Economic historians have traditionally linked bank branching to sector stability because of the capacity of such banks to diversify investments, lower overhead costs, redistribute money during panics, and—owing to consolidation—increase profits and capitalization. For this paper, I plan to inspect the ground-level workings of these factors by analyzing the development of American “country” banks—the smallest unit banks—between the 1870s and 1920s.
Compared to larger banks, most country banks were poorly capitalized and poorly managed. Their survival largely rested upon correspondent relations with larger city banks. City banks—in return for the right to hold their deposits—provided country banks an array of crucial services, ranging from fund transfers and trust functions to investment services and bridge loans. Moreover, due to the seasonal lending patterns of agricultural areas and the difficulty of generating profitable short-term loans, many country banks were highly invested in New York money markets, had undiversified loan portfolios, and engaged in risky lending practices, such as over-lending to entrepreneurial ventures and failing—as late as the 1920s—to keep reliable records or conduct thorough credit checks. This paper also covers the theme of the conference – “the business of labor” – by reviewing a persistent complaint of banking leaders and regulators—i.e., the poor quality of country bank directors, officers, and staff members.
Because these banks operated on such thin margins, they often marketed themselves through free or low-cost services. The country banker was expected to act as a “general information bureau, lawyer, friend, family confidant, general counsellor, community back-stop, and all-round booster.” Additionally, many country banks established Agricultural Departments, which operated far beyond the bounds of banking services by working with federal extension agents, organizing cattle vaccinations, overseeing livestock fairs, helping area farmers move away from one-crop systems, and much more.