Business
Banks and Kinship
07/10/2010 18:22
Lamoreaux, N. R. (1986). "Banks, Kinship, and Economic Development: The New England Case." The Journal of Economic History 46(3): 647-667.
Lamoreaux challenges “scholars [who] have seen the persistence of traditional social institutions, and especially kinship-oriented business, as major impediments to economic development.” (666) Using an approach that looks somewhat like the Zeitlin/Ratcliff Chilean kinship-network argument of Landlords and Capitalists (albeit with a positive spin), Lamoreaux argues that “Early banks in New England functioned not as commercial banks in the modern sense but as the financial arms of extended kinship networks.” (647)
“Scholars who have explored the relationship between banks and economic development have assessed the banking system in terms of what theoretically are its two major functions: to provide an adequate money supply and to serve as an intermediary between savers and investors.” I’d add one more function, which I think was behind Rockoff’s approach: as an intermediary to safeguard and insulate urban investors’ wealth (money stock) from direct contact with rural entrepreneur/borrowers (money flow). But I completely buy her argument that it’s the personal connections and kinship groups that are key here.
In 1800 there were 17 state-chartered banks in New England, with capital totaling $5.50 million. By 1850, this number had increased to 300, and the capital available for loan to $62.87 million. Ten years later, 505 New England banks controlled $123.56 million. (chart, 651) Capital during this period came to banks not primarily through deposits, but through investment, as first the founders and later a wider range of local people bought shares. Lamoreaux disagrees with Rockoff: even if initial capital “was largely fictitous...deposited only to satisfy legal requirements and then immediately withdrawn in the form of loans...sales of new shares to outsiders gradually transformed capital stock to a legitimate source of funds. (653-4) This may be true, but does it avoid the point that by getting in cheaply and then controlling subsequent paid-in capital, bank owners gained an incredible degree of economic power?
In the long run, institutional investors like insurance companies, savings associations, and trustees of large estates contributed the majority of bank capital. In many cases, these institutions were part of the same kin networks that initially owned, and continued to run the banks. “Members of kinship groups generally held large blocks of their banks’ stock at the time of formation.” (655) The percentage of bank stock held by the initial owners tended to decrease as the banks grew, but “the groups often retained their dominant positions on the banks’ boards of directors...because other stockholders rarely took an interest in the institutions’ affairs.” (655-6) And these same “kinship groups...often dominated the boards of the institutional investors that purchased their banks’ stock.” (657)
The role of these banks (despite the public-service rhetoric they employed to get their corporate charters during the early period, when incorporation implied quasi-governmental public status) was to “become engines to supply insiders with capital.” (657) “Even a prudent businessman,” Lamoreaux says, “might find himself in financial difficulty.” (658) The panic of 1837 and depression of 1839 had certainly proven that point. An emergency might force him to “convert illiquid assets into cash to pay off debts.” A friendly bank could “prevent distress sales of assets by accepting notes to balance accounts.” (659) After spending so much of his time in New York City, observing this process, is it any surprise that my upstate merchant started his own bank? Especially since, in the words of the 1854 Bankers Magazine, “where business is constantly and rapidly expanding, the younger class of business men who are entitled to bank facilities, equally with their older brethren, cannot have their wants fairly supplied without the occasional establishment of new banks. The old circle of customers use the existing banks to the extent of their capacity, and keep their door shut against the new men.” (663)
This raises questions that were apparently understood by bankers in the 1850s. Lamoreaux answers that “although the system of group-dominated banking doubtless resulted in some degree of favoritism in credit markets, the situation was remarkably fluid. Up-and-coming groups were able to build financial empires that rivaled those of the oldest, most established merchant families in the region.” (664) But even with no barriers to entry, is this what we’d call a “credit market?”
