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Banking in the Western U.S.
Lynne Pierson Doti, Chapman University
Banking in the western United States has had a distinctive history, marked by a great variety of banking arrangements and generally loose regulation.
California Banks in the Gold Rush Era
In the early frontier years, private individuals and outposts of the Hudson Bay Company and other trading companies provided banking services. As states west of the Mississippi began developing after the 1840s, capital flowed fairly readily from the east coast and also from foreign sources. This is particularly true of California. Gold was discovered in early 1848, and the population exploded. San Francisco and Sacramento quickly became cities. By 1852, numerous banks representing investors from St. Louis, Boston, New York and even other countries were operating in San Francisco. Lazard Freres, a French bank, has remained there to the present time. St. Louis, an earlier financial center of the west, and New York banks were well represented until the mid-1850s, when a bank panic forced the reevaluation of distant branches or subsidiaries. As California grew, spurred at first by gold production and then by the Nevada silver discoveries in the1860s, San Francisco became the financial center of the western states.
One of the largest banks in California in the 1850s was started by D.O. Mills, a young New York bank employee who came to California to mine gold. Soon tiring of mining, he opened a mercantile establishment in Sacramento. Mills began storing gold for the miners, and later began buying gold and issuing notes that circulated as money. Within a few years he changed the sign on his building from "store" to "bank." The Bank of D.O. Mills survived into the 1920s. Merchants started many early western banks in just this manner, since the lack of regulation or enforcement meant that potential depositors needed the security of a trusted, widely respected individual. A previous business often was the route to this trust.
Although the character of the individuals in control was of foremost importance, housing the bank in a solid structure also reassured customers. Because depositors worried about "wildcat banks" which accepted deposits, then relocated far away to discourage withdrawals, it was hard to gather deposits without proof of stability. So the bank was often the most solid structure in town. Although there are a few spectacular instances of bankers leaving town with deposits, the system generally worked extremely well with minimal regulation.
Large Banks Come to Dominate in the Late 1800s
Just as a few New York banks dominated financial markets on the east coast, a few large San Francisco banks -- created first by the "Silver Kings" made rich by the Virginia City, Nevada mines, then by the railroad barons -- dominated the West Coast financial world in the late 1800s. For example, in 1865, William Ralston started the Bank of California, which quickly branched into Nevada, and then Oregon and other western states. As in the case of New York City's large banks, correspondent relationships with smaller banks and direct deposits and loans in larger amounts from customers located far from the bank's offices allowed the Bank of California to become important throughout the far west.
Although, the western bank network still had many ties to the East at the end of the nineteenth century, the lag between the east coast and west coast in financial crises was still a few years. For example, in 1893, New York experienced a panic where customers rushed to withdraw their funds, fearing that the banks would fail. The New York panic spread quickly to the other east coast banks, but reached San Francisco only in 1895.
A. P. Giannini and Branch Banking
By 1930, A.P. Giannini was the most powerful financier in the Western U.S. He had started his first bank, the Bank of Italy, in 1905 to appeal to the Italian immigrants of North Beach in San Francisco. Having many connections and having learned about customer service in the produce industry helped him turn the setback of the 1906 earthquake into an advantage. As the city burned, Giannini loaded the contents of his safe into a produce wagon and relocated. While some other bankers waited in frustration for their safes to cool enough to open, Giannini was making loans. Perhaps this impressed upon him the benefits of diverse locations. Diversification meant that if business was bad in one area, it might be better in another. He opened his first branch in 1907 in the Mission district of San Francisco. After 1915 he began to add new offices and buy other banks at a rate that became alarming to rival banks.
Giannini was a pioneer of branch banking, maneuvering around state and federal regulators to eventually establish over one thousand branches in California. He dreamed of a bank with branches around the world, but it did not occur in his lifetime. However, his banking system, consolidated in 1930 as Bank of America, N.T. and S.A., moved from California into neighboring states in the 1970s and (along with Citibank of New York) created the pressure that eventually lead to interstate branching in the 1990s. The 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act allowed banks to combine across state lines. Bank of America was purchased by Nationsbank of North Carolina in 1999, creating a truly national bank using the name "Bank of America."
Restrictions on Branch Banking
Although California regulators, undoubtedly spurred on by rival bankers, tried to confine Giannini's operations to a small geographic area in the 1920s, they never actually banned branch banking for state-chartered banks. This was atypical, even in the less regulated west. National banks were banned from opening branches under the National Banking Act of 1864, confirming the general attitude, carefully cultivated by local monopolist bankers, that branching only existed to drain funds from the countryside to finance growth in the cities.
Among the western states Texas, Oregon, Washington, Utah, Colorado, New Mexico and Idaho had severe restrictions on branching and only reduced or removed these limits during the Depression, when acquisition by a stronger bank became the only alternative to failure for many rural banks. Also, it became clear that the banks with branches were surviving much better than the unit banks (those with only one location). Nevada, Idaho, Oregon and Washington removed most of their onerous restrictions on branching during the 1930s, but Texas, Wyoming, Montana, New Mexico and Colorado remained almost entirely branchless until late in the twentieth century. Colorado was the last of the fifty states to allow branch banking. In the states where branch banking was limited, the number of small banks grew as the economy grew, but many failed in bad times.
