridge,

Mass., 1949),

Federal

pp, 53-56;

Berry,

Reserve Bank of Cleveland

i
i

,

I

tI
I
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I

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(1

J\

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1836

Total
Capitalb

Location
4D TO

r

I\L

Capital

Densitvv

48

15,368.5

17.2

2
4

1 ,582.0
1,170.9

67.7
20.9

1
2
5
2
1
20

104.8
659.2
4,108.2
820.1
178.4
3,778.5

3.3
32.9
59.5
39.2
6.2
8.9

1
3
4

105.8
2,357.5
506.0

4.1
34.2
5.1

2
1

738.0
79.0

51.8
10.4

"""""Kenfucky:
Lexington
Country

Ohio:
Canton
Cleveland
Cincinnati
Columbus
Dayton
Country

Pennsylvania:
Erie
Pittsburgh
Country

West Virginia:
Wheeling
Country
aBranches
bThousands

of Kentucky

cCapital/county
Source:
Economic

Executive
Review/Annual

Documents
Report

and West Virginia banks are treated

a, separate

banks.

of dollars.
population.

of Congress, The Serial Set, Serial No. 324, Doc. No. 79 (1837).
1976

17

President jackson's war with the Second Bank.19 In both instances anti-banking forces
charged the State banks with reckless over-issue of notes and placed the blame for the
hardships of the Depression on the banks.
Viewed from the perspective of fractional reserve banking, the charge of over-issue
again appears shallow (Table 2). The Ohio banks seemingly behaved quite well, in
aggregate, with respect to circulation, reducing their multiple well below the national
average or the New England multiple by the panic year. That so many banks failed to
survive in Ohio while more expansionary
banks in Wheeling did not even suspend specie
redemption before 1841 must be attributed to stronger dissatisfaction with banks in Ohio
rather than widespread
inflation of note issue. "The people of [Ohio] knew that
something was wrong with their banking system, and note issue being the most prominent
function of ban ks, ... concluded that the remedy lay in adopti ng a new system wherei n
the note issue should not depend on general assets alone ... "20 This attitude culminated
in the wholesale rejection of bank charters in 1843, founding of a State bank and new
independent
banks in 1845 and finally establishment
of free banking, which did not
require separate chartering legislation for each bank, in 1851.

PASSING OF THE FRONTIER
Free banking legislation, adopted in Ohio and Virginia in 1851 and in Pennslyvania
in 1860-1861, has been regarded as the final successful effort by enterprise to provide
for the expansion of banking resources on a basis commensurate
with the expansion of
economic activity)'
Once certain conditions regarding the number of principals and the
amount of capital were met, bank charters were granted upon application. As a result,
free banking removed the necessity of periodic legislative action on new bank charters
and requests for increments to existing banks' capital.
Banks established
under free banking laws secured note issues by depositing
government bonds with State banking authorities (as did branches of the State Bank of
Ohio and independent
Ohio banks chartered under the 1845 legislation). Thus, from
another point of view, free banking and prior legislative reform in Ohio mandated
portfolio diversification by State banks. Previously, banks had sought to diversify on their
own by taking part in financing internal improvements.
As early as 1828, banks
petitioned the Ohio Canal Commission for loan business, and Ohio banks took over 50
percent of the canal bonds sold between 1836 and 1840)2 The purchases of canal bonds
represented
substantial
amounts relative to bank assets. For example, a $1,000,000
purchase by the Oh io Life Insurance and Trust Company in 1836-1839 was 45 percent
of the bank's assets reported in 1836. These bond purchases must have been primarily for

191n addition to the establishment
of "pet banks" the actions included passage of the Deposit Act of
1836, which specified restrictions
on State banks holding Federal funds, distribution
of the Federal
government's
surplus, and the Specie Circular of 1836, which prohibited
acceptance
of State bank
notes in payment for public lands. Recent investigations
minimize the effects of these policies either as
a cause of specie management
problems for State banks or as the proximate cause of the panic and the
inflation which preceeded
it. See, especially,
Peter Temin, The jacksonian Economy (New York,
1969).
20Huntington,op.

cit., p. 181. (Emphasis

not in the or iginal.]

21 Bray Hammond, "Banking in the Early West: Monopoly,
Prohibition
and Laissez Faire," j. Econ.
Hist. (May 1948), pp. 23-24;
Hugh T. Rockoff,
"Varieties
of Banking and Regional Economic
Development
in the United States, 1840-1860,"
j. Econ. Hist. (March 1975), pp. 163-164.
22Letter on behalf of Farmers' and Mechanics' Bank of Steubenville,
Mss. No. 3205, Trimble Papers,
Western Reserve Historical Association,
Cleveland, Ohio; Harry N. Scheiber, Ohio Canal Era: A Case
Study of Government and the Economy, 7820-7867 (Athens, Ohio, 1969), pp. 143, 148.

