Capital of Capital: Money, Banking+Power in New York City 1784

In the decades that followed the Civil War, New York’s banks—and in particular, its investment banks—drove the country’s explosive growth. Business with the South diminished in relative importance as the city shifted its attention toward the building of railroads in the West, as well as related industries such as steel and iron, which merchant bankers like Moses Taylor had already started to finance before the war. Such massive projects required a new financial infrastructure that could provide amounts of capital on a scale never before imagined. Whereas immediately after the Civil War there were 170 bankers and brokers in New York City, by 1870 there were 1,800, and a quarter of all resources related to banking in the United States were located within a one-mile radius, in downtown Manhattan.

Moreover, while investment banking had grown due to the financing of the Civil War, in the late 19th and early 20th century these bankers’ roles became far more complicated. Leading the profession was a small group of men with either New England or German Jewish roots and strong business and political connections, both within the United States and across the Atlantic. They not only raised capital but also facilitated mergers to create large corporations that replaced the smaller, private partnership businesses of an earlier era. The partnerships they created to raise funds for corporations drew in New York commercial banks and trust companies, as well as investment banking firms in Boston, Philadelphia, Chicago, London, Paris, Hamburg, and elsewhere. They were midwives to the nation’s new industrial order.

Whereas Henry James described the city in somewhat static—if impressive—terms, in 1900, Henry Adams observed the intense energy that characterized the city at the center of this new national economy and foreshadowed its future. “The city had the air and movement of hysteria,” wrote the journalist, historian, and direct descendant of two presidents, “prosperity never before imagined, power never yet wielded by man, speed never reached, by anything but a meteor.” By the end of the century’s third decade, the same investing, lending, and spending that had sent profits skyward would send the nation’s economy into free fall.2

Undertaking projects of such magnitude required special expertise and institutions for facilitating growth. New York was the center of both. The New York Stock Exchange at Broad and Wall Streets—which grew exponentially in the last third of the 19th century—was essential. Stocks in financial enterprises had dominated the exchange’s early business. In the mid-1830s, 70 of the 81 corporations listed on the exchange were banks or insurance companies. Until after the Civil War, New York’s stock market was small enough that “seats” on the exchange referred to actual wooden chairs around a table, and brokers participated in a “call market” where individual transactions occurred at set times, rather than continually. By 1871, however, the formal call market and use of chairs were both discontinued because of the increase in securities listed and trading volumes—caused mainly by the dramatic expansion of the railroad industry. The exchange increased its membership to 1,100 “seats” in 1879 to meet growing demand for capital and investment, and transactions began to take place continuously across the trading floor, each stock assigned a specific location. Between 1878 and 1893, the total value of railroad stocks and bonds climbed from $4.8 billion to $9.9 billion.

In the 1890s, the corporation became the dominant form through which industrial companies—many of them originally private partnerships—sought size, stability, profits, and access to the investment capital that American banks and investors could offer. Investment bankers played the crucial role in arranging the consolidation of previously competing firms into new, larger corporations that issued stocks and bonds sold to outside investors through brokers and in securities exchanges, most notably in Boston and New York. Unlike private partnerships that ended when partners died or dissolved their firms, corporations enjoyed legal immortality; they also offered protections limiting the liability of shareholders and were able to print and sell securities at will to raise capital. The creation of U.S. Steel in 1901 was the crowning event of this new era in which the corporation became the characteristic business form. J. P. Morgan and Company, Kuhn, Loeb and Company, and other Wall Street investment banks earned fortunes for industrialists and themselves by arranging mergers and underwriting or “floating” securities issues (i.e., organizing groups or “syndicates” of banks and other investors to buy such issues, often with the intent of reselling them).

