¹ Sylla, Richard, “Federal Policy, Banking Market Structure and Capital Mobilization in the United States, 1863–1913,” Journal of Economic History, XXIX (December, 1969), 657–660CrossRefGoogle Scholar and passim; “The United States 1863–1913,” Chapter VIII in Cameron, Rondo, ed., Banking and Economic Development (New York, 1972), 232–262Google Scholar.

² Robertson, Ross, The Comptroller and Bank Supervision (Washington, D.C., 1968), 62–66Google Scholar.

³ Ibid., 68; also see Sylla, “Federal Policy,” 663–664.

⁴ This argument has been put forward by Lance Davis in a series of articles. See Davis, Lance, “The Investment Market, 1870–1914: The Evolution of a National Market,” Journal of Economic History, XXV (September, 1965), 355–399CrossRefGoogle Scholar; “Capital Immobilities and Finance Capitalism: A Study of Economic Evolution in the United States, 1820–1920,” Explorations in Entrepreneurial History, Second Series, I (Fall, 1963), 88–105Google Scholar; “Capital Immobilities, Institutional Adaptations, and Financial Developments: The United States and England, An International Comparison,” Zeitschrift sür die gesante Staatswuissenschast, 124 (1968), 14–33Google Scholar; “The Capital Markets and Industrial Concentration: The United States and United Kingdom, A Comparative Study,” Economic History Review, Second Series, XIX (August, 1966), 255–272Google Scholar.

⁶ The literature on bank costs and scale economies in banking is voluminous. For example, see Gramley, Lyle E., A Study of Scale Economies in Banking (Kansas City, 1962)Google Scholar; Horvitz, P. M., “Economies of Scale in Banking,” Private Financial Institutions (Englewood Cliffs, N.J., 1965)Google Scholar; Benston, George, “Economies of Scale and Marginal Costs in Banking Operations,” National Banking Review, II (June, 1965), 507–549Google Scholar; Greenbaum, Stuart I., “A Study of Bank Costs,” National Banking Review, IV (June, 1967), 415–434Google Scholar; Bell, F. W. and Murphy, N. B., Costs in Commercial Banking: A Quantitative Analysis of Bank Behavior and its Relation to Bank Regulation (Boston, Federal Reserve Bank of Boston, Research Report No. 41, April, 1968)Google Scholar.

⁶ The source for bank balance sheet and income data is the Report of the Comptroller of the Currency for the indicated years. Individual bank balance sheets were reported annually. Income data were reported for country and reserve city banks as groups and not individually. Balance sheet and income data used in this study are totals for these two groups. Details are in Keehn, Richard H., “Market Structure and Bank Performance: Wisconsin 1870–1900” (Ph.D. dissertation, University of Wisconsin, 1972)Google Scholar, Appendix H. Much of the information in this article is from this source.

⁷ Sylla, “Federal Policy,” 659–662.

⁸ Ibid., 664–665. Sylla also discussed the manner in which the National Banking System linked the “country's banks together through a reserve system that provided a formal, legally sanctioned mechanism for transferring funds between banks” (657).

⁹ For example, see Robertson, The Comptroller, 57–66.

¹⁰ National bank figures are for the call nearest September 30; state and private banks between July 1 and November 30.

¹¹ Descriptive accounts of Wisconsin banking during the 1860s are Merk, Frederick, Economic History of Wisconsin During the Civil War Decade (Madison, 1916), 187–219Google Scholar, and Krueger, Leonard B., History of Commercial Banking in Wisconsin (Madison, 1933), 75–96Google Scholar.

¹² Keehn, “Market Structure,” 19–24.

¹³ National bank chartering was slowed nationally after 1866 because of the ceiling placed on the total amount of national bank notes that could be issued. This prevented new national banks from obtaining charters unless existing banks surrendered theirs. An act of 1870 increased by $54 million (to $354 million) maximum circulation. Most of this increase was allocated to the Midwest and South and evidently accounts for the rapid increase in the number of Wisconsin national banks between 1871 and 1874. The limit on national bank notes outstanding was removed in 1875 but failed to stimulate entry, and the number of national charters in Wisconsin fell by thirteen between 1875 and 1881. Krueger, History of Commercial Banking, 113–116.

¹⁴ Reasonably complete information on private banks is available only from 1879, when they were required to file financial reports with a state agency. Some of the increase in the number of private banks between 1880 and 1900 (Table 1) reflects increased compliance with the law and not necessarily an increase in the number of banks of the magnitude shown.

¹⁵ Calculated from data in Keehn, “Market Structure,” Appendices F and G.

¹⁶ Cameron, Rondo et al. , Banking in the Early Stages of Industrialization: A Study in Comparative Economic History (New York, 1967), 297Google Scholar. Cameron defines a ratio over 1.0 as “high.” By this standard, Wisconsin was better served by banking offices than most countries at similar stages of development.

¹⁷ Calculated from data in Keehn, “Market Structure,” Tables B–5, a–f.