18

Federal

Reserve Bank of Cleveland

TABLE 2
NOTE CIRCULATION/SPECIE
NEW ENGLAND

Kentuckya
Number
of
Year Banks
1835
1836
1837
1838

4
6
6
5

MULTIPLES

OF BANKS IN DISTRICT

STATES AND THE NATION:

Ohio

Virginiab

Pennsylvania

CIS

Number
of
Banks

CIS

2.73
2.66
2.34
3.16

31
31
32
34

3.31
2.63
2.34
3.10

Number
of
Banks
5
8
7
7

Number
of
Banks

CIS
4.46
5.85
2.58
3.48

3
3
3
3

1835-1838

New England

CIS

Number
of
Banks

5.60
4.72
2.06
1.37

277
309
323
300

aDistrict branches of Northern Bank of Kentucky includes separately. Lexington
Kentucky included in 1836,1837,1838.
Maysville branch included 1836,1837.
bBranch of Northwestern Bank of Virginia at Wellsburg included separately.
Mechanics' Bank branch at Morgantown deducted (estimated in 1835).
Sources:

STATES,

Nation

CIS

Number
of
Banks

CIS

5.31
4.14
5.02
4.37

529
619
667
662

3.53
3.64
3.32
2.77

branch of the Bank of

Data for Merchants'

and

Executive Documents of Congress, The Serial Set, Serial No. 302, Doc. No. 65 (1837); Serial
No. 324, Doc. No. 79 (1838); Serial No. 348, Doc. No. 227 (1839); Serial No. 319, Doc. No.
471 (1839); Serial No. 367, Doc. No. 367 (1840).

J. Van
(1965).

Fenstermaker,

Economic Review/Annual

The

Development

Report 1976

of

American

Commercial

Banking:

7782-7837

19

the accounts of others for they did not end up in the banks' investment portfolios. By
1856, however, the year before the third major panic of the century, asset diversification
clearly distinguished Ohio and Virginia banks from those of Kentucky and Pennsylvania
(Table 3).
As important
as free banking may have been for promoting entry and asset
diversification,
more telling still for long-term bank growth were the changes in the
structure of the District economy taking place in the 1850's. Manufacturing expanded in
the District before 1850, but its organization had changed little from the early part of the
century. In 1844, the Governor of Ohio estimated that nearly one-fourth of the total
product of the State was manufactured
goods. But artisan manufacturing
or cottage
industry still accounted for most of the activity. Even the pork packing industry at
Cincinnati consisted of small shops rather than factories. In 1841, 48 establishments
employing 1,220 people produced the pack of 3.1 million pounds)3
All this was changing. The industrial revolution in America did not take place until
after the Civil War, but its foundations were laid in the 1850's. Railroads were the prime
builders. Total railroad mileage in Ohio, where the most rapid expansion occurred,
reached about 3,000 miles by 1860, probably more than any other State and one-tenth of
the nation's total. In response to local demand for railroad connections, 28 separate roads
served the State at the outbreak of the Civil War. Towns such as Alliance, Bellefontaine
and Delaware, which were located off the canal network, possessed multiple rail
connections to larger exporting centers. Indeed, railroad construction
in Ohio may have
proceeded too rapidly; many of the lines proved unprofitable)4
The impact of the railroads on the economy was monumental.
They brought
eastern markets within a few days journey of agricultural producers, thus completing the
by-pass of New Orleans as the middleman in the western trade which the canals had
started. They were the source of early growth in key industries, primarily iron and steel,
which were to be so important to later industrialization
in the District. They also
provided an outlet for loanable funds and thus directly served as the means of further
bank portfolio diversification.
However, railroads' use of bank finance, like the canals
beforehand, was secondary to other sources of capital.
The contribution
of railroads was not an unmixed blessing. Railroads became a
source of economic instability as well as economic growth. Declining profitability and
failure of railroads contributed to the Panic of 1857. This disturbance provided the first
evidence that, so far as District banks were concerned, the frontier had passed. The Panic
of 1857 was accompanied, as before, by crop failures and declining wholesale prices for
produce. Banks in the District failed, some as early as 1853, but the banking system,
freed from illiquid portfolios and a distrustful clientele, was not reduced to shambles as it
had been in earlier depressions. The most noteworthy feature from the standpoint of
District banking was that the failure of the Ohio Life Insurance Company apparently

23 J. B. D. DeBow, DeBow's Review: Agricultural,
Vol. III, (1851), p.131; Berry,op. cit., p. 220.

Commercial and Industrial Progressand Resources,

24George Rogers Taylor, "Comment
on Railroad Investment
Before the Civil War," National Bureau
of Economic Research, Studies in Income and Wealth, Vol. 24, Trends in the American Economy in
the Nineteenth Century (Princeton,
N. J., 1960), pp. 526-527;
George Rogers Taylor and Irene P.
Neu, The A merican Railroad Network: 7867 - 7890 (Cambridge,
Mass., 1956), Map II; Albert
Fishlow, Railroads and the Transformation of the Ante-Bellum Economy (Cambridge, Mass., 1965),
pp. 177-189.

20

Federal

Reserve Bank of Cleveland

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21

triggered the actual panic. This failure was the result of irregularities in the New York
office and was unrelated to local business.25
On the eve of the Civil War, more banks were more widely distributed throughout
the District than ever before (Figure 4). Bank resources, however, measured by capital
density, had not yet recoverd to 1836 levels. Rapid improvement here was left to the
industrial age.

