Free Banking and Competition in Antebellum America

Abstract

Economic historians remain divided over America’s experiment with free banking during the antebellum era. Some argue that the reforms, which liberalized the bank-chartering process, simply exchanged one set of entry barriers for another, while others hold that free banking improved competition in the banking systems of those states that adopted it. One challenge that has plagued efforts to provide a clear assessment of free-banking’s effectiveness is a lack of reliable data. In this paper, we use Warren Weber’s near-comprehensive database of antebellum bank balance to assess whether the banking system responded in a manner consistent with the removal of entry barriers. We find that the passage of a free banking law increased bank assets, deposits, and banknotes substantially, and that this effect was long lasting. Specifically, we find that two years after the adoption of free banking, bank loans and discounts increased by 72%, and by 61% six years after the reform. Taken together, our results indicate that free banking had a substantial and long-lasting effect on the competitiveness of the banking systems in which it was tried.

Keywords: Competition and Monopoly, Entry Barriers, Free Banking

JEL Classification: G28, L43, N21