One thing that does seem certain, though, is that these banks facilitated a particular type of economic development. “Could kinship groups have tapped the community’s savings without their aid?” Lamoreaux asks. “The market for securities of manufacturing corporations in early nineteenth-century New England was extremely narrow,” she says. Even the Boston Associates failed to raise enough capital, and were forced to borrow. “The market for bank securities was much wider...because the diversified enterprises of the kinship groups permitted them to pay high and steady dividends and thereby draw out the community’s savings in a way that most individual ventures could never have done.” (665) “Without banks,” she concludes, “kinship groups would have been forced to depend largely on their own resources to finance investment.” (666)
Even if New England’s financial system allowed relatively free entry into banking, and banks allowed a slightly wider public to participate in a diversified portfolio of investments that would otherwise have been restricted to the very rich, was the concentration of economic activity in the hands of these “kinship groups” a good thing? Lamoreaux mentions in the first few pages of her article that lawsuits across New England challenged the “insider” ways in which these chartered corporations behaved. Even banking commissioners admitted “an almost uniform departure from the original design of banks in this respect.” (651) Although it involves counterhistorical speculation, it might be useful to ask what alternatives there may have been to simply accepting the inevitability that “kinship groups” should gain access to the “community’s savings” to finance business ventures for their individual benefit. To what degree is this a free choice, made by empowered individuals (investors and later depositors) acting in their own best interests, and to what degree is the public’s range of choices limited by laws and social conventions that allow incorporation, interlocking control, and that regulate the terms and conditions of credit? (along these lines, do usury laws actually benefit established banks, by lowering the incentive for individuals to loan money to each other at higher -- risk-appropriate -- rates of interest?)
Lamoreaux challenges “scholars [who] have seen the persistence of traditional social institutions, and especially kinship-oriented business, as major impediments to economic development.” (666) Using an approach that looks somewhat like the Zeitlin/Ratcliff Chilean kinship-network argument of Landlords and Capitalists (albeit with a positive spin), Lamoreaux argues that “Early banks in New England functioned not as commercial banks in the modern sense but as the financial arms of extended kinship networks.” (647)
“Scholars who have explored the relationship between banks and economic development have assessed the banking system in terms of what theoretically are its two major functions: to provide an adequate money supply and to serve as an intermediary between savers and investors.” I’d add one more function, which I think was behind Rockoff’s approach: as an intermediary to safeguard and insulate urban investors’ wealth (money stock) from direct contact with rural entrepreneur/borrowers (money flow). But I completely buy her argument that it’s the personal connections and kinship groups that are key here.
In 1800 there were 17 state-chartered banks in New England, with capital totaling $5.50 million. By 1850, this number had increased to 300, and the capital available for loan to $62.87 million. Ten years later, 505 New England banks controlled $123.56 million. (chart, 651) Capital during this period came to banks not primarily through deposits, but through investment, as first the founders and later a wider range of local people bought shares. Lamoreaux disagrees with Rockoff: even if initial capital “was largely fictitous...deposited only to satisfy legal requirements and then immediately withdrawn in the form of loans...sales of new shares to outsiders gradually transformed capital stock to a legitimate source of funds. (653-4) This may be true, but does it avoid the point that by getting in cheaply and then controlling subsequent paid-in capital, bank owners gained an incredible degree of economic power?
