Insider lending Banks in early nineteenth-century New England functioned very differently from their modern counterparts Most significantly, they lent a large proportion of their funds to members of their own boards of directors or to others with close personal connections to the boards In Insider Lending, Naomi R Lamoreaux explores the workings of this early nineteenth-century banking system - how and how well it functioned and the way it was regarded by contemporaries She also traces the processes that transformed this banking system based on insider lending into a more impersonal and professional system by the end of the century In the particular social, economic, and political context of early nineteenth-century New England, Lamoreaux argues, the benefits of insider lending outweighed its costs, and banks were instrumental in financing economic development As the banking system grew more impersonal, however, banks came to play a more restricted role in economic life At the root of this change were the new information problems banks faced when they conducted more and more of their business at arm's length Difficulties in obtaining information about the creditworthiness of borrowers and in conveying information to the public about their own soundness led them to concentrate on providing short-term loans to commercial borrowers and to forsake the important role they had played early on in financing economic development NBER Series on Long-term Factors in Economic Development Editor CLAUDIA GOLDIN Also in the series Claudia Goldin Understanding the Gender Gap: An Economic History of American Women (Oxford University Press, 1990) Roderick Floud, Kenneth Wachter, and Annabel Gregory Height, Health and History: Nutritional Status in the United Kingdom, 1750— 1980 (Cambridge University Press, 1990) Robert A Margo Race and Schooling in the South, 1880-1950: An Economic History (University of Chicago Press, 1990) Samuel H Preston and Michael R Haines fatal Years: Child Mortality in Late Nineteenth-Century America (Princeton University Press, 1991) Barry Eichengreen Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (Oxford University Press, 1992) In preparation (tentative titles) Lance E Davis, Robert E Gallman, Karin J Gleiter, and Teresa D Hutchins In Pursuit of Leviathan: Technology, Institutions, Productivity, and Profits in American Whaling, 1816-1906 Ronald N Johnson and Gary Libecap The Federal Civil Service System and the Problem of Bureaucracy: The Economics and Politics of Institutional Change Robert W Fogel The Escape from Hunger and Early Death: Europe and America, 1750-2050 Richard H Steckel Families on the Move: A History of Migration within the United States, 17001990 Kenneth L Sokoloff The Means to Private Comfort: Early Industrialization in the American Northeast National Bureau of Economic Research Officers George T Conklin, Jr., chairman Paul W McCracken, vice-chairman Martin Feldstein, president and chief executive officer Geoffrey Carliner, executive director Charles A Walworth, treasurer Sam Parker, director of finance and administration Directors at Large Elizabeth E Bailey John H Biggs Andrew Brimmer Carl F Christ George T Conklin, Jr Don R Conlan Kathleen B Cooper Jean A Crockett Directors by University George C Eads Martin Feldstein George Hatsopoulos Lawrence R Klein Franklin A Lindsay Paul W McCracken Leo Melamed Michael H Moskow Appointment Jagdish Bhagwati, Columbia William C Brainard, Yale Glen G Cain, Wisconsin Franklin Fisher, Massachusetts Institute of Technology Saul H Hymans, Michigan Marjorie B McElroy, Duke Joel Mokyr, Northwestern Directors by Appointment Robert T Parry Peter G Peterson Robert V Roosa Richard N Rosett Bert Seidman Eli Shapiro Donald S Wasserman Marina v N Whitman of