Banking in the Industrial Society
The spirit of economic nationalism that arose after the Civil War promoted the rise
of an industrial economy guided by entrepreneurs who organized production within the
factory system. The forces providing momentum for the industrial take-off included
extensions of improvements
already in place, such as the standardization
of railroad
gauges, which transformed
the transportation
system into a truly national linkage;
advances in technology, such as the Bessemer process in steel making; and more favorable
attitudes of society and government toward capital accumulation and banking. They also
included, in the dual (National and State) banking system which was the prodigy of Civil
War financing efforts, the foundation of a financial network capable of mobilizing capital
on a larger and geographically broader scale than ever before.
The State banking systems existing in 1861 proved incapable of marshalling the
resources needed to finance the war effort while at the same time maintaining specie
redemption of notes. Large eastern banks raised $150 million for the government during
1861. This action resulted in a substantial specie drain and, by the end of the year, these
banks had suspended note redemption. In part, this was due to the insistence of Secretary
Chase on enforcing the specie clause of the Independent
Treasury Law forbidding
Treasury acceptance
of State bank notes. Also, the various State systems were
unaccustomed
to joint action, and the burdens of war finance could not be distributed
among separate banks, at least on short notice.
Secretary Chase, in his annual report for 1861, called for a system of national banks
with a uniform note issue secured by government bonds. He repeated the call in his report
for 1862 and, in 1863, the National Banking System was born. The new system, as
revised by the Act of 1864, was in many respects an extension of earlier State
experiments with free banking. In addition to bond secured note issue, freedom of entry
was maintained.26 Cash reserves against notes and deposits, tried earlier by a few States,
were also required of national banks.

25When it became clear that railroads possessed a speculative element rivaling earlier land dealings,
charges of bank involvement to the exclusion of traditional interests again arose (A. Barton Hepburn,
A History of Currency in the United States (New York, 1924), p, 168). Some individual banks did
become too closely associated with railroad finance. The failure of the Ohio Life Insurance Company
in 1857 and the earlier failure of the Bank of Massillon were District examples. (Huntington, op. cit.,
pp. 226,242.)

26There were economic barriers to entry, however, in the form of capital requirements and
prohibition of mortgage lending which probably accounted for the slow growth of national banks in
areas of the west and south. See Richard Sylla, "The United States, 1863-1913,"
in Rondo Cameron
(ed.), Banking and Economic Development (New York, 1972), pp. 241-242.
22

Federal Reserve Bank of Cleveland

•

•

•

•

figure 4

BANKING

TJ£"-

IN

Location
4D TOTAL
Kentucky:

FOURTH

/6

Ohio:
•••••---~~~en~t~:nd

--

r

8.3

1,058.2
2,920.7

46.8
22.0

38

40.0
988.6
622.5
368.5
182.0
160.2
204.4
4,968.5

0.9
12.7
2.9
7.3
3.5
6.2
7.9
5.6

1
7
10

38.7
5,283.5
956.6

0.8
29.5
3.5

2

1,084.7
121.7

48.4
22.1

~

Cincinnati
Columbus
Dayton
Toledo
Youngstown
Country

1860

Capital
DensityC

18,998.8
2
11

Lexington
Country

DISTRICT:

No. of
Total
Banksa Capitalb

2
2
2
1
1

PennsyIvania:
Erie
Pittsburgh
Country

West Virginia:
Wheeling
Country
aBranches
of Ohio

of Kentucky
are treated

bThousands

Executive

Documents

banks and branches

of the State Bank

banks.

of dollars.

cCapital(county
Source:

and West Virginia

as separate

of

population.
Congress,

The

Serial

Set,

Serial

No.

1101, Doc. No. 77 (1861);

Serial No. 1176, Doc. No. 50 (1864).

Economic

Review( Annual

Report

1976

23

The framers of the National Banking System did not envrsron
State banks
continuing after 1864.27 But formation of national banks was slow; and to spur State
ban k conversion, a 10 percent tax on State bank notes became effective in 1866. While
this had some of the desired effect, note issue was fast becoming secondary to deposits as
a source of bank funds. State and national banks continued to exist side-by-side and, for
the most part, the partners of the dual system that entered the industrial age were banks
of deposit rather than banks of note issue.

FORMATIVE

YEARS

In 1860, firms in Fourth District States produced manufactured products valued at
$500.4 million or $896.8 million at 1926 wholesale prices (Table 4). Between 1860 and
1890, product value increased more than four times in both nominal and real terms.
From 1890 to 1920, nominal value increased more than six times and real value doubled.
Urban centers assumed the leading role in the process of industrialization.
Their share of
the product increased from 20 percent in 1860 to 40 percent in 1920.
The years from 1860 to 1890 were formative. Organizing factories, adapting new
technology and training a labor force more accustomed to the ways of agriculture or,
because much of the labor force growth was through immigration, to different languages
and cultures, was a formidable task. As a result, large scale industry did not leap into
being. Increases in the number of firms accompanied output growth prior to 1890, and in
urban centers, were more significant than increases in firm size. Sometime in the 1890's,
however, the merger movement in American industry gained ascendency.
For the
remainder of the predepression years, growth in firm size dominated growth in industrial
output in the District (Table 5-A).
The growth of District banking paralleled industrial growth. Initially, banks
increased in number. By 1901, over 1,000 banks received deposits and extended credit
throughout
the District (Figure 5). Although total bank capital and capital density
advanced from their pre-Civil War bases, average bank size remained small. In the case of
country banks, average bank size declined between 1860 and 1901 (Table 5-B).
The parallel growth in the number of industrial firms and the number of banks
undoubtedly produced a match-up between supply and demand for short-term credit, but
the match-up was far from complete. As early as the 1870's, industrial firms found the
constraints of their geographical banking connections too restrictive and began to seek
short-term capital funds outside their immediate regional market. In so doing, they
turned to the open-market for commercial paper.
The main vehicles for raising short-term funds on the open market were one-name
promissory
notes. As industrial firms increased their interest in supplying these
instruments, commercial paper dealers sought placement outside the traditional eastern
markets. They found demanders mainly in the widespread banking institutions of the
time.28 Thus, in part directiy and in part indirectly, banks supplied the short-term credit
base for early industrial growth.

