From Drafts to Checks: The Evolution of Correspondent Banking Networks and the Formation of the Modern U.S. Payments System, 1850–1914

TLDR

Checks remained local payment instruments throughout most of the nineteenth century, with significant interregional use only emerging in the 1890s. The authors aim to explain the delayed spatial diffusion of checks by examining the rise of centralized payment institutions coordinating transactions among many banks. Centralized payment institutions were large correspondent banks, especially in New York, whose post‑Civil War funds formed a national settlement medium and whose concentrated balances supplied liquidity and externalities that smoothed check payment flows.

Abstract

Checks remained local payments instruments throughout virtually the entire nineteenth century. Their significant use in interregional transactions dates only to the 1890s. We explain their lagged spatial diffusion by the evolution of centralized payments institutions to coordinate transactions among myriad banks, not real technological changes to “annihilate” distance. The pivotal institutions were large correspondent banks, especially in New York. After the Civil War, New York funds constituted a national settlement medium, and the concentration of bankers’ balances in New York yielded liquidity and other externalities smoothing the flow of check payments.