The Metamorphosis of City and Chase As Multinational Banks

The Metamorphosisof City and Chase as Multinational Banks Srinivas B. Prasad • DepartmentofManagement CentralMichigan University Banksecho the distant past, and financial capital has crossedpolitical boundariesfrom timesimmemorial. Banks in Europeand Americahave been in multinationalbusiness for centuries.Whether American banks in the past were guidedby the principle of minimizinginternal transactioncosts as the 'internalizationtheory' holds, or whether they investedabroad sequentially as the stage-theorymaintains, remains to be examined.Such inquiries can be madewith the aid of bank histories.As expressedby Wilkins [1995,pp. 8-9], the "businesshistorian pushes the studentof contemporaryinternational busi- nessto look at the rootsand patternsof developmentand to identifythe paths and processes2 in the growthof the multinationalenterprise." In otherwords, a richer explanationof the multinationalphenomenon can be soughtby blendinginsights from the historiesof firms and the contemporarytheories of multinationalenterprises. The earliesteffort in the directionof developinghis- torical-theoreticalperspectives of the multinationalenterprises was initiated by Hertner andJones [1986] and the topic of multinationalbanks, in particular, wasexpounded in the compendiumedited by Jones[1990]. The purposeof the paperis to briefly examinethe multinationaltheories 3 in the light of the historiesof City National Bank and the Chase National Bank,both of whichhad evolved,prior to the 1950s,as multinational banking enterprises.4 The followinganalysis offers someevidence for the 'stage~theory' of internationalization; however, the foreign direct activities of the two Americanbanks in the early twentiethcentury were propelledmore by the interplayof the externalcontexts and the leadershiproles of the chief execu- • The author acknowledgesthe financialsupport of the ResearchProfessor Committee (1988), CentralMichigan University, for the projectMultinational Banks.' Histories and Theories. He wouldalso like to thankP.N. Ghauri (University of Groningen)and Rose M. Prasad(Central Michigan) for theirencour- agementand helpful comments on earlierdrafts of this paper. 2 Somewriters include 'internationalization' and the 'stage-theory'as theoriesof the international- izationprocess. A criticalevaluation can be foundin Anderson[1993]. • Thereare three strands: the 'internalization';the 'stage-theory'and the 'networkapproach.' The net- work approachis assumedto be a commonpractice in bankingknown as 'correspondentbanking.' Therefore,references are to the firsttwo theoriesexpounded in the mid-seventies. 4 The term ' multinational'is usedhere as a synonymfor the multinationalcorporation, multinationalenterprise, global firm andthe like. BUSINESS•IND ECONOMICHISTORY, Volume Twenty-eight, no. 2, Winter 1999. Copyright¸ 1999by the BusinessHistory Conference. ISSN 0894-6825 202 / SRINIVASB. PRASAD tires than by the 'internalizationtheory' imperativessuch as the drivesto min- imize transaction costs and to maximize control. Two Multinational Theories The internalizationtheory hasbeen built on the monopolisticadvantage notion advancedby Caves [1971]. Its main postulatehas been that multinational firms striveto seekcontrol of monopolisticadvantages in order to safe- guard them againstmarket imperfections.The firm's activities"are brought under common ownershipand control in a market 'internal' to the firm" [Buckleyand Casson,1976, p.47]. The theoreticalfocus has been on the industrial firm. As at present,service firms, in particularbanks, also have playeda pivotal role in the past. Focusingon banks,Casson [in Jones,1990, pp. 24-25] has explainedthat the post-warexpansion of U.S. retailbanking reveals that foreigndirect investment in manufacturing(sector) created a new demandfor corporatebanking services.Banks set up foreign subsidiariesbecause the alternativesuch as 'exportingof bankingservices from the United States'or 'correspondentrela- tionship'was not optimal. This economicview, however,may not be a fuller explanationof the multinationalbanking phenomenon because bank histories offer two important insights.One is there has been a 'process'in the expan- sion abroad of banks. Two, akin to their industrial counterparts,banks also have exported some proprietary financial productsfrom home base,forged joint venturesand alliances,and set up their own foreign branchesor sub- sidiariesat the same time, indicatingthat the alternativesto national banks were not mutually exclusive. 