Banking Structure and the National Capital Market, 1869–1914: A Comment

Abstract

Marie E. Sushka and W. Brian Barrett's study evaluating postbellum development of American capital market makes a number of interesting points, but their use of inappropriate data and their methods of analysis call into question their conclusions. ' Sushka and Barrett proxy regional interest rates by regional net rates of return derived by Lance E. Davis in his 1965 study.2 The Davis data afford them a longer time period than would other series, but Davis's net rates of return on earning assets are not satisfactory proxies for interest rates.3 This point has been made elsewhere, but it needs to be reemphasized and further defended.4 In his 1965 study Davis presented gross and net rates of return on earning assets for country and city bank regions. The net rates covered years 1869 through 1914, but gross rates could only be calculated for years 1888 through 1914. The gross rates were calculated as ratio of gross earnings of banks divided by level of income earning assets at a call date in middle of year. However, gross earnings were not reported prior to 1888. Since net earnings were reported back to 1869, net rates of return could be calculated from 1869 to 1914. Net earnings were gross earnings less operating expenses, taxes paid, and premiums and losses charged off against gross earnings. Davis suggested that, the net rates of return are a fairly good proxy for long-