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Clearinghouses and the Origin of Central Banking in the United States

Published online by Cambridge University Press:  03 March 2009

Gary Gorton
Gary Gorton
Affiliation:
The author is Assistant Professor of Finance, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104.
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Abstract

The pre-1914 U.S. banking industry is not easily characterized as a market operating through a price system. The endogenous development of the clearinghouse as the industry's organizing institution can be explained by inherent characteristics of demand deposits. During banking panics the clearinghouse united banks into an organization resembling a single firm which produced deposit insurance.

Type
Papers Presented at the Forty-fourth Annual Meeting of the Economic History Association
Information
The Journal of Economic History , Volume 45 , Issue 2 , June 1985 , pp. 277 - 283
Copyright
Copyright © The Economic History Association 1985

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References

1 Coase, R. H., “The Nature of the Firm,” Economica, 4 (1937), p. 386–405.CrossRefGoogle Scholar

2 On clearinghouse beginnings see Gibbons, J. S., The Banks of New York, Their Dealers, The Clearinghouse, and the Panic of 1857 (New York, 1968; reprint of 1859 original);Google ScholarCannon, James G., Clearinghouses (Washington, 1910);Google ScholarRedlich, Fritz, The Molding of American Banking (New York, 1951), chap. 13.Google Scholar

3 See Redlich, American Banking, Part II, p. 3.Google Scholar

4 See Dillistin, William H., Bank Note Reporters and Countefeit Detectors, 1826–1866, Numismatic Notes and Monographs 114 (New York, 1949).Google Scholar

5 The argument is developed in greater detail in Gorton, G. and Mullineaux, D., “The Joint Production of Confidence: Clearinghouses and the Theory of Hierarchy,” 1985, forthcoming.Google Scholar

6 See Cannon, Clearinghouses.Google Scholar

7 An important part of the clearinghouses' usual functioning was the investigation of rumors about particular member banks. In response to rumors the clearinghouse, sometimes at the request of the member bank, would audit the bank with its own auditors or auditors hired for that purpose and would then announce the results. There are many examples of this in the New York City Clearinghouse Association, Clearinghouse Committee Minutes [hereafter, Minutes]. See, for example, April 29, 1873 entry.Google Scholar

8 Member banks were suspended, expelled, and readmitted fairly frequently. For example, the Minutes record two member suspensions, six expulsions, four applications for membership declined, four readmissions, and two admissions during the first six years after the clearinghouse was organized.Google Scholar

9 See Gorton, Gary, “Banking Panics and Business Cycles,” Philadelphia Federal Reserve Bank, Working Paper, 1984.Google Scholar

10 New York City Clearinghouse Association, Loan Committee Minutes, January 30, 1891, June 6, 1893, November 1, 1907; and Minutes, November 1, 1907.Google Scholar

11 Suspension of convertibility was avoided during the crises of 1860, 1884, 1895, and 1896. Loan certificates were issued during the crises of 1860 and 1884. In the Panic of 1884 one member did suspend convertibility and was then “suspended from the privileges of the clearinghouse” by unanimous vote (Minutes, May 6, 1884). During the crises of 1895 and 1896 the Loan Committee was authorized to issue loan certificates, but no members applied (Loan Committee Minutes, December 24–31, 1895, if., and August 24, 1896).Google Scholar

12 See Minutes October 14, 1857 through November 9, 1857.Google Scholar

13 Sprague, O.M.W., History of Crises Under the National Banking System (New York, 1968; reprint of 1910 original), pp. 432–33 lists dates of issue, amounts, rate of interest, nature of collateral, and length of issue.Google Scholar

14 The original loan certificate process agreement, Minutes, November 21, 1860, does not mention this, though it was made clear during the Panic of 1907 (Minutes, October 31, 1907). The Panic of 1907 was apparently the only occasion when members, subsequent to the October 31 resolution could not repay loan certificates.Google Scholar

15 Minutes, November 21, 1860.Google Scholar

16 See Minutes, October 18, 1907, October 21–22, 1907, January 9, 28, 1907, February 1, 1908.Google Scholar

17 Minutes, January 30–31, 1908.Google Scholar

18 During the Panic of 1873, the New York City Clearinghouse took an intermediate step by certifying limited amounts of checks as liabilities of the Association. See Sprague, Crises, p. 54.Google Scholar

19 Warner, John D., “The Currency Famine of 1893,” Sound Currency, 11 (02 15, 1895);Google ScholarAndrew, A.Piatt, “Substitutes for Cash in the Panic of 1907,” Quarterly Journal of Economics, 22 (08 1908), pp. 497–516.CrossRefGoogle Scholar

20 The currency premia are provided by Sprague, Crises, pp. 57, 187, 280–81.Google Scholar

21 For example, see Fama, Eugene, “Banking in the Theory of Finance,” Journal of Monetary Economics, 6 (01 1980), pp. 39–57.CrossRefGoogle Scholar