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Market Power and Bank Lending: Some Evidence from Wisconsin, 1870–1900

Published online by Cambridge University Press:  11 May 2010

Richard H. Keehn
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Abstract

The pioneering work of Lance Davis on regional bank loan rates in the United States from 1870 to 1914 generated several attempts to explain the observed regional interest rate differentials and their subsequent narrowing by 1914. This article reports on a more direct test of the hypothesis that barriers to capital mobility were due to monopoly power on the part of local bankers. Tests using data on individual banks and local markets for one state, Wisconsin, suggest that local competitive conditions did not exert a significant influence on bank lending performance. This may be the result of relatively free entry into Wisconsin banking during the period.

Type
Papers Presented at the Thirty-Ninth Annual Meeting of the Economic History Association
Information
The Journal of Economic History , Volume 40 , Issue 1 , March 1980 , pp. 45 - 52
Copyright
Copyright © The Economic History Association 1980

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References

1 Davis, Lance, “The Investment Market, 1870–1914: The Evolution of a National Market,” this Journal, 25 (Sept. 1965), 355–99Google Scholar.

2 An excellent review is Sylla, Richard, “Financial Intermediaries in Economic History: Quantitative Research on the Seminal Hypotheses of Lance Davis and Alexander Gerschenkron,” in Gallman, Robert E., ed., Recent Developments in the Study of Business and Economic History: Essays in Memory of Herman E. Krooss (Greenwich, Conn., 1977), pp. 55–80Google Scholar.

3 Stigler, George, “Imperfections in the Capital Market,” Journal of Political Economy, 25 (June 1967), 287–92CrossRefGoogle Scholar.

4 Williamson, Jeffrey G., Late Nineteenth-Century American Development—A General Equilibrium History (London and New York, 1974)Google Scholar, ch. 6.

5 Sylla, Richard, “Federal Policy, Banking Market Structure, and Capital Mobilization in the United States, 1865–1913,” this Journal, 24 (Dec. 1969), 657–86Google Scholar; Sylla, , “The United States 1863–1913,” in Cameron, Rondo, ed., Banking and Economic Development (New York, 1972), 232–62, ch. 8Google Scholar; James, John A., “The Development of the National Money Market, 1893–1911,” this Journal, 36 (Dec. 1976), 878–97Google Scholar; “Banking Market Structure, Risk and the Pattern of Local Interest Rates in the United States, 1893–1911,” Review of Economics and Statistics, 58 (Nov. 1976), 453–62Google Scholar.

6 John A. James, “National Money Market,” p. 882 and passim.

7 A review of studies on the effect of concentration on bank performance is in Benston, George J., “The Optimal Banking Structure: Theory and Evidence,” Journal of Bank Research, 3 (Winter 1973), 220–37Google Scholar.

8 Some banks may discriminate within the loan market, which would tend to raise loan ratios. It is doubtful, however, that many banks in nineteenth-century Wisconsin were able to do so. The costs of extensive discrimination in the local loan market would be high.

9 State and private bank balance sheets were taken from the semi-annual report dated the first Monday in July whereas national bank data were from the call reports nearest October 1. This discrepancy biases the results to some extent because bank balance sheets appear to have been subject to some seasonal variation. For 1900, balance sheet data were taken from the call reports of December 13 for all bank types. For the sources of individual bank balance sheet data, see Richard H. Keehn, “Market Structure and Bank Performance: Wisconsin 1870–1900,” Ph.D. dissertation, University of Wisconsin-Madison, 1972, Appendix B.

10 Non-bank financial intermediaries can also influence competitive conditions in the loan market. Nineteenth-century Wisconsin banks operated primarily in the short-term loan market whereas other financial institutions were not important.

11 The original source is Herfindahl, Orris C., “Concentration in the Steel Industry,” Ph.D. dissertation, Columbia University, 1950Google Scholar; Smith, William Paul, “Measures of Banking Structure and Competition,” Federal Reserve Bulletin (Sept. 1965), 1212–22Google Scholar.

12 Several studies have explored the relationship between bank market structure and the performance of banks in that market as measured by the aggregate market loan ratio. To approximate these studies, tests were made using the weighted county loan ratio as the dependent variable. The results were disappointing. The R2s were very low and market structure variables could account for almost none of the intercounty differences in loan ratios. Other variables were usually not statistically significant at the 20 percent confidence level.

13 Relatively free entry and exit would make collusion more difficult. The continued existence of very small banks in the same local market with very large banks indicates that economies of scale could not have been a significant barrier to entry. Increasingly easy entry and exit, lack of significant economies of scale, and the difficulty of effective collusion support the statement that local Wisconsin markets were becoming more competitive in the post-1870 period.

14 Keehn, Richard H., “Federal Bank Policy, Bank Market Structure, and Bank Performance: Wisconsin, 1863–1914,” Business History Review, 48 (Spring 1974), 12–13CrossRefGoogle Scholar.