27Senator
John Sherman,
who sponsored
the National Banking Bill in the Senate, expressed
the belief
that "[the National
Banking System],
if it has a fair trial, a fair experiment,
will gr aduallv absorb all
the State banks, without
deranging
the currency
of the country
or destroying
the value of the
property
of stockholders
in banks. ("Speech
by Senator
John Sherman
[Ohio]
on the National
Banking
Bill, February
10, 1863,"
reprinted
in Herman
E. Krooss (ed.), Documentary History of
Banking and Currency in the United States, Vol. II (New York, 1969), p. 1386.) Secretary
Chase held
the same view.
28Albert
42-51.
24

O. Greef,

The Commercial Paper House in the United States (Cambridge,

Federal

Reserve

Mass., 1938),

pp.

Bank of Cleveland

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Federal

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Bank of Cleveland

<1.l

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BANKING

'\
IN T

Location

1901

State

National

Total
Capital+

Capital
Densityb

4D TOTAL
Kentucky:

542

226.8

24.7

Lexington
Country

7
33

2.6
8.0

60.9
13.5

1
5
28
6
9
0
10
1
415

4
2
18
13
6
7
6
5
235

1.0
1.0

7.6
3.0
41.6

13.6
9.8
73.7
39.7
27.7
25.2
48.3
40.4
11.0

1
43
56

3
37
158

1.5
66.9
31.0

15.1
83.7
15.9

12
12

2
6

3.1

63.1
13.7

Ohio:

Cincinnati
Colu mbus
Dayton
Toledo
Youngstown
Country

33.8
16.5
4.7
3.4

Pennsy Ivania:
Erie
Pittsburgh
Country

West Virginia:
Wheeling
Country

1.1

aMillions of dollars. Partially estimated for State banks.
bCapital/county

population.

Sources: Annual
Report of the Comptroller
of the Currency
(1901);
Proceedings of the
Twenty-seventh Annual Convention of the American Bankers Association (1901); Board of
Governors of the Federal Reserve System, All Bank Statistics:
7896-7955 (1959); The
Rand-McNally Bankers' Directory (July 1902).

Economic Review/Annual

Report 1976

27

Organization

of Federal Reserve Banks

The operations of the Federal Reserve System are conducted through a
nationwide network of 12 Federal Reserve Banks located in Boston, New
York, Philadelphia,
Cleveland, Richmond,
Atlanta, Chicago, St. Louis,
Minneapolis, Kansas City, Dallas, and San Francisco. Branches of Reserve
Banks have been established in 24 additional cities, and the Federal Reserve
also has other facilities around the country, mainly for the purpose of
clearing checks. The Board's offices in Washington are a headquarters-type
facil ity, and no operations are conducted from those offices.
Each Reserve Bank is an incorporated institution with its own board of
directors, consisting of nine members. As provided by law, the Class A
directors, who represent member banks, and the Class B directors, who are
engaged in pursuits other than banking, are elected by the member banks in
each Federal Reserve District. The Board of Governors appoints the three
Class C directors, and it designates one of the three as Chairman and another
as Deputy Chairman of the Bank's board. No Class B or Class C director may
be an officer, director, or employee of a bank; in addition, Class C directors
are prohibited from being stockholders of a bank. Each branch of a Reserve
Bank has its own board of directors of five or seven members. A majority
(three or four, as the case may be) is appointed by the head-office directors,
and the others by the Board of Governors.
The directors of each Reserve Bank oversee the operations of their
Bank under the over-all supervision of the Board of Governors, and they
establish, subject to approval by the Board, the interest rates that the Bank
charges on short-term collateral loans to member banks and on any loans that
may be extended to nonmember institutions.
Board of Governors of the Federal Reserve System,
The Federal Reserve System: Purposes and Functions
(Washington, 1974)

The effectiveness of the direct contribution
of banks to industrial growth of the
District was mixed. In some cases, such as petroleum refining, great foresight into the
future evolution of the industry and confidence in the entrepreneurs
who guided this
evolution led banks to playa
significant role in the industry's formation.
John D.
Rockefeller
cultivated
ties with Cleveland banks early in his business career as a
commission merchant. Once formed, these ties were not broken and became crucial to
the first venture into refining. " ...
Cleveland bankers were willing to encourage so
important a local industry-particularly
when they could lend to a man as able and
reliable as Rockefeller."29
In other cases, such as automobile manufacturing, short-term
risks clouded the long-term potential of the industry, and bank finance was not
forthcomi ng. AI though prospects for "a steady process of quantity manufacture
[of
automobilesl"were
demonstrated by the Winton Motor Works of Cleveland before 1900,
eventual growth of the industry took place outside the District.30
Indirect bank financing of industrialization
held other implications. Participation of
District banks, along with other banks throughout the United States, in the commercial
paper market contributed to the formation of a National short-term credit market. Had
the banking system been less dispersed in the late 1800's and early 1900's, open market
financing across geographical borders probably would not have developed as extensively as
it did. Structural elements of regional credit markets then may have been more resistent
to change, particularly the interest rate differentials that at one time distinguished one
region from another. As it was, these differentials were gradually reduced during the
28

Federal

Reserve

Bank

of Cleveland

waning years of the nineteenth
century. By 1900, interest rates were much more
geographically uniform; and certainly before World War I, creation of a national credit
market was complete.3!