Other Marcel Boyer, Canadian Economics Association Rueben C Buse, American Agricultural Economics Association Richard A Easterlin, Economic History Association Gail D Fosler, The 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shall then notify each member of the Board, requesting approval or disapproval of publication, and thirty days additional shall be granted for this purpose The manuscript shall then not be published unless at least a majority of the entire Board who shall have voted on the proposal within the time fixed for the receipt of votes shall have approved No manuscript may be published, though approved by each member of the special manuscript committee, until forty-five days have elapsed from the transmittal of the report in manuscript form The interval is allowed for the receipt of any memorandum of dissent or reservation, together with a brief statement of his reasons, that any member may wish to express; and such memorandum of dissent or reservation shall be published with the manuscript if he so desires Publication does not, however, imply that each member of the Board has read the manuscript, or that either members of the Board in general or the special committee have passed on its validity in every detail Publications of the National Bureau issued for informational purposes concerning the work of the Bureau and its staff, or issued to inform the public of activities of Bureau staff, and volumes issued as a result of various conferences involving the National Bureau shall contain a specific disclaimer noting that such publication has not passed through the normal review procedures required in this resolution The Executive Committee of the Board is charged with review of all such publications from time to time to ensure that they not take on the character of formal research reports of the National Bureau, requiring formal Board approval Unless otherwise determined by the Board or exempted by the terms of paragraph 6, a copy of this resolution shall be printed in each National Bureau publication (Resolution adopted October 2;, 1926, as revised through September 30, 1974) Insider lending Banks, personal connections, and economic development in industrial New England NAOMI R LAMOREAUX BROWN UNIVERSITY MSIK CAMBRIDGE UNIVERSITY PRESS Published by the Press Syndicate of the University of Cambridge The Pitt Building, Trumpington Street, Cambridge CB2 IRP 40 West 20th Street, New York, NY 10011-4211, USA 10 Stamford Road, Oakleigh, Melbourne 3166, Australia © Cambridge University Press 1996 First published 1994 Reprinted 1996 First paperback edition 1996 Printed in the United States of America Library of Congress Cataloging-in-Publication Data is available A catalog record for this book is available from the British Library ISBN 0-521-46096-4 hardback ISBN 0-521 -56624-X paperback FOR DAVID AND STEPHEN Contents Acknowledgments page xi Introduction i Vehicles for accumulating capital Insider lending and Jacksonian hostility toward banks Engines of economic development The decline of insider lending and the problem of determining creditworthiness Professionalization and specialization The merger movement in banking n 84 107 133 Conclusion 157 Index 166 IX 31 52 Index Abbott family, 24 accommodation paper, 2, 2n, 4, 68-9, 81, 162 Aldrich, Nelson, 151 American Bank of Providence, R.I., 22, 23, 24, 69 American Insurance Co., 22 Appleton, Nathan, 36, n n Arnold, Samuel G., 26 Arnold, Welcome, 27 asymmetric information, problems of, 67, 79, 80, 89—90, 101—5, 106, 107, 108-10, 154, 156, 162 Atlantic (National) Bank of Boston, 73, 74, 78, 123 bank failures, 10, 15, 31-32, 41, 42-3, 45, 63-4, lion, 113, 126, 159 bank mergers, 7, 136-45, 161-2, 163 banknotes, 3, 10, 19, 29, 36, 37, 38-9, 41, 64, 65-66, 90 bank