The German Jewish investment banking firm Kuhn, Loeb and Company became one of the two most important American investment banks in the late 19th and early 20th centuries, its longtime president Jacob Schiff “a prince on Wall Street, bested only by the great J. Pierpont Morgan.” Abraham Kuhn and Solomon Loeb first became partners in a dry goods business in Cincinnati, a popular destination for Germans fleeing the 1848 revolutions that swept Europe. They built their wealth selling uniforms and blankets to the Union Army. Following the war, they opened their first bank offices at 31 Nassau Street, near Wall Street. Jacob Schiff joined the company in 1873, two years later also becoming a part of Loeb’s family through marriage to his daughter, Therese. Descended from generations of scholars, rabbis, and businessmen in Frankfurt, Schiff quickly became a noted force in New York City. En route to work, he “strode smartly down Fifth Avenue in frock coat and top hat, short, spiffy, polished, his step nimble, his carriage erect, his passage so punctual that shopkeepers set their watch by him.” From Wall Street, Schiff grew the firm through the sale of railroad securities—by the 20th century, 10 of the largest American railroad companies were Kuhn, Loeb’s clients, most notably the mighty Pennsylvania Railroad—and the company had high-level relationships with bankers in England, France, Scotland, and Germany.3

One of those international relationships was with Germany’s M. M. Warburg, the world’s oldest bank operated by a single family. Kuhn, Loeb relied on Warburg to sell American securities in Germany while Warburg depended on Kuhn, Loeb’s sale of German treasury bonds to American investors—testimony to the growing role of Americans as creditors to the rest of the world, with Wall Street as the focal point of transactions. Ultimately, great-grandsons of the German bank’s founders—brothers Felix and Paul Warburg—became partners in Kuhn, Loeb. Though their moving to the United States (in 1894 and 1895 respectively) marked the first time in 14 generations that members of the Warburg family had left Europe, the men quickly established not only business but also familial ties to the most preeminent German Jewish bankers in America: Felix married Jacob Schiff’s daughter, Frieda, in March 1895 and Paul married Abraham Kuhn’s daughter, Nina, in October of the same year. Of the brothers, Paul had the sharpest mind for banking, “a financial prodigy malgre lui [in spite of himself], who made money without especially caring about money.” He received training in London and Paris banking houses and helped to run his family’s Hamburg bank prior to joining Kuhn, Loeb. Felix, meanwhile, was more interested in philanthropy—known for saying that he spent 75 percent of his day on charity and 25 percent on banking. Among the boards Felix served on were the Educational Alliance, the Henry Street Settlement House, and the New York Association for the Blind. Through Felix Warburg’s endeavors, Kuhn, Loeb money flowed to these and other charities in New York, the nation, and around the world.⁵

In the late 19th and early 20th century, it was typical to see one name at the top of that billing: John Pierpont Morgan, a name described in terms so amplified that they were matched only by the size of his earnings and his influence on the nation’s economy and politics. Son of the wealthy Massachusetts-born, London-based merchant and banker Junius Spencer Morgan, the junior Morgan created the firm J. P. Morgan and Company with his cousin at age 24. Through the arrangement of his father, J. P. joined the much older—and more experienced—Charles Dabney three years later, in 1864, in the formation of Dabney, Morgan and Company, which became Junius’s New York agent. In 1871, he became a partner in Drexel, Morgan and Company, which in 1895 ultimately became J. P. Morgan and Company. Simultaneously called the “financial Moses of the New World” and a “beefy, red-faced, thick-necked financial bully, drunk with wealth and power,” Morgan was respected and admired, but also hated.7

Morgan’s influence grew so large that on separate occasions he played the chief role in saving the country and New York City from financial ruin. He helped bring the country out of the 1893 Panic by forming a syndicate to underwrite and sell $60 million in government debt, and during the Panic of 1907 he rescued New York City from bankruptcy by buying $30 million in city bonds, cajoling fellow bankers into making emergency loans to vulnerable banks, and persuading President Theodore Roosevelt’s treasury secretary to place $25 million in federal deposits in city banks. Morgan effectively served as the nation’s central bank, a role that had been vacant since the demise of the Bank of the United States in 1836 and would not be officially filled until the creation of the Federal Reserve in 1913.

Morgan’s financial success depended on reducing competition. “Morganization”—a term first applied to the railroad industry—involved consolidating unprofitable corporations, trimming allegedly “excess” human and physical resources, and making the final, consolidated corporation safe and profitable for investment. In the wake of the 1893 depression, Morgan had reorganized a railway system broken by speculation, excess, and cutthroat competition, ultimately gaining control of one-sixth of the country’s railroads. In the first decade of the 20th century, he and other investment bankers turned their attention to investing in corporations in industries such as electricity and steel, so that by 1910, securities issued for utilities and industrials outpaced those for railroads.