COPING WITH INDUSTRIAL

CRISIS

Even before the Great Depression, the process of industrialization
experienced
disruptions of substantial proportion. Serious panics occurred in 1873, 1884, 1893 and
1907 and a number of other disturbances erupted as well. The financial features of these
crises differed considerably from earlier episodes.
Safety of the national bank currency was never a serious question during post-Civil
War panics. Indeed, attempts at conversion were attempts to exchange deposits for
currency, especially at State banks. The supply of government bonds to secure national
bank notes was limited and note issues were linked to the par value of bank holdings. The
limited supply of bonds and, with rising market values of bonds, the lack of a profit
incentive to encourage note expansion, meant that rising demand for currency was not
accompanied by rising supply. In short, the currency was inelastic.
Moreover, the required reserve mechanism that was supposed to improve the
liquidity of the banking system turned out to be an inefficient means of distributing
reserves among banks when they were needed. The National Banking System created a
hierarchy of Central Reserve City banks, Reserve City banks and "country" banks and a
reserve mechanism which drew reserv.es into city banks. Legal reserve provisions of State
banking laws also channeled reserves into city banks. The reserves deposited in this
manner generally found their way to the call loan market and could be obtained in time
of trouble only insofar as these loans were actually callable. It was a system where often
one bank could strengthen itself only at the expense of others.
These deficiencies meant that suspensions of cash payments, thought to be a thing
of the past, were very much a feature of industrial panics, and probably amplified the
disturbances.32
As a result, the Federal Reserve Act was passed in 1913 and the Fourth
District joined previously by common economic interests became a legal reality. The
Federal Reserve Bank of Cleveland began operations on November 16, 1914 and the
Cincinnati and Pittsburgh branches opened early in 1918.33 By the end of 1917, 1,854
ban ks had joined the System.
The Federal Reserve System was established at a time when the banking system,
like industry, was changing. Until 1920, the compatibility between industrial needs for
short-term capital and supply through a proliferating number of banks remained intact.
The number of banks in the District, as in the United States in general, continued to grow
and bank funds which could not be lent directly to customers were placed in open market
paper. However, the industrial merger movement began to cause changes in the short-term
credit market.
About 1920, the volume of commercial paper in the open market began to decline
as the large firms capable of using the market experienced reduced needs for short-term

29 Allan Nevins, John D. Rockefeller:
1940), p, 248.
30Allan

Nevins, Ford:

The Heroic Age of A merican

The Times, the Man, the Company (New York, 1954),

31 Lance E. Davis, "The Investment
Market,
Econ. Hist. (September 1965), pp. 355-393.
32Sylla,op.

1870-1914:

The

Evolution

p. 164.
of a National

Market,"

J.

cit., p, 250.

330n the formation
of the Fourth District,
of Cleveland (New York, 1942), Ch. 5.

Economic

Enterprise, Vol. I (New York,

Review/Annual

Report

1976

see Arthur

Frederic

Blaser, [r ., The Federal Reserve Bank

29

credit and cultivated
alternative
sources of funds. Among the alternatives,
direct
borrowing from commercial banks was the most important.34
To accommodate
these
firms held forth the promise of a bank-customer relationship more permanent than past
associations; but to satisfy short-term credit needs of large firms on an on-going basis
required larger banks as well. Consequently, expansion in the number of banks came to a
halt and banks began to grow in size. This movement was fairly slow paced and involved,
initially, a relatively few banks in urban centers.
It is difficult to determine the extent of the concentration movement which began
in the 1920's or the means which permitted banks to grow in size. The intervention of the
Great Depression aborted whatever gradual evolution was underway. Pittsburgh banks
were probably leaders in the District. Between 1920 and 1929, the average size of the
national banks in Pittsburgh on the Comptroller's call list doubled while similar banks in
Ohio Reserve Cities grew by about twenty-two percent. In contrast, all Ohio national
banks, on average, were only five percent larger in 1929 than in 1920.
In addition to structural effects on banks, changing financial market relationships
had portfolio effects as well. The forces which led to the declining volume of open
market paper also limited the direct commercial business of banks, and they were forced
to look for other outlets for funds. In large measure, this meant loans on collateral,
primarily securities, and investments in securities other than U. S. governments. This was
a particularly dangerous portfolio adjustment for banks because their capital positions,
for the most part adequate for ordinary commercial banking purposes, could not
necessarily support activities in securities markets where potential asset depreciation was
large.35 By 1930, more than 30 percent of Fourth District member banks' earning assets
were loans on securities.
Given time, consolidation,
shored-up capital and a modest amount (relative to
subsequent experience) of failure of truly marginal banks would probably have carried
out an orderly transformation
of banking markets without undue hardship. The forces of
change certainly were at work in the 1920's. But time was not at hand. The
transformation
was viciously interrupted by the Great Depression.
The recurring panics of the late nineteenth and early twentieth centuries seem to
have caused no more than temporary interruptions in either economic progress or bank
expansion. The Great Depression, caused by events still the subject of heated debate, was
another matter. Regardless of the causes of the depression, the consequences for a
banking system caught in the process of transition were severe. Between 1930 and 1940,
840 banks failed in Fourth District States and nearly 200 more went into voluntary
liquidation (Table 6). While these failures were not generally out-of-line with national
experience, whether viewed in terms of the proportion of banks existing in 1930 or in
terms of the proportion of total failures since the Civil War, the ravages of the depression
were clearly extensive.
The Great Depression brought about vast changes in the structure and behavior of
the banking system. These included modification in the Federal Reserve System to make
it more responsive in times of severe stress, founding of the Federal Deposit Insurance
Corporation to absorb losses to depositors from bank failures, and greater awareness on
the part of everyone involved in banking that financial stability was a key ingredient in -,