officers and directors, 146-7 capital stock owned by, 19-21, 33-4, 71-2, 88n, 135-6, 150-2 conflict of interest with stockholders, 134-41 distribution of authority among, 3-4, 76-8, 160 effect of mergers on, 145-7 fluctuating attendance to duties, 77, 107—8, 124—6, 160 Baker, George F., 145, 151, i52n Banigan, Joseph, Rubber Co., 148 bank capital, 28-9, 66, 82-3 concentration of, 59 declining attractiveness of, after Panic of 1873 93 fictitious nature of, 19, 65 importance of, on banks' balance sheets, 3, 10, 64-5,92, 94, 109 investments of savings institutions in, I9» 33-4 59, 71-1 136-7 investors' willingness to buy, 5, 6, 19, 2-2-, 7° 71-1, 79-8o prices of shares of, 72, 79-80 requirements for, as barrier to entry, 55-6 risks associated with purchase of, 66-7 as vehicle for accumulation, 7, 19-22, 7° see also bank earnings; bank officers and directors, capital stock owned by bank charters, 11, 27, 28, 29, 36, 41, 57, 158 bank earnings, 5, 6, 7, 72, 88n, 90-3, 96-101, 133, 136-7, 142, 159 166 importance of reputation to, 74—6 interlocks with other capital accumulating institutions, 58—9, 71 personal connections among, 23—5, 86, !35 J professionalization of, 7, 117-18, 1235, !3° 145-7, 149, 160-1 remuneration of, 4, 124, 125 upward mobility of, 60-2, 123, 124, 145, 149 worries about opportunistic behavior by, 6, 108, 116, 118, 120—1, 122, 160 see also deposits, directors' attitudes toward paying interest on; insider lending Bank of North America, Bank of the State of South Carolina, bank regulation, 7, 10, 32, 65, 66, 68, 73, 90, 100, 115-16, 125-6, 131-2, 157, 164 bank commissioners, 43, 47 branch banking, 100, 140-1, 162 deposit insurance, 10, 163, 164 insider lending, 5, 32-3, 43, 47, 48-9, 118, 120, 130-1, 159 usury, 33-5, 43, 48 Index via charters, n , 19, 27-30, 55, 57, 158 weakness of, 48-50, 52, 114, 12.5, 147-8, 162 Bath (Me.) Bank, 23 Baylie family, 25 Beal, James H., 111-12 Beal, Thomas P., 112 Beal family, 24, 111—12, 116 Bell, Samuel, 14 Beveridge, Andrew, 49, 79 Biddle, Thomas, 35 Blair Camera Co., 130 Blake family, 24—5 Bliss, George T, 147 Boston Associates, 24, 82 Boston Brick Co., 75 Boston Clearing House, 111-14, 126-7, 131 Boston (Mass.) National Bank, 137 Boylston National Bank of Boston, 107, Bramhall, William, 145 Breed, Henry A., 15 Broadway National Bank of Boston, 113, 126, i27n Brown, Cyrus P., 149, 150, 151 Brown, Eli, 14 Brown, Fred K., 123 Brown, H Martin, 152 Brown, James, 54 Brown, John, 12, 27 Brown, Moses, 12 Brown, Nicholas, 54 Brown family, 23, 24, 58, 82, 86-9, too Browne, T Quincy, 123 Bunker Hill (National) Bank of Charlestown, Mass., 77-8, 123, i29n Burrillville (R.I.) Bank, i8n Cabot-Lowell-Higginson clan, 23 Calomiris, Charles W., 109, 155 Canal Bank of Portland, Me., 54 Cannon, James G., 84, 99n, 118 Carberry, John D., 152 Cary, Thomas G., 17, 18 Central National Bank of Boston, 113, 141 Centreville Bank of Warwick, R.I., 82 Chapin family, 24 Chase, Salmon P., 116 Cheshire Provident Institution for Savings of Keene, N.H., 49, 79, 82 Citibank of New York, N.Y., City Bank of Lynn, Mass., 24 x67 I I clearinghouses, 111-14, 126-7, Cleveland, Harold van B., Coburn, Abner, 82 collateral, as backing for loans, 100-1, 120-1, 123, 131-2 Colt, Samuel P., 139, 140—1, 145-6, I 47-53 X55 Columbian National Bank of Boston, 137 Coman, E T., 121-2 Commercial Bank of Portsmouth, N.H., 4in Commercial National Bank of Boston, 95 Commercial National Bank of Providence, R.I., 94-5 commercial paper, 2, 81, 89-90, 127, 128, 147, 156, 161; see also real bills doctrine Commonwealth Bank of Boston, 43, 45, 46 Concord (Mass.) Bank, 17, 54n, 69n Continental National Bank of Boston, 138, 141 Cottrell, P L, credit investigation by banks, 103, 105, ii2, 160 Democrats, 41, 42-3, 44, 46, 49 deposits, 65-70, 89, 