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Public Choice Analyses of American Economic History pp 167–206Cite as

Private Seeking of Private Monopoly in Early American Banking

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Part of the book series: Studies in Public Choice ((SIPC,volume 39))

Abstract

In early nineteenth-century America, banks were chartered through legislative acts of incorporation. Most bank charters established local monopolies so that charters created economic rents. The public choice approach holds that governmental creation of artificial rents invites rent seeking and welfare losses, and more so the larger the potential rents. This chapter provides estimates of rents and potential welfare losses for Pennsylvania. The results suggest that local monopoly rents amounted to approximately 1–1.5% of gross domestic product. Pennsylvania adopted a number of policies, including price ceilings and tax policies, which reduced welfare losses and redistributed some of the rents. The chapter concludes with reflections on the evolving political economy of chartering policy, and why Pennsylvania was slow to reform its practices.

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Notes

  1. 1.

    Pennsylvania’s experience was typical. Between 1821 and 1835 the New York assembly received 563 petitions for bank charters. Only 56 were successful (Bodenhorn and Cuberes 2018).

  2. 2.

    Bribery is not a cost of rent seeking; it is a transfer. Moreover, if a lobbyist pays for a legislative junket, the value the legislators place on the junket is subtracted from the costs of rent seeking. Bribes and junkets are not genuinely wasteful spending in that they increase someone else’s welfare (Tollison 2012). See Lambsdorff (2002) for a comparison of lobbying and bribery in rent-seeking model.

  3. 3.

    The promised payment of $135,000 in 1803 is equivalent to between $3 million and $5 million in 2017 dollars depending on the conversion factor, keeping in mind that any inflation adjustment across two centuries is problematic. See Williamson (2018) for the inflation calculator.

  4. 4.

    Hartz (1948) and Handlin and Handlin (1969) show that corporate status was not often granted to private, profit-seeking enterprises in the early nineteenth-century. Because corporate status conferred privileges—limited liability, perpetual succession, and so on—unavailable to other enterprises, corporations, even private corporations, received legislative sanction only when they promoted some public purpose, broadly defined. Thus, the organizations most likely to receive corporate charters were churches, schools, libraries, turnpikes, bridges, ferries, and banks. One responsibility of government was promotion of economic growth, and it was believed, at least in some quarters, that bank-supplied credit was as integral to economic development as education and transportation infrastructure; thus, legislative bank chartering. General incorporation laws were uncommon before mid-century (Hilt 2017).

  5. 5.

    In his study of early nineteenth-century lobbying in Pennsylvania, Bowers (1983, p. 455) writes that the 1814 omnibus banking act created 41 banks, “each with an interest in future legislation.” By the 1820s bank lobbyists were “regular travelers” to the capital.

  6. 6.

    An example of board dysfunction occurred at the Bank of Pennsylvania in 1829. The state wanted to place a $2.2 million bond issue with the Philadelphia banks to finance canal construction. The Philadelphia Bank refused to subscribe to any part of the issue and the board at the Bank of Pennsylvania split. State-appointed directors favored the bank’s taking a large portion, while investor-elected directors were opposed. The state-appointed directors charged the elected directors with malpractice and a legislative committee was appointed to investigate. In testimony taken before the committee it became evident that the “ordinary courtesies” vital to a functioning board had been abandoned. Ordinary business was delayed and contentious (Holdsworth 1928, pp. 143–144; Hartz 1948, pp. 98–99).

  7. 7.

    Quote in section title from McCarthy (1903, p. 370).

  8. 8.

    North et al (2009) also recognize this as a pivotal moment in history; it as an example of an economy transitioning from natural state to open access.

  9. 9.

    I thank Bill Dougan for this insight.

  10. 10.

    To this day, banks receiving a federal charter are labeled national associations (as in Citibank, NA) because the national banking acts passed during the Civil War were modeled on New York’s 1838 banking act.

  11. 11.

    In my reading of contemporary literature and modern histories, I can find scant evidence of the new social history’s contention that the Antimason-Democrat debates were driven by concerns over increasing inequality, which translated to Antimasonic calls for equality of outcome (Note 1989). Rank-and-file Antimasons were not, to use the historical term, levelers.

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Acknowledgements

I thank Bill Dougan, Rob Fleck, Mike Makowsky, Sergey Mityakov and the other participants in the Public Economics workshop at Clemson University for comments on an earlier draft. I am deeply indebted to the late Bob Tollison for his generosity, collegiality, and for animating a culture of intellectual curiosity at Clemson. I thank Pam Bodenhorn for valuable research assistance.

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  1. Clemson University, Clemson, SC, 29634, USA

    Howard Bodenhorn

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Correspondence to Howard Bodenhorn .

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  1. Department of Economics, West Virginia University, Morgantown, WV, USA

    Joshua Hall

  2. Department of Economics, West Virginia University, Morgantown, WV, USA

    Marcus Witcher

Appendix

Appendix

See Table 10.7.

Table 10.7 Bonus payments paid by banks in return for charter
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Bodenhorn, H. (2019). Private Seeking of Private Monopoly in Early American Banking. In: Hall, J., Witcher, M. (eds) Public Choice Analyses of American Economic History. Studies in Public Choice, vol 39. Springer, Cham. https://doi.org/10.1007/978-3-030-11313-1_10

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