34Greef,op.

cit.,

pp, 145-166.

35There were many State banks in rural areas with capital below $25,000 which may have been
seriously under-capitalized
even for ordinary banking purposes. When the rate of bank failure
picked-up in the 1920's, it was largely these banks which suffered.
30

Federal Reserve Bank of Cleveland

TABLE 6
BANK FAILURES
DURING

IN DISTRICT

THE GREAT

STATES

DEPRESSION

(1930-1940)

State
Bank
Suspensions

State
Kentucky
Number of Banks
Percent of United States
Failures (1930-1940)
Percent of Kentucky
Failures (1863-1940)
Percent of Existing
Kentucky Banks (1930)

110

Economic

1.0

2.1

57.0

17.3

28.8
36.1

47

70

2.5

2.6

4.8

46.1

15.1

62.5
38.0

26.8

West Virginia
Number of Banks
Percent of United States
Failures (1930-1940)
Percent of West Virginia
Failures (1863-1940)
Percent of Existing
West Virginia Banks (1930)

30

1.5

182

Pennsylvania
Number of Banks
Percent of United States
Fallures (1930-1940)
Percent of Pennsylvania
Failures (1863-1940)
Percent of Existing
Pennsylvania Banks (1930)

National
Banks
Insolvent

18

26.5

Ohio
Number of Banks
Percent of United States
Failures (1930-1940)
Percent of Ohio
Failures (1863-1940)
Percent of Existing
Ohio Banks (1930)

Sources:

National Banks in
Voluntary
Liquidation

188

103

149

2.5

5.7

0.2

45.0

30.7

71.3
29.8

26.9
85

28

26

1.2

1.5

1.8

75.2

43.8

68.4

48.0

48.6

Comptroller
of the Currency, Annual Reports, 1896-1940.
Board of Governors
Federal Reserve System, All Bank Statistics:
7896-7955 (1959).

Review/Annual

Report

1976

of the

31

the well-being of the industrial society. The banking system which emerged in the Fourth
District reflected this commitment
to financial stability. Far fewer banks existed in 1940
than in 1930, fewer even than in 1901, but they were far stronger as well (Figure 6).
The reconstructed
banking system that emerged from the depression immediately
faced the problem of supplying short-term credit for rebuilding industrial capacity and
renewing economic growth. In 1940, industrial output of Fourth District States, in
nominal terms, was more than 20 percent lower than in 1920, though real output (1926
prices) was higher because of deflation during the 1930's (Table 4). This problem soon
was compounded
by the necessity of sharing the financial burden of World War II. The
best evidence of the success of Fourth District banks in meeting these challenges is
provided by the rapid growth of industrial output in the District and the further
strengthening
of the banks themselves that has taken place in the post-World War II
economy (Table 4, Figure 1).
The modern economy that has developed since the war is faster moving than in the
past, but banks in the Fourth District are keeping pace. New methods of portfolio
management
(the techniques of "liability management"),
new forms of organization
(bank holding companies), new markets (international
in scope) and new technology
(automated banking) all contribute to "the changing world of banking" in the District.36
This world is the future of banking, not the past, but it is a world in which banks are well
positioned to respond to the evolving financial needs of the Fourth District economy.

36Herbert V. Prochnow and Herbert V. Prochnow, Jr., The Changing World of Banking (New York,
1974). The modern age of banking is fully explored in the essays of this volume.

32

Federal Reserve Bank of Cleveland

e

•

•

Figure 6
IN THE FOURTH

DISTRICT:

Number of Banks''
State
Nonmember National

Location
4D TOTAL
Kentucky:

527

Lexington
Country

502

1940
Total
Capitaf?

Capital
Density?

684.6

38.9

2
105

2
50

5.1
21.5

64.1
16.6

3
1
7
4
5

5.8
5.5
71.3
39.9
18.9
5.9
13.7
11.0
130.0

17.0
23.6
58.5
64.2
48.6
19.9
39.9
45.7
18.8

Ohio:

Cincinnati
Columbus
Dayton
Toledo
Youngstown
Country

2
3
2
6
1
0
4
2
101

1
288

0
1
2
4
3
3
0
2
227

1
11
15

2
19
74

3
8
189

6.3
250.7
85.7

35.0
177.6
25.8

2

5
9

3
5

9.9
3.4

135.3
25.5

Pennsylvania:
Erie
Pittsburgh
Country

West Virginia:
Wheeling
Country
aBranches

are consolidated

bMiliions of dollars.
cCapital/county
Sources:

Economic

population.