The creation of U.S. Steel represented the zenith of Morgan’s ability to marshal men and their money behind a merger. This largest of the industrial mergers came about through Morgan’s negotiations with the steel magnates. Bolstered by the pro-business views of President William McKinley, whose second campaign had been financed chiefly by northeastern bankers, Morgan formed the country’s first billion-dollar company. The first meeting about consolidation plans took place around Christmas 1900, when Morgan summoned Robert Bacon (a Morgan partner) and Charles Schwab (president of Carnegie Steel) to the “black library” in his mansion on Madison Avenue and 36th Street—so called by his servants for its dark and uninviting interior. Ultimately, the U.S. Steel merger involved over 300 underwriters in the United States, Britain, and Europe. The consolidation was enormously profitable for the business magnates taking part; Andrew Carnegie, whose Carnegie Steel Company was merged into the new mega-corporation, personally received about $300 million in U.S. Steel bonds, while John D. Rockefeller’s stock holdings in U.S. Steel made him the second wealthiest man in America (Carnegie was the first). Morgan also organized General Electric (1892), became the banker for American Telephone and Telegraph (1906), and promoted the consolidation of other corporations that dominated their fields. Not all his efforts proved successful; the International Mercantile Marine Company (1902), an attempt to merge and monopolize transatlantic shipping lines, proved costly and unwieldy, although one of its constituent companies, the White Star Line, did launch the world’s largest steamship, the RMS Titanic, in 1912.

The National City Bank (the bank earlier made prominent by Moses Taylor) led the commercial banks in investment banking activities (assisting corporate clients in meeting their financial needs). Its president, James Stillman, was skilled at forging business connections in the United States and abroad. Having been a partner in his father’s cotton brokerage business (the largest in the United States) and director of Hanover National Bank, Stillman took the helm of National City in 1891. He brought with him “a gift for being with men of power and financial knowledge,” who placed their deposits with National City and purchased securities from Stillman. Such men included William Rockefeller, a founder, with his brother John, of Standard Oil, who made National City his company’s and his personal main bank; New York Life Insurance Company president John A. McCall; Theodore Havemeyer, an executive at the American Sugar Refining Company; Daniel S. Lamont, who would become Secretary of War under Grover Cleveland; and George W. Pullman, of the Pullman Palace Car company, famous for manufacturing luxury passenger train cars staffed with white conductors and African American porters. Abroad, Stillman served as advisor on the state of American securities to Lord Revelstoke of Baring Brothers and managed a portfolio of securities for the U.S. Trust Company of London, a British investment firm. These relationships paved the way for partnerships with investment banks to underwrite major corporations. The most significant move into the investment banking world was Stillman’s partnership with Kuhn, Loeb to reorganize the Union Pacific Railroad. Under Stillman’s and then Frank Vanderlip’s leadership, by World War I the National City Bank at 55 Wall Street had become the nation’s largest commercial bank, and one of the world’s largest.8

Physical expansion followed banking activities abroad. Numerous investment banks had maintained agents and branches in Europe, but the Federal Reserve Act, approved December 23, 1913 (and largely the work of New York financiers), enabled the spread of dozens of American commercial bank branches not only in the financial capitals of England, France, and Germany but also as far away as Chile, Uruguay, and Japan. Inspired by the combined interest of political leadership, corporations, and bank leaders in advancing international trade, the legislation meant New York’s commercial banks could now hold the money of companies with large export businesses as well as finance the foreign investments of American companies in such industries as nitrate, coffee, and sugar. National City was the first nationally chartered bank to open a foreign branch, on November 10, 1914, in Buenos Aires. Initially, National City’s president (and former Assistant Secretary of the Treasury under William McKinley), Frank Vanderlip, expressed skepticism, writing to his friend Henry S. Pritchett that he did “not expect much profit out of it” but hoped “to get very considerable return by offering facilities that other banks cannot offer to exporters.” By 1917, the bank’s Buenos Aires branch had become the ninth largest bank in Argentina, its deposits making up 1.8 percent of the deposits in the country’s entire banking system. It was the acquisition of the International Banking Corporation, however, that led National City to become the American bank with the most expansive foreign presence, operating 35 foreign branches by 1917. Granted a special charter by the Connecticut legislature to conduct banking business abroad, the IBC was started in order to advance trade in the Far East, and consequently had offices in the Philippines, Singapore, China, and Japan by 1914. A president of IBC, Marcellus Hartley, had developed connections with National City through financing of the transatlantic cable in 1866.10

Meanwhile, Wall Street investment banks increasingly displaced English and German banks (distracted by the domestic financial pressures of World War I) as the leading underwriters of bond issues for the governments of Cuba, Brazil, Peru, Chile, and other Caribbean, Central, and South American states; by 1920, New York had displaced London as the leading source of capital in Latin America. Thus Manhattan’s commercial and investment banks laid the groundwork for the unrivaled role they would play globally later in the century.