In the long run, institutional investors like insurance companies, savings associations, and trustees of large estates contributed the majority of bank capital. In many cases, these institutions were part of the same kin networks that initially owned, and continued to run the banks. “Members of kinship groups generally held large blocks of their banks’ stock at the time of formation.” (655) The percentage of bank stock held by the initial owners tended to decrease as the banks grew, but “the groups often retained their dominant positions on the banks’ boards of directors...because other stockholders rarely took an interest in the institutions’ affairs.” (655-6) And these same “kinship groups...often dominated the boards of the institutional investors that purchased their banks’ stock.” (657)
The role of these banks (despite the public-service rhetoric they employed to get their corporate charters during the early period, when incorporation implied quasi-governmental public status) was to “become engines to supply insiders with capital.” (657) “Even a prudent businessman,” Lamoreaux says, “might find himself in financial difficulty.” (658) The panic of 1837 and depression of 1839 had certainly proven that point. An emergency might force him to “convert illiquid assets into cash to pay off debts.” A friendly bank could “prevent distress sales of assets by accepting notes to balance accounts.” (659) After spending so much of his time in New York City, observing this process, is it any surprise that my upstate merchant started his own bank? Especially since, in the words of the 1854 Bankers Magazine, “where business is constantly and rapidly expanding, the younger class of business men who are entitled to bank facilities, equally with their older brethren, cannot have their wants fairly supplied without the occasional establishment of new banks. The old circle of customers use the existing banks to the extent of their capacity, and keep their door shut against the new men.” (663)
This raises questions that were apparently understood by bankers in the 1850s. Lamoreaux answers that “although the system of group-dominated banking doubtless resulted in some degree of favoritism in credit markets, the situation was remarkably fluid. Up-and-coming groups were able to build financial empires that rivaled those of the oldest, most established merchant families in the region.” (664) But even with no barriers to entry, is this what we’d call a “credit market?”
One thing that does seem certain, though, is that these banks facilitated a particular type of economic development. “Could kinship groups have tapped the community’s savings without their aid?” Lamoreaux asks. “The market for securities of manufacturing corporations in early nineteenth-century New England was extremely narrow,” she says. Even the Boston Associates failed to raise enough capital, and were forced to borrow. “The market for bank securities was much wider...because the diversified enterprises of the kinship groups permitted them to pay high and steady dividends and thereby draw out the community’s savings in a way that most individual ventures could never have done.” (665) “Without banks,” she concludes, “kinship groups would have been forced to depend largely on their own resources to finance investment.” (666)
Even if New England’s financial system allowed relatively free entry into banking, and banks allowed a slightly wider public to participate in a diversified portfolio of investments that would otherwise have been restricted to the very rich, was the concentration of economic activity in the hands of these “kinship groups” a good thing? Lamoreaux mentions in the first few pages of her article that lawsuits across New England challenged the “insider” ways in which these chartered corporations behaved. Even banking commissioners admitted “an almost uniform departure from the original design of banks in this respect.” (651) Although it involves counterhistorical speculation, it might be useful to ask what alternatives there may have been to simply accepting the inevitability that “kinship groups” should gain access to the “community’s savings” to finance business ventures for their individual benefit. To what degree is this a free choice, made by empowered individuals (investors and later depositors) acting in their own best interests, and to what degree is the public’s range of choices limited by laws and social conventions that allow incorporation, interlocking control, and that regulate the terms and conditions of credit? (along these lines, do usury laws actually benefit established banks, by lowering the incentive for individuals to loan money to each other at higher -- risk-appropriate -- rates of interest?)
Merchants and Manufacturers
07/11/2010 18:20
Glenn Porter and Harold C. Livesay
Merchants and Manufacturers: Studies in the Changing Structure of Nineteenth-Century Marketing
1971
Their thesis is that “Changes in distribution played at least as important a role in the story of our economic past as did changes in production.” (1) No one who’s studied the history of transportation would think this point needed to be made again -- but apparently the shelves of business historians are “groaning with the weight of volumes dealing with...manufactured goods.”
This is interesting, although of limited use to me, because they specifically exclude ag. products from their study. Even so, their finding that “the all-purpose merchant...was the key man in the American economy in 1815...the channel through which agricultural products flowed to market, and he supplied manufactured goods and imported raw materials to city craftsmen and country storekeepers.” (15-16) And, for my purposes, he supplied country manufactures to the urban and international markets.
They briefly mention drug jobbers, who “depended on extensive trade with the interior to provide a wide market area with a sufficient volume of trade to insure success.” (29) These jobbers began as general merchants, in Porter and Livesay’s model, and then specialized in response to increasing volumes and competitive pressures. The jobber “had to maintain a large inventory of goods...[and] be prepared to ship goods in small lots on short notice” and extend credit to their rural retailers. “Storekeepers...relied on their suppliers to act as bankers and urban agents for them.” (29) And, because the majority of drugs initially came from England, drug jobbers usually had extensive foreign connections.
