Self-governance among Manhattan banks, 1840--1980

Intensive government regulation over the banking industry did not begin in the United States until the founding of the Federal Reserve in 1914. Before that, commercial banks run a set of community-based self-governance, called the clearing house, throughout the country. The clearing house organized collective action and facilitated mutual assistance during financial crises; it imposed self-discipline and urged prudential operations during regular time. This set of self-governance was deeply embedded in the American ideology of anti-centralization and the political institutions of a weak state. The anti-branching restriction enacted by the National Banking Act in 1864 ruled out a market solution of financial crises through geographical diversification, and called for a collective solution. The clearing house emerged as a community-based coalition through which banks weathered financial turmoil with their peers. The community-based collective action relied on the cooperation among local banking elites. At the end of 19th century, when the scope of economy went beyond local communities, the clearing house became inadequate to dampen financial crises. The first national wide financial crisis, the Panic of 1907, amid the state-building movement championed by progressivists and populists, triggered a request for a public solution that necessitates government intervention. The founding of the Federal Reserve embarked on a new era of government regulation. Moreover, the failure of government regulation in preventing the biggest financial crisis in history, the Great Depression, did not result in the resurgence of private solutions, but further strengthened the state control.;I conduct the empirical testing of the efficacy of private and public regulations using the population of commercial banks in Manhattan from 1840 to 1980. I investigate the effectiveness of the New York Clearing House Association, the oldest and also the largest clearing house in the country, in constraining its members' behaviors. I find that the overall bank failure rate is lower during the clearing house period than during the free-market period or the government regulation period. What contributes to the lower overall failure rates during the clearing house period is that banks that participated in the NYCHA had a significantly lower failure rate. Moreover, the effectiveness of the self-governance hinged on its nature as a city-based coalition that included a relatively small number of densely-connected banks. Especially, elite bankers' affiliations with elite clubs in New York constituted a network that enabled the self-governance to be effective. The density of elite bankers' network had a significant moderating effect on the effectiveness of the NYCHA in reducing member banks' failure rates and their operational risks. This self-governance lost its efficacy after the government actively intervened with the governance of banking. But the government's safety-nets introduced a moral hazard problem, in that banks that participated in government institutions tended to be more risk-taking.;By showing the efficacy of private institutions in solving the problems of commons, my dissertation helps to shatter pessimistic convictions based on the free-rider problem. Specially, by emphasizing the structure of the community in which a private institution is embedded, my dissertation reveals a scope condition in affecting the effectiveness of private institutions. A close-knit community facilitates information transfer, nurtures trust and social interactions, and thus helps to solve the free-riding problem that plagues some private institutions. Thus, identifying whether a private institution is embedded within the right social structure helps to reconcile the conflicting empirical results regarding the efficacy of private institutions, and sheds light on the question why private institutions are neither rare nor ubiquitous.;The community-based institutions are decentralized, localized, and embedded within social relations. The community-based institutions are an organic form of initiatives that local actors reply on mutual aid societies and self-organized associations to solve their commons problems, and an intermediary between the extremes of the market and the state. In recent decades, sociologists have repeatedly called into our attention the increasing atomization, the loss of social capital, and the demise of civic groups. These problems can be at least partially attributed to the over focus on the market or the state instead of the community. At one end, the free competition ideology popularized by neoliberlism delegitimizes cooperation among industrial peers, and hence their social interactions. At the other end, the reply on the state as one major supplier of institutions have similarly displaced local arrangements and weakened social relations. Nurturing vibrant community-based institutions are an effective instrument to defeat the taboo against cooperation, to cultivate local associations that turn strangers to trusting neighbors, and to advance diversity and innovations rather than homogenization or centralization. This is because the community-based institutions are glue, the operation of which depends on social coordination instead of atomized transactions or impersonal bureaucracies. (Abstract shortened by UMI.)...