Meanwhile, banks’ geography and architecture at home in New York City further reflected the growth of the industry. While Midtown Manhattan began to emerge as a secondary business and office district, the area around Wall Street in Lower Manhattan remained the nerve center of finance and corporate decision making. “The Street” was the acknowledged center of the city’s “downtown” business district, an increasingly dense cluster of offices for brokers, insurers, private bankers, publishers, and corporate lawyers, amid the stock exchange, other securities and commodities markets, and the city’s U.S. Subtreasury and Custom House. As towers rose to house the offices of partnerships and corporations, banks—and particularly savings banks—sought to impress their customers with displays of copious wealth. Beaux-Arts structures with richly ornamented, cavernous halls of marble, granite, steel, and bronze replaced the restrained Greek Revival temples of the antebellum years. Though “a fine building will not make a bad bank good,” one critic wrote, “it will make a good bank better in the eyes of many.”11

The city’s elite residential district expanded beyond Washington and Stuyvesant Squares and lower Fifth Avenue to include the area between 42nd Street and Central Park at 59th Street. Wealthy bankers—along with industrialists whose stocks and bonds they sold—were conspicuous in this “march uptown.” While J. P. Morgan’s mansion and private library occupied its own space on Madison Avenue, other bankers broke ground on upper Fifth Avenue facing Central Park. This display of metropolitan wealth extended all the way to 92nd Street by 1908, when Felix Warburg built for his family a six-story French Gothic palace staffed by 13 servants, which would eventually become the Jewish Museum. The families of these magnates further flaunted their wealth during daily carriage parades in the urban oasis of Central Park.

After the Civil War, the city’s bankers also used their fortunes to try to make New York a center of Western civilization to rival London and Paris. They built new opera houses, concert halls, and museums, some to “elevate” the working poor and others as exclusive palaces for the affluent to showcase and enjoy the fine visual and performing arts. The Metropolitan Museum of Art straddled both roles, born of an impulse common among founders of museums in the decades after the Civil War. The museum’s board hoped it would surpass colleges and universities in diffusion of knowledge at a time when those institutions opened their doors only to the elite. The museum’s earliest benefactors—including Wall Street banker Henry G. Marquand, J. P. Morgan, and Herbert R. Bishop, a banker and director of many railroad companies who was on the original committee of 50 men assembled in 1869 to establish the museum—aimed to distinguish their institution from the type of sensational amusements they had seen featured at P. T. Barnum’s American Museum on lower Broadway. The Metropolitan Museum would offer mechanics and artisans vocational classes and provide knowledge to the masses rather than “kill time for the idle.” As time went on, however, the museum’s focus turned away from popular instruction and toward buying up Old Master artworks. In 1897, Morgan himself began donating art to the museum, and he helped to finance acquisitions and expeditions. Indeed, in the last 20 years of his life, Morgan spent close to $1 billion in today’s dollars on art, most of which was either donated to the Metropolitan Museum or displayed in what became The Morgan Library & Museum.13

Immigrants were apt to trust savings banks and informal associations run by those from their original country, or even town, over a commercial bank. In one of his novels, Isaac Raboy, who immigrated to New York in 1903 following an anti-Semitic pogrom in Czarist Russia and spent part of his life working in the city’s factories, detailed this tendency. Whereas the main character, Jacob, is “filled with fear” upon walking into the National Bank, he loves bringing “a small amount of cash into the Jewish bank” where “the president of the bank himself stands behind the table, greets him cordially and smiles.” Less formal were mutual aid societies, organizations within ethnic communities that pooled money from members to assist in everything from paying for funerals to doling out a regular allowance to those who were sick or out of work. In the decades before the New Deal era’s social welfare programs, these ethnic organizations offered essential resources to poor and working-class immigrants.14

