From Partisan Banking to Open Access - A Study on the Emergence of Free Banking in Early Nineteenth Century Massachusetts

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My dissertation examines how the financial sector, specifically banks, achieved open entry in early nineteenth-century Massachusetts. The first chapter introduces this question and provides the historical background and conceptual framework necessary for unpacking this question. The second chapter provides new evidence showing how the majority political party, the Federalists, held a monopoly on banks by dominating the state legislature in charge of issuing charters for new banks, effectively prohibiting members of the opposing political party, the Democratic-

Republicans, from opening banks. Political turnover in the period between 1810 and 1812 destroyed the Federalist monopoly and allowed for the possibility of open entry in the banking sector. The third chapter provides a new measurement of an elite coalition by collecting original data about bank directors and state legislators in an effort to identify their relationship. The empirical results show how the political composition of the banking sector changed during the Federalist and the Democratic-Republican eras and how the banking sector became less connected to political elites (i.e. the legislators) in the 1830s-1850s. The fourth chapter shows that for people who were ever legislators at some point in their life, they were more likely to be legislators and bankers at the same time in the late 1790s and early 1800s than afterwards. The fifth chapter collects data on private accumulation of wealth from Boston tax rolls and data on bank balance sheets to show that bankers were always richer than other wealthy citizens in the 1830s and 1840s, but their relative wealth inequality remained stable. New banks chartered in the 1840s and 1850s were smaller banks. The sixth chapter provides an explanation of the transition from limited to open access banking based on the idea of intra-elite competition. Taken together, these chapters show that the banking sector moved toward free banking by solving the problem of exclusive party politics. Although intra-elite conflicts did not eliminate elites banking privileges, political elites and banks were still connected and bankers remained the wealthy class, they nevertheless led to de facto free banking.