Three essays in banking history

The three essays that constitute this dissertation examine the workings of the U.S. banking system prior to 1933--the watershed year in which Congress prohibited interest payments on demand deposits and provided for federal deposit insurance. The first essay examines whether, as charged by critics, the payment of interest on bankers\u27 balances (interbank deposits) induced country banks to send an excessive quantity of funds to the cities, thereby depriving rural areas of needed credit. The essay presents evidence that country banks used bankers\u27 balances to finance local agricultural production and received correspondent services in exchange for their balances in city banks. Using a statistical cost allocation model on data from 1929 and 1898-99, it finds that the value of the correspondent services provided below cost constituted an implicit return to country banks that was attractive relative the return on interest-earning assets. The second essay looks at the deposit rates paid by national banks in 1889, 1894, and 1899 to shed light on and old issue in economic history: What accounts for the large regional interest rate differentials of the Postbellum period? It develops an option-based model of bank deposit pricing, then tests the hypothesis that deposit rates reflected bank risk. It finds that regional deposit rate differentials were significantly related to the risk measures suggested by the option-based model. The third essay examines the Federal Reserve\u27s actions as a lender of last resort during the Great Depression. Although the Federal Reserve clearly failed to add sufficient reserves to the system through open market operations to stop the banking panics of the early 1930s, member banks should have been able to obtain ample emergency credit through the discount window. The essay tests whether Federal Reserve changed its credit policy during 1923-33, using recursive residuals methods to identify possible structural shifts in bank borrowing behavior. The tests indicate that the Federal Reserve became significantly less willing to lend to banks through the discount window beginning in March 1929