Comptroller
of the Currency, Individual Statements of Condition of National Banks (1941);
Thirtv-third
Annual Report of the Division of Banks, State of Ohio (1941); Federal Deposit
Insurance Corporation,
Assets and Liabilities
of Operating
Insured Banks (1941);
Polk's
Bankers Encyclopedia
(March 1941).
Review/Annual

Report

1976

33

Comparative Statement of Condition

Dec. 31. 1976

ASSETS

.

939,388,200
103,000,000
63,793,713
46,208,019

.
.

-0560,153,000

.
.
.

3,180,233,000
3,955,325,000
554,496,000

2,939,681,000
3,475,489,000
436,259,000

Total U. S. Government Securities

.

7,690,054,000

6,851,429,000

Total Loans and Securities

.

8,250,207,000

7,331,279,000

.
.
.
.

604,290,443
24,054,463
2,467,341
215,460,395
127,683,665

558,094,757
25,335,174
697,574
654,068,671
103,121,178

Gold Certificate Reserves
Special Drawing Rights Certificates ....•.......•.
Federal Reserve Notes of Other Banks ...........•
Other Cash
Loans to Member Banks
Federal Agency -Obligations· Bought Outright
U. S. Government Securities:
Bills
Notes
Bonds

Cash Items in Process of Collection
Bank Premises
Operating Equipment
Interdistrict Settlement Account
Other Assets .................•.............

.

Total Assets

$

Dec. 31! 1975
$

888,341,331
43,000,000
121,257,590
44,629,033
100,000
479,750,000

$10,376,553,239

$ 9,769,824,308

LIABILITIES
Federal Reserve Notes

.

$ 7,382,250,855

$ 6,770,159,378

Deposits:
Member Bank - Reserve Accounts
Due To Other FR Banks - Collected Funds
U. S. Treasurer - General Account
Foreign
Other Deposits

.
.
.
.
.

1,327,438,555
26,468,675
788,564,949
20,505,900
40,758,742

1,689,907,719
-0597,027,539
22,846,200
18,263,605

.

2,203,736,821

2,328,045,063

.
.

549,153,562
72,983,501

.

$10,208,124,739

$ 9,608,554,108

.
.

84,214,250
84,214,250

80,635,100
80,635,100

.

$10,376,553,239

$ 9,769,824,308

Total Deposits
Deferred Availability Cash Items
Other Liabilities
Total Liabilities
CAPITAL

ACCOUNTS

Capital Paid in
Surplus
Total Liabilities and Capital Accounts
Contingent Liability on Acceptances Purchased
for Foreign Correspondents
34

413 ,832,654
96,517,013

.

-0-

$

-0-

Federal Reserve Bank of Cleveland

Comparison of Earnings and Expenses

1976
Total Current Earnings .......................
Net Expenses ...............................
Current Net Earnings

$

......................

523,648,517
42,812,911

1975
$

480,835,606

483,991,239
38,663,613
445,327,626

Additions to Current Net Earnings:
Profit on Sales of U. S. Government
Securities (Net) ........................
All Other
.' .......................

.......

Total Additions ........................

2,662,918
335,816

3,012,563
138,099

2,998,734

3,150,662

2,181,447
44,675

21,035,480
61,300

2,226,122

21,096,780

-0772,612

17,946,118
-0-

Deductions from Current Net Earnings:
Loss on Foreign Exchange Transactions (Net)
All Other

...............................

Total Deductions

......................

NET DEDUCTIONS ....................
NET ADDITIONS ......................

....

$

481,608,218

Dividends Paid ..............................
Payments to U. S. Treasury
(Interest on F. R. Notes)
Transferred to Surplus ........................

$

4,953,406

4,790,394

473,075,662
3,579,150

419,877,314
2,713,800

Total ................................

$

Net Earnings before Payments to U. S. Treasury

...................

Disposition

481,608,218

427,381,508

$

427,381,508

$

of Gross Earnings
1975

1976
To

u.s. Treasury
Dividends

-8.2
-0.7

Economic Review/Annual Report 1976

Operating Expenses
Surplus

35

As of February 7, 7977

FEDERAL RESERVE BANK OF CLEVELAND

DIRECTORS

-1977

Chairman
Chairman

HORACE A. SHEPARD
of the Board and Chief Executive
TRW Inc., Cleveland, Ohio

Officer

Deputy Chairman
ROBERT E. KIRBY
Chairman and Chief Executive Officer
Westinghouse Electric Corporation,
Pittsburgh, Pennsylvania

JOHN W. ALFORD,
The Park National
Newark, Ohio

President
Bank

JOH N J. DWYER, President
Oglebay Norton Company
Cleveland, Ohio

MERLE E. GILLIAND
Chairman of the Board
and Chief Executive Officer
Pittsburgh National Ban k
Pittsburgh, Pennsylvania

CHARLES Y. LAZARUS
Chairman
The F. & R. Lazarus Co.
Columbus, Ohio
DONALD E. NOBLE
Chairman of the Board
and Chief Executive Officer
Ru bbermaid Incorporated
Wooster, Ohio
RICHARD P. RAISH, President
The First National Bank
Bellevue, Ohio