The Emigrant Industrial Savings Bank was the most successful of the ethnic savings banks. It grew directly out of the Irish Emigrant Society, an organization that helped Irish immigrants adjust to life in New York. Founded in 1841 and based on the model initiated in New York by the Bank for Savings in 1819, it steered these immigrants away from the hucksters waiting to exploit them in the port and toward legitimate jobs and shelter. Together with the German Emigrant Society, the Irish Emigrant Society worked to improve the immigration process, establishing the Emigrant Refuge and Hospital on Ward’s Island in 1847 for those who arrived sick and helping to found the first official state-sponsored immigration center at Castle Garden in 1855. The bank, which began accepting deposits in 1850, offered Irish immigrants opportunities nearly impossible to find in their home country, which was ravaged by famine and poverty. By accumulating savings, unskilled workers were able not only to build a safety net but also to start businesses and buy property. Patrick Lennon, for example, who came to New York in 1848 and started out as a porter, took out $800 from his Irish Emigrant Society account in 1860 to open a grocery. By 1870 he had $3,500 worth of real estate.¹⁵

The Jarmulowsky Bank, meanwhile, mainly served the Russian, Ukrainian, Polish, and Lithuanian Jews of the Lower East Side. Its founder, Sender Jarmulowsky, was from Russia and a religious Jew. Like Kuhn and Loeb, he began his career in a business that involved exporting goods, and he became not just a respected banker but also an esteemed community leader and philanthropist. Born in Lonza, Russia (now east-central Poland), Jarmulowsky graduated from a Talmudic academy as an ordained rabbi, married into a wealthy family, and in 1868 opened a business in Hamburg that transported people and products to the United States. He moved to New York by 1873, opening an office of his German business at 193 Canal Street and his bank by 1884. Though private—and therefore unregulated—the bank earned customers’ trust through its stability and its leader’s reputation. Tageblat, a Yiddish language newspaper, wrote that “Sender Jarmulowsky was a name that was known to every Jew in the Old and … New World. His business brought him into contact with hundreds of thousands of immigrants to whom the name Jarmulowsky was the guarantee of honesty.” Jarmulowsky’s bank had survived four bank runs through his prudent management, and protecting of sizeable cash reserves in the Corn Exchange Bank and in his own safe. In fact, the bank grew large enough to merit the first skyscraper on the Lower East Side in 1912. The New York Times referred to the neo-Renaissance building at the southwest corner of Canal and Orchard as “equal in every respect to the highest grade banking buildings throughout the city.” At 12 stories, it narrowly exceeded the height of the building of the Yiddish socialist newspaper the Daily Forward, which had busts of Karl Marx and Friedrich Engels on its façade.¹⁶

The federal government facilitated this growth through the U.S. Comptroller’s decision in 1903 to let national banks operate a savings department. As a result, by 1913 more than half of the national banks accepted savings deposits. Journalists, bankers, and political scientists broadcast the growth of savings institutions as a marker of the United States’ global standing. An 1878 newspaper article noted that savings institutions “are so important in their industrial, financial, beneficial, national and individual relations, and are growing so much more numerous and important over all the world.”17

There was early skepticism among the banking elite that men and women with modest amounts of money would buy the bonds. When the Secretary of the Treasury sought bankers’ advice on issuing war bonds, they concluded that Wall Street “was no place for the average salaried man without a surplus.” Not only salaried but also wage-earning men proved them mightily wrong. The Civil War had offered Americans the opportunity to buy government debt through the banks in both large and small increments; the scale at which they purchased government bonds between 1917 and 1919 was unprecedented. In its 1917 annual report, the U.S. Treasury noted the “great movement that vibrated with energy and patriotism and swept the country from coast to coast in the greatest bond-selling campaign ever launched by any nation.” The treasury passed four Liberty Loan Acts between 1917 and 1918, issuing bonds whose value totaled $17 billion, and just between May and November 1918, the number of bondholders (of different bond types) grew from 350,000 to an estimated 10 million.18

