The Origins of the National Banking System: The Chase-Cooke Connection and the New York City Banks

Abstract

This paper investigates the background behind the United States’ National Banking System (1863-1913) and develops a special interest account for its passage. It first argues that an important relationship, the Chase-Cooke connection between Treasury Secretary Salmon P. Chase and Philadelphia investment banker Jay Cooke, was indispensable for both the passage of the 1863 National Banking Act and the initial survival of the new system. It then argues that the 1864 National Banking Act revisions were passed so that a separate set of interests, the prominent but hostile New York City banks, would be enticed to join the system. Cooke benefited because national banks would purchase government bonds he was selling in order to back their bank notes, while the New York City banks benefited because national banks in other large cities could count their deposits in those banks as reserves. The concentration of reserves in a few banks led to the creation of an unstable banking system.