Porter and Livesay say merchants were much more successful than manufacturers in obtaining bank credit in the early nineteenth century, because “merchants usually were the banks. An analysis of the directors and officers of the banks of New York, Philadelphia, and Baltimore in 1840, 1850, and 1860 reveals that more than two-thirds of the officials were or had been merchants.” (72) This was probably even more the rule in smaller communities, where merchants would have been the main investors as well as the main customers of local banks.
The merchant’s value as a financial expert declined during and after the Civil War,” the authors say. The proliferation of greenbacks allowed a “switch from credit to cash [that] virtually eliminated the merchant’s role as credit consultant and guarantor of payment.” (129) “The financing of transactions became the province of specialized agencies that evolved from private banks and brokerage houses...In 1850 it would have been difficult to find a producer not dependent on his distributors for capital; sixty years later one declared, ‘the manufacturer who needs the jobber as a commercial banker is a weak manufacturer.’” (129-30) I think the point they miss, is that there wasn’t a hard border between manufacturing and merchandizing. Like the brothers whose papers I’ve been reading, many of these early manufacturers were also merchants...and bankers.
Merchants and Manufacturers: Studies in the Changing Structure of Nineteenth-Century Marketing
1971
Their thesis is that “Changes in distribution played at least as important a role in the story of our economic past as did changes in production.” (1) No one who’s studied the history of transportation would think this point needed to be made again -- but apparently the shelves of business historians are “groaning with the weight of volumes dealing with...manufactured goods.”
This is interesting, although of limited use to me, because they specifically exclude ag. products from their study. Even so, their finding that “the all-purpose merchant...was the key man in the American economy in 1815...the channel through which agricultural products flowed to market, and he supplied manufactured goods and imported raw materials to city craftsmen and country storekeepers.” (15-16) And, for my purposes, he supplied country manufactures to the urban and international markets.
They briefly mention drug jobbers, who “depended on extensive trade with the interior to provide a wide market area with a sufficient volume of trade to insure success.” (29) These jobbers began as general merchants, in Porter and Livesay’s model, and then specialized in response to increasing volumes and competitive pressures. The jobber “had to maintain a large inventory of goods...[and] be prepared to ship goods in small lots on short notice” and extend credit to their rural retailers. “Storekeepers...relied on their suppliers to act as bankers and urban agents for them.” (29) And, because the majority of drugs initially came from England, drug jobbers usually had extensive foreign connections.
Porter and Livesay say merchants were much more successful than manufacturers in obtaining bank credit in the early nineteenth century, because “merchants usually were the banks. An analysis of the directors and officers of the banks of New York, Philadelphia, and Baltimore in 1840, 1850, and 1860 reveals that more than two-thirds of the officials were or had been merchants.” (72) This was probably even more the rule in smaller communities, where merchants would have been the main investors as well as the main customers of local banks.
The merchant’s value as a financial expert declined during and after the Civil War,” the authors say. The proliferation of greenbacks allowed a “switch from credit to cash [that] virtually eliminated the merchant’s role as credit consultant and guarantor of payment.” (129) “The financing of transactions became the province of specialized agencies that evolved from private banks and brokerage houses...In 1850 it would have been difficult to find a producer not dependent on his distributors for capital; sixty years later one declared, ‘the manufacturer who needs the jobber as a commercial banker is a weak manufacturer.’” (129-30) I think the point they miss, is that there wasn’t a hard border between manufacturing and merchandizing. Like the brothers whose papers I’ve been reading, many of these early manufacturers were also merchants...and bankers.
Bankruptcy made the middle class?
