50 South LaSalle Street
Not as large as Chase Manhattan, nor as well known as J. P. Morgan, the Northern Trust Company has built a solid reputation on personal trust management. With stable leadership, conservative but sound policies, and the ability to create its own opportunities, this century-old bank is regarded as one of the most reliable banking institutions in the United States.
The Northern Trust Company was founded by Byron L. Smith. Formerly associated with the Hide and Leather Bank and then the Merchants Savings, Loan and Trust Company, Smith left the banking industry in 1885 to devote more time to family business matters. Over the next four years, however, he was frequently called upon by relatives and friends for advice about planning estates and setting up trusts. As the demand from wealthy Chicagoans for his services increased, he decided in 1889 to open a new type of bank.
Because of the previously chaotic nature of banking throughout the United States, Chicago was ripe for a different kind of financial institution. During the nineteenth century the banking industry was unregulated; it lacked any centralized control over bank charters; and individual banks issued hundreds of different paper notes, which flooded the local area and were of questionable value. In 1887 the Illinois state legislature, sensing the potential danger, enacted banking laws that regulated state bank charters and the administration of trusts.
This is the predicament that led Smith to open the Northern Trust Company on August 12, 1889. In one room on the second floor of the Rookery Building, which still stands on the corner of Adams and LaSalle streets, a staff of six opened seven accounts and handled $137,981 of deposits during the first day's business. By the beginning of the new year, the bank had taken in over $1.5 million in deposits.
Smith provided 40 percent of the bank's original capitalization of $1 million, and counted such businessmen and civic leaders as Marshall Field, Martin A. Ryerson, and Philip D. Armour among the original 27 shareholders. Intimately acquainted with the operations of the bank, these men would personally examine Northern's assets and records at each year's end. On December 31st, they would assemble in the banking room, count all the bank's cash and securities, and greet the new year.
Northern became the first bank in Chicago to advertise its services, first by direct mail and then by ads in the daily newspaper and Chicago City Directory. Smith reasoned that spending significant amounts of cash on newspaper advertising and becoming the first bank in the city to hire an advertising agency would help build confidence in Northern's conservative approach to banking.
During the 1893 Columbian Exposition, held in Chicago to commemorate the 400th anniversary of the arrival of Columbus in the new world, Congress had authorized another Chicago bank to open a branch on the fairgrounds. The exposition had only been open for eight days when the bank failed, and Northern was asked to operate the branch. The exposure bolstered Northern's reputation and increased its international recognition. Despite the panic in the financial industry due to bank closures and industrial insolvencies across the United States in 1893, which, in turn, led to a general economic decline for several years, Northern's fortunes continued to improve. By 1895 deposits totaled $10.5 million.
Declaring its first dividend in July 1896, Northern began to grow rapidly. In 1906 the bank constructed its own building in the center of Chicago's financial district. The architecture of the bank received so much attention that its cornerstone was used to measure the height of all buildings in Chicago. Much fanfare also surrounded the fact that the banking offices were the first in Chicago equipped with "manufactured air," an ancestor of modern air conditioning, and that its telephone system was at the forefront of technology for the era.
The business climate began to change dramatically in the early years of the twentieth century, and Northern was forced to reassess some of its long-standing policies. Since its founding, the bank had only made collateral loans, but now aware that this policy stymied growth, the board of directors approved Northern's purchase of commercial paper in 1912. When the Federal Reserve System was created two years later, reducing the chance of the money panics that plagued the banking industry during the nineteenth century, Northern joined the system and began to provide unsecured lines of credit to its most reputable customers. Within a brief period of time, commercial banking become one of the most important sectors of Northern's business.
A new era was on the horizon when Byron L. Smith died in March 1914 and his son, Solomon A. Smith, took over the reins of the bank. World War I started in August 1914, and stock and bond prices dropped markedly, even though the dollar gained in value against European currencies. When the United States finally entered the war in 1917, Northern acted as a depository for the Alien Property Custodian Act and held over $500 million in enemy assets. During and immediately after the war, Northern sold nearly $30 million in war bonds for the Liberty Bond and Victory Bond campaigns.
Immediately after the war, the American economy muddled through a short period of inflation and slow growth. But by 1922 the "Roaring Twenties" was in full swing, a time when public confidence in the economy was at its highest, and throughout the nation investors were enticed into highly speculative markets. On October 23, 1929, however, the flamboyant decade of the 1920s came to a sudden halt--the stock market crash led to a spectacular drop in prices, employment and production. Banks were hit particularly hard. What had previously been regarded as sound loans could not be collected, and panicking depositors withdrew their funds from banks. As these troubles swept across the country, one bank after another closed.
By mid-1932 the American economy had reached its lowest point ever, and public confidence--especially in the banks--had all but faded away. Two days after his inauguration on March 6, 1933, Franklin D. Roosevelt closed all the banks in the United States. When they reopened a short time later, there was a great deal of uncertainty as to what might occur. Fortunately, the people in line outside the Northern bank offices were there to deposit money instead of withdraw it. In fact, so much money was deposited during the first day that cash had to be stacked in huge piles on the floor.
