² Sylla, R., The American Capital Market, 1846–191: A Study of the Effects of Public Policy on Economic Development (New York, 1975)Google Scholar, and ‘Forgotten men of money: private bankers in early US history’, Journal of Economic History, 36 (1976), pp. 173–88. See James, J. and Weiman, D., ‘Financial clearing systems’, in Nelson, R. (ed.), The Limits of Market Organization (New York, 2005), pp. 114–55Google Scholar, on the clearing and settlement functions of payments systems. All estimates of the size of the private banking sector are from Sylla, American Capital Market, pp. 40–1.

³ City banks were also known to refuse to accept the small notes issued by otherwise well-regarded banks. In 1837, Cincinnati city banks took ‘all Ohio notes greater than $5’ on deposit or in payments of debts at par, except those of specified banks. Liberty Hall and Gazette, 13 June 1837.

⁴ Redenius, S. A., ‘Designing a national currency: antebellum payments networks and the structure of the national banking system’, Financial History Review, 14.2 (2007), pp. 207–27CrossRefGoogle Scholar.

⁵ Russell, S., ‘The US currency system: a historical perspective’, Federal Reserve Bank of St Louis Review, 73. 5 (1991), pp. 34–5Google Scholar. In contrast, personal checks do not circulate hand-to-hand, and require validation by third parties (check-clearing by the payor's bank) of the adequacy of funds for payment to be completed. The only entities involved in cash or currency transactions are the buyer and the seller.

⁶ Redlich, F., The Molding of American Banking (New York, 1968), p. 64Google Scholar.

⁷ On a daily basis, wholesale houses sent their ‘counting house boys’ to the brokers with a package of money of various denominations and origins to sell to the one who offered the highest bid. Rottenberg, D., The Man Who Made Wall Street: Anthony J. Drexel and the Rise of Modern Finance (Philadelphia, 2006), p. 36Google Scholar; Smith, A. A., ‘Bank note detecting in the era of state banks’, The Mississippi Valley Historical Review, 29.3 (1942), pp. 371–86CrossRefGoogle Scholar.

⁸ Bodenhorn, H., A History of Banking in Antebellum America (Cambridge, 2000), pp. 178–9Google Scholar. For estimates of the growth of private banking in midwestern cities between 1840 and 1860, see J. Knodell, ‘Private banking and economic growth in the Middle West,’ unpub. MS, tables 2a and 2b.

⁹ Admittedly, this literature is primarily concerned with the informational efficiency of the market, not the economics of banknote dealing. W. Weber, ‘Were US state banknotes priced as securities?’, Federal Reserve Bank of Minneapolis Research Department Report 344, May 2005, 22; Gorton, G., ‘Reputation formation in early bank note markets’, Journal of Political Economy 104.2 (1996), pp. 346–97CrossRefGoogle Scholar.

¹⁰ Larson, H., ‘E. W. Clark & Co., 1837–1857’, Journal of Economic and Business History, 4.3 (1932), p. 438Google Scholar. If uncurrent notes failed to sell, the local correspondent may have incurred the expense of returning them to their issuers for specie, which would have been much lower than the expense to the Philadelphia bank.

¹¹ If the Philadelphia private bank had a branch office in Cleveland, it could avoid paying the premium and earn the full $8 in arbitrage income. Otherwise, some portion of the $8 price differential is earned by some other entity.

¹² For example, manufacturers may have purchased currency from banknote dealers to make wage payments, which would end up back in the hands of merchants, to be resold to the dealers.

¹³ Rottenberg, Man Who Made Wall Street, p. 49.

¹⁴ It is true that prices could change in the interval between sending notes and selling them in the distant market, but an agent could be instructed not to sell below, or buy above, some limit price.

¹⁵ Cooke himself was extremely ‘deft in the business of handling money … With lightning rapidity, the notes passed through his delicate fingers … There was no hesitancy, no pause, apparently, no thought or mental effort. It was as a smoothly flowing stream of noiseless water …’ Rottenberg, Man Who Made Wall Street, p. 33; Oberholtzer, E. P., Jay Cooke, Financier of the Civil War (Philadelphia, 1907), pp. 69–70Google Scholar.

