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Published online by Cambridge University Press: 06 October 2008
Previous studies of entry under New York's free banking law of 1838 have generated conflicting results. This article shows that different measures of entry lead to different conclusions about the competitive effects of the law. Measured by the entry of new banks, New York's free banking law led to increased rates of entry relative to other states. Free banking did not, however, lead to significant increases in capital accumulation in the industry. This paradoxical outcome resulted from the regulatory features of free banking, especially the bond security feature, which reduced profitability and incentives to invest in banking.
Des études précédentes conduites selon la loi bancaire libre de New York de 1838 ont produit des résultats contradictoires. Cette communication montre que des mesures différentes d'entrée mènent à des conclusions différentes sur les effets compétitifs de la loi. Mesurée par l'entrée de nouvelles banques, la loi bancaire libre de New York a entraîné des taux élevés d'entrée par rapport aux autres états. Cependant, les opérations bancaires libres n'ont pas entraîné d'augmentation importante dans l'accumulation de capital dans l'industrie. Ce résultat paradoxal provient des caractéristiques réglementaires des opérations bancaires libres, en particulier la fonction de sécurité du titre, qui a réduit la profitabilité et les d'incitations à l'investissement dans le secteur bancaire.
Bisherige Studien zum Eintritt von Banken in das Banksystem unter der New Yorker Freibankgesetzgebung von 1838 haben widersprüchliche Ergebnisse hervor gebracht. Dieser Artikel zeigt, dass die unterschiedlichen Maßstäbe, die für den Eintritt in den Markt angelegt werden, zu unterschiedlichen Schlussfolgerungen über die Wirksamkeit der Gesetzgebung führen. Wenn man die Anzahl der Bankneuzugänge betrachtet, so bewirkte die New Yorker Freibankgesetzgebung – im Vergleich zu anderen Staaten – erhöhte Bankeintrittsraten. Die Freibankgesetzgebung führte jedoch nicht zu einer signifikanten Erhöhung der Kapitalakkumulation in der Branche. Dieses paradoxe Ergebnis entstand infolge der regulatorischen Elemente des Freibankwesens – insbesondere des Elements der Bürgschaftswechsel, die die Rentabilität und die Anreize einer Investition in das Bankwesen senkten.
Estudios previos sobre la entrada de la ley de la banca libre en Nueva York en 1838 han generado resultados contradictorios. Este artículo muestra que las diferentes medidas de entrada nos llevan a diferentes conclusiones sobre los efectos competitivos de la ley. Medidos por la entrada de nuevos bancos, la ley de la banca libre en Nueva York, provocó un aumento de las tasas de entrada con relación a otros estados. Sin embargo, la banca libre no llevó a un aumento importante de la acumulación de capital en la industria. Este resultado paradójico se produjo a causa de las características reguladoras de la banca libre, especialmente la seguridad de los bonos, la cual redujo los beneficios y los incentivos para invertir en la banca.
1 I thank Mike Bordo, Hugh Rockoff, David Weiman, Eugene White and two anonymous referees for many helpful comments and suggestions. Pam Bodenhorn provided invaluable research assistance. This article was thoroughly revised while visiting Yale University in 2006–7 and I would like to thank Tim Guinnane and the economics department for their generosity and the many courtesies extended during the year. All remaining errors in fact and interpretation are, of course, my own.
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27 This Bank of America has no relationship with the modern Bank of America. The modern Bank of America is the progeny of Amadeo Giannini's Bank of Italy, which originated in San Francisco, California in 1904.
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43 Albany Evening Journal (3 January 1837). That William L. Marcy, Democratic governor and one-time Bucktail power broker and originator of the phrase, ‘to the victors go the spoils’, would utter such a sentiment reveals the extent to which Jacksonianism, generally, and the free banking impulse, specifically, had changed 1830s New York political rhetoric.
44 New York Senate, ‘Report of the select committee consisting of one senator from each senate district, on sundry petitions for the passage of a law creating a general system of private banking’, Senate Document No. 55 (March 1837), p. 2.
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54 Ibid., p. 11.
55 A more complete empirical specification would include supply-side factors, such as local returns to capital and observable costs important to entrepreneurs. I have not been able to identify any such variables at a sufficiently low level of aggregation to include them here. Parameter estimates will suffer from omitted variable bias, relative to a complete specification. They, nevertheless, remain useful in that they account for most of the variables of concern to legislators in granting charters.
56 The entry data are gathered from a number of sources, including Fentermaker, J. V., The Development of American Commercial Banking: 1782–1837 (Kent, OH, 1965)Google Scholar and individual chartering Acts. See notes to Figure 1 for details.
57 I use the change in per capita bank capital rather than the percentage change because many counties in which a bank is opened begin with zero per capita bank capital. The resulting percentage change is infinitely large, which raises several estimation issues. In using the absolute of the change, which is sometimes negative, rather than the percentage change, OLS remains a viable technique. Moreover, contemporaries were seemingly more concerned with the absolute scale of financial operations rather than its growth rate.
58 Sokoloff, K., ‘Inventive activity in early industrial America: evidence from the patent records, 1790–1846’, Journal of Economic History, 48 (1988), pp. 813–50CrossRefGoogle Scholar. I include canals rather than navigable bodies of water because canals purposely altered the commercial landscape after their completion in the 1820s.
59 The coefficients reported from a Poisson or negative binomial regression are interpreted as the difference in the natural log of the expected counts (dependent variable) due to a one unit change in the independent variable of interest, holding all others constant. Formally, this may written as β = ln(μ|x + 1) − ln(μ|x), where μ is the expected count and x is the relevant independent variable. Recall that the difference of two logs can be rewritten as the logarithm of the ratio, or β = ln[ (μ|x + 1) / (μ|x)]. The reported incidence rate ratio is then exp(β) = (μ|x + 1) / (μ|x). If exp(β) = 2, for example, the incidence rate ratio can be interpreted as a one unit increase in the independent variable increases the incidence rate of the dependent variable by a factor of 2.
60 See Hammond, Banks and Politics; Redlich, Molding of American Banking; Bodenhorn, State Banking; Sylla, Legler and Wallis, ‘Banks and state public finance’; and Wallis, Sylla and Legler, ‘Interaction of taxation and regulation’.
61 New York, ‘Report of the New York State bank commissioners for 1840’, reprinted in Raguet, Condy, A Treatise on Currency and Banking, 2nd edition (Philadelphia, 1840), pp. 312–13Google Scholar.
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66 Bodenhorn, H., ‘Usury ceilings and bank lending behavior: evidence from nineteenth-century New York’, Explorations in Economic History, 44 (2007), pp. 179–202CrossRefGoogle Scholar, shows that at least one bank selectively violated the usury law. Nevertheless, most loans were made at or below the legal ceiling rate.
67 In 1856, the ratio of circulation to circulation plus deposits was about 0.10 among New York City banks; 0.40 at banks in five cities of 25,000 or more inhabitants (Albany, Brooklyn, Buffalo, Rochester and Troy); and about 0.55 in banks in smaller cities and towns. Author's calculation from information reported in New York State Banking Department, Annual Report of the Superintendent of the Banking Department of the State of New York, Transmitted to the Legislature, January 7, 1857 (Albany, 1857).
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