96, 97, 101-2, 112, 163-4 competition for, 99-100, 102 directors' attitudes toward paying interest on, 6, 17, 19, 66-70, 92-5 importance on banks' balance sheets, 3, 5, 6, 10, 64-5, 92,94, 144 risks associated with, 6, 66—70, 80, 104, 109-11, 163-4 Dixwell, John James, 75 Dorr, Thomas W, 33n Dorr Rebellion, 46 Draper, W S., 138 Dunn, R G., & Co., 27, 74, 103 Dwight, Edmund, 75 DWolf, Charles, Jr., 20 DWolf, George, 20 DWolf family, 20 Eagle Bank of Bristol, R.I., 3n, I7n, 20, 78 economic development, role of banks in, 5, 6, 7, 9, 52, 80-3, 104, 105-6, 122-3, I2-7-32 153-6, 159 162, 163-4 economics of scale in banking, 97, 143-4 Eddy, John, 124 Index i68 Elmore, Franklin Harper, entry barriers in banking, 55-7 Evans, Irving A., 113 Excelsior Webb and Tape Co., 130 Farmers and Mechanics Bank of Pawtucket, R.I., 31-2 Federal Deposit Insurance Corporation, 163 Fenstermaker, J Van, 66 fifty-percent rule, 103-5, T48, x ^ z Filer, John E., 66 First National Bank of Bristol, R.I., 129, r 39 First National Bank of Fall River, Mass., 130 First National Bank of New York, 145 First National Bank of Pawtucket, R.I., 85, 130, 139 First National Bank of Providence, R.I., no First National Bank of St Albans, Vt., 109-10 First National Bank of Warren, R.I., 85, 129 Forgan, David R., 107, 122, 133 Forgan, James B., 119 Foster, John, 50-1, 53 Fourth National Bank of Boston, 94 Fourth National Bank of New York, 118 Francis, Ebenezer, 75 Franklin, Henry P., 23 Franklin Bank of Boston, 44 Franklin family, 24 Freeman's National Bank of Boston, 137 German banks, 8, 154-5, Gerry, Elbridge X, 146, 151, 152 Glaisek, Christopher, 60 Globe (National) Bank of Boston, 111, 113, 126 Globe (National) Bank of Providence, R.I., 24, n o Goddard, William, 87, n o , 111 Goddard Brothers Co., 87-8, 93n, 100 Goff family, 150 Gorton, Gary, 109 Granite Bank of Boston, 24, 112 Granite Bank of Pascoag, R.I., 78 Green, Edward A., 24 Green, William B., 4on Hallett and Davis Piano Co., 131 Hamilton National Bank of Boston, 137 Hammond, Bray, Hammond, James Henry, Handlin, Oscar and Mary Flug, 27 hard-money Jacksonians, 36-48 Harris, Stephen, 82 Haven, Franklin, 111, 112, n n Haven, Franklin, Jr., i n Haven family, n o , 116 Hazard, Benjamin, 18 Hazard, Isaac P., 15, 21, 27 Hazard family, 16, 21 Hill, Isaac, m Hillsborough (N.H.) Bank, 14 Hope Co., 87 Hope Webbing Co., 130 Howard National Bank of Boston, 137 Huertas, Thomas F., Hutchins, Shubael, 24 Indian Head Bank of Nashua, N.H., 23 Industrial Trust Co of R.I., 139-41, 1425, 146, 147-53, !55 insider lending, 4, 5, 30, 52, 69, 108, 154, 158-9, 164 attitudes toward, 5, 6, 17-19, 31-5, 37, 38-40, 43, 45-6> 47, 48> 49-5 , 73-4, 116-22, 147, 153, 157-8, 160—1 decline in, 6, 84-9, 107, 159-60 directors' monitoring of, 5—6, 76—8, 159 discriminatory consequences of assessed, 5, 52-62, 158 effect on stability of the banking system, 5, 52, 62-4, 159, 164 examples of, 12, 14-18, 20, 21, 26-7, 31-2-, 34, 35, 43-5, 48, 49, 50, 53, 76, 78, 86-7, n o , 113, 121, 126, 13°, M7, 157-8 legislation to restrict, 5, 16, 43, 47, 48-9 losses from, 14-15, 31-2, 43-5, 63-4, 78, 158-9 in other regions and countries, 7-9, 164-5 as source of information about banks' portfolios, 52, 79-80, 82, 107, 158, 160 stockholders' regulation of, 73-4, 147 as technique of capital accumulation, 5, 19-22, 82-3, 154 Jacksonian critique of banks, 31, 36-8, 44-6 James, John, 91 Johnson, A B., n n Index Kidder, Peabody & Co., 137-9, T44> J ^ kinship connections, 23-7, 86-7, 135, 158, 159, 164 Knox, John Jay, 115-16 Kuhn, Loeb 8c Co., 145 Lafayette Bank of Boston, 44 Lawrence, Charles R., 113 leverage ratios of banks, 5, 6, 64-5, 80, 97-9, I34> M4, 159 Lincoln National Bank of Boston, 141 Little, Edward, 54 Lonsdale Co., 87 Lowell Bleachery, 81 Manufacturers