Methods of Avoiding Branch Banking Restrictions
Mergers and chain banking were substitutes for branch banking and their formation came in waves generated by economic or technological change. The first merger movement came in the mid-1890s in Portland, Denver, Seattle and Salt Lake City, when many banks experienced problems due to the panic. Another wave of mergers came in the 1920s, inspired by Giannini's expansion (though still limited in unit banking states). Chain banking -- common ownership of several legally independent banks -- was another way to achieve diversification without branching. In Nevada, George Wingfield built a chain of twelve banks starting in 1908 as part of his business empire. However, low prices for wool put a majority of his customers in trouble and the banks were permanently closed in 1933. The chain system survived, however. The three Walker brothers started chain banks in Utah in 1859, which survived until their acquisition by another chain system in the1950s. First Interstate Bank, in spite of the common name for all its banks, was a chain of twenty-one banks in eleven western states, all owned by First Interstate Bancorporation. Joe Pinola, chairman of the chain, created the appearance of one bank operating in several states fifteen years before it became legal to actually have a single bank operating across state lines.
Developments after World War II
World War II brought population increases for the western states and many of the military personnel and workers in war industries settled permanently in the west after the war. The increases in population occurred disproportionately in the suburbs. A rash of new banks, and new branches, followed. Deposit insurance enacted in the 1930s now replaced the need for reassuring edifices and bank buildings acquired a new, often inexpensive demeanor. Drive-in banking facilities became common. Treats provided for the children and, sometimes, the dogs confined to the car were almost a requirement.
During the Depression and World War II, Giannini continued his expansion. To facilitate diversification he created Transamerica Corporation as a holding company for Bank of America, several insurance companies and about two hundred other banks. In 1948, the Securities and Exchange Commission and the Federal Reserve Board charged Transamerica with monopolizing western banking. In 1952, Transamerica won the case, but the attention precipitated the Bank Holding Company Act of 1956, which made bank holding companies subject to the same restrictions in crossing state lines as individual banks. Transamerica sold off its banks and remained a powerhouse in the insurance industry into the twenty-first century.
Savings and Loan Failures
In the mid 1980s into the mid 1990s, a large number of savings and loan institutions failed, and because California and Texas were among the states with the largest numbers of these institutions, they produced some notable disasters. Sharply rising interest rates and changing regulations brought on this national phenomenon. Established institutions with large long-term loans on the books at low interest rates could not attract deposits without paying high interest rates. As the real estate market had escalated in the west in the postwar period, the western banks and savings and loans had proportionately larger amounts of the low interest loans. They became desperate to find a way to increase their earnings. Many of them ventured into unfamiliar territory, including auto loans, business lending and real estate development. California's Columbia Savings and Loan, for example, tried investing in high-interest, high-risk (junk) bonds in a spectacularly unsuccessful quest for high earnings. Unscrupulous businessmen, who manipulated insurance guarantees to make large profits at little risk to themselves, purchased some weak banks. One of the most notorious of the villains of the disaster, Charles Keating, purchased California's Lincoln Savings & Loan. He expanded the bank by offering high interest rates on large deposits, and later by selling bonds to confused retirees to replace these deposits. The funds were invested in several of Keating's own projects, including an extravagant hotel in Arizona. Contributions to several Congressmen and taxpayer insured losses that totaled about $2 billion made Keating a notorious national figure.
California had the most losses in the savings and loan industry of any state, but Arizona and Colorado were also high. The problem worsened as troubled banks tried to unload repossessed real estate. The federal government ultimately paid the bill to bail out depositors, and established the Resolution Trust Corporation (RTC) to absorb the real estate holdings of failed institutions.
Banking in the American west has often been innovative. The more varied, but generally lower, level of regulation has allowed various banking experiments to run in the west. These innovations have often shaped national legislation and produced models eventually followed by many eastern states. The less stringent legal environment has produced the best and the worst banking in the nation, but has also shaped banking in the rest of the country and in the rest of the world.
Doti, Lynne Pierson. "Banking in California: Some Evidence on Structure 1878-1905." Ph.D. dissertation, University of California, Riverside, 1978.
Doti, Lynne Pierson. "Banking in California: The First Branching Era." Journal of the West 23, no. 2 (April 1984): 65-71.
Doti, Lynne Pierson and Larry Schweikart. Banking in the American West: From Gold Rush to Deregulation. Norman, OK: University of Oklahoma Press, 1991.
Doti, Lynne Pierson. "Nationwide Branching: Some Lessons from California." Essays in Economic and Business History 9 (May 1991): 141 -161.
Doti, Lynne Pierson and Larry Schweikart. California Bankers, 1848-1993. Needham Heights, MA: Ginn Press, 1994.
Schweikart, Larry. A History of Banking in Arizona. Tucson: University of Arizona Press, 1982.
Schweikart, Larry, editor. Encyclopedia of American Business History and Biography.: Banking and Finance, 1913-1989. New York: Facts on File, 1990.
Citation: Doti, Lynne. "Banking in the Western US". EH.Net Encyclopedia, edited by Robert Whaples. June 10, 2003. URL http://eh.net/encyclopedia/article/doti.banking.western.us