'Stage-theory,'in contrastto the 'internalization'theory, can be charac- terized as an explicit corporate history-basedmodel of internationalization [Johansonand Wiedersheim-Paul,1975; Johanson and Vahlne, 1977]. It con- sidersthe variablessuch as a firm's resources,its knowledge,its organization- al cultural proximity to its foreign locationsand cultures,and explainsthe related paths and processesof internationalexpansion. Relying for its con- ceptualizationon the businesshistories of four Swedishindustrial companies,5 the stage-theoryseeks to capturethe dynamicsof how firms make decisions, the incrementalstages through which a firm metamorphoses,and how they overcometheir own resourcelimitations. "The firm first developsin the domesticmarket and its internationalizationis the consequenceof a seriesof incremental decisions.The main obstacles are lack of knowledge and resources.These obstacles are reducedthrough incrementaldecision-making and learning about the foreign markets and operations" [Johansonand Wiedersheim-Paul,1975, p.306]. • Thesewere Atlas-Copco, Facit, Sandvik and Volvo. Based on the evolutionof thesefirms as multi- nationals,the authorsconstruct a modelthat includesvariables such as resources committed to foreign markets,knowledge of foreignmarket conditions, psychic distance or culturalproximity of foreignbusi- ness and incremental involvement abroad. THE METAMORPHOSISOF CITY AND CHASEAS MULTINATIONAL BANKS/ 203 Even though the 'stage-theory'was also formulated in the context of industrial firms, its postulatesare germaneto servicefirms. Bankshad beenservice firms to their borrowers and clients, and their histories contain the dimensions that revealthe processesof their internationalization.The following sketches of National City Bank and ChaseNational Bank are drawnfrom publishedhis- torical volumessuch as Clevelandand Huertas [1985], Wilson [1986], Miller [1993],Zweig [1995] and Chernow [1998].The focusin thesesketches is on major eventsat the banks and the growth initiatives of their executiveswhose formal titles remainedas presidentsuntil about the 1940s.The first sketchis about City Bank which becameNational City Bank in 1865. National City Bank In 1811,a group of New York merchantspetitioned for a new bank, the City Bank.6 With legislativeapproval, on June 16, 1812,City Bank openedfor businesswith SamuelOsgood as its president,with an initial capitalof $2 million. It was a bank of and for its merchant owners and directors. Its loans went mostlyto the insiders.Within a few yearsafter its founding,the bank fell into financial disarray.In 1825, the founderslost control to the new owner Isaac Wright, a textile merchant,who himselfbecame the bank'spresident in 1827. Wright wasmore a merchantthan a banker,though he held office asthe president until 1832. After the financialpanic of 1837,City Bank alsofaced a declinein the cir- culation of its notes and was near collapse.John Jacob Astor investedin the bank, took control and named his prot•g•e MosesTaylor, as a directoron June 6, 1837.Taylor becamethe president7 of City Bank in 1856, began acquiring controllingequity in the bank. "He certainlycould not be calleda banker,but he did keep the bank in business,"according to Zweig [1993].After receiving a national charter in 1865, the bank renameditself as National City Bank. After Taylor's death in 1882, his son4n4awPercy Paynewas promptly namedthe president.He managedthe bank in the Taylor'stradition. Between 1857 and 1891,the assetsof the bank had grown in tandem with the fortunes of the Taylor family.The assetsamounted to $1.7 million in 1837when Taylor first became a director to about $17 million in 1882 and to about $22 million in 1891 when Paynesuffered a strokeand had to resign. SucceedingPayne as presidentwas James Stillman. Much as MosesTaylor, Stillman usedthe bank to finance his personalbusiness empire. Stillman, an investment banker, had issued on his own account, railroad and industrial 6 SamuelOsgood, mitigated the controversiessurrounding the proposedbank and devisedhis own versionof it whichwas approved by the New YorkState legislature in 1812. 7Some of the well-knownpresidents of the bankwere: Samuel Osgood, 1812-1813; Isaac Wright, 1827- 1832;Moses Taylor, 1856-1882; James Stillman, 1891-1909. Stillman evidently was the first presidentto be namedas Chairmanwhich title he held 1909-1918.Other subsequentchairmen included: James A. Stillman,1918-1919; James Perkins, 1933-940; James Stillman Rockefeller, 1959-1967; George Moore, 1967- 1970,and Walter B. Wriston, 1970-1984. 204 / SKINWASB. PRASAD bonds. "With the bank under his control, Stillman did underwriteon a larger scale.He continuedto take the underwritingrisk personally,and usedthe bank to supportthese efforts" [Cleveland and Huertas,1985, p.33]. To Taylor'sclient companies Stillman added leading industrial firms, correspondent banks around the world, and the governmentof the United States,providing them with a plethoraof financialservices. They in return boostedtheir balancesat the bank, making

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