The Bank of the United States and the American Economy

Abstract

The Bank of the United States and the American Economy. By Edward S. Kaplan. (Westport, CT: Greenwood Press, 1999. Pp. x, 172. $57.95.) A History of Banking in Antebellum America: Financial Markets and Economic Development in an Era of Nation-Building. By Howard Bodenhorn. (New York: Cambridge University Press, 2000. Pp. xxi, 260. Illustrations. $59.95.) Although both of these works deal with the general topic of banks and banking in the early national period, they stand worlds apart in terms of their style, analytical approach, and source materials. Moreover, they seem clearly designed for different readerships. Howard Bodenhorn has produced a real winner in his attempt to deal with the long-standing question of the role played by commercial banks in the early economic development of the United States. The author clearly identifies the positions taken by scholars over the years. Was the growth of commercial banking in early U. S. history a consequence of the process of economic development (demand following) or a necessary element in the financial infrastructure within which economic growth and development ultimately took root? Bodenhorn's answer, though tempered with appropriate scholarly disclaimers, is unequivocal; banks directly contributed to the nation's economic growth by increasing the pool of capital available to prospective borrowers and allocating that larger, but still scarce, supply of loanable funds in a more efficient manner. Relying on the commonly accepted advantages that economists attribute to the indirect lending process as practiced by financial intermediaries, Bodenhorn notes how commercial banks reduced search, information, and transactions costs in the lending process and increased the efficiency with which the critically important and closely related acts of saving and investing took place. To accomplish this, notes Bodenhorn, the commercial banking institutions of the era established long-distance networks via correspondent relationships and branches to mobilize capital resources where needed and to ensure that the supply of capital was directed to socially desirable uses. As proof of this accomplishment, the author relies on data pertaining to regional differences in interest rates. Most economists would agree that significant spreads between interest rates in one region and another denote a misallocation of capital resources. Given the mobility and fungibility of capital, such interest rate disparities almost certainly indicate that one region is being over-served while others are being under-served. Under such conditions, society is best served by a flow of capital resources from low-interest regions to high-interest regions. Bodenhorn observes that since Lance Edwin Davis and others uncovered significant regional differences in interest rates in their studies of the late nineteenth-century capital market, scholars have assumed that the early nineteenth century also exhibited such differentials, perhaps to an even greater degree due to less developed mechanisms for moving capital to those areas that yielded the greatest monetary and social return. Notwithstanding such unsupported conclusions, the author presents new data derived from primary sources that indicate that antebellum short-term interest rates were nearly equal across a broad expanse of the country east of the Mississippi River. Moreover, notes Bodenhorn, when rates diverged (say, during a financial panic) such divergences were short-lived transitory phenomena (26). Capital markets of the antebellum period operated efficiently within the technological bounds afforded them (127). …