Private Seeking of Private Monopoly in Early American Banking

Abstract

In early nineteenth-century America, banks were chartered through legislative acts of incorporation. Most bank charters established local monopolies so that charters created economic rents. The public choice approach holds that governmental creation of artificial rents invites rent seeking and welfare losses, and more so the larger the potential rents. This chapter provides estimates of rents and potential welfare losses for Pennsylvania. The results suggest that local monopoly rents amounted to approximately 1–1.5% of gross domestic product. Pennsylvania adopted a number of policies, including price ceilings and tax policies, which reduced welfare losses and redistributed some of the rents. The chapter concludes with reflections on the evolving political economy of chartering policy, and why Pennsylvania was slow to reform its practices.