Northern's conservative policies had served it well during the 1920s. Since it had refused to involve itself in highly dubious stock or bond speculations and had passed up the opportunity for rapid earnings growth, the Northern was able to pay its depositors their money whenever they wanted it. It was therefore no fluke that public confidence in the Northern ran high; more than 10,000 new accounts were opened at the bank in the early 1930s. In 1929 deposits amounted to $56 million; by 1935, deposits had soared to over $300 million. In 1929 there were 335 banks within Cook County; in 1935 there were only 95 left. The Northern Trust was one of the few banks in Chicago that survived the depression without the need for any government assistance.
Near the end of the depression, Northern started to expand its effort to solicit commercial business, particularly in the Midwest. By 1941 nearly half of all the bank's commercial accounts were drawn from outside the Chicago metropolitan area. During World War II, Northern once again took part in the government's war bond drives, and also provided loans for manufacturing war materials under special government programs. The war created more opportunities for the bank; all sectors of its business expanded, and by 1945 the Northern Trust had doubled in size.
The years after World War II brought even greater prosperity to the bank as it continued to expand its services. Still under the direction of Solomon Smith, management at the bank became more aware of electronic data processing and how this new technology would revolutionize the banking industry. During the 1950s, Northern was at the forefront of developing numerous automated banking services, including fully automated financial statements for trust clients, the very first in the industry.
When Solomon Smith died in 1963 and his son, Edward Byron Smith, assumed leadership of the bank, assets totaled more than $1 billion. Near the end of the decade, Northern became the first state-chartered bank from Illinois to open an office outside the United States. Illinois banking laws were revised in order to allow state-chartered banks to open offices abroad, yet strangely prohibited opening branches within the state. Northern's new London office helped expand the bank's services to European customers. The Northern Trust International Banking Corporation, a New York subsidiary created to handle currency transactions for financial institutions abroad, was also established the same year.
The 1970s ushered in dramatic changes not only for Northern Trust but for the banking industry as a whole. Deregulation had two far-reaching effects: First, financial institutions were allowed to pay their depositors interest rates that were competitive with other market rates. Consequently banks began to lose depositors to money market funds offering higher interest rates. Second, many corporations discovered that the commercial paper market was a cost-efficient method of borrowing short-term funds, and thus banks lost their most stable and most profitable earnings asset. As a result of these changes, Northern, like many other banks, was forced to search for new markets.
During the late 1960s, the creation of the Eurodollar market provided American banks with the opportunity to grant foreign loans at a much lower risk than what was ordinarily expected. In 1973 the availability of dollars skyrocketed when the OPEC oil cartel inflated its prices for a barrel of crude oil, and many nations that depended on OPEC oil watched helplessly as their dollar reserves were depleted. The United Nations and many world governments, in order to prevent less developed countries from becoming even poorer, encouraged banks to recycle what came to be known as "petrodollars," by granting loans to these countries. As speculation rose in financial circles as to the prospects of crude oil increasing to $100 a barrel, the more needy nations demanded more and more bank credit.
When oil prices dropped suddenly in the early 1980s, many South American nations realized they could not pay off their enormous bank loans. Northern suffered uncharacteristically high losses, but through aggressive and astute management, loan reserves, and write-offs, the bank was able to restore its asset quality.
In 1971 Northern acquired Security Trust Company, located in Miami, Florida. Additional trust operations were established in Palm Beach, Sarasota, and Naples. In 1982 Northern expanded its services in the state of Florida from trust operations to include a full range of financial services. In 1990 the bank administered trust assets worth over $5 billion in South Florida alone. In 1974 Northern established a trust operation in Arizona, and expanded in 1986 to include full financial services. In 1988 a trust subsidiary was created with offices in San Francisco, Los Angeles, and Santa Barbara, California. In 1989 the acquisition of Concorde Bank in Dallas, Texas, provided Northern with access to business opportunities in one more state. By the end of 1993, the bank has plans for forty-three offices in five states.
The bank created a holding corporation in 1971, the Northern Trust Corporation, for the purpose of future expansion within the state of Illinois. In 1981, when the state finally permitted Illinois banks to acquire banks in Cook and the surrounding counties, Northern immediately took advantage of the law and acquired O'Hare International Bank in Park Ridge, First Security Bank in Oakbrook, and First National Bank of Lake Forest.
With offices in five states, Northern Trust provided many personal financial services, including investment management, securities custody, estate planning and administration, and tax preparation. The bank provided master trust and custody services to foundations, endowments, corporations, and pooled investments worldwide. Northern's cash management and commercial banking services were provided to corporations and financial institutions to help manage cash collections, control cash disbursements, and create information systems needed for the growing complexity of clients' needs.
When Edward Byron Smith retired in 1979, he was succeeded by E. Norman Staub, followed a few years later by Philip W. K. Sweet, and then by Weston Christopherson. When company veteran David W. Fox took over, he was only the seventh chief executive in the bank's existence. This stability, in both leadership and financial policy, enabled the Northern Trust to weather some difficult moments in its history and develop into one of the most trustworthy banks in the United States.