The federal government charged bankers, businessmen, and advertisers with convincing everyday Americans that investing was as much a patriotic duty as marching off to war. Though bankers had become the targets of great political mistrust by the early 20th century (as will be discussed in Chapter Five), in the national and international crisis of World War I, the treasury turned to the banking community—and especially those in New York—to broker the sale of bonds. Lewis B. Franklin, president of the Investment Bankers Association, directed the Second Liberty bond drive while Jacob Schiff, Thomas W. Lamont, and George F. Baker all sat on different Liberty Loan committees. The Magazine of Wall Street highlighted these new roles, noting that they were “a signal recognition of the importance and necessity of the financial district and financial leaders in the flotation of the Liberty Loan.” Indeed, the government depended on a host of commercial banks, investment houses, and brokerage firms to place war bonds in the hands of millions.¹⁹

These financial firms in turn depended on a legion of businesses, institutions, associations, publications, and individuals—both nationally renowned and locally esteemed—to sell bonds in campaigns called “Liberty Loan drives.” Though big city bankers had dominated the publicity during the first Liberty Loan drive of 1917, famous politicians, actors, and religious figures, including William Jennings Bryan, Charlie Chaplin, and the Reverend Billy Sunday, spoke at rallies and meetings alongside local clergy and educators considered “molders of sentiment.” Morning to night, men, women, and children either had opportunities to buy the country’s debt or encountered advertisements reminding them it was their duty to take that opportunity. A mother might walk into a Woolworth’s (with Liberty Loan posters in its window) and purchase bonds from the store clerk, receiving change in the form of war savings stamps; upon arriving at school, her children might give handfuls of pennies to their teachers in exchange for War Savings stamps; and their father, on coming home from work, might settle down with a newspaper featuring advertisements about supporting the war effort.²⁰

The message behind most of the publicity was that buying war bonds was part of being American. Through purchasing government debt, no matter how small the amount, immigrants could prove they were citizens. As the vice president of the National Bank of Commerce in New York observed in March 1918, the advertising campaign showed that “the American people is sound at the core, is more truly a unit than we would have dared believe could be moulded from the heterogeneous jumble of races that makes up the nation. Through nation-wide publicity, the American people has discovered itself.”²¹

The Liberty Loan campaign made visible a largely untapped market and tremendous source of potential profit for New York’s banks. Banks and other corporations just needed to figure out how to shift popular investment in government bonds to wideranging corporate securities and consumer goods. Even before the war was over, companies bought space in publications for Liberty Loan and Red Cross advertisements, thereby yoking patriotism with investments in corporations. In exchange, the companies could include their name in the ad, enabling such statements as “This page contributed to the Winning of the War by Westinghouse.” Brokerage companies also encouraged investment in these corporations by explicitly invoking Americans’ new wartime habits of bond buying. The New York-based brokerage company John Muir and Co., for example, wrote in its publicity material following the war’s end: “You know now that you can invest,” exhorting the “small capitalist” to take the same opportunities as the “large capitalist.”²²

Banks and their security-selling affiliates used aggressive marketing to solicit those “small capitalists.” They bought advertisements in popular publications such as Scribner’s, Harpers, McClures, The Saturday Evening Post, and Atlantic Monthly that enlightened readers on the difference between stocks and bonds. They distributed free literature and circulars, some hiring an advertising man to create text and language that would educate and engage. Bank presidents themselves were adept at using persuasive prose to both link the buying of stocks and bonds to established banking behavior and convince potential customers that—like holding war bonds—holding securities enabled full participation in American democracy. Charles Mitchell, president of National City Bank, exemplified the former in a speech he delivered to a class on banking in 1919. Using language common to the founders of early savings banks, Mitchell argued that “if, by advertising, we could spread the gospel of thrift and saving and investment,” the bank could “render a service to the individual investor such as had theretofore never been rendered.” National City’s marketing worked; between 1921 and 1929 the bank underwrote close to one-fifth of bonds issued by investment banks, among them J. P. Morgan; Kuhn, Loeb; Guaranty Co.; and Bankers Trust.23