Mutual Fire Insurance Co., 22 Manufacturers National Bank of Boston, 141 Market National Bank of Boston, 137 Martin, Joseph G., 96 Massachusetts (National) Bank of Boston, n - J , 23, 24, 75, 76, 95, 107, 123, 125, 14m Maverick National Bank of Boston, 113, 124 McCulloch, Hugh, 122 McGee, Henry F., 55 Mechanics Bank of Concord, N.H., m Mechanics Bank of Providence, R.I., 28, 5* Mechanics and Traders Bank of Portsmouth, N.H., 59 Mendon (Mass.) Bank, i8n, 54n, 68n Merchants Bank of Bangor, Me., 24-5 Merchants (National) Bank of Boston, in, 131 Merchants (National) Bank of Providence, RI - , 24, 33, 34, 95 Merrimack County Bank of Concord, N.H., m modernization theory, 25, 159 Monument National Bank of Charlestown, R.I., i29n Morgan,] P., 155 Morton, Bliss &c Co., 147 Morton, Marcus, 46 Morton Trust Co of New York, 145 Moulton, H G., 127-8 Munn, C W., Mutual Life Insurance Co., 145, 151 Nahant Bank of Lynn, Mass., 15 Narragansett Machine Co., 130 Nashua (N.H.) Trust Co., 94 169 National Banking Acts, 90, 100, 118, 120, 126 National Bank of (Newport) Rhode Island, 85, 129 National Bank of North America of Boston, 137, 138 National City Bank of Boston, 137 National City Bank of New York, 145 National Eagle Bank of Boston, 137 National Exchange Bank of Providence, (R.I.), 94-5 National Hope Bank of Warren, R.I., 129 National India Rubber Co., 148 National Niantic Bank of Westerly, R.I., 85, 129 National Revere Bank of Boston, 137 National Shawmut Bank of Boston, 137, 139 141, 142-4, 145 146-7, 148, 156 National Union Bank of Swanton, Vt., no National Warren (R.I.) Bank, 129 Newport (R.I.) Bank, 59 North National Bank of Boston, 137 Pacific National Bank of Boston, 112, 113 Pacific National Bank of Pawtucket, R.I., 130 Paine and Sackett, 86 Panic of 1837, 5, 30, 35, 41, 43, 45, 46, 48, 64, 65, 73, i n Panic of 1857, 112 Panic of 1873, 24, 91, 92, 94, n o Panic of 1907, 149, 153 Patten, Claudius B., 115 Pawtuxet Bank of Warwick, R.I., 15, i7n, 21, 24, 59, 74, 78n People's (National) Bank of Roxbury, Mass., 34, 77, 107, 123, 125, 131 Perkins, Benjamin R., 141 Phenix (R.I.) National Bank, 125 Phillips, William, 12 Phillips family, 24 Phoenix Bank of Charlestown, Mass., 54, 55, 68n, 81 Pierce, Franklin, m Piscataqua Bank of Portsmouth, N.H., m Piscataqua Exchange Bank of Portsmouth, N.H., n Pollak, Robert A., 26 Pollard, Sidney, 80, 81 Portsmouth (N.H.) Bank, m Potter, Asa P., 113 professionalization, 6, 7, 114—17, 145—7, 150, 154, 160-1 Index 170 Providence and Worcester Railroad, 69 Providence (R.I.) (National) Bank, 12, 23, 26, 54, 58, 7on, 86-8, 100, n o , 148 Providence Insurance Co., 58 Provident Institution for Savings of Providence, R.I., 69, 87, 88, n o public/private character of banks, 5, n , 17-30 3S-47 5°, ! Rantoul, Robert, Jr., 35n, 38, 4m, 45 real bills doctrine, i n , 118-20, 161, 164 Redlich, Fritz, Rhode Island Hospital Trust Co., 88, 148, 149 Rhode Island Insurance Co., 59 Rhode Island Share and Indemnity Corporation, 157, 164 Rhode Island Society for the Encouragement of Domestic Industry, 21, 59 Rhodes, Bradford, 115 Rhodes, Christopher, 15, 24 Rhodes, James, 15, 24, 59 Rhodes, William, 15, 24 Rhodes family, 15, 21, 24 Richmond family, 24 Ridgely, William Barret, 108 Rix, James M., 49 Robinson family, 16, 21, 24 Rodman, Samuel, 15, 21, 27 Rodman family, 16, 21, 150 Roger Williams Insurance Co., 22 Rogers, Robert, Jr., 20 savings and loan crisis, 158 Schiff, Jacob H., 145, 146, 151, 152 Schumpeter, Joseph A., 153 Schweikart, Larry, Scituate (R.I.) Bank, i8n Second Bank of the United States, 35, 43, 44 Second National Bank of Boston, 24, i n , ii2, 131 Second National Bank of Providence, R.I., no Shawmut (National) Bank of Boston, i8n, 23, iO2n, 137, 139, 141, 142, 145 Shoe and Leather (Dealers) (National) Bank