The resulting deflation of the currency produced William Jennings Bryan and Populist agitation for the “free coinage” of silver. One factor and one alone makes a bank successful over time: It must have money to lend. In the desperate recession of the 189Os, a decade that was anything but “gay” for American workers and businessmen, the state banks, not shackled by the declining national debt, found money and revived.

One cannot exaggerate the importance of the local banker in the maintenance of local autonomy and diversity in a country being unified by the railroad, the telegraph, the national magazine, chain stores, nationally branded products, and then the radio networks. Because there was, in effect, a local market for money, local manufacturers of everything from beer and bread to bicycles could start out on a base of their own market. Unlike the situation in Europe, where national governments provided the funds for local improvement, American cities and towns could build their own schools and bridges, waterworks, and sewage treatment plants with bonds sold to (sometimes resold by) the local banks. Bankers were—still are—the big boosters of their communities. That New York never achieved in the United States the total dominance won by London or Paris or Berlin reflected in part the size of the country—but also the spread of financial capability through the operation of localized banks.

There was another side to the coin. Because banking is so much a matter of trust, and people trust those they consider most like themselves, banking became a bulwark of racism. There were significant Jewish investment bankers in New York from the 1870s on, and early in this century A. P. Giannini in California could build his Bank of Italy into the Bank of America (because he always had money: he built branches and solicited small deposits from people whom the established banks didn’t want to see in their palaces). But across the country, banking was white, Protestant, and dominated by old ethnic groups. No Irish need apply, and it was inconceivable that a bank would lend to a black businessman—or, for that matter, to a female proprietor.

Banking was stodgy, more a family business than most: the third generation of the manufacturing entrepreneur was supposedly back in shirt sleeves, but the bankers’ progeny stayed at the banks. And the system was monstrously inefficient in an economy rapidly growing more articulated. Just as banks in the old days had taken other banks’ notes only at a discount from their face value, the banks of the turn of this century would accept each other’s checks—unless both were in the same city and members of the same clearinghouse—only for something less than the full amount.

The method of linking the banks into a national monetary system was the “correspondent” relationship: a bank that kept its own funds on deposit with another bank in a distant city could arrange credit at that bank (and at other banks that were members of the same clearinghouse) for the checks its customers wrote on their home accounts. This arrangement was necessarily incomplete because there was a limit to the amount of money a country bank could leave idle at another bank for that purpose, and it was also a dangerous practice.

In the nature of the correspondent relationship, banks sometimes have positive balances and sometimes have overdrafts in their accounts. As the money markets concentrated in New York around the Stock Exchange, the New York banks became prisoners of the demand for funds on Wall Street. When J. P. Morgan and E.H. Harriman locked horns over the Northern Pacific Railway, the ready money of the country drained to New York; correspondents found their traditional overdrafts denied them, any balances they held from big-city correspondents drained away, and funds were very hard to come by. The result was that purely financial crises—such as the Bankers Panic of 1907—threw people out of work and left factories idle.

The Federal Reserve, created in 1913, designed to establish a national and stable banking system, was hedged with protections for the local banks. Nationally chartered banks had to be Federal Reserve members, but state-chartered banks did not (and, indeed, two-thirds of the nation’s banks did not become Fed members). The nation was divided into twelve “districts,” each of which had its own Federal Reserve Bank, charged with minding the store in its own region; and no two of the seven governors of the Federal Reserve could be drawn from the same district. In the 1920s Congress ordered federal regulators to make sure that every nationally chartered bank obeyed whatever basic regulations the states imposed on their own banks in that region. If a state forbade a bank to have branches, as Texas and Illinois and Georgia and many others did, then a nationally chartered bank would also be required to do all its business from one office.