Commercial banks similarly sought customers of more modest means as new sources of capital. The federal McFadden Act of 1927 allowed national banks to open local branches, enabling them to target middle-class as well as working-class populations. By opening an office on 42nd Street, for example, National City could serve employees of the corporations establishing themselves in Midtown. The branch solicited checking accounts with “a monthly average balance of three figures” and a minimum balance of $500, numbers only possible for “the businessman” and “fairly successful members of the middle class.” The top five banks with the largest number of branches by the end of 1929 were the Corn Exchange Bank (67 branches); Bank of Manhattan Trust Co. (64 branches); Bank of United States (58 branches); Manufacturers’ Trust Co. (45 branches); and National City Bank (37 branches). Their growth contributed substantially to the increase in depositors—particularly small ones. At National City, the number of savings depositors shot up from 6,300 in June 1922 to 232,000 by mid-1929, though the average balance remained at $300.24

While commercial banks encouraged Americans to deposit and invest their money, they also—indirectly—fueled the spending of it. They began providing loans to finance companies, which in turn gave loans to both businesses and individuals. Car companies originated these finance companies. Before 1919, a New York car buyer was likely to be a member of the upper class who would walk into a car dealership and hand over a check or a stack of cash; by the 1920s, a middle-class buyer would purchase his Ford Model T on an installment plan. As car companies increased production, dealerships could no longer afford to pay cash for the total stock. As a result, manufacturers created wholesale finance companies to lend these dealers money, and later retail finance companies to offer credit directly to the consumer. Coupled with the rise in production and the advent of the used car market, wholesale and retail financing allowed the number of cars on the city’s streets to soar. Whereas in 1914 there had been 125,000, by 1924 there were 800,000, one automobile for every eight New Yorkers. In 1929, 60 percent of automobiles bought nationwide were purchased on installment. Meanwhile, banks quickly moved from helping to finance the buying of automobiles to other high-ticket, mass-produced goods like refrigerators, radios, washing machines, and vacuum cleaners. By providing ample credit to retailers across the country, New York’s commercial banks helped to drive a postwar revolution in middle-class consumer spending.

Whereas most Americans had previously conflated debt and luxury goods with immorality, by the 1920s they considered them an entitlement. New regulations and mass production played a large role in the shift. Prior to 1917, lending to ordinary working-class and middle-class Americans had often been the domain of ethnic societies, individual stores, pawn shops, and loan sharks, and those who turned to the last might pay interest as high as 480 percent. Inspired by investigations of lending practices commissioned by the Russell Sage Foundation, three states passed a small loan lending law in 1917 that capped the interest a company could charge on credit. By 1928, 25 states—including New York—had passed a version of the law, which defined small loans as $300 or less and declared the maximum monthly interest rate to be 3.5 percent. As a result of the law, new lending businesses proliferated as well as profited. Though public profits were not published for New York City, in nearby New Jersey, small lenders’ net profits on loans totaled 13 percent. Meanwhile, investment banks and most commercial banks avoided direct financing to customers. After all, as historian Louis Hyman has argued, “why would the Carnegies and Morgans of the world want to tie up their capital in loans to steelworkers, when they could make so much more money by building steel plants?” According to an address at the 1929 annual meeting of the National Association of Sales Finance Companies, “no bank [could] afford to have more than a certain proportion of its resources tied up in installment finance.” Instead it was “simpler, safer, and in the long run, probably as profitable for the banks to carry the lines of finance companies as it would be to do the business direct[ly].” Bank credit flowed to consumers through the intermediary finance company or department store credit department, rather than directly in the form of retail loans.25

As the size of the city’s banks grew, so did the share of Americans who did business with them. In the late 19th century, most immigrants tried to avoid debt, depositing money in ethnic savings banks and borrowing when they had to from ethnic societies (or loan sharks as a last resort). New York’s and America’s savings and commercial banks espoused a gospel of thrift to attract the deposits of customers, including the foreign-born. Bank initiatives during and after World War I then proved pivotal in helping to turn such savers into investors, spenders, and borrowers. In the wake of the government’s successful World War I bond-selling drives, banks urged ordinary Americans to buy corporate bonds and stocks. Banks also encouraged consumers to spend and borrow by providing much of the loan money that went into store credit and finance company loans to retail customers.

As a result, by the end of the 1920s, the children and grandchildren of immigrants were buying mass-produced goods on installment, borrowing from loan companies, and purchasing government bonds and shares in corporations. New York City had become a capital of capital that not only turned a profit but also enmeshed the city and country in a cycle of debt. That cycle could sustain itself as long as the economy kept booming; at the start of 1929, Americans believed that consumer prosperity would continue indefinitely.