Robert E. Wright, The Origins of Commercial Banking in America, 1750-1800. London and New York: Rowman & Littlefield Publishers, 2001. xii + 219 pp. $65 (cloth), ISBN: 0-7425-2086-2; $24.95 (paperback), ISBN: 0-7425-2087-0.

Reviewed for EH.NET by Edwin J. Perkins, Professor of History, emeritus, University of Southern California.

Robert Wright has written a highly original book that merits our attention. First, he overlaps the late colonial period and the first decade of the early national era -- an uncommon periodization for financial historians. Previous authors typically have covered either the colonial period or the national period, not both. Second, Wright approaches the subject mainly from an economic perspective rather than from a political angle. Earlier writers have been mostly concerned with the public policy ramifications of legislative debates over financial matters, and they have been less concerned with the impact of financial legislation on the economy. Trained as a historian but employed for several years in the economics department of the University of Virginia, Wright has a unique academic profile. That interdisciplinary background has enabled him to generate an analysis of critical financial issues during this era that is unmatched by any of his predecessors. For economists, in particular, this volume stands as the new starting point for gaining an understanding of the evolution of U.S. commercial banking.

Wright focuses throughout on the perpetual demand for improved liquidity. The colonial economy had no active private banks. Likewise, there was no uniform currency since the British had forbidden the establishment of a colonial mint. As a result, most of the coinage in circulation originated in Spain's colonial empire in the Western Hemisphere. The paper currency issues of the various colonial legislatures supplemented these hard monies. Capital markets in the colonies were non-existent or thin. Only Massachusetts had a public debt that was privately held and occasionally traded. The whole financial system was institutionally immature. A huge percentage of the outstanding colonial mercantile debt could be traced back to the London money market. Colonial merchants did make use of domestic and foreign bills of exchange, but it was nearly impossible to convert these financial instruments into cash during periods of stringency. While the financial system was sufficiently functional to support steady increases in the size of the colonial economy (primarily due to population growth), its overall performance was less than optimal. Liquidity was sorely lacking. Merchants, family farmers, great planters, and artisans all sought some form of institutional relief.

Parliamentary regulations and the negative attitudes of distant British administrators who were responsible for colonial affairs discouraged private initiatives. Colonial leaders from South Carolina to New England periodically sought legislative permission to create banks of one variety or another, but none of these attempts produced anything sustainable. Wright covers these early efforts in a fair amount of detail. He views these abortive efforts as legitimate antecedents of the private commercial banks that emerged after 1780.

After the achievement of independence, the new nation began to experiment with modern commercial banking. Luckily, these experiments, which aroused much public debate and legislative controversy at the state and federal levels, almost immediately led to the creation of viable institutions. I say "luckily" because the effort to create similar institutions in many other emerging nations over the last two centuries has produced numerous tragic missteps. The Bank of North America, the brainchild of Robert Morris, the famous treasurer of the confederation government, became the prime model for all subsequent commercial banks. It issued currency supported by adequate specie reserves, accepted deposits, discounted mercantile notes, and turned a respectable profit for investors. Other commercial banks operating under state charters began to multiply. The problem of illiquidity in the U.S. economy was steadily alleviated thereafter. The national government created the Bank of the United States, which was the largest economic unit in the economy throughout its twenty-year life span. Commercial banks were the pillars and catalysts for the expansion of the U.S. economy from 1790 forward. We are finally coming to the realization, thanks largely to the contributions of Richard Sylla and his collaborators, that improvements in financial services preceded advancements in agriculture, transportation, and industry.

For his discussion of events after 1780, Wright draws most of his information from a careful analysis of banking in Pennsylvania and New York. His conclusions contrast at many points with Naomi Lamoreaux's study of New England banking during the same period. In her research, Lamoreaux found that commercial banks were typically closely held; the major investors dominated the board of directors and made numerous insider loans to themselves. Wright has found a different pattern in the middle Atlantic region. These banks had a larger capitalization and a broader ownership. They made loans mainly to depositors, not owners, and the occupations of borrowers varied -- from merchants to farmers to artisans. As much as I admire Wright's detailed discussion of the development of the commercial banking system, I would have gone about this project in a different manner -- not necessarily better, but different and complementary. Since I have been working in this subfield for decades, I offer my own admittedly biased opinions without apology.

Whereas Wright concentrates on the demand for liquidity, I would have celebrated the supply side of the equation. I am not convinced that the colonial demand for liquidity was any different than the persistent demands of thousands of urban merchants in past civilizations. I take the demand for superior financial services as a given -- a truism. What was astonishingly different in the eighteenth century was the institutional response in the new United States. Borrowing piecemeal from the example of a handful of British private bankers and the singular Bank of England, the first generation of independent Americans were imaginative and prudent institutional innovators. Despite their strategic differences, Hamiltonians and Jeffersonians both wanted a successful financial system -- if only to prove to a skeptical world that a republican form of government could survive and indeed thrive financially as well as politically.

I also wish Wright had cited the public loan offices created by the colonial legislatures as the prime forerunners of the modern commercial bank. Across the Atlantic Ocean, advocates of land banks had tried for centuries to gain the attention and approval of the ruling classes. Their proposed land banks were designed to offer loans to citizens with real estate as collateral. None of these European schemes proved viable. But in English North America, land banks in the middle colonies (but not in New England) operated successfully for decades. They made loans to a wide swath of landholders; they experienced few losses; and they generated substantial interest revenue for their provincial legislatures. Their issues of paper currency were retired at their original purchasing-power values; depreciation was not a serious problem. The Pennsylvania legislature imposed no new taxes for decades because interest income from the loan office covered its modest annual expenses. True, the loan offices did not accept deposits and did not discount mercantile paper, but they succeeded over a long period of time, whereas similar efforts in all other contemporary societies had failed. The colonial land offices were remarkable enterprises for their era and deserve more recognition as emulative institutional models.

My third friendly amendment relates to the coverage of the Bank of the United States. Wright just does not devote sufficient space to this novel institution. It too was highly innovative. Unlike the Bank of England, its main customers after 1795 were private citizens, not governments. It possessed branch offices in major port cities. As David Cowen has recently argued, the BUS in tandem with the U.S. Treasury Department acted very much like a modern central bank. Fourthly, Wright might have cited the recent work of Glenn Crothers on commercial banking in northern Virginia in the 1790s. I had better stop here with my recommended additions or I might be roundly accused of criticizing the author for not writing the book I had envisioned rather than the book he chose to write. By revising the analytical model for all subsequent historians who embark on an examination of the origins of U.S. commercial banking, Robert Wright has made a major scholarly contribution. The supply side innovations did not occur in a vacuum, Wright reminds us; they came about because thousands of participants in the eighteenth-century economy desired increased levels of liquidity. If the author has gone slightly overboard to prove a valid point, he has done so in a noble cause.

Edwin J. Perkins has written extensively about financial history. His books include American Public Finance and Financial Services, 1700-1815 (Ohio State University Press, 1994). His most recent publication is Wall Street to Main Street: Charles Merrill and Middle Class Investors (Cambridge University Press, 1999).