1 For a “ pro– German bank” view from the American side of the Atlantic, see Calomiris (1995). German universal banks, closely involved with the firms they finance, are thought to have done a better job of monitoring firm manage- ments than “ arms-length” Anglo-Saxon banks, and to have raised capital for firms at lower costs than those experi- enced in Anglo-Saxon systems in which commercial and investment banking often were separated. F EDERAL R ESERVE B ANK OF S T. L OUIS 83 M AY / JUNE 1998 U.S. Securities Markets and the Banking System, 1790-1840 Richard Sylla A fact underappreciated about the rise of the United States in the world econo- my is that a modern, “world class” financial system—by the standards of the time—emerged virtually at the beginning of the nation’s history and provided a solid underpinning for the country’s subsequent growth and development. This paper explores the emergence of that financial system. It emphasizes the mutual support between the banking system, which has been well studied by financial historians, and securities markets, which have been relatively neglected. Distinctive features of the U.S. banking system depended on the existence of securities markets, and before long, distinctive features of U.S. money and securities markets depended on develop- ments in the banking system. BANKING SYSTEMS AND FINANCIAL SYSTEMS The “Anglo-American” or “Anglo- Saxon” pattern of financial organization features a functional division of labor and a balance among three main, interrelated sectors: the banking system, the money market, and the securities market. This pattern is often contrasted with the “Con- tinental European” or “German” pattern, in which banks dominate the financial system while the money and securities markets are relegated to minor, secondary roles. The advantages and disadvantages of each pattern of organization relative to the other are much studied and debated. Also discussed are the questions of whether today’s globalization of finance (which is less unprecedented than many believe) will bring about a convergence of financial systems and, if so, in what direc- tion. Financial historians have become interested in an additional question: why the two different patterns of financial orga- nization emerged in history. Thus far, however, they have only scratched the sur- face in attempts to answer it. A reason for the limited progress in understanding why systemic differences emerged in history is that, while Anglo- Saxon and German systems may compete with each other in the real world, in the world of financial historians—be it the Anglo-Saxon, the Continental European, or any other division—the German model seemingly has carried the day. This is not meant to imply that financial historians have weighed the evidence and decided that the German bank-based pattern of financial organization is best, although some on both sides of the Atlantic would agree with such a contention. 1 Rather, it is meant to suggest that banks everywhere have received the lion’s share of attention from financial historians. I would hazard the guess, based on some years of experience, that there are 25 or 50 dissertations, articles, and books on the history of banks and banking for each one on the history of money and securities markets. No doubt there are many reasons for the overwhelming attention financial histo- rians devote to banks and banking. Among them is the obvious one that, in Continen- tal Europe, banks were by far the dominant financial institutions during the past two centuries, so that other components of financial organization merited less study. But why is the emphasis on banking history much the same among Anglo-American scholars? Here I think an explanation would include several points. One is that, even in Great Britain and the United States, Richard Sylla is the Henry Kaufman Professor of the History of Financial Institutions and Markets and a professor of economics, Stern School of Business, New York University. This research was supported by the Alfred P. Sloan Foundation.