EH.Net Abstracts in Economic History

                ABSTRACTS IN ECONOMIC HISTORY
                     (c) 2001 EH.Net
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Name: Christopher Meissner
Email: meissner at econ.berkeley.edu
Institution: University of California Berkeley

Co-author: none

Title: Mechanisms of Integrity: Nineteenth Century New England
Banking and the Success of Insider Lending

Internet Address of abstracted work: not available

By mail:
Department of Economics
U.C. Berkeley
549 Evans Hall, #3880
Berkeley, CA 94720-3880

Phone:  (510) 841-0736
Fax:  (510) 841-0736

Language: English

Abstract:
Early 19th century New England banking exhibited high levels of 
lending to directors and associates (connected lending); today many 
think this arrangement might lead to corruption and financial 
fragility. This paper argues that institutions helped make connected 
lending viable. Banks used committees that voted on the approval of 
projects. Banks that used high levels of consensus (i.e., more votes 
for a given committee size) prevented the approval of loans for 
projects with private gains and social costs. This allowed only the 
best of all loans to be approved. The data show that stock prices 
were higher and returns on capital were greater for banks that used 
higher levels of consensus in their loan committees. Also, anecdotal 
evidence supports the theoretical arguments. I also discuss how 
committees were complementary to other mechanisms which restrained 
the socially inefficient allocation of capital.

Bibliography: Meissner, Christopher "Mechanisms of Integrity: 
Nineteenth Century New England Banking and the Success of Insider 
Lending." Manuscript, University of California at Berkeley, 2000.

Subject: B,H
Geographical Area: 7
Country/Region: USA, New England
Time Period: 6,7

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