The Birth of the American Bankers Association

By Evan Sparks

A massive construction bubble, driven both by speculative investments and government subsidies. Investment houses with excessive leverage in that very same construction bubble. A stock market crash, a spike in unemployment, global panic, a wave of domestic bank failures and resounding political consequences.

If this scenario recalls to you the past several years, then you’ll well understand the drama into which the American Bankers Association was born in 1875.

The construction bubble had been in railroads, whose growth had been jumpstarted by the completion of the first transcontinental line in 1863 and the need for rebuilding after the Civil War. From 1868 to 1873, more than 30,000 miles of new track were laid, and speculators piled into railroad stocks.

At the same time, the U.S. government—following the lead of European powers—moved the dollar to the gold standard. Dropping silver backing for the currency contributed to a tighter money supply and choked off funds for speculative investments. In September of 1873, the investment house of Jay Cooke, the heavily leveraged financier behind the Northern Pacific railway, failed to find buyers for its bonds and collapsed.

The economy crashed with Cooke’s firm and the railroads, triggering one of the deepest and longest recessions in American history. The New York Stock Exchange closed for two weeks. Wages fell by a quarter. Unemployment spiked to double digits. Ninety percent of railroad concerns collapsed. More than 300 banks failed in the years of the panic.

The effects of the panic were felt far and wide. In St. Louis, a 31-year-old bank cashier named James Howenstein watched and worried as his liquidity dwindled. One afternoon at closing time, he found himself with just a few hundred dollars left—and millions in deposits remaining to pay. He cut it close, but Howenstein made it. That very night, his clearing house provided the necessary funds.

As a correspondent banker for smaller banks in the surrounding countryside and a former examiner with the nascent Comptroller of the Currency, Howenstein kept up an active correspondence with his peers across the country, sharing news of the panic and how it was playing out in their towns. Howenstein was a bit embarrassed, though, to share news of surviving his tight squeeze with his colleagues—many of whom were not so lucky as he.

“A common sorrow makes friends of us all,” Howenstein recalled wistfully. As the money crunch eased, he received fewer frantic missives and more reflective letters, a sign of a young industry moving beyond a crisis and looking ahead once again to its future. “We were acquaintances before we had seen more of each other than handwriting; we were friends before we knew it. But the time had now come for something better,” he later reflected. “We wanted to meet each other.”

The concept took clearer shape for Howenstein one day early in 1875, when, after closing up shop, he and fellow banker Edward Breck were walking down Olive Street in St. Louis and passed a women’s suffrage organizational meeting. “Breck,” Howenstein said, “if women can get together and talk over their sorrows and their troubles and what they are entitled to in this country, why is it that the bankers cannot get together at such times as these and by cooperation and organization accomplish what we desire?”

Howenstein initiated another flurry of correspondence, and in May of that year, 17 bankers—more than half of them, like Howenstein, under 40—convened in New York City to plan a national convention for their industry. They decided on July 20, 1875, in the popular resort town of Saratoga Springs in upstate New York—and that the convention should result in an association of bankers. Approximately 350 bankers, representing 32 states and territories, accepted the invitation.

The new organization would, uniquely for the time, represent the interests of national banks, state banks, savings banks and trust companies, as well as banks in both cities and small towns—overcoming previous divisions along lines of charters and bank size. They discussed the top banking issues of the day—some no longer with us, such as the urgency of resuming specie payments, but others strangely relevant. Bankers were exercised over the continued burden of a Civil War-era stamp tax on bank transactions, which had persisted long after other wartime taxes had been repealed.

And thus, out of a deep panic was born a dynamic and progressive organization—one that would provide not just infrastructure to help banks operate day-to-day. It was clear from day one that Howenstein and ABA’s other founders intended the association to provide what we would today call “thought leadership” for the industry—to provide the time and space for bankers to plan for the future and innovate. The real-world friendships afforded by ABA were superior to ad hoc correspondence, Howenstein found. Together, as friends and compatriots, they would change the industry and the country. The fellowship that Howenstein helped to inaugurate 140 years ago laid the foundation for the safe and accessible deposits, fast and convenient payment methods and widely available personal and business loans that characterize the banking industry today.

Since the 2008 financial crisis, bankers and their customers have faced huge obstacles—the collapse of housing prices, a stumbling economy and excessive regulation. But the Panic of 1873 and the story of ABA’s founding make clear that obstacles are not insurmountable. With unity of voice and action, bankers can overcome the challenges before them.

“Men are different denominations, like money,” Howenstein liked to joke. “Some are eagles, some are dollars, some are cents and some are nonsense—and it is imperative we get together to make change.”

In helping to create ABA, that’s precisely what he did.


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