From Drafts to Checks: The Evolution of Correspondent Banking Networks and the Formation of the Modern U.S. Payments System, 1850-1914

Despite their continued prevalence in the U.S., checks circulated locally until the 1890s. The authors explain their lagged spatial diffusion by the evolution of centralized payments institutions to coordinate transactions among myriad banks, not real technological changes to "annihilate" distance. The pivotal institutions were large correspondent banks especially in New York. By the early 1890s New York funds constituted a national settlement medium, and the concentration of bankers' balances in New York yielded liquidity and other externalities smoothing the flow of check payments. Despite the efficiencies of correspondent banks, they unlike the Fed could not readily adopt newer electronic technologies