Abstract
1. lntroduction Bankers' balances were interbank deposits, usually demand deposits held by country banks with urban correspondent banks. From the end of the Civil War to the Banking Act of 1933 bankerss balances were at the center of controversy regarding the flow of funds between regions in the United States and the availability of credit in rural areas. The payment of interest on bankers' balances, it was contended by its critics, was drawing funds out of productive uses in rural areas to the cities, where they were placed by urban banks in call loans financing stock market speculation. l One of the central motivations for the prohibition of interest payments on all demand deposits in the Banking Act of 1933 was the desire to halt the flow of funds out of rural areas through bankers' balances. Since Congress and the federal banking regulatory agencies are currently considering removing the prohibition against payment of interest on transactions balances, a review of this argument that supported the original prohibition appears timely.
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