(Mayer, 1974). The latter underwrite and distribute securities such as corporate bonds and stock, and government bonds; while the former take deposits and make loans from them. While the two activities have been historically combined in Europe, this was not generally the case in the US until the latter part of the 1800s. Banks in major cities like New York, Chicago, and San Francisco at that time entered the bond-underwriting business, acting in effect as brokerage houses. For example, First National City of New York became one of the nation's largest underwriters and distributors of corporate and government bonds. The country's economy was booming, particularly manufacturing, and governments of all types (for example, localities) also needed funding for infrastructure (like roads and sewers). As a result, "securities affiliates," holding companies, subsidiaries, and various other organizational arrangements cropped up to implement the underwriting of securities by banks. Indeed, in World War I, the US government itself promoted this activity by encouraging banks to sell its Liberty Bonds.
By the 1920s, the commingling of commercial and investment banking reached new heights (Mayer, 1974). Goldman Sachs, the big Wall Street investment bank, had taken over Manufacturers Trust, a very large commercial bank. And (First) National City Bank had organized the biggest brokerage affiliate in the country. Such large dual-purpose banks were national in scope because they were not restricted to single-state locations like commercial banks. They took on risky activities such as lending their money to their brokerage affiliates, speculating in Latin American government bonds, and running real estate syndicates. All this was done during the boom times of the 1920s, in which the stock market skyrocketed and prosperity ruled. As a consequence, depositors and investors demanded higher and higher rates of return (to keep up with the compet...