Nationwide branch banking, by permitting one and the same bank to operate both in the countryside and in New York, would have avoided this dependence of the entire system on a handful of New York banks, as well as the periodic scramble for legal tender and ensuing market turmoil.
Selgin’s thesis is that the banking laws as of 1900 gave privileges to New York banks and that part of the impetus for the creation of the Fed was the preservation of those privileges.
Selgin’s thesis is that the banking laws as of 1900 gave privileges to New York banks and that part of the impetus for the creation of the Fed was the preservation of those privileges.
The hardest thing to understand about the Selgin’s thesis is whether the main failure of the pre-1900 banking system:
1) The New York banks could not grow because they could not place branches across the US and especially in Chicago and St. Louis. (Important to think about because of TBTF today.)
2) The Fed was created to play referee between New York banks and local branch banks.
3) Was the consistent panics because the era was policies were very hard money Gold Standard practices.
4) Or does capitalism is simply prone to financial crisis and panics? (Not say capitalism is bad but it does appear financial crisis consistently happen.)
1. Not only New York banks, but basically any banks in the US could not branch
2. Again, there were no “local branch banks” there were unit banks.
3. Canada had the exact same Gold Standard and did not have those panics, so no.
4. Canadian Capitalism sure wasn’t.
In terms of branching, New York, and other banks, I am assuming the larger New York and Midwest banks would have come to dominate most larger markets kept the local banks with fewer numbers. The era did not have TBTF because of the weird non-branching system. With a branching system, the US in the era would have had TBTF but also less probably panics. (Given that bank risk was very important in the era and in general the era was filled with growing companies with economies of scales advantages to dominate the market.)
Colin, I think you might want to give the paper a closer read. I observe there that the U.S. was the only gold-standard country to be afflicted by frequent crises in the later 19th and early 20th centuries. I also explain that the lack of branch banking was particularly beneficial to a handful of New York City banks, which gained from the corresponded-balances that came there way owing partly to other banks’ inability to open branches in the nation’s central money market, and partly to the reserve requirement laws in effect at the time. The second point is central to the paper, hence pretty hard to miss.
Every bank would have had a New York branch then, and they would have been larger and fewer. It would have aided exchange and transfer, but not risk, especially without a lender of last resort. Scrambles would continue until they became freezes.