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Protecting Small Savers: The Political Economy of Economic Security

  • R. Daniel Wadhwani (a1)


Admitting, then, that it is eminently desirable to reduce the action of the organized public force to the minimum … shall we not say that government can not relieve itself from the necessity of frequent and minute interferences with industry in any other way to so great an extent as by, 1st, insisting on the thorough primary education of the whole population; 2d, providing a strict system of sanitary administration; 3d, securing by special precautions the integrity of banks of savings for the encouragement of the instincts of frugality, sobriety, and industry? Each of these things is contrary to the doctrine of Laissez faire; yet I, for one, can not find room to doubt that, on purely economical grounds, the action of the State herein is not only justifiable but a matter of elementary duty.



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1. Assertions regarding growth rates, deposits, and total assets are based on data from Series X 20–41 and Series X 238–39 in The Statistical History of the United States from Colonial Times to the Present (Stamford, Conn., 1965), 623625, 641. See also Krooss, Herman and Blyn, Martin, A History of Financial Intermediaries (New York, 1971), 8182.

2. Keyes, Emerson, History of Savings Banks in the United States From Their Inception in 1816 Down to 1874 (New York, 1876), 1:1–4.

3. For more detail, see Wadhwani, Rohit Daniel, “Citizen Savers: The Family Economy, Financial Institutions, and Social Policy in the Northeastern U.S. from the Market Revolution to the Great Depression” (Ph.D. diss., University of Pennsylvania, 2002), 1866.

4. For the purposes of this essay, the northeastern United States can be understood to embrace the six New England states as well as New York, Pennsylvania, Delaware, New Jersey, and Maryland.

5. That state governments promoted economic development in the nineteenth century is well known. Indeed, an extensive body of literature has characterized the role of the government during this period as primarily promotional. See, for example, Horwitz, Morton, The Transformation of American Law, 1780–1860 (Cambridge, 1977); Hurst, J. Willard, Law and the Conditions of Freedom in the Nineteenth-Century United States (Madison, 1956); and Oscar, and Handlin, Mary Flug, Commonwealth: A Study of the Role of Government in the American Economy–Massachusetts, 1774–1861 (Cambridge, Mass., 1947; rev. ed. 1969). Recently, several historians have contended that the role of the government in the nineteenth-century political economy extended beyond promotion to embrace regulation and even public administration. See, for example, Richard R. John, “Governmental Institutions as Agents of Change: Rethinking American Political Development in the Early Republic, 1787–1835,” Studies in American Political Development 11 (Fall 1997): 347–80; William Novak, The People's Welfare (Chapel Hill, 1996); and the literature cited in Harry N. Scheiber, “Private Rights and Public Power: American Law, Capitalism, and the Republican Polity in Nineteenth-Century America,” Yale Law Journal 107 (December 1997): 823–61.

6. See, for example, Wright, Robert E., Wealth of Nations Rediscovered: Integration and Expansion in American Financial Markets, 1780–1850 (New York, 2002), 18, 193–211; Bodenhorn, Howard, A History of Banking in Antebellum America: Financial Markets and Economic Development in an Era of Nation Building (New York, 2000); and Lamoreaux, Naomi, Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England (Cambridge, 1994), 5283. The centrality of banking and financial institutions to economic growth has long been a preoccupation of economic historians. See, most notably, Gerschenkron, Alexander, Economic Backwardness in Historical Perspective (Cambridge, Mass, 1962), and Cameron, Rondo, Banking in the Early Stages of Industrialization (London, 1967).

7. Although nineteenth-century lawmakers experimented with various expedients to limit risk taking by commercial banks, most of these experiments proved fleeting. For a lucid introduction to this topic, see Bodenhorn, Howard, State Banking in Early America: A New Economic History (New York, 2003), 155218, and Moss, David A. and Brennan, Sarah, “Managing Money Risk in Antebellum New York: From Chartered Banking to Free Banking and Beyond,” Studies in American Political Development 15 (Fall 2001): 138162. On the relationship between risk taking and shareholder liability, see Esty, Benjamin, “The Impact of Contingent Liability on Commercial Bank Risk Taking,” Journal of Financial Economics 47 (1998): 189218.

