Working Paper: NBER ID: w23560
Authors: Howard Bodenhorn
Abstract: Before 1838 commercial banks in New York, as elsewhere, were incorporated by special legislative charter. In 1838 New York adopted free banking, which transformed bank formation from legislative prerogative to administrative procedure. This paper places this transition within the context of the North, Wallis, and Weingast (2009) model of social transitions from natural states to open access orders, and shows that the transition was more process than discrete event. A confluence of events, including the expansion of the franchise under the 1821 constitution, the emergence of party machine politics under the direction of Martin Van Buren, and the rise of the opposition Antimasonic Party, brought patronage-based politics and the political disbursement of economic privileges under attack. Pre-1838 attempts to open access to finance were turned back by natural state politicians, who used the chartering process to reward party operatives. By the mid-1830s, public distaste for spoils-driven patronage generated pressure to expand access to bank finance, especially among entrepreneurs in southern and western New York frustrated by their limited access to transportation and financial networks. New York’s adoption of free banking then was not an ill-advised response to the panic of 1837, but rather a manifestation of a longer-term process toward a more open polity and economy.
Keywords: Free Banking; Political Economy; Bank Chartering; New York; Historical Economics
JEL Codes: N21; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expansion of the franchise (K16) | Transition to free banking (P34) |
| Rise of political parties (D72) | Transition to free banking (P34) |
| Decline of patronage-based politics (D72) | Transition to free banking (P34) |
| Increased public distaste for bank charters (G28) | Decline of patronage-based politics (D72) |
| Demands for broader access to financial resources (F65) | Transition to free banking (P34) |
| Political dynamics shift (D72) | Decline of influence of politically connected bankers (F65) |
| Transition to free banking (P34) | Long-term process of political and economic transformation (P39) |