Interbank deposits: The purpose and effects of domestic balances, 1934-54 (The Rise of commercial banking) by Katherine Finney

1. Purposes and Uses 
of Interbank Deposits
Large interbank deposits, or bankers' balances, have 
been characteristic of the commercial banking system of 
the United States from its early years. The oldest exist-

ing interbank account is said to be that of The Bank of 
New York, which opened an account in a predecessor 
of Philadelphia's First Pennsylvania Banking and Trust 
Company in 1784.
The intricate network of interbank deposits and of 
correspondent relationships reflects the historical devel-

opment of banking in the United States in contrast to 
that in many other industrialized countries, such as the 
United Kingdom or France. Correspondent banking 
arose from two elements in the early structure of our 
system.
 First, we did not establish a central bank until 

after 1913. Consequently, banks scattered throughout 
the country came to rely upon city correspondents in 
the financial centers for certain functions which central 
banks usually perform, such as the holding of reserves 
and the extension of credit to the commercial banks. 
Second, commercial banking was carried on by many 
independent units, rather than by nationwide branch 
banks or some other type of multiple office institution. 
With no system of branch offices through which to col-

lect out-of-town checks or to transfer funds to and from 
trading centers, banks came to rely upon their corre-

spondents for these services. Correspondents in the fi-

nancial centers were the means by which investments 
were made, whether in the form of stock market call 
loans or the purchase of securities or commercial paper. 
SERVICES TO THE DEPOSITING BANK 
Interbank deposits, which amounted to $13.5 billion 
at the end of 1954, serve several purposes for the de-

positing banks today. Correspondent balances provide 
a liquid asset out of which legal reserves or vault cash 
may be quickly replenished. These balances are a ready 
source of funds to the depositing bank when the de-

mands of its customers are heavy, and they provide an 
outlet for temporary surpluses. For banks which are 
not members of the Federal Reserve System, the city cor-

respondent serves as a kind of central bank, regularly 
holding legal reserves and providing currency for the 
country correspondent and occasionally extending 
credit to it. In addition, correspondent balances es-

Interbank deposits: The purpose and effects of domestic balances, 1934-54 (The Rise of commercial banking) by Katherine Finney