8. For a broader discussion of the impact of governmental institutions on economic and social life in the nineteenth century, see John, “Governmental Institutions as Agents of Change,” 347–80. On the role of the government in managing risk, see Moss, David, When All Else Fails: Government as the Ultimate Risk Manager (Cambridge, Mass., 2002).

9. For an overview of the early American financial system, see Wright, Wealth of Nations Rediscovered, 9–166. For a discussion of specific financial institutions, see Krooss and Blyn, Financial Intermediaries, 3–116. My own approach to the historical study of financial institutions has been shaped by the functional model proposed in Merton, Robert, “The Financial System and Economic Performance,” Journal of Financial Services Research 4 (12 1990). For an elaboration of this model, see Crane, Dwight et al. , The Global Financial System: A Functional Perspective (Boston, 1995).

10. See Wadhwani, “Citizen Savers,” 1–3; Wright, Robert, “Banking and Politics in New York, 1784–1829” (Ph.D. diss., SUNY Buffalo, 1996), 975.

11. On the history of savings banks in the United States, see Olmstead, Alan, New York City Mutual Savings Banks, 1819–1861 (Chapel Hill, 1976); Welfling, Weldon, Mutual Savings Banks: Evolution of a Financial Intermediary (Cleveland, 1968); and Davis, Lance and Payne, Peter, The Savings Bank of Baltimore, 1818–1866: A Historical and Analytical Study (Baltimore, 1956).

12. “An Address to the Public,” June 1819, reprinted in Knowles, Charles, History of the Bank for Savings in the City of New York, 1819–1929 (New York, 1929), 42.

13. An important exception was the Freedman's Savings Bank, which had a federal charter and operated branches throughout the South during Reconstruction. See Osthaus, Carl, Freedmen, Philanthropy, and Fraud: A History of the Freedman's Savings Bank (Urbana, 1976).

14. For a discussion of how shareholders and banknote-holders monitored the management of commercial banks in the early republic, see Bodenhorn, State Banking, 36–42. On the importance in the early republic of kinship and personal connection as conduits for the monitoring of financial institutions and investments, see Lamoreaux, Insider Lending, 22–27. For a theoretical discussion of the special problems small depositors faced in monitoring banks, see Dewatripoint, Mathias and Tirole, Jean, “Efficient Governance Structure: Implications for Banking Regulation,” in Capital Markets and Financial Intermediation, ed. Mayer, Colin and Vives, Xavier (New York, 1993), 1245; Caprio, G. Jr. and Levine, R., “Corporate Governance in Finance: Concepts and International Observations,” in Financial Sector Governance: The Roles of the Public and Private Sectors, ed. Litan, R. E., Pomerleano, M., and Sundararajan, V. (Washington, D.C., 2002); and Macey, Jonathan and O'Hara, Maureen, “The Corporate Governance of Banks,” FRBN.Y. Economic Policy Review 9 (04 2003): 91107.

15. Stock-issuing savings banks were much more common in other parts of the United States. In the Northeast, however, they were rare and in some instances prohibited.