of Boston, 77, 85, i29n short-term loans, conservative bankers' preference for, 7, 103-6, 121-2, 127-32, 147, 148, 154, 161-3 Slater National Bank of Pawtucket, R.I., Smith, Amos D., 23—24 Smith, Ward E., 146 Smithfield (R.I.) Exchange Bank, 28 Somerset (Me.) Bank, 82 Sprague family, 24, 110 Squire, John P., & Co., 126 Squire family, 126, i27n State (National) Bank of Boston, 23, 34, US Stearns, James P., 137, 145 Stetson family, 24-5 Stillman, James, 145 Stratford Bank of Dover, N.H., i8n, 54, 77n Suffolk (National) Bank of Boston, 24, 56, 66, 69, 75, 77, 115, 128, 136, 156 Suffolk system, 10, 19, 56, 66, i n , 112 Sundlun, Bruce, 157 Sutton (Mass.) Bank, 15, 53 Sylla, Richard, 95 Taft family, 24 Tapley family, 24 Taunton (Mass.) Bank, 25 Taylor, Moses, Tremont (National) Bank of Boston, 501 53, 137 trust companies, 91—2, 97, 141—2, 143, 148 Union Trust Co of Providence, R.I., 149, 153 United National Bank of Providence, R.I., 144 U.S Comptroller of the Currency, 84, 96, 108, 114, 115—16, 122, 125—6, 130, 131, 148 U.S Rubber Co., 145-6, 148, 149, 155 Wakefield (R.I.) Bank, 15, i7n, 21, 24, 2-7 53 Waterman, John, 23 Wauregan Mills, 86 Weston, Samuel, 82 Whigs, 41, 44, 46, 47, 49 Whig Young Men of Boston, 23 Whittier Machine Co., 131 Wilkinson, A 8c I., 32 Wilkinson family, 15, 25, 32, 53 Williams, Henry, 11 Williamson, William D., 48 Wing, Daniel G., 123 Winthrop National Bank of Boston, 113 Woodbury, Levi, 4m, 44 Most urban banks during the early nineteenth century occupied modest quarters on the second stories of commercial buildings They could leave desirable ground-floor locations to retailers because their customer base consisted largely of people personally connected with members of their boards Here two institutions, the Globe Bank and the Grocers and Producers Bank, share the second story of the Lyceum Building in Providence, Rhode Island (Rhode Island Historical Society, neg no RHi X3 5876) Even in Boston, the region's financial center, early-nineteenth-century banks occupied second-story offices Virtually all of the banks in the city were crowded together with other businesses on State Street (Boston Athenaeum) Country banks often built detached structures, but they were typically of modest proportions Researchers at Old Sturbridge Village, searching for a typical example of regional bank architecture, moved the Thompson Bank from a small village in Connecticut to their historical museum (Photograph by Henry E Peach, reproduced courtesy of Old Sturbridge Village, neg no B23977) The layout of the interior of the Thompson Bank shows that bank officers in the early nineteenth century made little attempt to differentiate the space they occupied from that used by the relatives and friends who constituted their main customers Note the low counter, the open passage to the vault, and the low wall that separated the directors' room on the left from the rest of the bank (Photograph by Henry E Peach, reproduced courtesy of Old Sturbridge Village, neg no B2.1391) D A floor plan drawn up in 1825 for the directors of the Mendon Bank, a country bank in southern Massachusetts, shows clearly how little space banking operations required in the early nineteenth century The building that was actually constructed deviated from the plan in several ways Most significantly, there were no interior walls to divide the directors' room from the banking area (Mendon Historical Society) The imposing presence of the Boston branch of the Second Bank of the United States, an institution with an avowedly public purpose, contrasts dramatically with the more modest appearance of other banks in the city, which, though state-chartered institutions, mainly served private interests (Lithograph by John Henry Bufford for Pendleton's