Marc Levinson on Bank Regulation During the American Civil War

28 02 2013

Marc Levinson has published a great post on the Bloomberg Echoes blog about the banking and currency law introduced in the US in 1863 to help finance the Civil War. This law also established the foundations of the modern US banking system, or at least the broad outlines of the system that existed up until 1933.

Here is the key part of Levinson’s blog post:

Many of the regulatory concepts put in place in 1863 are still with us today. But in one important way, the nation’s earliest bank regulations were stricter than today’s. Congress made national bank shareholders doubly liable — if a national bank became unable to repay depositors or other creditors, its shareholders could be forced to ante up the par value of their shares, in addition to the amount they had already invested. Double liability proved a recipe for keeping banks sound. It was discontinued in the 1930s, but the comptroller’s examiners are still paying visits to national banks today.

This is a crucial point. Double liability meant that if a bank failed and went into administration, the bankruptcy court would force shareholders to pay an amount up to the par or nominal value of their stock. In other words, they would lose more than the purchase price of their shares. Double liability also meant that bank shareholders had a strong incentive to monitor the bank’s lending. Under today’s limited liability regime, they have less of an incentive to do so. Needless to say, the owners’ incentive is even stronger under a regime of unlimited liability, which would have allowed creditors to seize the personal assets of the shareholders.


Marc Levinson is a great researcher and writer. I enjoyed his two previous books (see above) and am looking forward to hearing him speak in about three weeks at the Business History Conference in Columbus, Ohio.  He will be speaking on “The Financial Crisis of 2008-2013: A Historical Perspective.”



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