¹⁶ Postal rates are from Pred, A. R., Urban Growth and the Circulation of Information: The United States System of Cities, 1790–1840 (Cambridge, 1973), p. 82Google Scholar. Larson, H., Jay Cooke, Private Banker (New York, 1968), p. 59Google Scholar, provides an example of a shipment of $1,282 of currency from Corcoran and Riggs, in Washington, to Clark, Dodge & Co. in New York in 1846.

¹⁷ Larson, Jay Cooke, p. 42; Rottenberg, Man Who Made Wall Street, pp. 33–52.

¹⁸ Larson, ‘E. W. Clark & Co.’, pp. 448–54; Larson, H., ‘S. & M. Allen – lottery, exchange, and stock brokerage’, Journal of Economic and Business History, 3.3 (1931), pp. 443–4Google Scholar.

¹⁹ As explained by Sylla, ‘Private bankers', pp. 179–80, check-clearing mechanisms were in a ‘primitive state of development’, so a check drawn by a St Louis businessman on his deposit account at Page & Bacon would not have been accepted by a New York bank.

²⁰ A contemporary monetary economist described the payments system as ‘circles of banks keeping mutual accounts …ramified over the entire country’; Colwell, S., The Ways and Means of Payment (Philadelphia, 1860), p. 270Google Scholar.

²¹ Clarke, D. L., William Tecumseh Sherman: Gold Rush Banker (San Francisco, 1969), pp. 91Google Scholar, 98.

²² Author's review of items in Cook, Sargent & Downey (CSD) papers dealing with the crediting of collected items to CSD. State Historical Society of Iowa, Iowa City. As one counter-example, a Muscatine, Iowa, private bank sent a certificate drawn on Culbertson & Reno to CSD to be collected and credited to their account at CSD (19 December 1855).

²³ Chicago Daily Democrat, 21 March 1857; Chicago Democrat, 16 Sept. 1854.

²⁴ James, J. A. and Weiman, D. F., ‘From drafts to checks: the evolution of correspondent banking networks and the transformation of the US payments system, 1850–1914’, Journal of Money, Credit and Banking, 42.2–3 (2010), pp. 237–65CrossRefGoogle Scholar, for a discussion of the emergence of New York drafts as a national payments instrument.

²⁵ Myers, M. G., The New York Money Market, vol. 1: Origins and Development (New York, 1931), p. 119Google Scholar.

²⁶ Ibid., p. 115; Sylla, American Capital Market, p. 41. This is comparable to the 85% (600 of 700) of incorporated banks which kept balances in New York ten years earlier in 1850, and there is no reason why the behavior of incorporated banks and private banks would be dramatically different in this regard.

²⁷ Ledger of Andrew J. Stevens & Co., State Historical Society of Iowa, Des Moines.

²⁸ A. J. Stevens kept a running balance which it defined in ‘due to’ terms; when positive, A. J. Stevens was in a net debt position, and when negative, a net credit position vis-à-vis the correspondents. The drawing of drafts increased the ‘due to’ position and remittances reduced the ‘due to’ position.

²⁹ In contrast, another Iowa private bank was asked by a Baltimore banking house (not a correspondent) to promptly attend to a $22.10 debit balance; CSD correspondence.

³⁰ The following New York City banks and bankers were listed as correspondents in these transactions: Clark, Dodge; People's Bank; Atwood & Co., American Exchange Bank, Ohio Life Insurance and Trust Co., and Bank of the State of New York.

³¹ Hoffman & Gelpeke, of Chicago, sent a certificate of deposit issued by Culbertson & Reno, another Iowa City private bank, to CSD for CSD to collect and remit in exchange on New York (27 December 1856). J. O. Seely, a Kalamazoo, Michigan, private bank, sent CSD their own certificate of deposit for remittance in a draft on New York (3 September 1858). One Council Bluffs private bank sent a certificate drawn on another Council Bluffs bank to CSD for collection and remittance in New York funds (24 September 1858). Other examples include Palmer, Hanna & Co. to Cook, Sargent & Downey (CSD), 3 December 1855; F. Granger Adams to CSD 6 December 1855; and Francis A. Hoffman Banking House to CSD 10 December 1855. Cook, Sargent & Downey correspondence.