¹⁸ Ibid., Tables B–5, a–f.

¹⁹ Sylla, “The United States,” (p. 244) says: “The factor that appears to have been responsible for the slow recovery of state banking was the effective prohibition of state bank note issues by the ten percent federal tax enacted in 1865 on such issues.” He recognized considerable regional diversity in the importance of note issue just prior to 1866 and suggested that deposit banking was slower to develop in those areas where note issue had been most important (p. 245). His conclusion, however, does not mention regional differences: (pp. 245–246) “State banking was slow to provide a remedy for the deficiencies of national banking in the late nineteenth century largely because an important part of its business, note issue, had been taken away. The habit of writing checks, which seems so simple today, was slow in coming to the rural districts of America in this period and so, therefore, was pure deposit banking.” State and private banks were limited to deposit banking, but in Wisconsin these banks had surpassed national banks in importance by 1880. This illustrates the problem of generalizing about the very diverse American banking sector in the post-Civil War period.

²⁰ Sylla, “Federal Policy,” 657.

²¹ For evidence on the limited size of banking markets in the 1960s see Lynn A. Stiles, Businesses View Banking Services, A Survey of Cedar Rapids, Iowa; Kaufman, George G., Customers View Bank Markets and Services, A Survey of Elkhart, Indiana, and Business Firms and Households View Commercial Banks, A Survey of Appleton, Wisconsin (Chicago, Federal Reserve Bank of Chicago, 1967).Google Scholar

²² As late as 1914, the Wisconsin Commissioner of Banking did not have authority to deny charter applications. In that year he attempted to deny a new state charter on the grounds that another bank was not needed in the area, but he was overruled by the Board of Appeal, which stated that the Commissioner did not have the power to pass on charter applications. See Wisconsin State Journal (Madison), July 9, 1914Google Scholar; Milwaukee Sentinel, July 17, 1914.

²³ For a more detailed discussion of these issues see Keehn, “Market Structure,” 88–91. Also see Bain, Joe, Barriers to New Competition (Cambridge, Mass., 1950), 12Google Scholar and passim.

²⁴ Keehn, “Market Structure,” Chapter Four. The results of multiple regression analysis exploring the relationship between bank loan ratios as an indicator of bank performance and measures of market structure, including the number of banks in county or city markets and one bank concentration ratios, found that market structure variables explain very little of the observed differentials in individual Wisconsin bank loan ratios. A plausible reason for this finding is relatively unrestricted entry, which made many markets more competitive than the usual indicators suggest.

²⁵ Cagan, Phillip, “The First Fifty Years of the National Banking System — An Historical Appraisal,” in Carson, Deane, ed., Banking and Monetary Studies (Homewood, III., 1963), 22Google Scholar; Robertson, The Comptroller, 62–64.

²⁶ Robertson, The Comptroller, 64–66.

²⁷ Ibid., 66.

²⁸ Out of 186 national banks that operated in Wisconsin prior to 1914, six were reported as failing through 1914. See Table 2.

²⁹ The high rates of return do not necessarily reflect barriers to entry but rather increasing demand and lagged adjustment.

³⁰ Average annual entry rates were calculated from the data contained in Table 2. Average annual returns to equity (net profit/net worth) were calculated from information in Table 8. Data for all U.S. national banks are from Powlison, Keith, Profits of the National Banks (Boston, 1931), 93–96Google Scholar. This series is the ratio of net profits to capital and surplus.

³¹ Cameron, Banking in the Early Stages, 9.

³² Posey, Rollin, “Profits of Commercial Banks,” Harvard Business Review, VIII (July, 1930), 427Google Scholar; Myers, Margaret G., The New York Money Market (New York, 1931), 331–334Google Scholar.

³³ Breckenridge, R. M., “Discount Rates in the United States,” Political Science Quarterly, XIII (1898), 126Google Scholar.

³⁴ Davis, “The Investment Market,” especially 360–365. Davis (on p. 356) attempted “to provide some quantitative measures of the barriers to interregional mobility and to suggest that certain institutional innovations in the period 1870–1914 acted to reduce these barriers.”

³⁵ In constructing the gross and net earnings series, an attempt was made to approximate the methods used by Davis, “The Investment Market,” 357–358.

³⁶ Ibid., 357.

³⁷ It is also consistent with other Wisconsin interest rate data for 1870–1914. Keehn, “Market Structure,” Appendix E. Region Four includes Ohio, Indiana, Illinois, Michigan, Wisconsin, Minnesota, Iowa, and Missouri.

³⁸ Ibid., 158–163.

³⁹ Ibid., 161.

⁴⁰ Gramley, A Study of Scale Economies, 48.

⁴¹ Davis, “Capital Immobilities, Institutional Adaptation,” 19.

⁴² Calculated from data in Keehn, “Market Structure,” Table G–4, 315–333.

⁴³ Suspension rates for all United States national banks and Wisconsin national banks are given below for selected periods (percentages per year):

U.S. figures are from Cagan, “The First Fifty Years,” 40. Wisconsin figures are from Keehn, “Market Structure,” 31.