16. On the legal structure of savings banks, see Hansmann, Henry, The Ownership Enterprise (Cambridge, 1996), 246251.

17. Huntington v. Savings Bank, 96 U.S. 388, 394 (1877).

18. Ibid.

19. For an introduction to the constitutional dimensions of nineteenth-century corporate law, see Freyer, Tony A., “Business Law and American Economic History,” in The Cambridge Economic History of the United States, ed. Engerman, Stanley and Gallman, Robert (New York, 2000), 2:435–82. On the continuing role of state governments in corporate oversight, see Freyer, Tony, Producers Versus Capitalists: Constitutional Conflict in Antebellum America (Charlottesville, 1994), 54; Novak, People's Welfare, 105–11; Novak, William, “The American Law of Association: The Legal-Political Construction of Civil Society,” Studies in American Political Development 15 (10 2001): 163188; and Scheiber, Harry, “Regulation, Property Rights, and Definition of ‘the Market’: Law and the American Economy,” Journal of Economic History 41 (03 1989): 103109. On the reserve powers of legislatures over financial institutions, see Freyer, Producers, 95–104. On the gradual emergence of the distinction between public and private corporations, see Whitehead, John, The Separation of College and State: Columbia, Dartmouth, Harvard, and Yale, 1776–1876 (New Haven, 1973), and Hartog, Hendrik, Public Property and Private Power: The Corporation of the City of New York in American Law, 1730–1870 (Chapel Hill, 1983). For the view that modern corporate law has been designed primarily to facilitate the mobilization of private capital, see Hurst, Willard, The Legitimacy of the Business Corporation in the Law of the United States, 1780–1970 (Charlottesville, 1970), and Hovenkamp, Herbert, Enterprise and American Law, 1836–1937 (Cambridge, 1991). For a discussion of how banking law shaped the emergence of the modern corporate form, see Sylla, Richard, “Early American Banking: The Significance of the Corporate Form,” Business and Economic History 14 (1985): 105123.

20. In the Opinion of the Justices, 9 Cush. 604, 610 (1852).

21. In the Opinion of the Justices, 9 Cush. 604 (1852).

22. In the Opinion of the Justices, 9 Cush. 604, 609 (1852).

23. In the Opinion of the Justices, 9 Cush. 604, 609–11 (1852).

24. People v. Binghamton Trust Company, 139 N.Y. 185, 191–92 (1893).

25. People v. Binghamton Trust Company, 139 N.Y. 185, 192 (1893).

26. Olmstead, Savings Banks, 35–42.

27. For examples, see “The Case of the Philadelphia Savings Institution,” in Reports of Cases Adjudged in the Supreme Court of Pennsylvania in the Eastern District, ed. Wharton, Thomas (Philadelphia, 1836), 1:461–68, and The Highly Interesting and Important Trial of Dr. T. W. Dyott, the Banker, for Fraudulent Insolvency (Philadelphia, 1839).

28. For a more general discussion of the implications of early American free banking laws for free incorporation, including, in particular, the extension of limited liability, see Sylla, “Early American Banking.”

29. Bodenhorn, State Banking, 183–218.

30. “Report of the Committee on Banks and Insurance Companies on the Bill from the Assembly for the Formation of Savings Banks,” 28 March 1848, in Keyes, Emerson, A History of Savings Banks in the State of New York (Albany, 1870), 293295.

31. Ibid.

32. Keyes, History of Savings Banks in the State of New York, 127.

33. Ibid. Emphasis added.

34. As early as 1819, at least one board of trustees had established a contingent fund. Board of Managers Meeting Minutes, 7 June 1819, V441, Philadelphia Saving Fund Society Collection, Hagley Museum and Library, Wilmington, Delaware.

35. Paine, Willis, Laws of New York Relating to Banks, Banking, Trust Companies, Loan, Mortgage, and Safe Deposit Corporations (Albany, 1894), 6364.

36. Keyes, History of Savings Banks in the United States, 1:132.

37. General Savings Bank Law (New York, 1875), 26.

38. Commonwealth of Massachusetts, Sen. Doc. 66 (1852).

39. Keyes, History of Savings Banks in the United States, 1:67–68.

40. General Savings Bank Law, 25.

41. Paine, Laws of New York, 233–34; Greeley v. Nashua Savings Bank, 63 N.H. 145, 146 (1884).

42. Keyes, History of Savings Banks in the United States, 1: 376.

43. “An Act to Regulate Institutions for Savings,” 2 April 1834, sec. 8, in Keyes, History of Savings Banks in the United States, 1:49.

44. See, for example, Paine, Laws of New York, 66–67.

45. Keyes, History of Savings Banks in the United States, 1:127–28.

46. The investments that legislatures permitted trustees to make varied from charter to charter. These variations might seem capricious, yet, in fact, they often reflected lawmakers' judgments about the capabilities of a particular board of trustees. See Keyes, History of Savings Banks in the State of New York, 72 (including footnote).