³² 1856–7 Case's Chicago City Directory; April 1861 Chicago Tribune; Bankers' Magazine, July 1860, pp. 49–63.

³³ For example, in March of 1850, a merchant in St Louis with a $1,000 bundle of Kentucky, Ohio, Indiana and Louisiana banknotes could buy $985 of New York funds from a private banker, selling the western currency at a discount of 1% and paying a 0.5% premium on New York exchange. The wording of the advertisements suggests that some private bankers were strictly dealers: they did not originate drafts, only bought and sold drafts originated by other entities.

³⁴ Knodell, ‘Private banking in the Middle West’, table 2.

³⁵ Contemporary advertisements in St Louis, Chicago and Cincinnati periodicals, various issues, 1830–60, author's files; on frontier private bankers and land investment, see Swierenga, R. P., Pioneers and Profits: Land Speculation on the Iowa Frontier (Ames, 1968).Google Scholar

³⁶ As the New York money market grew in volume, holders of New York balances also benefited from liquidity externalities; see James and Weiman, ‘From drafts to checks’. By 1860, state-chartered bankers' balances lodged with New York banks were almost three times that lodged with banks in Philadelphia, Baltimore and Boston combined; H. Bodenhorn, ‘Banking and the integration of antebellum financial markets, 1815–1859’, PhD thesis, Rutgers University, 1990, p. 164.

³⁷ Cannon, J. G., Clearing-Houses (New York, 1900), p. 148Google Scholar; Cleaveland, J., The Banking System of the State of New York (New York, 1857), pp. 282–3Google Scholar. There were no private banks on an 1855 list of Clearing House members.

³⁸ Chartered banks charged up to 6.5% on call loans, and earned between 5.5% on US debt and 7% on high-grade railroad bonds, on a current yield basis; Homer, S. and Sylla, R., A History of Interest Rates (New Brunswick, 1991), p. 319Google Scholar.

³⁹ Private banks paid between 4 and 6% on deposits, higher rates than those paid by the few (6 out of 46) Clearing House members that also paid interest on deposit balances. Myers, New York Money Market, p. 124.

⁴⁰ Cleaveland, Banking System of New York, p. 116.

⁴¹ Bankers' Magazine, July 1860, pp. 49–63.

⁴² J. F. D. Lanier, Sketch of the Life of J. F. D. Lanier (privately printed), pp. 18–20; Carosso, The Morgans. Private banks also advised clients on market conditions and the design of security instruments.

⁴³ Bankers' Magazine, July 1860, pp. 49–63.

⁴⁴ Gibbons, J. S., The Banks of New York (New York, 1858), p. 174Google Scholar.

⁴⁵ Ibid., p. 128. The first amendment to the Clearing House's constitution clarified that ‘the clearing member was responsible for the items drawn upon the non-member’; Cannon, Clearing-Houses, pp. 150–1.

⁴⁶ Chicago Daily Democrat, 1854; Illinois State Archives electronic record 492.032.

⁴⁷ According to Myers, New York Money Market, p. 115: ‘The bankers' balances deposited in the incorporated banks of the city represented only a part of the total country balances in New York. Nearly the same amount was on deposit with the private bankers and brokers of the city.’

⁴⁸ Annual Report of New York Bank Superintendent, 5 January 1858, Statement O; Bankers' Magazine, 1860–1. The New York free banking law was unusual in that it did not require incorporation for currency issuance.

⁴⁹ Ibid., pp. 115, 119, and Sylla, American Capital Market, p. 41. There were 709 such correspondencies reported by the Bankers' Magazine. Although this listing covered only 65% of all private banks, there is no reason to believe that the banks omitted made radically different choices than those that were included. This analysis counts ‘brokers’ as ‘private banks’, and assumes that Bankers' Magazine reported the identity of the ‘primary’ New York correspondent. See Table 3.

⁵⁰ Note that several of the networks in Table 2 included both a chartered bank and a private bank in New York.

⁵¹ Cincinnati Daily Gazette, 2 Sept. 1854.

⁵² The 1854 number refers to state-chartered banks; the 1868, to nationally chartered banks. The fall in private banks’ share of correspondencies also reflects the National Banking Act's requirement that balances be held with a national bank to qualify as official reserves. I thank Scott Redenius for this point.

