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.”

Celebratory Narratives and the Fortune 500 of 1812

12 04 2012

Since 1995, Fortune magazine has been  publishing annual rankings of U.S. corporations by size. Observers analyse changes in the Fortune 500 to track the evolution of the economy. Remember how the top of the list used to be dominated by industrial behemoths such as United States Steel?

Recently, two business historians, Dick Sylla and Robert E. Wright, have tried to create a retrospective Fortune 500-type list for the US in 1812. They posted it recently on Bloomberg’s business history blog, Echoes.

Sylla and Wright show that the list of large US corporations in 1812 was dominated by banks rather than manufacturing firms.

This is a very interesting intellectual exercise and I enjoyed their post. However, I think Sylla and Wright have fallen into the trap of writing a celebratory narrative of US business history that goes something like this: Americans have been world leaders in business from the earliest days of their republic and their precocious modernity of early American business owed much to the excellence of the political and legal institutions of the United States.

Consider this part of their blog post:

The larger significance of being able to come up with a Fortune 500 for 1812 demands some reflection. The country’s population then was about 7.5 million, less than that of New York City today, and far less than the populations of leading European nations. Yet international comparisons, to the extent we can make them, indicate that the U.S. already had more business corporations than any other country, and possibly more than all other countries put together.

France had chartered 13 corporations by 1812, and Prussia had chartered eight. An old source indicates that England had only 156 joint-stock companies before 1824, and so the entire U.K. probably had no more than 200 to 300. In contrast, our U.S. data show more than a thousand charters by 1812.

The U.S. was the world’s first “corporation nation,” and the ease of incorporating businesses released a lot of entrepreneurial energy that helped to build an ever-expanding economy. By the end of the 19th century, the U.S. would be the world’s largest national economy with tens of thousands of corporations.

Americans continue to have mixed feelings about corporations, just as they did in 1812 and throughout our history. But there’s no denying that the corporation played a large role in making Americans who they were — and are.

In other words, the US in 1812 was more sophisticated, capitalist, and quintessentially modern than other Western nations.

I suppose this fits with historian Alfred Chandler’s view that it was the United States that took the lead in making the transition from family firms and other allegedly archaic structures to managerial capitalism and the modern corporation. However, as Leslie Hannah, a distinguished business historian based at the LSE and the University of Tokyo, has argued, there is evidence to suggest that modern corporate governance and forms of industrial was pioneered in Britain and was adopted only later adopted by the United States, which was a relatively primitive economy as late as 1900.

Dick Sylla and Bob Wright are great historians, but I think that the international comparison they are making in these paragraphs is a bit problematic.