Lithographers, reproduced courtesy of the Boston Athenaeum) By mid century a few prominent banks in the region's largest cities had begun to build monumental buildings, as this 1856 photograph of the new Merchants Bank Building in Boston shows Even in this building, however, the bank occupied second-story office space The president of the Merchants Bank was Franklin Haven, an early leader of the conservative banking movement (Massachusetts Historical Society) The Merchants Bank's ornate interior matched its grand facade The architecture sharply differentiated public from work space, symbolically communicating the distance that now existed between the bank's officers and its customers The high counter extended the complete length of the banking room and prevented the public from coming into direct contact with bank employees (Image taken from Boston Massachusetts by Geo W Engelhardt (Boston: Boston Chamber of Commerce, 1897); reproduced courtesy of the Society for the Preservation of New England Antiquities, neg no 15878-B) Most Boston banks continued in the late nineteenth century to occupy second-story offices that appeared externally to be very similar to their early-nineteenth-century quarters Very few as yet used architecture to distinguish themselves from competitors or to create an image of soundness The imposing structure in this photograph is the Merchants Exchange on State Street The small sign in the foreground for the Washington National Bank is dwarfed by that of the Boylston Insurance Company Banks also occupied second-story offices on the other side of the Exchange (Boston Athenaeum) In their interiors late-nineteenth-century banks followed the trend (evident in the photograph of the Merchants Bank) of differentiating public space from work space This floor plan for the new Continental National Bank in Boston provides a sharp contrast to the earlier plan for the Mendon Bank The drawing shows the extent to which public space (the Banking Room) had been proportionally reduced and separated from the space occupied by employees (the area behind the counter, the Directors' Room, and a second floor that was off limits to the public) (Drawing by architect Nathaniel J Bradlee, 1873, reproduced courtesy of the Boston Athenaeum) This elevation shows the counter planned for Continental's banking room The fancy detail only heightened the significance of the barrier to be erected between the bank's customers and its tellers (Drawing by architect Nathaniel J Bradlee, 1873, reproduced courtesy of the Boston Athenaeum) The same differentiation of space came to characterize outlying banks, as this 1890s photograph of the Merchants National Bank in Lawrence, Massachusetts, shows (Society for the Preservation of New England Antiquities, neg no 15877-B) Before (and immediately after) its 1898 merger, the National Shawmut Bank occupied a second-story office similar to those of other Boston banks (Boston Athenaeum) Shortly after the merger, Shawmut's officers began planning construction of a building with proportions commensurate with the bank's new prominence in the city The building was finally completed in 1907 (Boston Athenaeum) ... nineteenth-century New England, Lamoreaux argues, the benefits of insider lending outweighed its costs, and banks were instrumental in financing economic development As the banking system grew more impersonal,... 2;, 1926, as revised through September 30, 1974) Insider lending Banks, personal connections, and economic development in industrial New England NAOMI R LAMOREAUX BROWN UNIVERSITY MSIK CAMBRIDGE... competition and has thus had a constraining effect on economic growth In still other cases (including certain parts of New England in recent years), large loans to insiders have undermined the soundness