The author hereby expresses his appreciation to Lance Davis, Stanley Engerman, Donald McClosky, and the Editor of this Journal for valuable suggestions offered to him during the preparation of this article.

¹ Gerschenkron, Alexander, Economic Backwardness in Historical Perspective (Cambridge: Harvard University Press, 1962), especially ch. 1, pp. 5–30Google Scholar and Postscript, pp. 353–64.

² Hammond, Bray, Banks and Politics in America, from the Revolution to the Civil War (Princeton: Princeton University Press, 1957), p. 605Google Scholar.

³ Ibid., p. 606.

⁴ Huntington, A. T. and Mawhinney, Robert J., compilers, Laws of the United States Concerning Money, Banking and Loans, 1778–1909 (National Monetary Commission publication. Washington: Government Printing Office, 1910), p. 333Google Scholar.

⁵ Data on bank numbers are taken from Board of Governors of the Federal Reserve System, All Bank Statistics, United States 1896–1955 (Washington: Board of Governors, 1959)Google Scholar.

⁶ See Alhadeff, David A., Monopoly and Competition in Banking (Berkeley: University of California Press, 1954), p. 28 ffGoogle Scholar.

⁷ Huntington and Mawhinney, pp. 343–44.

⁸ Hammond, Bank and Politics, p. 681.

⁹ U.S. National Monetary Commission, Replies to Circular Letter of Inquiry … on Suggested Changes in Administrative Features of the National Banking Laws (Washington: Government Printing Office, 1908), p. 135Google Scholar. It is worth noting that in this document a number of bankers and bank examiners raised objections to the real estate loan prohibition even though comments on the prohibition were not solicited.

¹⁰ Board of Governors, All Bank Statistics, pp. 39, 43.

¹¹ Profitability of note issue is analyzed in detail by Cagan, Phillip, Determinants and Effects of Changes in the Stock of Money, 1875–1960 (New York: National Bureau of Economic Research, 1965), pp. 86–95Google Scholar.

¹² Huntington and Mawhinney, Laws, p. 446.

¹³ Ibid., pp. 256, 446–47.

¹⁴ Report of the Comptroller of the Currency, 1913, pp. 333, 339.

¹⁵ Report of the Comptroller, 1900, p. xx.

¹⁶ Derived from data presented in Report of the Comptroller, 1910, p. 20.

¹⁷ Huntington and Mawhinney, Laws, pp. 345–46. A later Act of June 20, 1874, repealed the requirement that national banks hold reserves against note circulation. Ibid., p. 418.

¹⁸ During the next fifty years Chicago and St. Louis became central reserve cities, and the number of reserve cities increased to 47. See Report of the Comptroller, 1913, p. 282.

¹⁹ Pure competition in country banking would rule out price discrimination within the local market. It would also change cost conditions as the competitive banks bid against each other for customers' deposits. In Figure 2 such bidding would tend to raise the level of AC to a point of tangency at its lowest point with D_u. Then both a group of competitive banks and a perfectly discriminating monopolist would grant the same total amount of local loans (OL'₄). The sense in which local loan output is restricted by a monopolistic country bank arises when comparison is made with a city bank having the same cost curves. See fn. 23.

²⁰ Davis, Lance E., “The Investment Market, 1870–1914: The Evolution of a National Market,” The Journal of Economic History, XXV (Sept. 1965), 355–99CrossRefGoogle Scholar.

²¹ For Davis' regions see notes to Table 2; the regional groupings used in this study are given in the notes to Table 1 above.

²² The city-country differential of Region V for 1888–1900 is sharply affected by an extreme value in 1898. If this value is excluded, the average differential for the other 12 years is 1.59 instead of 0.53.

²³ The output restriction alluded to here corresponds in Figure 2 to the difference between OL₄, the amount of loans which would be made by a city bank, and OL'₄, the amount which would be made in the local market by an intramarket discriminating monopolist or, for that matter, by a group of purely competitive country banks. This restriction of output is consistent with efficient fund allocation and should be distinguished from the quantity (OL'₄-OL₃) which is the amount output would be restricted by a nondiscriminating bank monopolist. Empirically, the two types of output restriction are difficult to distinguish.

²⁴ That is, unless the average cost curves of country banks reached lower levels than those of larger city banks because of real cost differences that could not be competed away. For example, labor costs might have been substantially higher for city banks than for country banks. I deem this unlikely, primarily because studies of bank costs in more recent periods (e.g., Alhadeff, Monopoly and Competition in Banking) indicate that average costs decline, or at least do not rise, as bank size increases. Real cost differences remain a possible explanation of differences in bank profit rates but variations in competition due to entry barriers appear to provide an explanation more consistent with the historical circumstances.

²⁵ Myers, Margaret G., The New York Money Market, Origins and Development (New York: Columbia University Press, 1931), p. 236Google Scholar.

²⁶ Data from Report of the Comptroller, 1878.

²⁷ In Table 7, the decline in the percentage received by reserve-city banks in the East North Central region between 1885 and 1890 was primarily a result of the elevation of Chicago to central-reserve-city status.

²⁸ Beckhart, B. H. and Smith, James G., The New York Money Market, Sources and Movements of Funds (New York: Columbia University Press, 1932), p. 184Google Scholar.

²⁹ Quoted ibid., p. 164.

³⁰ Ibid.