47. Brice, Seward, A Treatise on the Doctrine of Ultra Vires, ed. Green, Ashbel (New York, 1880), 673.

48. Ibid., ix-xi.

49. Hovenkamp, Enterprise, 59–64; Horwitz, Morton, “Santa Clara Revisited: The Development of Corporate Theory,” West Virginia Law Review 88 (1985): 186188. According to Hovenkamp and Horwitz, the courts had by the late nineteenth century abandoned ultra vires as a regulatory tool. To reach this conclusion, Hovenkam and Horwitz focused on litigation involving ordinary business corporations. In the case of savings banks, however, ultra vires persisted much longer. Furthermore, when courts refused to apply the doctrine, they often did so in recognition of the fact that its invocation might harm the group it had been designed to protect. As one court explained, the doctrine of ultra vires “cannot prevail against depositors … from whose protection it was given.” Samuel Hurd, Receiver v. Richard Kelly, 78 N.Y. 588, 596 (1879).

50. Brice, Treatise, 706–7.

51. Jemison v. Citizens' Savings Bank, 122 N.Y. 135, 140 (1890).

52. Pratt v. Short, 79 N.Y. 437 (1880); Franklin Company, in Equity v. Lewistown Institution for Savings, 68 Me. 43 (1877); Paine v. Peter Barnum et al., 59 Howard's Practice 303 (1880).

53. Albert and Albert v. Baltimore and Savings Bank of Baltimore, 2 Md. 159 (1852).

54. Paine v. Mead et al., 59 Howard's Practice 318 (1880).

55. Delia Gilson v. Cambridge Savings Bank, 180 Mass. 444, 446 (1902).

56. Spering's Appeal, 71 Pa. 11, 24 (1872).

57. Spering's Appeal, 71 Pa. 11, 31 (1872). See also Percy v. Milladoun, 8 Mart. 68 (1829); Watt's Appeal, 780 Pa. 370 (1874); Chamberlin v. Chamberlin, 43 N.Y. 424 (1871).

58. Sedgwick, , “Trustees as Tort-Feasors,” American Law Review 10 (1880): 36.

59. Hun v. Carey, 82 N.Y. 65, 78–79 (1880).

60. Sedgwick, Arthur, “Trustees as Tort-Feasors II,” American Law Review 11 (1881): 160. It is “not disputed,” the court added, that the bank had the power under its charter to purchase a lot for a headquarters building. Hun v. Carey, 82 N.Y. 65, 77 (1880).

61. Hun v. Carey, 82 N.Y. 65, 73 (1880).

62. Hun v. Carey, 82 N.Y. 65, 74 (1880).

63. Sedgwick, “Trustees as Tort-Feasors II,” 167.

64. Hun v. Carey, 82 N.Y. 65, 78 (1880).

65. Hun v. Carey, 82 N.Y. 65, 71 (1880).

66. Hun v. Carey, 82 N.Y. 65, 78 (1880).

67. Sedgwick, “Trustees as Tort-Feasors II,” 169.

68. Mutual Building Fund and Dollar Savings Bank v. Bosseiux and Others, 3 F. 817 (1880). See also Marshall v. F&M Savings Bank, 85 Va. 676 (1889).

69. Marshall v. F&M Savings Bank, 85 Va. 676, 688 (1889).

70. Paine v. Peter Barnum et al., 59 Howard's Practice 303 (1880).

71. Paine v. Meade, 59 Howard's Practice 318 (1880).

72. Paine, Laws of New York, 231–32.

73. Briggs v. Spaulding, 141 U.S. 132, 152 (1891).

74. McCoy, Patricia, “A Political Economy of the Business Judgment Rule in Banking: Implications for Corporate Law,” Case Western Reserve Law Review 47 (Fall 1996): 3538.

75. McCoy, “Business Judgment Rule in Banking,” 39–40.

76. Ibid., 38–43; Wadhwani, “Citizen Savers,” 286–386.

77. Walker, Francis Amasa, The Wages Question: A Treatise on Wages and the Wages Class (New York, 1876), 414.

78. This conclusion is based on an analysis of a sample of probate records. For a more general discussion of the popularization of financial institutions that is based on an analysis of bank records, see Wadhwani, “Citizen Savers,” 166–72.

Protecting Small Savers: The Political Economy of Economic Security

  • R. Daniel Wadhwani (a1)


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