“Building destroyed. Vault intact. Credit unaffected.”

San Francisco’s Place in US Banking

1906 earthquake and the fire destroyed much of San Francisco

Nearly everyone assumes that New York is the banking capital of North America. It wouldn’t be surprising if majority of Americans thought of JP Morgan as the father of banking in the United States. While JP Morgan was a giant, it wasn’t his New York that set the foundation for modern banking in the United States. The city that gave birth to modern banking in the United States was San Francisco.

Banking in the United State — Pre-Gold Rush

During the early days of US history, Americans were not allowed to have domestic banks. All banks operating in the US were British banks and various regulations made opening up a bank headquartered in the American colonies illegal.

After the American revolution, however, Alexander Hamilton lobbied for the opening of America’s first bank. Bank of North America, headquartered in Philadelphia, was created by an act of Congress in 1781. In the next 50 years, in addition to the government owned banks, nearly 1,000 private banks opened up in the United States almost always serving a special group of merchants. These banks were not really banks as much as they were lending arms of a local guild. They were usually located inside a merchant’s shop and allowed companies dealing with the merchant to buy or sell goods on credit.

Gold Rush & Wells Fargo

It wasn’t until the gold rush that the America’s first modern bank was founded. When nearly a quarter of a million people moved from the east to California, two entrepreneurs saw an opportunity.

In 1850, Henry Wells and William Fargo of Buffalo, New York, who had started an express mail company (which would go on to become American Express) opened up an office in San Francisco to allow miners to exchange their gold for currency.

Miners would hand Wells Fargo, who owned a secure transportation company, their gold. This gold would then be transported, via stage coach, to WellsFargo’s office in San Francisco where it would be transformed into gold coin.

As more people moved to California in search of gold, more Wells Fargo offices opened up. By 1905, Wells Fargo was the largest bank in the United States with offices all over the West Coast.

These Wells Fargo offices would not just take gold from miners, but they would also extend credit to them. Even though Wells Fargo was growing quickly, it was still not a consumer bank. In fact, by 1904 the United States still did not have a consumer bank and the majority of the country’s population remained unbanked.

Bank of Italy— California’s Bank

That all changed starting on October 17, 1904.

Bank of Italy’s office in North Beach, San Francisco

At 9 a.m, on a cool October day, A.P. Giannini turned to his assistant Vic Caglieri and said “Vic, you may now open the front door.” The Bank of Italy was open for business.

A.P. Giannini had made a fortune in the food business, but by 1904 he had become convinced that San Francisco deserved a bank made for the common person. He took out $150,000 of his own money, leased a store front in North Beach neighborhood of San Francisco and opened up Bank of Italy.

While J.P. Morgan in New York was making a fortune banking large corporations, A.P. Giannini was shunning wealth and almost all corporations.

“This bank prides itself on expressing the true spirit of democracy. The so-called common people have made this institution and therefore it will ever remain the servitor of those same people” read Bank of Italy’s first print advertisement. Another early ad took an even more aggressive anti-Wall Street message “Small accounts welcomed! The small depositor of today often becomes the rich man of tomorrow.”

In New York, JP Morgan was becoming wealthy beyond anyone’s imagination building the world’s biggest corporate bank. In San Francisco, A.P. Giannini was doing the opposite. He paid himself a modest salary, refused to take a dividend and openly rejected wealth saying “I do not want to be rich. No man actually owns a fortune; it owns him.”

San Francisco Fire & Bank of America

The 1906 fire destroyed nearly every major building in San Francisco

In April 1906, less than two years after A.P. Giannini had opened up his bank and while Wells Fargo was clearly the biggest bank in the West, a great earthquake leveled San Francisco. The earthquake also caused a fire that destroyed nearly every building in San Francisco.

Particularly hard hit were all the banks in the city which were all located at the epicenter of the fire.

None of the banks could open up their doors and none could get into their vaults to see whether there was anything left of their gold and currency deposits.

Wells Fargo’s president in order to avoid a run on his bank sent out a telegram to all depositors

“Building destroyed. Vaults intact. Credit Unaffected”.

Of course, he was only sure of the first sentence. There was no way for him to know if the vault was in fact intact or if all his credit had disappeared.

While Wells Fargo was attempting to calm its depositors, A.P. Giannini had another plan.

After the earthquake hit, at 5:12 a.m., Giannini rushed into the city. While the entire city was evaculating, Giannini rushed into the city as the fire had begun spreading. He and his bank officers, who had shown up at his order, rushed into the Bank of Italy’s vault and began to empty it of whatever they could. They took the gold, the cash and all the books.

For Giannini, who was wealthy, this was not a matter of protecting his new business. It was a matter of honor. He wanted to protect his depositors’ money.

In the week after the fire, all the bankers in San Francisco gathered for a meeting. Nearly all bankers wanted to keep their office’s closed for half a year or more. None were hopeful that San Francisco was going to exist in a year.

A.P. Giannini, however, had other ideas. He borrowed a steel desk from a friend and personally went to the Washington Street wharf to re-open Bank of Italy. A few days after the fire, while parts of the city were still on fire, Giannini began making loans to rebuild the city. He was determined to re-build the city and to bank everyone who needed a bank account.

After San Francisco was re-built, Giannini began expanding the Bank of Italy. By 1918, Bank of Italy had 24 branches in California. By 1928, it had 292. Along the way, Giannini bought a small Los Angeles bank named Bank of America and re-branded the whole company as Bank of America.

It was A.P. Giannini’s belief that the common person should have a bank that allowed Bank of America, to thrive in the decades to come.

As Bank of America was really starting to come into its own, the US federal government jumped in to help. President Woodrow Wilson imposed branch banking on the United States to, as he said, “put the resources of the rich banks of the country at the disposal of the whole countryside, to whose merchants and farmers have only a restricted and local credit is now open”. This was music to Giannini’s ears. He put up banks anywhere he could and gave credit to businesses that Wall St shunned. His early clients included California wine producers, movie studios and a small businessman under financial duress named Walt Disney.

Giannini pursued an aggressive franchise model, opening up banks in every state and city he could — frequently opposed by state regulators and bank lobbyists who hated Bank of America more than anyone hates Uber today. In Los Angeles, for example, the banking lobby took out ads against Bank of America. “California does not need another Mussolini,” read the slander against the San Jose born Giannini.

Lobbyists, competition and state regulators could not stop Giannini. He was determined to open up a Bank of America branch in every location that he could.

Because of this aggressive expansion, by 1945 Bank of America had become the world’s largest bank. Unlike traditional banks, Bank of America became big because it was decentralized. No two banks ran the same systems. Local decision making and local customers, serving the small guy quickly and cheaply. That was Bank of America’s recipe for success.

San Francisco Today

Today, San Francisco is once again the home to banking innovation.

Whether it is companies innovating with digital currency or companies working to reduce the negative impact of some banking fees (like my company Kash), San Francisco is now the hub of financial innovation in a way that it has not been since the days of Henry Wells, William Fargo and A.P. Giannini.