⁴⁴ Hoover, Edgar M., The Location of Economic Activity (New York, 1963), 167Google Scholar. A differential at any time can also reflect disequilibrium and lagged adjustment.

⁴⁵ Stigler, George, “Imperfections in the Capital Market,” Journal of Political Economy, LXXV (June, 1967), 288Google Scholar.

⁴⁶ Greef, A. O., The Commercial Paper House in the United States (Cambridge, Mass., 1938), 139Google Scholar.

⁴⁷ Davis, “The Investment Market,” 392, concluded that “in the case of short-term rates, the differentials had been substantially reduced by World War I, and this reduction appears to have been the result of the growth of a national short-term capital market. In particular, the commercial paper market appears to have made substantial contributions to this process.” The reduction in transfer costs, broadly defined, also acted to reduce short-term rate differentials. Davis tends to overstate the role of institutional change in narrowing rate differentials, and the impact of each can not be measured separately.

In discussing the long-term market, Davis concluded (292–293) that “institutional developments appear to have reduced interest differentials, but some (particularly in the South and the Pacific region) continued to exist.” He used data on private and savings banks, reported by the Comptroller of the Currency, to support his argument. He says (378), “Let us assume that (1) if a banker is faced by two investment alternatives of equal risk, he will choose the one that yields the highest returns; and (2) the securities market for any bank is broader than the loan market for that same bank. Given these two assumptions, it follows that a bank in a high-interest area will tend to put a larger portion of its assets in loans (as opposed to securities), while a bank in a low-interest area will behave in the opposite manner. Thus the ratio of loans/loans + securities is a fair index of the rate of interest on loans in any area.”

This analysis is misleading. Davis assumes that the ratio is a function of relative rates of return but overlooks the impact of variations in the structure of local markets on the elasticity of demand for loans. The greater the degree of monopoly power, the lower the elasticity of demand for loans. To maximize profits, an individual bank would restrict output and change higher loan rates. High loan rates and low ratios of loans to loans plus securities may be positviely related in concentrated local markets. The ratio of loans to loans plus securities would be a fair index of the rate of interest on loans only if competitive conditions were similar in each local market. Since competitive conditions varied considerably between areas, the tests reported by Davis do not necessarily show progress toward a national long-term capital market.

⁴⁸ For a given local market the total volume of institutional saving and lending is related to interest rates and the number and variety of institutions. Total bank lending is inversely related to interest rates and directly related to the number of institutions, while the level of saving is positively related to both interest rates and the number of institutions. An increase in the number of institutions should increase the volume of both saving and lending becuase of increased customer convenience. An increase in savings channelled through intermediaries should increase intermediary lending to the local area. The increased number of institutions should also act to increase competition and lower interest rates (relatively). This will increase lending but may reduce savings rates. The overall impact will depend on the relevant elasticities of demand supply. Lower transfer costs act to reduce the protection afforded each institution in each local market and tend to increase competition and equalize interest rates between regions. This cannot be separated from the impact of an increasing number and variety of financial institutions.

⁴⁹ Refer to the studies cited in note 5, above.

⁵⁰ Developing a satisfactory measure of bank output has been a problem in studies of economies of scale in banking. These problems are ignored in this simple test. See the sources cited in note 5 for a discussion of these issues.

⁵¹ Calculated from data in Keehn, “Market Structure,” Table G–4, 315–333.

⁵² Bank earning assets were more homogenous in the nineteenth century because banks invested relatively little in securities and concentrated on loans.

⁵³ One reason for this could be substantially lower labor costs and/or lower rates paid on deposits in rural areas. The evidence suggests that wage rates were lower but interest paid on deposits higher outside of Milwaukee. The overall impact, therefore, is not clear.

⁵⁴ The explanation in the text is more plausible than assuming that Milwaukee national banks expanded onto a declining portion of the average cost curve beginning in 1895. Their average size continued to increase after 1905, but expense ratios were not consistently lower.

⁵⁵ Keehn, “Market Structure,” 35.

⁵⁶ The increasing number of bank failures in the 1920s and 1930s does not necessarily mean that a substantial number of banks were below a minimum efficient size in 1890 or 1900. Given the restriction on branching and relatively poor communications and transportation facilities, these banks provided the state's residents with relatively convenient banking services. Changes in communications and transportation after 1900 acted to expand markets and minimum efficient individual bank size. In the absence of branch banking, the banking system had considerable difficulty in adjusting to the new conditions. A period of adjustment followed which saw a substantial reduction and redistribution of banks within the state. These problems were less severe in Wisconsin than in some other midwestern states in the 1920s. Friedman, Milton and Schwartz, Anna J., A Monetary History of the United States 1867–1960 (Princeton, 1963), 249Google Scholar; Krueger, History of Commercial Banking, 227.

⁵⁷ Keehn, “Market Structure,” 45–46.