07/06/2010 16:53
Edward J. Balleisen
Navigating Failure: Bankruptcy and Commercial Society in Antebellum America
2001
Balleisen focuses on the 1841 Bankruptcy Law, “partly because it coincided with and emanated from powerful transformations in the scope and character of American capitalism.” (4) He agrees with Bushman and Lamoreaux that commercial acitivity was more universal and widespread than some of the “market revolution” historians would grant, but concedes that “financial panics, like the ones in 1837 and 1839 that precipitated tens of thousands of commercial insolvencies” not only “unleashed an upsurge of political support for a comprehensive federal bankruptcy system,” but also helped push some members of the growing middle class away from an ethic of entrepreneurial risk-taking and self-reliance, toward a desire for financial security in salaried employment. (5)
“To a great extent,” Balleisen says, “the relationship between failing antebellum proprietors and their creditors resembled a game of cat and mouse.” (84) Since anyone could fail, maybe we could extend the group -- especially in light of the fact that only recently had a transition been made from an older system of credit between family members, neighbors, and friends, to an impersonal credit market. Naturally, “Debtors sought to hide their true circumstances from the holders of claims against them,...[and] creditors...did their best to pounce on whatever assets the debtors possessed.” (84-5) This seems especially apparent in the case of the rural merchants I’m studying, who seem to have credit relationships both in the family/community and outside it. It might be interesting to see if they behave differently, depending on the creditor’s status in their local network. It might also be interesting to look at the way these relationships change over time. These guys, after all, were creditors as well as debtors.
“In addition to resuscitating the entrepreneurial exertions of myriad antebellum bankrupts and fostering considerable social flux,” Balleisin says “general releases from debt contributed to the mutability and dynamism of the nineteenth-century economy. Along with the culture of privately negotiated compromises, antebellum bankruptcy discharges increased the pool of entrepreneurs who actively sought to make their fortune by extending the reach of commercial exchange, inventing new products, or developing new marketing techniques.” (198) In other words, the ability to get out from under a failed business encouraged people to experiment and overextend, to reach for the brass ring of personal enrichment because the price of failure had been reduced. It encouraged entrepreneurs who took risks, which means it penalized prudent, conservative, old-fashioned, and especially cash-based businessmen. It allowed a small group of unusually aggressive players to keep trying until they won (whether by learning from their failures or simply by finally getting lucky), while it pushed their wiser, more prudent competitors to the sidelines. Balleisen doesn’t dwell on this, but it’s the dark side of the “perpetual search for profitable innovation that constitutes a defining characteristic of modern capitalism.” (198)
For some failed entrepreneurs, though, Balleisen says “encounters with insolvency led them away from business ownership altogether.” There was “a substantial class of bankrupts who either could not resume independent business careers [even as artisans] or chose not to accept the risks associated with doing so...Many of these individuals walked away from the scenes of ongoing financial wreckage, seeking a different and less hazardous means of securing a living...Their efforts link the experience of antebellum bankruptcy to the rise of a salaried urban middle class.” (201) The result, Balleisen says, was a “burgeoning class of clerks, bookkeepers, and agents [who] could not only take consolation in their enjoyment of relative economic stability but also lay claim to a version of republican independence--one in which the most fundamental ‘autonomy’ rested not on the responsibilities of self-employment, but on freedom from both the most severe forms of subservience and the degrading precariousness of irretrievable indebtedness.” (219) “Despite the substantial contrast between these responses to personal legacies of insolvency,” he says, “they worked together to help usher in a new economic order structured around large, bureaucratic corporations, rather than small-scale producers and purveyors of goods and services. In part, post-bellum America’s world of trusts and tycoons rested on a foundation of pervasive individual failure.” (227) One way of looking at this would be to say, “well, alright. They lost their nerve and handed over the reins to their economic ‘betters’ in return for security. In return, they got to live quiet lives as modern consumers in the suburbs.” Another perspective, though, might be that changes in the legal system allowed bad money (and behavior) to drive out good, specifically because the bad actors were absolved of their responsibility when they failed. The risks were socialized, the rewards privatized. And 170 years later, here we are...
