The Review of Austrian Economics, 14:4, 353–362, 2001.
2001 Kluwer Academic Publishers. Manufactured in The Netherlands.
Howard Bodenhorn, A History of Banking in Antebellum America: Financial Markets and
Economic Development in an Era of Nation-Building. Cambridge: Cambridge University
Press, 2000. Xxi + 260 pp. Hardback $59.95, Paperback $22.95.
Thank goodness, a book on antebellum American banking that is not primarily about
banking policy (Jackson versus Biddle, state banking debates). Howard Bodenhorn instead
explores topics that the textbooks have largely ignored: what kinds of business antebellum
banks did, and how they contributed to economic growth and development. His monograph
will be useful to anyone who teaches money and banking or the economic history of the
United States. (I teach both, so I will ﬁnd it doubly useful.) Readers of this journal should
note that Bodenhorn favorably cites Schumpeter on economic development, but does not
draw on Austrian monetary or capital theory. The book is largely an integrated compilation
of the author’s articles published over the last eight years.
Bodenhorn (p. 23) rightly emphasizes that “banks can affect economic development
either by increasing the pool of savings available to potential investors or by directing
capital into more efﬁcient investments.” As he notes, Edward Shaw, Ronald McKinnon,
and Hugh Patrick have emphasized the ﬁrst channel; Raymond Goldsmith the second.
Adam Smith discussed both. As Smith argued, one important increase in the pool of
savings arises from allowing money-holders to voluntarily replace the coins in their purses
with fractionally backed banknotes (or bank deposits). The substitution of bank liabilites
(which fund bank loans) for coin augments the economy’s stock of loanable funds and
provides the means for capital formation. Bodenhorn (7–8) writes: “In 1800 banks and thus
bank-supplied currencies were relatively unknown in the hinterlands. By 1820 banks had
extended their reach and were monetizing at least some parts of the rural economy.” Later
(44) he similarly names monetization as one of chief beneﬁts of banking. These statements
suggest that the use of banknotes and checking deposits directly replaced barter; I suspect
that instead they mostly replaced the use of coin. Thus I think it would be better to speak of
the substitution of bank-issued money (what Mises called “ﬁduciary media”) for coin than
to speak of “monetization.”
Bodenhorn may actually agree. When he proposes (45) a verbal model (or “parable”) to
explain “the link between ﬁnancial development and economic growth,” his starting point is
not a barter economy but a purely metallic monetary system. He does not offer any evidence
that barter widely prevailed in the hinterlands in 1800. Nor does he provide any argument
supporting the conclusion that bank-issued money is better than coins for promoting mon-
etization. There does is a strong argument to be made: in the relevant case of a monopoly
government mint versus competitive private banks, the products produced under greater
competition (which takes place primarily along the interest rate dimension in deposits, along
nonprice dimensions in currency) provide consumers with greater beneﬁts to using money.