OTIS A. SINGLETARY,
President
University of Kentucky
Lexington, Kentucky

36

Federal

Reserve

Ban k of Cleveland

As of February 7, 7977

FEDERAL RESERVE BANK OF CLEVELAND
OFFICERS
WILLISJ.
WALTER

- 1977

WINN,

H. MacDONALD.

Presid-ent
First Vice President

JOHN M. DAVIS, Jr., Senior Vice President and Economist
ROBERT D. DUGGAN, Senior Vice President
WILLIAM H. HENDRICKS,
Senior Vice President
ROBERT E. SHOWALTER.
Senior Vice President
DONALD G. BENJAMIN,
Vice President
JOHN E. BIRKY, Vice President
GEORGE E. BOOTH; Jr., Vice President and Cashier
PAUL BREIDENBACH,
Vice President and General Counsel
R. JOSEPH GINNANE,
Vice President
HARRY W. HUN lNG, Vice President
R. THOMAS KING, Vice President
ELFER B. MILLER, General Auditor
THOMAS E. ORMISTON, [r., Vice President
LESTER M. SELBY, Vice President and Secretary
HAROLD J. SWART, Vice President
DONALD G. VINCEL,
Vice President
OSCAR H. BEACH, [r., Assistant Vice President
MARGRET A. BEEKEL, Assistant Vice President
THOMAS J. CALLAHAN,
Assistant Vice President and Assistant Secretary
GEORGE E. COE, Assistant Vice President
PATRICK V. COST, Assistant General Auditor
ROBERT G. COURY, Assistant General Counsel
JOHN J. ERCEG, Assistant Vice President and Economist
ROBERT J. GORIUS, Assistant Vice President
CHARLES W. HALL, Assistant Vice President and Economist
JAMES W. KNAUF, Assistant Vice President
BURTON G. SHUTACK,
Assistant Vice President
ROBERT D. SYMONDS,
Assistant Vice President
DAVI D A. TRUBICA,
Assistant Vice President
ROBERT VAN VALKENBURG,
Assistant Vice President
ROBERT F. WARE, Assistant Vice President and Economist
CHARLES F. WILLIAMS,
Assistant Vice President
MEMBER,

FEDERAL

ADVISORY

COUNCIL

M. BROCK WEI R, President and Chief Executive Officer
The Cleveland Trust Company
Cleveland, Ohio

Economic Review/Annual

Report 1976

37

As of February

7, 7977

CINCINNATI

BRANCH

DIRECTORS

- 1977

Chairman

LAWRENCE H. ROGERS, II
Chairman and Chief Executive Officer
Development Communications,
Inc.
Cincinnati, Ohio

J.

JOE D. BLOUNT,
President
The National Bank of Cynthiana
Cynthiana, Kentucky

MARTIN B. FRIEDMAN,
Formica Corporation
Cincinnati, Ohio

President

WILLIAM N. LIGGETT
Chairman of the Board
and Chief Executive Officer
First National Bank of Cincinnati
Cincinnati, Ohio

OFFICERS

A. CERINO,

ROSCOE E. HARRISON,

38

- 1977

E. SHOWALTER,

CHARLES

President
Falcon Coal Company Inc.
Lexington, Kentucky

ROBERT A. KERR
Chairman and Chief Executive Officer
Winters National Bank
and Trust Company
Dayton, Ohio

LAWRENCE C. HAWKINS
Senior Vice President
University of Cincinnati
Cincinnati, Ohio

ROBERT

L. JACKSON,

DAVID

F. WEISBROD,

JERRY

S. WILSON,

Senior Vice President

Vice President and Cashier
Assistant Vice President
Assistant Vice President

Assistant Vice President

Federal

Reserve

Bank of Cleveland

As of February

PITTSBURGH

7, 7977

BRANCH

DI RECTORS

- 1977

Chairman

G. J. TANKERSLEY,
Consolidated

President

Natural Gas Company

Pittsburgh,

Pennsylvania

RICHARD D. EDWARDS, President
The Union National Bank
of Pittsburgh
Pittsburgh, Pennsylvania

WILLIAM E. MIDKIFF,
III
Chairman of the Board
First Steuben Bancorp, Inc.
Toronto, Ohio

R. BURT GOOKIN
Vice Chairman
and Chief Executive Officer
H. J. Heinz Co.
Pittsburgh, Pennsylvania

PETER MORTENSEN,
F.N.B. Corporation
Sharon, Pennsylvania

ARNOLD R. WEBER, Dean
Graduate School of
Industrial Administration
Carnegie-Mellon University
Pittsburgh, Pennsylvania

WI LLiAM H. KNOELL, President
Cyclops Corporation
Pittsburgh, Pennsylvania

OFFICERS
ROBERT
WI LLiAM

D. DUGGAN,
R. TAGGART,

PAUL E. ANDERSON,

- 1977
Senior Vice President
Vice President and Cashier

Assistant

Vice President

JOSEPH P. DONN ELL Y, Assistant
CHARLES

Economic Review/Annual

A. POWELL, Assistant

Report 1976

President

Vice President
Vice President

39

Research Department

FEDERAL

RESERVE

BANK

OF CLEVELAND

BULK RATE
U. S. Postage Paid

P. O. Box 6387

Cleveland, Ohio

Cleveland, Ohio 44101

Permit No. 3356