Wednesday, April 6, 2011

Banking was Contentious—Why Isn't Its History?

Dan Allosso

Banking has been a contentious issue throughout American History. The pages of our history books allow us brief glimpses of the most familiar stories, like Jefferson’s distrust of Hamilton and the Jacksonian Bank War. The popular press continues to blame banks—especially big, powerful, central ones—for many of our economic ills. It’s interesting that Rolling Stone has been at the forefront of this popular war against the central banks, featuring frequent articles by William Greider in the 1980s and Matt Taibbi in recent months. This ongoing popular distrust of banks and bankers, however, seems not to be shared by many of the economic historians we look to for leadership on these issues, and who often treat historical bankers with respect verging on reverence. As a result, the stories of American banking that find there way into mainstream history often treat the objectives and goals of bankers as economically sound and politically neutral, even when they acknowledge popular dissent.

For example, consider the early 19th-century “Suffolk System,” imposed on New England by the Suffolk Bank and six other Boston banks. It has come down to us as an attempt to insure the value of New England bank notes, at a time when any chartered bank was allowed to print its own money. Students reading about this and living in a world where we have a single, national currency, naturally assume that the Suffolk System provided an urgently needed service for the New England Economy. People who want to justify “small government” on economic terms suggest that bad (country) banknotes were driving good (city) banknotes out of the market through Gresham's Law, and that the system was proof that “private individuals acting outside the bounds of political control have proven entirely capable of providing much the same functions as a central bank, and at a far lower cost.” Even economic historians who admit that the Suffolk System was thoroughly hated by most New England banks, treat the system as a tool for providing a needed benefit to the financial market, and analyze its efficiency in providing this service.

The average discount on country banknotes in Boston by the 1820s was less than one percent, suggesting that most people did not fear to use them as currency. The Suffolk’s objective, economic historians tell us, was to insure the integrity of these various pieces of money; but also, they admit, to reduce the volume of country banknotes circulating in the city. Why might a consortium of city bankers be interested in reducing the circulation of country notes? Perhaps to give their own notes more circulation? Similarly, the Suffolk’s tactics for getting banks to “join” their system involved hoarding large quantities of the target bank’s notes and then bringing them into the bank for redemption all at once. This constituted an artificial “run” on the country banks, and at least one filed suit against the Suffolk for “malicious intent to break the bank without cause.” Historians have praised the Suffolk for forcing rural banks to hold larger reserves. But with mass redemptions comprising often more than half the victim bank’s total assets, it’s questionable whether any of the Suffolk’s associated Boston banks could have withstood similar treatment. So, what was the real objective of these raids?

The effect of the raids, historians agree, was to intimidate banks into joining the system. They were required to deposit $5,000 in the Suffolk Bank, on which they were paid no interest. You could call this a tax, but ransom might be a better word. The Suffolk thus had the use of hundreds of thousands of dollars over a period of four decades, at no cost. When the New England banks finally fought back, and got a state charter for their own clearinghouse, the Suffolk did not choose to compete with them. It went back to its regular business. Economic historians have suggested this change had something to do with the relative efficiency of the “cross-subsidization” of “payments-system networks,” and have analyzed these economic factors in detail. But perhaps in focusing so intently on the numbers, they miss the motivation. What if the goal of the system was never about providing an efficient service? What if it was about improving the competitive position of the Boston bankers by either limiting or taxing the rest of the New England banks?

It seems to me that motivation is the crucial question, in historical questions like this one. Too often, I think, historians take up the documented rationales for acts like the creation of the Suffolk System, as if they came from a disinterested, reliable source. They treat challenges in the popular press, and even in the courts, as understandable but generally misguided opposition to good economic policy. And perhaps they hesitate to dig deeper into the lives and personal archives of the people behind these changes, because that type of research is not part of the traditional “tool-box” of economic history. It’s precisely these personal archives, if they exist, that might provide answers to why people like the Boston bankers joined together to establish organization like the Suffolk System. These answers might shed an altogether different light on the actions of these institutions and the results they ultimately achieved.


hcr said...

I'm with you on this, Dan. Banking cuts to the very heart of our beliefs about ownership, and value, and property, and status. Why on earth isn't it a hugely popular historical topic?

Bruce Mann managed to make debt human, perhaps you can do the same for banking.

And then, of course, there's the tariff....

dan allosso said...

Thanks, Heather. I wonder if the fact that Mann is at the Harvard Law School might be a sign that part of the issue is disciplinary. I just read a really good article on New York City banks and the push for national banking under Lincoln/Chase, that named names and cited sources that are going to be really helpful to me. 1979, from the American Journal of Legal History, by David M. Gische, who I think is a partner at Troutman Sanders in DC.

Robert E. Wright said...

If you want to do some serious research on the Suffolk System, visit the Whaling Museum in New Bedford, Mass. which has recently made a vast new collection available.

But first you might want to do some additional reading as banking history is EXTREMELY contentious.

dan allosso said...

Thanks Robert. Didn't know about the Whaling Museum. My contention about a lack of appropriate contention is of course not meant to imply there's none at all. Even so, it surprises me how frequently I find economic historians accepting the premise that if an action is economically sound (and especially if it is talked about in those terms at the time), that this means the economic soundness was what motivated the actors in the first place. I think this is far from the real story, in a lot of cases.

Mark Stickle said...

Dan, While I wouldn't argue with your point about exploring the nefarious motivations of the Suffolk bankers, perhaps there is also room for examining the measurable results of policies and institutional innovations. I wouldn't pretend to be an expert, but I think there is some evidence that actions often have unintended consequences -- and for the folks on the receiving end, these may in fact be more important than the motives underlying the initiatives.
In the case of the Suffolk system, (and again I am emphatically no expert!!) I suspect that there were economic benefits in the form of a more stable medium of exchange. (A measurement of the average rate of discount over some period of time, would provide little or no insight into the size of these benefits; market participants could easily work around a discount of almost any size, provided it were stable. The economically relevant measurement, it seems to me, would be one that captured the volatility of exchange rates.) If the Suffolk system did, in fact, provide a shock absorber that reduced volatility, then it is likely that exchange relationships of all kinds throughout the region were placed on a more solid footing as a result. Perhaps the Suffolk bankers had rigged the system in such a way as to capture these benefits?? Perhaps these benefits accrued as unintended consequences of the actions of the bankers? Or perhaps I am wrong and they didn't exist at all?
I'd appreciate your thoughts.