References:
Bushman, “Markets and Composite Farms”
Lamoreaux, “Accounting for Capitalism”
Weber, Protestant Ethic, 58-75
Schumpeter, Capitalism, Socialism, and Democracy, 81-6
E.M. Gibson, “Going into Business,” 1855
Asa Greene, Perils of Pearl Street, 1834
Navigating Failure: Bankruptcy and Commercial Society in Antebellum America
2001
“To a great extent,” Balleisen says, “the relationship between failing antebellum proprietors and their creditors resembled a game of cat and mouse.” (84) Since anyone could fail, maybe we could extend the group -- especially in light of the fact that only recently had a transition been made from an older system of credit between family members, neighbors, and friends, to an impersonal credit market. Naturally, “Debtors sought to hide their true circumstances from the holders of claims against them,...[and] creditors...did their best to pounce on whatever assets the debtors possessed.” (84-5) This seems especially apparent in the case of the rural merchants I’m studying, who seem to have credit relationships both in the family/community and outside it. It might be interesting to see if they behave differently, depending on the creditor’s status in their local network. It might also be interesting to look at the way these relationships change over time. These guys, after all, were creditors as well as debtors.
“In addition to resuscitating the entrepreneurial exertions of myriad antebellum bankrupts and fostering considerable social flux,” Balleisin says “general releases from debt contributed to the mutability and dynamism of the nineteenth-century economy. Along with the culture of privately negotiated compromises, antebellum bankruptcy discharges increased the pool of entrepreneurs who actively sought to make their fortune by extending the reach of commercial exchange, inventing new products, or developing new marketing techniques.” (198) In other words, the ability to get out from under a failed business encouraged people to experiment and overextend, to reach for the brass ring of personal enrichment because the price of failure had been reduced. It encouraged entrepreneurs who took risks, which means it penalized prudent, conservative, old-fashioned, and especially cash-based businessmen. It allowed a small group of unusually aggressive players to keep trying until they won (whether by learning from their failures or simply by finally getting lucky), while it pushed their wiser, more prudent competitors to the sidelines. Balleisen doesn’t dwell on this, but it’s the dark side of the “perpetual search for profitable innovation that constitutes a defining characteristic of modern capitalism.” (198)
For some failed entrepreneurs, though, Balleisen says “encounters with insolvency led them away from business ownership altogether.” There was “a substantial class of bankrupts who either could not resume independent business careers [even as artisans] or chose not to accept the risks associated with doing so...Many of these individuals walked away from the scenes of ongoing financial wreckage, seeking a different and less hazardous means of securing a living...Their efforts link the experience of antebellum bankruptcy to the rise of a salaried urban middle class.” (201) The result, Balleisen says, was a “burgeoning class of clerks, bookkeepers, and agents [who] could not only take consolation in their enjoyment of relative economic stability but also lay claim to a version of republican independence--one in which the most fundamental ‘autonomy’ rested not on the responsibilities of self-employment, but on freedom from both the most severe forms of subservience and the degrading precariousness of irretrievable indebtedness.” (219) “Despite the substantial contrast between these responses to personal legacies of insolvency,” he says, “they worked together to help usher in a new economic order structured around large, bureaucratic corporations, rather than small-scale producers and purveyors of goods and services. In part, post-bellum America’s world of trusts and tycoons rested on a foundation of pervasive individual failure.” (227) One way of looking at this would be to say, “well, alright. They lost their nerve and handed over the reins to their economic ‘betters’ in return for security. In return, they got to live quiet lives as modern consumers in the suburbs.” Another perspective, though, might be that changes in the legal system allowed bad money (and behavior) to drive out good, specifically because the bad actors were absolved of their responsibility when they failed. The risks were socialized, the rewards privatized. And 170 years later, here we are...
References:
Bushman, “Markets and Composite Farms”
Lamoreaux, “Accounting for Capitalism”
Weber, Protestant Ethic, 58-75
Schumpeter, Capitalism, Socialism, and Democracy, 81-6
E.M. Gibson, “Going into Business,” 1855
Asa Greene, Perils of Pearl Street, 1834
