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Banks and State Public Finance in the New Republic: The United States, 1790–1860

Published online by Cambridge University Press:  03 March 2009

Richard Sylla ,
John B. Legler  and
John J. Wallis
Richard Sylla
Affiliation:
Professor of Economics and Business at North Carolina State University, Raleigh, NC 27695 and Research Associate, National Bureau of Economic Research
John B. Legler
Affiliation:
Professor of Banking and Finance, University of Georgia, Athens, GA 30602 and Research Associate, NBER
John J. Wallis
Affiliation:
Assistant Professor of Economics, University of Maryland, College Park, MD 20742 and Faculty Research Fellow, NBER
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Abstract

The U.S. Constitution, by taking away the power of the states to issue paper money, removed a major source of flexibility in state public finance. In their search for new sources of revenue and fiscal flexibility, the states discovered that the banks they chartered could fill the gap. Investment earnings and tax revenues derived from banks soon became major elements of state public finance. We discuss the nature of these early business-government relationships and provide the first systematic assessment of their relative importance in state finance.

Type
Papers Presented at the Forty-Sixth Annual Meeting of the Economic History Association
Information
The Journal of Economic History , Volume 47 , Issue 2 , June 1987 , pp. 391 - 403
Copyright
Copyright © The Economic History Association 1987

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References

We thank Lance Davis, J. Van Fenstermaker, and Thomas Huertas for their comments on an earlier draft; John McCusker for useful suggestions; and Patricia Colelli, M. Cary Collins, Gunther Elert, and Debra Shiley for research assistance. The research on which this paper is based is funded by National Science Foundation Grant No. SES-84 19857.Google Scholar

1 Ferguson, E. James, “Currency Finance: An Interpretation of Colonial Monetary Practices,” William and Mary Quarterly, 3rd ser., 10 (04 1953), pp. 153–80;CrossRefGoogle Scholar and Ferguson, , The Power of the Purse: A History of American Public Finance, 1776–1790 (Chapel Hill, 1961).Google Scholar

2 Two summary accounts of bank-and-state financial relationships in the antebellum period are given by Van Fenstermaker, J., The Development of American Commercial Banking, 1782–1837 (Kent, 1965), chap. 3;Google Scholar and Muscalus, John Anthony, “The Use of Banking Enterprises in the Financing of Public Education” (Ph.D. diss., University of Pennsylvania, 1945), chap. 26.Google Scholar

3 State governments also obtained frequent short-term loans from banks, but such normal banking operations, although obviously a substitute for currency finance, were seldom required in bank charters. Such loans, although convenient, were not a part of the state revenue base, and so we ignore them here.Google Scholar

4 Bullock, Charles J., “Historical Sketch of the Finances and Financial Policy of Massachusetts from 1780 to 1905,” Publications of the American Economic Association, 3rd ser., vol. 8, no. 2 (1907), p. 21.Google Scholar

5 Ibid., pp. 141–42.

6 Walradt, Henry F., The Financial History of Connecticut, 1789–1861 (New Haven, 1912), pp. 32–35, 100, 116–117.Google Scholar

7 Muscalus, “Use of Banking Enterprises.” Lack of annual detail on School Fund revenues precludes us from incorporating these revenues in Table 1.Google Scholar

8 A partial listing of bonus and other requirements that were imposed by Connecticut on banks in this era is given in Hasse, William F. Jr, A History of Money and Banking in Connecticut (New Haven, 1957), chap. 3.Google Scholar

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11 Ibid., pp. 123–24.

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13 Muscalus, “Use of Banking Enterprises,” pp. 88–89.Google Scholar

14 Sowers, Don C., The Financial History of New York State From 1789 to 1912 (New York, 1914), p. 143.Google Scholar

15 Bryan notes that “The bank reports made to the state Treasurer before 1828 were not published, and the statistical material for this period is quite unsatisfactory … The original reports were destroyed ‘with all that other rubbish,’ as a state officer informed me.” Bryan, Alfred Cookman, History of Stare Banking in Maryland (Baltimore, 1899), p. 8.Google Scholar Hanna compiled his revenue and expenditure series for the years before 1825 from scattered reports in the Journals of the House and Senate. Unfortunately for us Hanna found it “necessary to exclude entirely the receipts from the Bank Tax of 1814, the product of this tax having been transferred directly to the ‘Free School Fund’ and not entered in the regular statements of the treasury.” Hanna, Hugh Sisson, A Financial History of Maryland, 1789–1848 (Baltimore, 1907), p. 127.Google Scholar

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17 Macon, Hershal L., “A Fiscal History of North Carolina, 1776–1860” (Ph.D. diss., University of North Carolina, Chapel Hill, 1932).Google Scholar

18 Muscalus, “Use of Banking Enterprises,” p. 100.Google Scholar

19 Lesesne, J. Mauldin, The Bank of the State of South Carolina: A General and Political History (Columbia, 1970), p. 16.Google Scholar

20 Repor of the Commissioner appointed by Authority of the Legislature, on the Subject of the State Finances (Milledgeville, 1839), p. 11.Google Scholar

21 Ibid., p. 12.

22 Ibid.

23 Muscalus, “Use of Banking Enterprises,” p. 70.Google Scholar

24 As cited by Hammond, Bray, Banks and Politics in America, From the Revolution to the Civil War (Princeton, 1957), p. 165.Google Scholar