⁵³ Carosso, The Morgans, pp. 65–9.

⁵⁴ In reports to Congress, the Treasury provided information on where purchasers of Treasury notes deposited specie to the credit of the treasurer. See W. Gouge's Report on the Public Depositories in the 1854 Annual Report of the Secretary of the Treasury and 1847 Annual Report. Strict regulations were adopted to prevent Treasury drafts from circulating as money and to ensure their prompt payment in specie at a government depository. See Report H. in the 1846 Annual Report of the Secretary of the Treasury, with instructions to collectors, receivers, disbursing agents, and Treasury and Mint officials. In his classic account of Civil War finance, Hammond refers to the ‘irrational’ practice in which, ‘to keep relations between the government and the economy “pure” and wholesome, tons of gold had to be hauled to and fro in dray-loads, with horses and heavers doing by the hour what bookkeepers could do in a moment’. Hammond, B., Sovereignty and an Empty Purse (Princeton, 1970)Google Scholar,

⁵⁵ The government used the specie collected in customs to pay the interest on its longer-term debt.

⁵⁶ In some states, banks used greenbacks as reserves only after the legality of doing so was established through either a court ruling or new legislation. Mitchell, W. C., A History of the Greenbacks (Chicago, 1903), pp. 144–8Google Scholar.

⁵⁷ The Act also allowed holders of greenbacks to deposit them at any US depository or Sub-Treasury (‘temporary loans’) and earn 5% interest.

⁵⁸ Contractors were ‘selling their settled demands [payment promises from the government] at rates of discount ranging from 8 to 18%’. Oberholtzer, Jay Cooke, p. 301.

⁵⁹ It is generally recognized that national banks played a minimal role in financing the northern government during the war. Dewey, D. R., Financial History of the United States (New York, 1903), p. 328Google Scholar; Bensel, R. F., Yankee Leviathan (Cambridge, 1990), p. 247Google Scholar; Larson, Jay Cooke, p. 143.

⁶⁰ When Cooke's bond sales were large, he had to work closely with the chartered banks and the Treasury in managing the withdrawal of greenbacks, to avoid creating stringency in the money market; Larson, Jay Cooke, pp. 146–7; Oberholtzer, Jay Cooke, pp. 303–4, 310–11; Carosso, V. P., Investment Banking in America (Cambridge, MA, 1970), p. 15Google Scholar. Sherman believed that it was this ‘difficulty of using bank … paper, in dealing with the United States, that made the employment of intermediate private agencies in negotiating this loan not merely a choice of expedients, but an absolute necessity’, p. 313. Friedman, M. and Schwartz, A. Jacobson, A Monetary History of the United States, 1867–1960 (Princeton, 1963), p. 19Google Scholar; Patterson, R. T., Federal Debt-Management Policies, 1865–1879 (Durham, NC, 1954), pp. 78–112Google Scholar. Two early national banks that bought government bonds for note and deposit collateral, or that also distributed government bonds during the war, were organized by Jay Cooke and John Thompson, a former banknote dealer (the First National Banks of Philadelphia and New York respectively); Larson, Jay Cooke, pp. 139–40.

⁶¹ Oberholtzer, Jay Cooke, pp. 302.

⁶² Once the agency system was set up, the Treasury could not physically produce securities as fast as the rate at which securities were sold. Luckily for Cooke, he did not have to pay when he placed the order, only prior to receiving the securities.

⁶³ Letter from the Secretary of the Treasury, 38th Congress, 1st Session, House Exec. Doc. 66; Oberholtzer, Jay Cooke, p. 219. Cooke's partner in the head Philadelphia house told Cooke that ‘the only difficulty … is that of the sub-agents. If you are to be responsible for them it will require great caution and management to prevent losses … the risque will be very considerable, unless you require of them the same that the government requires of us, payments in advance.’ As it turned out, of the $362 m bonds negotiated by Cooke and his network, only $48,000 bonds were lost or unaccounted for at the end of the day (325). The details of the relationship between Cooke and his agents and sub-agents are not known.

⁶⁴ Ibid., p. 253.